Section 24 of the Companies Act, 2013 – Regulating Securities Issuance and Transfer

Section 24 of The Companies Act, 2013 reads as –

Power of Securities and Exchange Board to regulate issue and transfer of securities, etc.

(1) The provisions contained in this Chapter, Chapter IV and in section 127 shall,—

(a) in so far as they relate to —

(i) issue and transfer of  securities ; and

(ii) non-payment of dividend, by listed companies or those companies which intend to get their securities listed on any  recognised stock exchange in India, except as provided under this Act, be administered by the  Securities and Exchange Board by making regulations in this behalf;

(b) in any other case, be administered by the Central Government.

Explanation.— For the removal of doubts, it is hereby declared that all powers relating to all other matters relating to  prospectus , return of allotment, redemption of preference shares and any other matter specifically provided in this Act, shall be exercised by the Central Government, the Tribunal or the  Registrar  , as the case may be.

(2) The Securities and Exchange Board shall, in respect of matters specified in sub-section (1) and the matters delegated to it under proviso to sub-section (1) of section 458, exercise the powers conferred upon it under sub-sections (1), (2A), (3) and (4) of section 11, sections 11A, 11B and 11D of the Securities and Exchange Board of India Act, 1992 (15 of 1992).

The Companies Act, 2013, is a comprehensive legislation that governs corporate entities in India, ensuring transparency, accountability, and efficiency in corporate operations. One of its critical provisions, Section 24, grants regulatory authority over the issuance and transfer of securities to the Securities and Exchange Board of India (SEBI). This section plays a fundamental role in ensuring that companies comply with strict guidelines while raising capital from the public and engaging in securities transactions.

This article explores the key aspects of Section 24 of the Companies Act, 2013, its implications for companies, the role of SEBI in regulating securities, and the overall impact of this provision on the corporate sector.

Section 24 specifically empowers SEBI to regulate securities transactions related to public companies. The provision ensures that companies seeking to raise capital from the public comply with legal requirements that protect investors and maintain market integrity. The key components of Section 24 are as follows:

1. Authority of SEBI Over Public Companies
   • SEBI has exclusive jurisdiction over public companies regarding the issuance of securities and their transfer.
   • It sets guidelines that companies must follow while launching Initial Public Offerings (IPOs) or other public security issues.
2. Private Companies and Government Regulation
   • SEBI’s jurisdiction does not extend to private placements of securities by public companies or securities transactions involving private companies.
   • In such cases, the Central Government or the Registrar of Companies (ROC) is responsible for overseeing compliance.
3. Compliance with SEBI Regulations
   • Public companies planning to issue securities must strictly adhere to SEBI’s disclosure norms, approval processes, and investor protection mechanisms.
   • Non-compliance can result in penalties, suspension from trading, and even legal action.

Why Was Section 24 Introduced ?

The primary objective behind Section 24 is to prevent malpractices in the securities market and ensure that public companies maintain high levels of transparency and accountability. Before the introduction of this provision, multiple regulatory authorities had overlapping responsibilities, leading to confusion and regulatory gaps. By granting SEBI exclusive authority over public securities transactions, the Act streamlined the process, ensuring that a single competent authority regulates securities markets.

Implications for Companies

For companies, Section 24 mandates a stringent regulatory framework that must be followed while dealing with securities. Here are some important implications:

1. Mandatory Compliance with SEBI Guidelines

Companies raising capital through public offerings must follow SEBI’s regulations on:

• Prospectus and disclosure requirements
• Eligibility conditions for listing
• Pricing mechanisms
• Due diligence and audit compliance

Failure to comply with these norms can lead to regulatory scrutiny and penalties.

2. Increased Transparency and Accountability

SEBI mandates public companies to disclose all material financial and operational information to prospective investors. This prevents misleading practices, ensuring that investors make informed decisions based on accurate data.

3. Market Integrity and Investor Protection

SEBI continuously monitors stock market transactions to prevent:

• Insider trading
• Stock price manipulation
• Fraudulent practices

By enforcing these measures, Section 24 ensures that market confidence remains high and investors are protected from fraudulent schemes.

Role of SEBI Under Section 24

SEBI, the primary regulatory authority for securities markets in India, plays a crucial role in enforcing Section 24. Some of its key functions under this provision include:

SEBI plays a crucial role in regulating the public issue of securities by ensuring that companies seeking to issue shares to the public first obtain its approval. It evaluates whether these companies meet the necessary criteria for financial stability, governance standards, and risk disclosure. Additionally, SEBI actively monitors stock market activities to prevent fraud, unfair trade practices, and insider trading. If any suspicious activities are detected, it has the authority to investigate and penalize the responsible companies or individuals. Once a company is listed on the stock exchange, it must comply with SEBI’s regulations regarding financial reporting, investor communication, and corporate governance. Furthermore, SEBI is committed to protecting shareholder interests by ensuring that companies do not engage in practices that may harm minority shareholders. Companies are required to adhere to fair policies regarding dividends, stock buybacks, and voting rights to maintain transparency and fairness in the market.

Challenges and Criticism of Section 24

While Section 24 strengthens the regulatory framework, some challenges remain:

Regulatory overlap poses a challenge in the securities market, as SEBI regulates public securities transactions, but private placements still fall under multiple authorities, sometimes leading to confusion. This fragmented regulatory framework can create uncertainties for companies and investors alike.

Additionally, strict regulations impose a significant compliance burden on companies. Businesses must invest heavily in legal and financial compliance to meet SEBI’s requirements, increasing operational costs and administrative complexities.

Another challenge is the delay in capital raising due to the extensive approval process under SEBI regulations. These procedural requirements can slow down the issuance of securities, potentially impacting a company’s expansion plans and overall business growth.

Furthermore, with rapid digitization and the introduction of new financial instruments, SEBI must continuously update its policies to address evolving challenges in the securities market. Adapting to these dynamic market conditions is essential to ensure regulatory effectiveness while fostering innovation and growth.

Conclusion

Section 24 of the Companies Act, 2013, serves as a critical regulatory mechanism to ensure fairness, transparency, and accountability in the issuance and transfer of securities. By granting SEBI exclusive authority over public company securities transactions, this provision has strengthened investor protection and promoted a stable financial market.

While certain challenges exist, such as compliance burdens and regulatory delays, the long-term benefits of enhancing market integrity and protecting investors far outweigh these drawbacks. Companies must prioritize adherence to SEBI’s regulations to maintain trust and credibility in the securities market. In the years to come, as capital markets evolve, the effective implementation of Section 24 will play a crucial role in shaping India’s financial ecosystem, ensuring a balance between corporate growth and investor security.

Bibliography

• Section 24, The Companies Act, 2013
• Ramaiya, Guide to the Companies Act (19th ed. 2020)
• T Ramappa, Commentary on the Companies Act, 2013 as Amended by the Companies (Amendment) Act, 2015

This article is presented by CA B K Goyal & Co LLP Chartered Accountants, your trusted partner in audit and compliance solutions.