SECURITIES CONTRACTS (REGULATION) ACT, 1956
The Securities Contracts (Regulation) Act, 1956 [SC(R)A] was enacted to prevent undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. This is the principal Act, which governs the trading of securities in India.
The definitions of some of the important terms are given below:
‘Recognised Stock Exchange’ means a stock exchange, which is for the time being recognised by the Central Government under Section 4 of the SC(R)A.
‘Stock Exchange’ means –
(a) any body of individuals, whether incorporated or not, constituted before corporatisation and demutualization under sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whether under a scheme of corporatisation and demutualization or otherwise, for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.
As per Section 2(h), the term “securities” include-
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate,
(iii) units or any other instrument issued by any collective investment scheme to the investors in such schemes,
(iv) Security receipts as defined in clause (zg) of section 2 of the Securisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI)
(v) units or any other such instrument issued to the investors under any mutual fund scheme,
(vi) any certificate or instrument issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case maybe.
(vii) government securities,
(viii) such other instruments as may be declared by the Central Government to be securities, and
(ix) rights or interests in securities.
As per section 2(aa), “Derivative” includes-
A. a security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security;
B. a contract which derives its value from the prices, or index of prices, of underlying securities;
Section 18A provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are-
(i) traded on a recognised stock exchange;
(ii) settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchanges.
In accordance with the rules and bye-laws of such stock exchange.
“Spot delivery contract” has been defined in Section 2(i) to mean a contract which provides for-
(a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the despatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality;
(b) transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository.
The SC(R)A deals with-
1. stock exchanges, through a process of recognition and continued supervision,
2. contracts & options in securities, and
3. listing of securities on stock exchanges.
Recognition of stock exchanges
By virtue of the provisions of the Act, the business of dealing in securities cannot be carried out without registration from SEBI. Any Stock Exchange which is desirous of being recognised has to make an application under Section 3 of the Act to SEBI, which is empowered to grant recognition and prescribe conditions. This recognition can be withdrawn in the interest of the trade or public.
Section 4A of the Act was added in the year 2004 for the purpose of corporatisation and demutualisation of stock exchange. Under section 4A of the Act, SEBI by notification in the official gazette may specify an appointed date on and from which date all recognised stock exchanges have to corporatise and demutualise their stock exchanges. Each of the Recognised stock exchanges which have not already being corporatised and demutualised by the appointed date are required to submit a scheme for corporatisation and demutualization for SEBI’s approval. After receiving the scheme SEBI may conduct such enquiry and obtain such information as be may be required by it and after satisfying that the scheme is in the interest of the trade and also in the public interest, SEBI may approve the scheme. SEBI is authorised to call for periodical returns from the recognised Stock Exchanges and make enquiries in relation to their affairs. Every Stock Exchange is obliged to furnish annual reports to SEBI. Recognised Stock Exchanges are allowed to make bylaws for the regulation and control of contracts but subject to the previous approval of SEBI and SEBI has the power to amend the said bylaws. The Central Government and SEBI have the power to supersede the governing body of any recognised stock exchange. The Central Government and SEBI also have power to suspend the business of the recognised stock exchange to meet any emergency as and when it arises, by notifying in the official gazette.
Contracts and Options in Securities
Organised trading activity in securities takes place on a recognised stock exchange. If the Central Government is satisfied, having regard to the nature or the volume of transactions in securities in any State or States or area, that it is necessary so to do, it may, by notification in the Official Gazette, declare provisions of section 13 to apply to such State or States or area, and thereupon every contract in such State or States or area which is entered into after date of the notification otherwise than between members of a recognised stock exchange or recognised in stock exchanges in such State or States or area or through or with such member shall be illegal. The effect of this provision clearly is that if a transaction in securities has to be validly entered into, such a transaction has to be either between the members of a recognised stock exchange or through a member of a Stock Exchange.
Listing of Securities
Where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange (Section 21). Where a recognised stock exchange acting in pursuance of any power given to it by its bye-laws, refuses to list the securities of any company, the company shall be entitled to be furnished with reasons for such refusal and the company may appeal to Securities Appellate Tribunal (SAT) against such refusal.
Delisting of Securities
A recognised stock exchange may delist the securities of any listed companies on such grounds as are prescribed under the Act. Before delisting any company from its exchange, the recognised stock exchange has to give the concerned company a reasonable opportunity of being heard and has to record the reasons for delisting that concerned company. The concerned company or any aggrieved investor may appeal to SAT against such delisting.(Section 21A).