Securities Contracts (Regulation) Act, 1956

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,

(ii) derivative,

(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.… Read the rest

Terms commonly used with reference to capital market

There are several terms which are commonly used with reference to capital market. Several such terms have already been discussed in the previous articles. Understanding of following terms (given in alphabetical order) will help the readers in better grasping the structure and trading system in the capital market in India :

Arbitrage: Arbitrage refers to taking advantage of price differential in a particular security on to different stock exchanges. An investor/speculator can sell at one stock exchange and buy the same at lower price at other stock exchange. The difference in prices is the profit of the investor/speculator.

Categories of Shares at BSE: At the Mumbai Stock Exchange, the shares have been categorised in different categories  such as A, B1, B2, S, T, TS and Z. Categories A , B1 and B2 depend upon the volume and turnover of different shares on the BSE. S group is called BSE Indonext, which provide a nationwide trading platform for the small and medium enterprises already listed with the BSE and regional stock exchanges. As required by SEBI, category T, referring to Trade to Trade, shares are those of which the transactions must result in the delivery. In other words, the squirring off of the transaction is not allowed. An investor buying or selling a T-group share must effect a delivery. It cannot be settled by a counter transaction. TS group is trade to trade segment of BSE Indonext. Z group refers to the companies which have failed to comply with the listing requirements and/or have failed to resolving investors complaints.… Read the rest

Margin trading at stock exchanges

Margin Trading (MT) is an arrangement whereby an investor purchases securities by borrowing a portion of the purchase value from the authorised broker by using securities in his portfolio as collateral. Since April 1, 2004, SEBI has allowed member brokers to provide margin trading facility to their client in the cash market. Only corporate brokers with net worth of at least Rs. 3 crores would be eligible to participate in Mragin Trading. The brokers interested to provide margin trading facility to their clients have to seek approval from the stock exchange. The broker may use his own funds or borrow from scheduled commercial banks/NBFC regulated by the RBI. The total exposure of a broker shall be within self imposed prudential limits and not exceeding 50% of networth.

The margin arrangement has to be agreed upon between the broker and the client, subject to SEBI Guidelines, 2004. Initial and maintenance margin for the client shall be a minimum of 50% and 40% respectively, to be paid in cash. A broker may liquidate the securities (kept as collateral) if the client fails to deposit the additional margin in the following cases :

  • If the client fails to meet the margin call.
  • If the client fails to deposit the cheque after the margin call has been made.
  • If the cheque deposited by the client has been dishonoured.

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Risk management system at NSE

A sound risk management system is integral to an efficient clearing and settlement system. NSE introduced for the first time in India, risk containment measures that were common internationally but were absent from the Indian securities markets. NSCCL (National Securities Clearing Corporation Ltd.) has put in place a comprehensive risk management system, which is constantly upgraded to pre-empt market failures. It ensures that trading member obligations are commensurate with their networth. Risk containment measures include capital adequacy requirements of members, monitoring of member performance and track record, stringent margin requirements, position limits based on capital, on-line monitoring of member positions and automatic disablement from trading when limits are breached, etc. Daily margins payable by members consists of (1) Value at Risk Margin, (2) Extreme Loss Margin, and (3) Mark to Market Margin.

Mark-to-Market Margin :

Mark to market loss is calculated by marking each transaction in security to the closing price of the security at the end of trading. In case the security has not been traded on a particular day, the latest available closing price at the NSE shall be considered as the closing price. In case the net outstanding position in any security is nil, the difference between the buy and sell values shall be considered as notional loss for the purpose of calculating the mark to market margin payable.

The mark to market margin (MTM) is collected from the member before the start of the trading of the next day. The MTM margin is collected/adjusted from/against the cash/cash equivalent component of the liquid net worth deposited with the NSE.… Read the rest

National Securities Clearing Corporation Ltd.(NSCCL)

National Securities Clearing Corporation Ltd. (NSCCL) is a wholly owned subsidiary of NSE and was incorporated in August 1995. It was the first clearing corporation to be established in the country and also the first clearing corporation in the country to introduce settlement guarantee. It was set up with the following objectives:

  • to bring and sustain confidence in clearing and settlement of securities;
  • to promote and maintain, short and consistent settlement cycles;
  • to provide counter-party risk guarantee, and
  • to operate a tight risk containment system.

Clearing & Settlement by NSCCL:

NSCCL carries out the clearing and settlement of the trades executed in the equities and derivatives segments of the NSE, It operates a well-defined settlement cycle and there are no deviations or deferments from this cycle. It aggregates trades over a trading period, nets the positions to determine the liabilities of members and ensures movement of funds and securities to meet respective liabilities. At the end of each trading day, concluded or locked-in trades are received from NSE by NSCCL. NSCCL determines the cumulative obligations of each member and electronically transfers the data to Clearing Members (CMs). All trades concluded during a particular trading period are settled together. A multilateral netting procedure is adopted to determine the net settlement obligations(delivery/receipt positions) of CMs. NSCCL then allocates or assigns delivery of securities inter se the members to arrive at the delivery and receipt obligation of funds and securities by each member. Settlement is deemed to be complete upon declaration and release of pay-out of funds and securities.… Read the rest

Rolling settlement system

Rolling settlement is the trading system of securities in which the transaction (buying or selling of securities) can be squirred up by a counter-transaction on the same day only. If the transaction is not squirred up on the same day, then the delivery will take place as per the prevailing rules. For example, if an investor purchases a security on Monday and the transaction is not squirred up by a counter-sale transaction, then this buying transaction must be completed. He will get the delivery and he will have to make the payment for the purchase.

The Rolling settlement system was introduced in India on Jan. 10, 2000 when 10 scrip’s were put in the compulsory rolling settlement. Initially, the settlement period was T+5 but it has been gradually reduced toT+2 with effect from April 1, 2003. Since 2000, all other shares have been brought gradually in the compulsory rolling settlement system. It may be noted that there are some shares put in the T-Category. The transactions cannot be squirred up even on the same day in these shares. These are known as “Trade to Trade Shares” and the transaction must end with a delivery and payment.

Before the Rolling Settlement was introduced in year 2000, the normal settlement period was 5 days and it used to take about 15-20 days to get the sale proceeds of the shares. The transaction could be squirred up within the same settlement period also, and in that case, the investor/speculator had to pay or receive the difference only.… Read the rest