[FAQs] on Securities Contracts Regulation Act (SCRA) – Objects | Applicability | Definitions

Objects of the Securities Contracts (Regulation) Act, 1956 are as follows:

• To provide for the regulation of stock exchanges.
• To provide for the regulation of transactions in securities.
• To prevent undesirable speculation in securities.
• To regulate the buying and selling of securities outside the limits of stock exchanges.
• To provide for ancillary matters e.g. promoting healthy stock market.

As per section 28(1) of the Securities Contracts (Regulation) Act, 1956, the provisions of the Act shall not apply to corporation set up by a special law.

As stated in the question Industrial Finance Corporation of India is a corporation set up under the Industrial Finance Corporation Act, 1948 i.e. under a special statute enacted by the Parliament. Therefore, this Corporation does not need any permission from a stock exchange to issue any bonds or other securities. Accordingly, it has not violated the provisions of the Securities Contracts (Regulation) Act, 1956. The nature and tenure of the bonds are immaterial.

Spot delivery contract means a contract which provides for —

• Actual delivery of securities and the payment of a price either on the same day or on the next day.
• Transfer of the securities by the depository from the account of one beneficial owner to another beneficial owner.

In simple words, if the delivery and payment for securities are to be made on the same day or the next day it is said to be spot delivery. Rolling settlement is followed in India for settlement of spot delivery contract.

Transactions in securities market are divided in two categories.

One is ‘Spot Market’ and other is ‘Derivative Market’.

• In spot market securities are delivered and cash is paid on the spot and hence called as spot market.
• Derivative is one where the price is agreed on one day and delivery and settlement is made on a specified future date. Derivative Market is also known as credit market.

A derivative includes —

• 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 and
• A contract which derives its value from the prices or index of prices of underlying securities.

A derivative is a financial contract which derives its value from the performance of another entity such as an asset, index, or interest rate, called the “underlying”.

Derivatives include a variety of financial contracts, including futures, forwards, swaps, options.

Withdrawal of recognition [Section 5]: The Central Government may withdraw recognition granted to a stock exchange in the interest of trade or in public interest.

The Central Government may serve on the governing body of the stock exchange a written notice that it is considering the withdrawal of the recognition for the reasons stated in the notice.

After giving an opportunity being heard to the governing body, the Central Government may withdraw the recognition by notification in the Official Gazette.

Such withdrawal shall not affect the validity of any contract entered into or made before the date of the notification.

The Central Government may, after consultation with the stock exchange, make provisions for the due performance of any contracts outstanding on that date by issuing notification.

Power of recognized stock exchange to make rules restricting voting rights, etc. [Section 7A]: Normally, voting rights is proportional to shareholding of a member. However, on case of recognised rules can provide the following matters:

• Restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting.
• Regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only.
• Restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting.
• Such incidental, consequential and supplementary matters as may be necessary to give effect to any of the matters specified above.

Amendments of rules of stock exchange: Rules relating to matter referred to above can be made or amended only with the approval of the Central Government/SEBI. In approving the rules, the Central Government may make modifications therein as it thinks fit. On publication of amended rules as approved by the Central Government the rules shall be deemed to have been validly made.

As per Section 8A of the Securities Contracts (Regulation) Act, 1956, a recognized stock exchange may transfer the duties and functions of a clearing house to a clearing corporation, being a company incorporated under the Companies Act, 2013 with the prior approval of SEBI.

Following duties and functions can be transferred to clearing corporation:

• Periodical settlement of contracts
• Delivery and payment for securities
• Other incidental or connected matters

Every clearing corporation shall, for the purpose of transfer of the duties and functions of a clearing house to a clearing corporation, make bye-laws and submit the same to the SEBI for its approval.

The SEBI on being satisfied that grant approval is in the interest of the trade and also in the public interest, approve the transfer of the duties and functions of a clearing house to a clearing corporation.

Section 10 of the Securities Contracts (Regulation) Act, 1956 makes following provisions relating to power of SEBI to make or amend the bye-laws of recognized stock exchanges:

• SEBI is empowered to make or amend bye-laws of recognised stock exchanges after consultation with the governing body of the stock exchange:

1. 1. On request from stock exchange or
   2. On its own motion.

• The bye-laws or amended the bye-laws shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognised stock exchange is situate. However, if the SEBI is satisfied in any case that in the interest of the trade or in the public interest any bye laws should be made, amended or revised immediately, it may by order in writing specifying the reasons, dispense with the condition of previous publication.
• The bye-laws or amendments become effective as if made or amended by the stock exchange itself.
• If the governing body objects to any bye-laws made or amended by SEBI, it should apply to SEBI within 2 months of publication of the bye-laws in Gazette.
• SEBI will give opportunity of hearing and then may revise the bye-laws.
• Revised bye-laws will be published in Official Gazette.
• Bye-laws or amendments become effective only after publication in Official Gazette.

Power to issue directions [Section 12A]: SEBI is empowered to issue direction for the following reasons:

• In the interest of investors, or orderly development of securities market.
• To prevent the affairs of any recognised stock exchange or clearing corporation which are being conducted in a manner detrimental to the interests of investors or securities market.
• To secure the proper management of any stock exchange or clearing corporation or agency or other person.

Such directions can be issue to:

• Any stock exchange or clearing corporation or agency or class of persons associated with the securities market.
• Any company whose securities are listed or proposed to be listed.

As per Explanation given in the section, it is declared that power to issue directions shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made there under, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.

So, accordingly the directions can be given to an individual who had made some profit in any transaction in contravention of any provisions of the Securities Contracts (Regulation) Act, 1956.

Historically, most of the stock exchanges, except NSE & OTCEI were formed as ‘mutual organization’ i.e. formed by trading members for their common benefit. The disadvantage of such organization is that they primarily work for interest of members and those of investors. The office bearers will have access to inside information, which can be misused by them. There is no transparency and no professional approach. Moreover, they cannot raise large funds for modernization or up-gradation by offering equity shares to others.

In view of above shortcomings of ‘mutual stock exchanges’, a policy decision was taken by the Government of India for corporatization of stock exchange. Corporatization means stock exchange should be organized as a company.

Thus, the process of converting ‘mutual stock exchanges’ into company form of organization is known as ‘Demutualization of Stock Exchanges’.

Corporatisation [Section 2(aa)]: Corporatisation means the succession of a recognised stock exchange, being a body of individuals or a society registered under the Societies Registration Act, 1860, by another stock exchange, being a company incorporated for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities carried on by such individuals or society.

Demutualisation [Section 2(ab)]: Demutualisation means the segregation of ownership and management from the trading rights of the members of a recognised stock exchange in accordance with a scheme approved by the SEBI.

Corporatisation and demutualisation of stock exchanges [Section 4A]: Every stock exchange shall be corporatized and demutualised before appointed date.

Procedure for corporatisation and demutualisation [Section 4B] :

Submission of scheme: All recognised stock exchanges shall submit a scheme for corporatisation and demutualisation for its approval within time specified by the SEBI. However, stock exchanges, which had already been corporatized and demutualised, shall not be required to submit the scheme.

Approval of scheme: On receipt of the scheme, the SEBI may approve the scheme with or without modification.

Publication of scheme: The scheme so approved shall be published immediately by the SEBI in the Official Gazette and in two daily newspapers circulating in India.

Imposition of restriction: While approving the scheme, SEBI may make an order restricting —

• Voting rights of shareholders who are also stock brokers.
• Rights of shareholder to appoint the representatives on the governing board of the stock exchange.
• Maximum number of representatives of the stock brokers of the recognised stock exchange to be appointed on the governing board of the recognised stock exchange, which shall not exceed 1/4th of the total strength of the governing board.

Rejection of scheme: Where the SEBI is satisfied that it would not be in the interest of the trade and also in the public interest to approve the scheme, it may, by an order, reject the scheme. Such order of rejection shall be published by it in the Official Gazette.

However, the SEBI shall give a reasonable opportunity of being heard before passing an order rejecting the scheme.

Effects of publication: On the publication of scheme in the Official Gazette it shall have full effect.

Compliance: Every recognised stock exchange shall ensure that at least 51% of its equity share capital is held, within 12 months from the date of publication of the order, by the public other than shareholders having trading rights. However, the SEBI may extend the said period by another 12 months on sufficient cause being shown to it.

Power of recognized stock exchange to make rules restricting voting rights, etc. [Section 7A]: Normally, voting rights is proportional to shareholding of a member. However, on case of recognised rules can provide the following matters:

• The restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting.
• The regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only.
• The restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting.
• Such incidental, consequential and supplementary matters as may be necessary to give effect to any of the matters specified above.

Amendments of rules of stock exchange: Rules relating to matter referred to above can be made or amended only with the approval of the Central Government/SEBI. In approving the rules, the Central Government may make modifications therein as it thinks fit. On publication of amended rules as approved by the Central Government the rules shall be deemed to have been validly made.

Additional trading floor [Section 13A]: A stock exchange may establish additional trading floor with the prior approval of the SEBI in accordance with the terms and conditions stipulated by the SEBI.

Additional trading floor means a trading ring or trading facility offered by a recognized stock exchange outside its area of operation to enable the investors to buy and sell securities through such trading floor.

M/s Goyanka & Co., which is a member of a recognized stock exchange desire to buy and sell shares of Crossroads Company Limited on their own count as well as on behalf of investors. Advise M/s Goyanka & Co. whether there are any restrictions for dealing in securities on their own count under the provisions of the Securities Contracts (Regulation) Act, 1956.

Members may not act as principals in certain circumstances [Section 15]: A broker can act on principal basis with other members of stock exchange. However, a member of stock exchange shall not enter into any contract in respect of securities, as a principal with any person other than a member of recognised stock exchange. He can do so only if he has secured the consent or authority of such person. He should disclose in the note, memorandum or agreement of sale or purchase that he is acting as a principal. If the consent or authority of such other person was not obtained in writing, the member shall secure written confirmation within 3 days from the date of contract.

However, such written consent of such person is not necessary for closing outstanding contract entered into by such person in accordance with the bye-laws, if the member discloses in the note, memorandum or agreement of sale or purchase in respect of such closing out that he is acting as a principal.

Penalty [Section 23(2)]: Penalty up to ` 1,000 can be imposed for non-compliance of section 15.

Conditions for listing [Section 21]: 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.

Right of appeal to SAT against refusal to list securities of public companies [Section 22A] :

• Where a recognised stock exchange refuses to list the securities of any public company, it shall furnish the reasons for such refusal.
• Time period for filing appeal is 15 days from the date of refusal. However, SAT may extend such period not exceeding 1 month on sufficient cause being shown.
• Every appeal to SAT shall be in prescribed form along with prescribed fee.
• SAT may vary or set aside the decision of the stock exchange.
• If application is not disposed by the stock exchange within specified time, on appeal, SAT may grant or refuse the permission.
• Appeal should be decided by the SAT expeditiously and possibly within 6 months.
• SAT shall send a copy of every order made by it to the SEBI and parties to the appeal.

Procedure and powers of SAT [Section 22B]: The SAT is not bound by the procedure laid down by the Code of Civil Procedure, 1908 but shall be guided by the principles of natural justice.

SAT has powers of Civil Court in respect of —

• Summoning and enforcing the attendance of any person and examining him on oath.
• Requiring the discovery and production of documents.
• Receiving evidence on affidavits.
• Issuing commissions for the examination of witnesses or documents.
• Reviewing its decisions.
• Dismissing an application for default or deciding it ex parte.
• Setting aside any order of dismissal of any application for default or any order passed by it ex parte.
• Any other matter which may be prescribed.

Every proceeding before SAT shall be deemed to be a judicial proceeding within the meaning of the Indian Penal Code, 1860 and the SAT shall be deemed to be a Civil Court.