Securities Market

The American Civil War broke out in 1861 which cut off supply of cotton from the USA
to Europe. This heightened the demand for cotton from India. Cotton prices increased.
Exports of cotton grew, payments were received in bullion. There was first boom in
Indian stocks during 1861 – 1865 when 125 new companies went public on the
background of American Civil War as the war brought about an upsurge of Indian cotton
exports to Europe in place of American cotton. Banks and financial institutions also
attracted investors. India’s first bubble bursting was in 1865 when the Indian stock
market crashed after the end of American Civil War.1

The Indian Securities Act, 1920 was important legislation on securities but it was the
law mainly relating to Government securities in India. Immediately after independence,
the Capital Issues (Control) Act, 1947 was vital enactment to control capital issues of
the country in the line of other laws to control foreign exchange and export & import.
First time a comprehensive concept of corporate securities came into existence.

The Securities Contract (Regulation) Act, 1956 mainly followed the pattern of the
Prevention of Fraud (Investment) Act, 1939 of United Kingdom.

1
The Indian Securities Market: A Guide for Foreign and Domestic Investors, Tadashi Endo, Vision Books, 1 st
edition reprinted 2000, Page 84 – 85
First comprehensive law on securities in India is the Securities Contracts (Regulation)
Act, 1956 where the term “securities” under section 2(h) originally included

(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;

13[(ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the
investors in such schemes;]
14[(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]
15[(id) units or any other such instrument issued to the investors under any mutual fund
scheme;]

16[Explanation.—For the removal of doubts, it is hereby declared that "securities" shall

not include any unit linked insurance policy or scrips or any such instrument or unit, by
whatever name called, which provides a combined benefit risk on the life of the persons
and investment by such persons and issued by an insurer referred to in clause (9) of
section 2 of the Insurance Act, 1938 (4 of 1938);]

17[(ie) any certificate or instrument (by whatever name called), 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 may be;]
18[(ii) Government securities;
(iia) such other instruments as may be declared by the Central
Government to be securities; and]
(iii) rights or interest in securities;

After the introduction of mutual funds in India, the concept of security was widen by the
incorporation of the term ‘unit’. “Security" means, as per section 2 (i) of the Unit Trust
of India Act, 1963, (a) any share, stock, bond, debenture or debenture stock, of any body
corporate; (b) any unit or sub- unit issued by, or other participation in a unit scheme
framed by, any body or authority (not being the Trust) outside India or a mutual fund
established outside India; and includes (i) a government security as defined in section 2
of the Public Debt Act, 1944 ; (ii) a savings certificate to which the Government Savings
Certificates Act, 1959, applies; (iii) any security issued by any local authority in India, or
by the Government of, or a local authority in, any such country outside India as may be
approved by the Reserve Bank; and (iv) any foreign security as defined in section 2 of the
Foreign Exchange Regulation Act, 1973, as may be approved by the Reserve Bank.
Though the Unit Trust of India Act, 1963 was repealed2 later but this law introduced
unit of mutual funds as security and at the same time, Government Savings Certificate
was also included within the definition of security.

Foreign Exchange Management Act, 1973

Section 2(20)

';security'; means shares, stocks, bonds, debentures, debenture stock, Government

securities as defined in the Public Debt Act, 1944, savings certificates to which the
Government Savings Certificates Act, 1959 applies, deposit receipts in respect of
deposits of securities, and units or sub-units of unit trusts and includes certificates of title
to securities, but does not include bills of exchange or promissory notes other than
Government promissory notes;

Section 2(8)

;foreign security'; means any security created or issued elsewhere than in India, and any
security the principal of or interest on which is payable in any foreign currency or
elsewhere than in India;

2
The Unit Trust of India (Transfer of Undertaking and Repealing) Act 2002
“Security” means, as per section 2(za) of the Foreign Exchange Management Act, 1999,
shares, stocks, bonds and debentures, Government securities as defined in the Public
Debt Act, 1944 (18 of 1944), savings certificates to which the Government Savings
Certificates Act, 1959 (46 of 1959) applies, deposit receipts in respect of deposits of
securities and units of the Unit Trust of India established under sub-section (1) of section
3 of the Unit Trust of India Act, 1963 (52 of 1963) or of any mutual fund and includes
certificates of title to securities, but does not include bills of exchange or promissory
notes other than Government promissory notes or any other instruments which may be
notified by the Reserve Bank as security for the purposes of this Act; and “foreign
security” under Section 2(o) means any security, in the form of shares, stocks, bonds,
debentures or any other instrument denominated or expressed in foreign currency and
includes securities expressed in foreign currency, but where redemption or any form of
return such as interest or dividends is payable in Indian currency;

As per Section 2(1) (m) of the Payment and Settlement Systems Act, 2007,
“Securities” means the Government securities as defined in the Public Debt Act,
1944 or such, other securities as may be notified by the Central Government from
time to time under that Act;