Securities Contract Regulation Act 1956

Securities Contract Regulation Act 1956

Securities Contract Regulation Act 1956
 Flow of the chapter
1. Definition
2. Stock exchange
3. Application for recognition
4. Grant of Recognition
5. Terms and conditions for recognition
6. Records and returns
7. Demutualisation
8. Withdrawal of recognition
9. Effect of withdrawal
10. Rules by stock exchange
11. Rules by SEBI
12. Bye laws by SEBI
13. Clearing corporation
14. Take over of management
15. Supervision of governing body
16. Power to suspend stock exchange
17. Power to issue directions
18. Contract in notified area
19. Power to establish additional trading ring
20. Members not to act as principal
21. Listing of securities
22. Refusal for securities
23. Title of dividend
24. Details of SAT
25. Appeal
26. Settlement commission
27. Calling for information
28. Procedure for adjudication
29. Miscellaneous
Securities Contract Regulation Act 1956
 Objective of the Act :
- to protect interest of investor
- to regulate stock exchange
- develop securities

Issue of Securities
Any company propose to issue securities can be issued through recognised stock
exchange and not directly to the public.

Definitions
Securities
 shares, debenture, bonds and warrants.
 Derivatives including commodity derivatives
 Securities issued by government, RBI, Local authority or statutory corporation
(e.g LIC, IDFC, etc)

 Securities issued by Asset Reconstruction Co.

 Securities issued by collective investment scheme or mutual fund.

Stock Exchange
It is a body corporate which facilitates buying and selling of securities

Formed without CG approval Formed with CG approval

Recongnition not Recongnition

Illegal association granted by SEBI granted by SEBI

Unrecongnised stock Recongnised stock

exchange (valid only for recongnition) exchange (valid for all purpose)
Securities Contract Regulation Act 1956
Renewal of recognition –

Application for recognition Sec.3

Any stock exchange propose for recognition shall make an application for recognition
to SEBI along with rules and bye laws (MOA & AOA)

Rules
 Office bearer – functions and their roles.
 Governing body (like BOD) its constitution and power.
 Admission of partnership firm as a member in a stock exchange and exclusion,
suspension, expulsion and readmission.
 Representation of partner of a partnership firm in a recognised stock exchange.

Bye Laws Sec.9

 Listing
- Condition for listing
- Condition for listed company
 Membership
- eligibility
- entry
- membership fees
- security deposits
- records and returns
- expulsion (removal)

Contravention of bye laws :

1. Fine.
2. Expulsion from membership.
3. Suspension from membership for a specified period
4. Any other penalty of a like nature not involving the payment of money.
Securities Contract Regulation Act 1956
 Trading
 Trading hours
 Brokerage
 Security margin
 Publication of data

Grant of recognition (Sec.4)

SEBI shall give recognition if the given conditions are satisfied :
1. It is in public interest.
2. Rules and bye laws are sufficient enough for fair trading.

Then SEBI may give recognition subject to given terms and condition.
1. Qualification of member
2. Manner of entering into contract
3. Maintenance of books of accounts and their audit by CA.
4. Representative of SEBI (Max.3) in a stock exchange.
SEBI may give recognition by notification in official gazette.

Records and Returns Sec.6

 Prescribed records are to be maintained and prescribed returns are to be filed.
 Stock exchange should furnish copy of annual return before 31st January to CG.
 It shall maintain for 5 years.
 SEBI can make inquiry of stock exchange and its members. It may also direct
stock exchange to conduct inquiry of members.
 SEBI may take disciplinary action against stock exchange and members.
 SEBI may appoint investigating authority with a power of civil court.
 All directors, secretary and employee are under obligation to render all reasonable
assistance to investigating authority.

Securities Contract Regulation Act 1956

 withdrawal of Recognition Sec.5
If the SEBI is of the opinion that affairs of the stock exchange is conducted in the
manner prejudicial
 to public interest or
 scheme of corporation and demutualization not submitted or
 scheme of corporatization and demutalisation is rejected.
In the above grounds, SEBI may withdraw recognition after prior written notice for
opportunity of being heard.
Manner of withdrawal.
SEBI may withdraw recognition after issuing notification in the official gazette.
Effect of withdrawal

Validity of contract
Contract already entered before withdrawal such remain valid contract

Rules by stock exchange in relation to voting rights Sec.7A

Stock exchange can make various rules on the given matter with prior approval of SEBI.
1. Subject matter on which member can vote.
2. No. of votes members can cart (i.e. on the basis of share capital or on member
one vote)
3. Prohibition on voting through proxy
4. Any matter which is ancillary or incidental thereto
SEBI may approve this by issuing notification in the official gazette

Rules by SEBI
 SEBI by an order may require stock exchange to amend rules.
 Stock exchange shall amend the rules within 2 months.
Securities Contract Regulation Act 1956
 If stock exchange fails to amend the rules within 2 months then SEBI may
amend after expiry of 2 months of order.
SEBI shall amend by issuing notification in the official gazette and it is effective
with immediate effect.

Bye Laws by SEBI

 SEBI on its own or an application by governing body of stock exchange can
amend the bye laws.
 Stock exchange may appeal for review within 2 months

Demutualisation
 It is segregation between broking right and voting right.
 If all shares are held by broker then within 1 year issue so much shares to the
outsider that holding of broker becomes maximum 49%.

Member Broker Member Non Broker

1. Broking rights Voting rights

Shareholding minimum 51% of share
2. Shareholding maximum 49%
capital
Governing body maximum 1/4th of Governing body minimum ¾ of total
3.
total directors directors

Clearing Corporation
 It is a subsidiary of a stock exchange working as a cleaning house.
 SE (Stock Exchange) can form subsidiary under Companies Act.
 All settlement functions of stock exchange is discharged by clearing corporation.
e.g. delivery of securities, payment, etc.
 Approval of SEBI required for transfer of function of clearing house by stock
exchange to clearing corporation.
 Its name ends with clearing corporation limited.
Securities Contract Regulation Act 1956
 Sec.4 to 12 is equally applicable to clearing corporation.

(i) ...........................................................................................where the affairs of the

governing body is conducted in such a way that it is prejudicial to public interest.
SEBI may remove members of governing body after giving an opportunity of
being heard.
(ii) SEBI shall appoint members of governing body to carry out business of stock
exchange.
(iii) On directions of SEBI, member of stock exchange shall conduct meeting to
appoint members of governing body.
(iv) On appointment of directors by members of SE the member of the governing
body (appointed by SEBI) shall vacate the office.

Power to suspend stock exchange Section 12

Central government can suspend any recognised stock exchange for maximum 7
days by issuing notification in the official gazette.
It can be again suspended by issuing notification in the official gazette for another
7 days by CG.

Power to issue Direction :

........................................................................................
SEBI may issue directions to stock exchange for :
1. Development of securities market.
2. Proper management of stock exchange.
3. To protect interest of investor.

Securities Contract Regulation Act 1956

 Contract in Notified Area :
 Central Government may notify any area or State where transaction can be
done only among or through members of recognised stock exchange and not with
outsider.
 Transaction through with outsider will be treated as illegal transaction.
 It is not applicable to spot delivery contract.
 CG shall consider nature and value and volume of transaction.

Establishment of additional trading ring :

 SEBI may allow additional trading ring outside the area of stock exchange. Such
additional trading ring will facilitate buying and selling of securities.
 To establish such additional trading ring prior approval of ................. is required.

Members not to act as Principal :

 (Usually, member and investor have principal and agent relationship. However,
member and investor can have principal and principal relationship if prior
written consent is taken by the member) However relationship between two
member can be principal – principal even if it is not in writing.
 It is not applicable to spot delivery contract. (It means transaction can be
principal – principal without written approval/consent.)
 When the confirmation is not in writing i.e. other mode then written consent
should be taken within 3 days.

Refusal for Listing of Securities

 Stock exchange may refuse to list securities of company after recording reason
in writing and such reason shall be furnished.
 Such company may file an appeal to SAT (Securities Appellate Tribunal) within
15 days which can be extended upto 1 month. Earlier this power was given to CG.

Securities Contract Regulation Act 1956

 De-Listing of Securities
 Securities can be delisted by stock exchange after giving opportunity of being
heard.
 Such securities may be delisted if affairs are prejudicial to public interest or
interest of investors.
 Appeal can be filed against such order by company or its investor to SAT within
15 days.
 SAT shall dispose the case within 6 months.

Grounds for delisting

1. Company has incurred loss in preceding 3 FY and it has negative net worth.
2. Trading in securities of the company is suspended for a period of more than 6
months.
3. The securities of the company has remained infrequently traded during preceding
3 years.
4. The company or promoter or director has been convicted for non compliance of
SEBI Act or SCRA Act or depositor’s Act and levied penalty of atleast 1 crore or
imprisonment atleast 3 years.
5. The address of the company or promoter or director are not known or it is false.
6. Shareholding of the company held by the public fall below minimum level as per
listing agreement and company has failed to raise the holding.

Title of dividend
When transferor transfers share cum dividend but still received dividend on such
shares than transferee may claim dividend from transferor within 15 days of record
date. However, in the following situation period of 15 days will be entered :
1. Delay due to post (No. of days lost due to such delay).
2. Delay due to lost or theft (No. of days taken to recover)
3. Delay due to dispute among legal heirs. (No. of days taken to establish the
right).
Securities Contract Regulation Act 1956
Note :
The restriction of 15 days will not be applicable if company refuse to register the
transfer deed.

Qualification of presiding Officer or Member of SAT

Judge of Supreme Chief Justice of High Judge of High Court

Court (sitting / retiring) Court (sitting / retired) (sitting / retired)
Atlest 7 years of experience

Presiding Officer of SAT shall be appointed by CG in consultation with Chief Justice

of India or his representative.
Relevant Qualification and Experience
Law, Securities Law, Finance, Economics, Accounts.
Should not be director or senior position of SEBI (is or was in last 2 years).
(Any person who was member / is member of SEBI or into senior management in
that year or in last two years cannot become member in SAT.)
Penalties

Failure to furnish Failure to segregate No separate penalty Failure to comply listing

Return securities or client or conditions or delisting
Maintain BOA money or for self use general penalty ground
Enter agreement with
client in specified Upto 1 Crore Upto 1 crore Upto 25 crore

manner no compliance this Act)

Investor grievances

Appeal : Refer SEBI Act.

Securities Contract Regulation Act 1956

 Settlement of Administration and Civil Proceedings
 Any person against whom any proceeding is initiated or have been initiated
may file an application for settlement.
 It should be in writing.
 SEBI will consider following factor before accepting application.
 Nature of application
 Impact of default
 Amount of penalty
 Other such terms and conditions
 After settlement no appeal shall lie.

Recovery of Penalty Amount :

If person fails to pay the penalty imposed by the adjudicating authority, then it can
be recommended in the following manner:
1. Attachment and sale of immovable property.
2. Movable property.
3. Bank Account.
4. Can appoint receiver for sale of asset.
5. SEBI may appoint recovery officer by order in writing.
6. Assistance of local administration can be taken for execution of the duty e.g.
police.

Composition of Offences :
Only following offences can be compounded :
1. Fine only.
2. Fine or imprisonment.
3. Fine or imprisonment or both
Application of compounding can be filed before prosecution or during prosecution to
SAT/Court under compounding under whom such prosecution is going on.

Securities Contract Regulation Act 1956

 Power to Grant of Immunity :
 SEBI has made a recommendation to CG that a person alleged to have violated
any of the provisions and it should be granted immunity from prosecution or
penalty.
 The proceeding for the prosecution shall not be instituted before the date of
application.
 The central government may grant the immunity if found appropriate (the
recommendation of SEBI is not binding.)



Securities Contract Regulation Act 1956