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SECURITIES CONTRACTS (REGULATION) ACT, 1956
42 of 1956
Statement of Objects and Reasons.—In the last few years there have been substantial improvements in the functioning of capital markets in India. Market and credit risks have been reduced by requirement of adequate capitalisation, margining and establishment of clearing corporations in stock exchanges, etc. Systemic improvements have been made by introduction of screen based trading and depositories to allow book entry transfer of securities, etc. However, there are inadequate advanced risk management tools. With a view to provide such tools and to strengthen and deepen markets, there is an urgent need to include derivatives as securities in the Securities Contracts (Regulation) Act, 1956 whereby trading in derivatives may be possible within the framework of that Act. 2. Recently many companies especially plantation companies have been raising capital from investors through schemes which are in the form of collective investment schemes. However, there is not an adequate regulatory framework to allow an orderly development of this market. In order that the interests of investors are protected, it has been decided that the Securities and Exchange Board of India would frame regulations with regard to collective investment schemes. It is, therefore, proposed to amend the definition of "securities" so as to include within its ambit the derivatives and the units or any other instrument issued by any collective investment scheme to the investors in such schemes. 3. It is also proposed to substitute Section 29-A of the aforesaid Act relating to delegation of powers. At present powers can be delegated to the Securities and Exchange Board of India. It is now proposed to also delegate powers to the Reserve Bank of India. 4. The Securities Contracts (Regulation) Amendment Bill, 1998 was introduced in Lok Sabha on the 4th July, 1998 proposing amendments in the Securities Contracts (Regulation) Act, 1956 to give effect to the amendments mentioned above. The Bill was referred to the Standing Committee on Finance on the 10th July, 1998 for examination and report thereon by the Hon'ble Speaker, Lok Sabha. The Committee submitted its report on the 17th March, 1999. The Committee was of the opinion that the introduction of derivatives, if implemented with proper safeguards and risk containment measures, will certainly give a fillip to the sagging market, result in enhanced investment activity and instil greater confidence among the investors/participants. The Committee after having examined the provisions of the Bill and being convinced of the needs and objectives of the Bill, approved the same for enactment by Parliament with certain modifications/recommendations which, inter alia, are stated as under:— (i) A view was expressed before the Standing Committee that since under Section 30 of the Indian Contract Act, 1872, the contracts which are cash settled are classified as wagers and trading in wagers is null and void, the index future which are always cash settled would also be classified as wagers under the said Act. Due to this, no proceedings to enforce an index future contract either by an exchange against a defaulting broker or client against his broker would stand the legal scrutiny before the court of law. The Committee was, therefore, of the view that there was no harm in having an overriding provision as a matter of abundant caution. They, therefore, suggested the incorporation of the following provision in the Bill, namely: — "Notwithstanding anything contained in any other Act, contracts in derivatives as per this Act shall be legal and valid."; (ii) The Committee was convinced that stock exchanges which are presently working would be better equipped to undertake trading in derivatives in a sophisticated environment. They further observed that most of these exchanges have already been modernised having state-of- the-art technology, the facility of depository and clearance house and moreover, since they are in a better position to handle the risk profiles of the retail investors, institutional investors and corporate bodies, it would be prudent to allow trading in derivatives by such exchanges only. The Committee had, therefore, proposed that the following Explanation may be added in the Bill, namely: — "The derivatives shall be traded and settled on the stock exchange and clearing house of the stock exchange respectively in accordance with the rules and bye-laws of the stock exchange."; and (iii) The Committee was of the opinion that there was a need to define collective investment schemes in the Act. They had recommended that a definition of collective investment scheme suitably worded in consonance with the definition recommended by the Dave Committee should be included in the Act. The Central Government have accepted the above recommendations and incorporated the same in the Bill. 5. The Bill seeks to achieve the above objectives. Prefatory Note—Statement of Objects and Reasons.—The Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act. 1992 and the Depositories Act, 1996 govern the operations of the capital market. The objectives of these Acts are to prevent undesirable transactions in securities by regulating the business of dealing therein, to provide for the establishment of the Securities and Exchange Board of India to protect the interests of investors in securities and to promote the development of, and to regulate, the securities markets and to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto. 2. The Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 were amended by the Securities Laws (Amendment) Act, 1995, which, inter alia, made provisions in the Securities and Exchange Board of India Act, 1992 for appointment of adjudicating officer for imposition of penalties and for establishment of the Securities Appellate Tribunal to hear appeals against the orders or decisions of such adjudicating officers. 3. The Central Government has been conferred powers to hear appeals in respect of all matters (except hearing of appeals against the orders of adjudicating officer under the Securities and Exchange Board of India Act, 1992) under the Securities Contracts (Regulation) Act, 1956. the Securities and Exchange Board of India Act, 1992 and the Depositories Act, 1996. In addition to appellate powers, the Central Government, inter alia, has been conferred powers to issue directions and to make rules under these Acts. The Central Government is also represented on the management of the Securities and Exchange Board of India as well as stock exchanges. 4. The powers of the Central Government to issue directions and to make rules and to appoint members of the Securities and Exchange Board of India as well as on governing body of the stock exchanges are being perceived as compromising its appellate powers. It is therefore, proposed to transfer the aforesaid appellate functions of the Central Government under all three Acts from the Central Government to the Securities Appellate Tribunal. 5. The Bill seeks to achieve the above objectives. An Act to prevent undesirable transactions in securities by regulating the business of dealing therein, 1[* * *] by providing for certain other matters connected therewith. BE it enacted by Parliament in the Seventh Year of the Republic of India as follows:
CHAPTER 01: PRELIMINARY
SECTION 01: SHORT TITLE, EXTENT AND COMMENCEMENT
(1) This Act may be called the Securities Contracts (Regulation) Act, 1956.
(2) It extends to the whole of India.
(3) It shall come into force on such date2as the Central Government may, by notification in the Official Gazette, appoint.
SECTION 02: DEFINITIONS
In this Act, unless the context otherwise requires,-
(a) "contract" means a contract for or relating to the purchase or sale of securities;
3(aa) "derivative" include-
(A) a security derived from a debt instrument, share, lona, whether secured or unsecured, risk instrument or contract for differences of any other form of security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
(b) "Government security" means a security created and issued, whether before or after the commencement of this Act, by the Central Government or a State Government for the purpose of raising a public loan and having one of the forms specified in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944)-;
(c) "member" means a member of a recognised stock exchange ;
(d) "option in securities" means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities;
(e) "prescribed" means prescribed by rules made under this Act;
(f) "recognised stock exchange" means a stock exchange which is for the time being recognised by the Central Government under section 4-;
(g) "rules", with reference to the rules relating in general to the constitution and management of a stock exchange, includes, in the case of a stock exchange which is an incorporated association, its memorandum and articles of association;
7(ga) "Securities Appellate Tribunal" means a Securities Appellate Tribunal established under sub-section (1) of section 15K of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(h) "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;
6(ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes.
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Govern- ment to be securities; and
(iii) rights or interest in securities;
4[(i) "spot delivery contract" means 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;]
(j) "stock exchange" means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.
SECTION 02A: INTERPRETATION OF CERTAIN WORDS AND EXPRESSIONS
8-Words and expressions used herein and not defined in this Act but defined in the Companies Act, 1956 (1 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) shall have the same meanings respectively assigned to them in those Acts.
CHAPTER 2 RECOGNISED STOCK EXCHANGES
SECTION 03: APPLICATION FOR RECOGNITION OF STOCK EXCHANGES
(1) Any stock exchange, which is desirous of being recognised for the purposes of this Act, may make an application in the prescribed manner to the Central Government.
(2) Every application under sub-section (1) shall contain such particulars as may be prescribed, and shall be accompanied by a copy of the bye-laws of the stock exchange for the regulation and control of contracts and also a copy of the rules relating in general to the constitution of the stock exchange and in particular, to-
(a) the governing body of such stock exchange, its constitution and powers of management and the manner in which its business is to be transacted;
(b) the powers and duties of the office bearers of the stock exchange;
(c) the admission into the stock- exchange of various classes of members, the qualifications for membership, and the exclusion, suspension, exclusion and re-admission of members there from or there into;
(d) the procedure for the registration of partnerships as members of the stock exchange in cases where the rules provide for such membership; and the nomination and appointment of authorised representatives and clerks.
SECTION 04: GRANT OF RECOGNITION TO STOCK EXCHANGES
(1) If the Central Government ƒ is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as it may require,-
(a) that the rules and bye-laws of a stock exchange applying for registration are inconformity with such conditions as may be prescribed with a view to ensure fair dealing and to protect investors;
(b) that the stock exchange is willing to comply with any other conditions (including conditions as to the number of members) which the Central Government, after consultation with the governing body of the stock exchange and having regard to the area served by the stock exchange and its standing and the nature of the securities dealt with by it, may impose for the purpose of carrying out the objects of this Act; and
(c) that it would be in the interest of the trade and also in the public interest to grant recognition to the stock exchange ; it may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in such form as may be prescribed.
(2) The conditions which the Central Government ' may prescribe under clause
(a) of sub-section (1) for the grant of recognition to the stock exchanges may include, among other matters, conditions relating to,-
(i) the qualifications for membership of stock exchanges;
(ii) the manner in which contracts shall be entered into and enforced as between members;
(iii) the representation of the Central Government on each of the stock exchanges by such number of persons not exceeding three as the Central Government may nominate in this behalf and
(iv) the maintenance of accounts of members and their audit by chartered accountants whenever such audit it required by the Central Government.
(3) Every grant of recognition to a stock exchange under this section shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office as of the stock exchange is situate, and such recognition shall have effect as from the date of its publication in the Gazette of India9.
(4) No application for the grant of recognition shall be refused except after giving an opportunity to the stock exchange concerned to be heard in the matter; and the reasons for such refusal shall be communicated to the stock exchange in writing.
(5) No rules of a recognised stock exchange relating to any of the matters specified in sub-section (2) of section 3-shall be amended except with the approval of the Central Government10.
SECTION 05: WITHDRAWAL OF RECOGNITION
If the Central Government is of opinion that the recognition granted to a stock exchange under the provisions of this Act should, in the interest of the trade or in the public interest, be withdrawn, the Central Government may serve on the governing body of the stock exchange a written notice that the Central Government is considering the withdrawal of the recognition for the reasons stated in the notice and after giving an opportunity to the governing body to be heard in the matter, the Central Government may withdraw, by notification in the Official Gazette, the recognition granted to the stock exchange: Provided that no such withdrawal shall affect the validity of any contract entered into or made before the date of notification, and the Central Government may, after consultation with the stock exchange, make such provision as it deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due performance of any contracts outstanding on that date.
SECTION 06: POWER OF CENTRAL GOVERNMENT TO CALL FOR PERIODICAL RETURNS OR DIRECT INQUIRIES TO BE MADE
(1) Every recognised stock exchange shall furnish to the Securities and Exchange Board of India such periodical returns relating to its affairs as may be prescribed.
(2) Every recognised stock exchange and every member thereof shall maintain and preserve for such periods not exceeding five years such books of account, and other documents as the Central Government, after consultation with the stock exchange concerned, may prescribe in the interest of the trade or in the public interest, and such books of account, and other documents shall be subject to inspection at all reasonable times by the Securities and Exchange Board of India.
(3) Without prejudice to the provisions contained in sub-sections ( 1 ) and (2), the Securities and Exchange Board of India, if it is satisfied that it is in the interest of the trade or in the public interest so to do, may, by order in writing,-
(a) call upon a recognised stock exchange or any member thereof to furnish in writing such information or explanation relating to the affairs of the stock exchange or of the member in relation to the stock exchange as the Securities and Exchange Board of India may require ; or
(b) appoint one or more persons to make an inquiry in the prescribed manner in relation to the affairs of the governing body of a stock exchange or the affairs of any of the members of the stock exchange in relation to the stock exchange and submit a report of the result of such inquiry to the Securities and Exchange Board of India within such time as may be specified in the order or, in the case of an inquiry in relation to the affairs of any of the members of a stock exchange, direct the governing body to make the inquiry and submit its report to the Securities and Exchange Board of India.
(4) Where an inquiry in relation to the affairs of a recognised stock exchange or the affairs of any of its members in relation to the stock exchange has been undertaken under sub-section (3),-
(a) every director, manager, secretary or other officer of such stock ex- change;
(b) every member of such stock exchange ;
(c) if the member of the stock exchange is a firm, every partner, manager, secretary or other officer of the firm ; and
(d) every other person or body of persons who has had dealings in the course of business with any of the persons mentioned in clauses (a), (b) and (c) whether directly or indirectly, shall be bound to produce before the authority making the inquiry all such books of account, and other documents in his custody or power relating to or having a bearing on the subject-matter of such inquiry and also to furnish the authorities within such time as may be specified with any such statement or information relating thereto as may be required of him.
SECTION 07: ANNUAL REPORTS TO BE FURNISHED TO CENTRAL GOVERNMENT BY STOCK EXCHANGES
Every recognised stock exchange shall furnish the Central Government with a copy of the annual report, and such annual report shall contain such particulars as may be prescribed.
SECTION 07A: POWER OF RECOGNISED STOCK EXCHANGE TO MAKE RULES RESTRICTING OF VOTING RIGHTS ETC
(1) A recognised stock exchange may make rules or amend any rules made by it to provide for all or any of the following matters, namely:-
(a) the restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting;
(b) 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, irrespective of his share of the paid-up equity capital of the stock exchange;
(c) the restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting of the stock exchange;
(d) such incidental, consequential and supplementary matters as may be necessary to give effect to any of the matters specified in clauses (a), (b) and (c).
(2) No rules of a recognised stock exchange made or amended in relation to any matter referred to in clauses (a) to
(d) of sub-section (1) shall have effect until they have been approved by the Central Government 'and published by that Government in the Official Gazette and, in approving the rules so made or amended, the Central Government may make such modifications therein as it thinks fit, and on such publication, the rules as approved by the Central Government shall be deemed to have been validly made, notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956).
SECTION 08: POWER OF CENTRAL GOVERNMENT TO DIRECT RULES TO BE MADE OR TO MAKE RULES
(1) Where, after consultation with the governing bodies of stock exchanges generally or with the governing body of any stock exchange in particular, the Central Government is of opinion that it is necessary or expedient so to do, it may, by order in writing together with a statement of the reasons therefore, direct recognised stock exchanges generally or any recognised stock exchange in particular, as the case may be, to make any rules or to amend any rules already made in respect of all or any of the matters specified in sub-section (2) of section 3-within a period of13[two] months from the date of the order.
(2) If any recognised stock exchange fails or neglects to comply with any order made under sub-section (1) within the period specified therein, the Central Government may make the rules for, or amend the rules made by, the recognised stock exchange, either in the form proposed in the order or with such modifications thereof as may be agreed to between the stock exchange and the Central Government.
(3) Where in pursuance of this section any rules have been made or amended, the rules so made or amended shall be published in the Gazette of India and also in the Official Gazette or Gazettes of the State or States in which the principal off tee or offices of the recognised stock exchange or exchanges is or are situate, and, on the publication thereof, in the Gazette of India, the rules so made or amended shall, not withstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956)-or in any other law for the time being in force, have effect as if they had been made or amended by the recognised stock exchange or stock exchanges, as the case may be.
SECTION 09: POWER OF RECOGNISED STOCK EXCHANGES TO MAKE BYE--LAWS
(1) Any recognised stock exchange may, subject to the previous approval of the Securities and Exchange Board of India, make bye-laws for the regulation and control of contracts.
(2) In particular, and without prejudice to the generality of the foregoing power, such bye-laws may provide for:
(a) the opening and closing of markets and the regulation of the hours of trade;
(b) a clearing house for the periodical settlement of contracts and differences thereunder, the delivery of and payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house;
(c) the submission to the Securities and Exchange Board of India by the clearing house as soon as may be after each periodical settlement of all or any of the following particulars as the Securities and Exchange Board of India may, from time to time, require, namely :-
(i) the total number of each category of security carried over from one settlement period to another;
(ii) the total number of each category of security, contracts in respect of which have been squared up during the course of each settlement period;
(iii) the total number of each category of security actually delivered at each clearing;
(d) the publication by the clearing house of all or any of the particulars submitted to the Securities and Exchange Board of India under clause (c) subject to the directions, if any, issued by the Securities and Exchange Board of India in this behalf;
(e) the regulation or prohibition of blank transfers;
(f) the number and classes of contracts in respect of which settlements shall be made or differences paid through the clearing house;
(g) the regulation, or prohibition of budlas or carry-over facilities;
(h) the fixing, altering or postponing of days for settlements;
(i) the determination and declaration of market rates, including the opening, closing highest and lowest rates for securities;
(j) the terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing;
(k) the regulation of the entering into, making, performance, recession and termination of contracts, including contracts between members or between a member and his constituent or between a member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members who are not parties to such contracts;
(l) the regulation of taravani business including the placing of limitations thereon;
(m) the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities;
(n) the method an procedure for the settlement of claims or disputes, including settlement by arbitration;
(o) the levy and recovery of fees, fines and penalties;
(p) the regulation of the course of business between parties to contracts in any capacity;
(q) the fixing of a scale of brokerage and other charges;
(r) the making, comparing, settling and closing of bargains;
(s) the emergencies in trade which may arise, whether as a result of pool or syndicated operations or cornering or otherwise and the exercise of powers in such emergencies, including the power to fix maximum and minimum prices for securities;
(t) the regulation of dealings by members for their own account;
(u) the separation of the functions of jobbers and brokers;
(v) the limitations on the volume of trade done by any individual member in exceptional circumstances;
(w) the obligation of members to supply such information or explanation and to produce such documents relating to the business as the governing body may require.
(3) The bye-laws made under this section may-
(a) specify the bye-laws the contravention of which shall make a contract entered into otherwise than in accordance with the bye-laws void under sub-section (1) ofsection 14-;
(b) provided that the contravention of any of the bye-laws shall render the member concerned liable to one or more of the following punishments, namely:-
(i) fine,
(ii) expulsion from membership,
(iii) suspension from membership for a specified period.
(iv) any other penalty of a like nature not involving the payment of money.
(4) Any bye-laws made under this section shall be subject to such conditions in regard to previous publications as may be prescribed, and, when approved by the Securities and Exchange Board of India, 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, and shall have effect as from the date of its publication in the Gazette of India : Provided that if the Securities and Exchange Board of India is satisfied in any case that in the interest of the trade or in the public interest any bye-law should be made immediately, it may, by order in writing specifying the reasons therefore, dispense with the condition of previous publication.
SECTION 10: POWER OF SECURITIES AND EXCHANGE BOARD OF INDIA TO MAKE OR AMEND BYE--LAWS OF RECOGNISED STOCK EXCHANGES
(1) The Securities and Exchange Board of India may, either on a request in writing received by it in this behalf from the governing body of a recognised stock exchange or on its own motion, if it is satisfied after consultation with the governing body of the stock exchange that it is necessary or expedient so to do and after recording its reasons for so doing, make bye-laws for all or any of the matters specified in section 9-or amend any bye-laws made by such stock exchange under that section.
(2) Where in pursuance of this section any bye-laws have been made or amended the bye-laws so made or amended 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, and on the publication thereof in the Gazette of India, the bye-laws so made or amended shall have effect as if they had been made or amended by the recognised stock exchange concerned.
(3) Notwithstanding anything contained in this section, where the governing body of a recognised stock exchange objects to any bye-laws made or amended under this section by the Securities and Exchange Board of India on its own motion, it may, within14[two] months of the publication thereof in the Gazette of India under sub-section (2), apply to the Securities and Exchange Board of India for revision thereof, and the Securities and Exchange Board of India may, after giving an opportunity to the governing body of the stock exchange to be heard in the matter, revive the bye-laws so made or amended, and where any bye-laws so made or amended are revised as a result of any action taken under this sub-section, the bye-laws so revised shall be published and shall become effective as provided in sub-section (2).
(4) The making or the amendment or revision of any bye-laws under this section shall in all cases be subject to the condition of previous publication: Provided that if the Securities and Exchange Board of India 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 therefor, dispense with the condition of previous publication.
SECTION 11: POWER OF CENTRAL GOVERNMENT TO SUPERSEDE GOVERNING BODY OF A RECOGNISED STOCK EXCHANGE
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