Securities contract regulation act, 1956

Learn what is Corporatisation and Demutualisation of Securities.Know what are the penalties and offences under the Securities Contract (Regulation) Act, 1956
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1. Securities Contract ( Regulation ) Act , 1956 Prepared by- Dr Ramandeep Assistant Professor Deptt. of Commerce GCW, Sirsa (Haryana)

2. Introduction Applicability- It was enacted by parliament in the seventh year of the Republic of India(1956) & extends to the whole of India . Objective- The securities contracts(regulation)Act , 1956 is an Act to pre v ent undesirable transactions in securities by regulating the business of dealing therein , by providing for certain other matters connected therewith.

3. Non-Applicability of the Act (Section 28) The provisions of this Act shall not apply to – (a) The Government ; ( b) the Reserve Bank of India ( RBI ); ( c) any local authority ; ( d) any corporation set-up by a special law; or ( e) Any convertible bond or share warrant or any option or right in relation thereto.

4. Meaning of Corporatisation 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.” [Section 2( aa )]

5. Stock Exchange Trading Floor in 1950’s Corporatized Stock Exchange in 2004

6. Meaning of Demutualisation 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 Securities and Exchange Board of India.” [ Section 2( ab )]

7. The first picture shows the traditional trading floor, wherein the members of the stock exchange, were the stock brokers themselves. The second picture depicts the current scenario of stock exchanges, wherein the contracts relating to sale and purchase of shares are automated online and the stock brokers are mere intermediaries between the stock exchange and the investors.

8. Structure Of The Act Definitions (Section 2) Recognition of Stock Exchange (Section 3-5) Powers of CG, SEBI & stock exchange (Section 5-9) Contracts in securities (Section 13) Licensing of Securities (Section 17-20) Listing of Securities (Section 21) Appellate proceedings (Section 22) Penalties and Offences (Section 23-26)

9. Definition of Stock Exchange “ 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 .

10. What it deals with ? The Securities contracts (Regulation ) Act , 1956 deals with - Stock exchanges , through a process of recognition & continued supervision , Contracts in securities , Listing of securities .

11. Application for Recognition of Stock Exchange (Sec-3) Any Stock exchange, which is desirous of being recognized for the purposes of this act may make an application in the prescribed manner to the Central Government . The application for the recognition shall be made to SEBI in Form A. The fees to be paid for the application shall be INR 500.

12. Continue….. The application made to SEBI shall be accompanied by a copy of the rules relating in general to the constitution of the stock exchange and in particular, to – (a) The governing body , its constitution and powers of management; (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, expulsion and re-admission of members;

13. Continue… Every application shall be accompanied by 4 copies of the rules (including MoA and AoA) and bye-laws of the stock exchange applying for recognition as specified in Section 3 of the Act.

14. Grant of Recognition to Stock Exchanges (Sec-4) If the Central Government is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such to further information, if any, as it may require- ( a) that the rules and bye-laws of a stock exchange applying for registration are in conformity with such conditions ; ( b) that the stock exchange is willing to comply with any other conditions, and ( c) that it would be in the interest of the trade and in the public interest. 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.

15. The recognition granted to a stock exchange shall be in Form B and be subject to the following conditions, namely – (a) That the recognition, unless granted on a permanent basis, shall be for such period not less than one year as may be specified in the recognition; (b) That the stock exchange shall comply with such conditions as are or may be prescribed or imposed. Continue……

16. Renewal of Recognition (Rule 7) T hree months before the expiry of the period of recognition, a recognised stock exchange desirous of renewal of such recognition may make an application to the SEBI in Form A . Fees- The fee payable upon the application of renewal of recognition of stock exchange shall be two hundred rupees .

17. Who is eligible to be a member of a recognised stock exchange? Rule 8(1) – No person shall be eligible to be elected as a member if – he is less than 21 years of age; he is not a citizen of India ; he has been adjudged bankrupt ; he has been compounded with his creditors; he has been convicted of fraud and dishonesty; he is engaged as principal or employee in any business other than that of securities or commodity derivatives; he has been, at any time expelled or declared a defaulter , and he has been previously refused admission to membership.

18. Who is eligible to be a member of a recognised stock exchange ? No person eligible for admission as a member under Rule 8(1) shall be admitted as a member unless – (a) he has worked for not less than two years as a partner with, or an authorised assistant or authorised clerk or remisier or apprentice to, a member; or (b) he agrees to work for a minimum period of two years as a partner or representative member with another member. (c) he succeeds to the established business of a deceased or retiring member.

19. Who is eligible to be a member of a recognised stock exchange? Rule 8(4) - A company defined in Companies Act, 1956 shall be eligible to be elected as member of a stock exchange if – ( i ) such company is formed in compliance with the provisions of section 322 of the said Act; (ii) a majority of the directors of such company are also the members of that stock exchange, and (iii) the directors of such company, who have ultimate liability in such company are members of that stock exchange.

20. Continue….. The governing body of stock exchange may admit as member the following – Industrial Finance Corporation of India (IFCI) ; the Industrial Development Bank of India (IDBI) ; any insurance company registered by the (IRDA) ; the Unit Trust of India (UTI) ; the Industrial Credit and Investment Corporation of India (ICICI) ; the subsidiaries of any of the corporations or companies; any bank included in the 2 nd Schedule to the RBI Act, 1934; the Export Import Bank of India (EXIM) ; (j) the NABARD ; (k) the National Housing Bank (NHB) ; (l) Central Board of Trsutees , Employees' Provident Fund (EPF) ; (m) any pension fund registered or appointed or regulated by the PFRDA;

21. Withdrawal of Recognition (Section 5) The CG or SEBI may serve on the governing body of the stock exchange, a written notice for 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. The written notice for the withdrawal of recognition shall be in Form C .

22. Administration of Stock Exchanges The SCRA Rules, 1957 state that every stock exchange is required to follow the following rules – Audit of account of members (Rule 12) – Every member shall get his accounts audited by a Chartered Accountant whenever such audit is required by SEBI. Maintenance of books of accounts (Rule 14) – Every recognised stock exchange shall maintain and preserve the following books of account and documents for a period of 5 years – Minute books of the meetings Register of members

23. Continue… Maintenance of Books of Account by every member (Rule 15)- Books of account to be maintained and preserved by the members for 5 years – Register of transactions ( Sauda Book) Clients’ ledger General ledger Journals Cash Book Bank pass-book Documents register showing full particulars of shares and securities received and delivered.

24. Powers of Central Government or SEBI under the Act To Furnish Periodical Returns and inquiries (Sec 6)- It is the responsibility of every recognised stock exchange to furnish periodical return to Central Government or SEBI. It is the responsibility of the recognised stock exchanges to maintain and preserve the books of accounts . The CG or SEBI can issue an order to call upon a recognised stock exchange to furnish in writing such information or explanation . The CG or SEBI can appoint one or more persons to make an inquiry in relation to the affair of the governing body of a stock exchange.

25. Continue… Annual reports to be furnished to SEBI by stock exchanges (Sec 7)- Every recognised stock exchange shall before the 31st day of January furnish an annual report to SEBI about its activities , which shall contain detailed information about the following matters – Changes in the rules and bye-laws , if any; • Changes in the composition of the governing body ; • Admissions, re-admissions, deaths or resignations of members ; • Disciplinary action against members; • Defaults • Securities listed and de-listed ; and • Securities brought on or removed from the forward list.

26. Continue… To direct rules to be made or to make rules of the Stock Exchange (Section 8) The Central Government may direct any recognised stock exchange by order in writing, to make or amend any rules already made in respect of all or any of the matters.

27. Continue… Clearing Corporation (Section 8A) A recognised stock exchange may, with the prior approval of SEBI , transfer the duties and functions of a clearing house to a clearing corporation , being a company incorporated under the Companies Act for the purpose of – • The periodical settlement of contracts and differences thereunder and • delivery of, and payment for, securities;

28. Continue…. Power of recognised stock exchanges to make bye-laws (Sec 9) Any recognised stock exchange may make bye-laws for the regulation and control of contracts - The opening and closing of markets and the regulation of the hours of the trade. The regulation or prohibition of blank transfers ; The regulation, or prohibition of budlas or carry-over facilities; The fixing, altering or postponing of days for settlements ; The method and procedure for the settlement of claims or disputes, including settlement by arbitration; • The levy and recovery of fees, fines and penalties ;

29. Continue… Power of SEBI to make or amend bye- laws of recognised stock exchanges (Sec 10 ) The SEBI may either on a request from the governing body of a recognised stock exchange or on its own motion 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.

30. Continue…. Power to suspend business of recognised stock exchanges (Sec 12 ) The Central Government is empowered to suspend the business of recognised stock exchange on an emergency situation by giving notification in the Official Gazette stating the reasons therein, for a period of not exceeding seven days and subject to such conditions as may be specified in the notification. However, in the interest of the trade or the public the said period can be extended from time to time .

31. Continue… Power to prohibit contracts in certain cases (Section 16) In case the CG or SEBI , by notification in the Official Gazette, declare that no person in the State or area, may enter into a contract for the sale or purchase of any security specified in the notification, except with the permission of Central Government or SEBI.

32. Continue…. Power to issue License to dealers in securities in certain areas (Section 17) No person shall carry on or purport to carry on, whether on his own or on behalf of any other person, the business of dealing in securities, except under the authority of a license granted by SEBI in this behalf.

33. Investors’ Right relating to Dividend, Income from Collective Investment Scheme and Mutual Funds It shall be lawful for the holder to receive and retain any dividend declared by the company in respect thereof for any year, notwithstanding that the said security has already been transferred by him for consideration, unless the transferee who claims the dividend from the transferor has lodged the security and all other documents relating to the transfer which may be required by the company with the company for being registered in his name within 15 days of the date on which the dividend became due.

34. Listing of Securities “Listing”- means taking into admission the securities of any company to dealings on a recognised stock exchange. If the company intends to offer its shares or debentures to the public for subscription by the issue of a prospectus, it must apply to one or more recognised stock exchanges for permission to have the shares or debentures intended to be so offered to the public to be dealt with each such stock exchange.

35. Conditions for listing (Section 21) Where the 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.

36. Requirements regarding initial listing/listing of public issues of securities A public limited company shall apply to the recognised stock exchange in the prescribed form of the concerned stock exchange and the listing application form shall be duly filled and signed with enclosures. The same should be sent to the stock exchange along with the following – • Listing agreement duly executed and stamped; • Initial listing fees as prescribed.

37. Delisting of securities (Section 21A) A recognised stock exchange may delist the securities, after recording the reasons therefore, from any recognised stock exchange on any of the ground or grounds as may be prescribed under this Act. The securities of a company shall not be delisted unless the company concerned has been given a reasonable opportunity of being heard .

38. Continue… The alleged grounds for delisting are stated as follows – the company has incurred losses during the preceding 3 consecutive years and it has negative net-worth ; (ii) trading in securities has remained suspended for a period of more than 6 months ; (iii) the securities have remained infrequently traded during the preceding 3 years; (iv) the company or any of its promoters or any of its director has been convicted and awarded a penalty of not less than one crore rupees or imprisonment of not less than 3 years ; (vi) shareholding of the company held by the public has come below the minimum level applicable to the company as per the listing agreement under the Act.

39. Right of appeal against refusal of stock exchange to list securities of public companies (Section 22) Where a recognised stock exchange refuses to list the securities of any public company, the company shall be entitled to make an appeal to CG against such refusal, omission or failure and thereupon CG may, after giving the stock exchange an opportunity of being heard - ( i ) vary or set aside the decision of the stock exchange, or (ii) where the stock exchange has omitted or failed to dispose of the application within the specified time, grant or refuse the permission.

40. Right of Securities Appellate Tribunal against refusal of stock exchange to list securities of public companies (Section 22A) Where a recognised stock exchange refuses to list the securities of any public company, the company shall be entitled to make an appeal to SAT against such refusal, omission or failure and thereupon SAT may, after giving the stock exchange an opportunity of being heard - ( i ) vary or set aside the decision of the stock exchange, or (ii) where the stock exchange has omitted or failed to dispose of the application within the specified time, grant or refuse the permission.

41. Procedures and Powers of Securities Appellate Tribunal (Sec 22B) SAT shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 , but shall be guided by the principles of natural justice and, subject to the other provisions of this Act SAT shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit,

42. Civil court not to have jurisdiction (Section 22E) No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Securities Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority.

43. Appeal to Supreme Court (Section 22F) Any person aggrieved by any decision or order of the Securities Appellate Tribunal (SAT) may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order.

44. Penalties & Offences

45. Grounds for imposing penalties (Section 23) Any person who— (a) without reasonable excuse fails to comply with any requisition; or (b) enters into any contract in contravention of any of the provisions; or (e) owns or keeps a place other than that of a recognised stock exchange for the purpose of entering into or performing any contracts; or (f) manages, controls, or assists in keeping any place other than that of a recognised stock exchange for the purpose of entering into or performing any contracts.

46. Continue… (g) not being a member of a recognised stock exchange or his agent authorised as such under the rules, willfully represents to or induces any person to believe that contracts can be entered into or performed under this Act through him, or (h) joins, gathers or assists in gathering at any place other than the place of business any person or persons for making bids or offers or for entering into or performing any contracts in contravention of any of the provisions of this Act.

47. Continue… shall, without prejudice to any award of penalty by the Adjudicating Officer under this Act, on conviction, be punishable with imprisonment for a term which may extend to ten years or with fine , which may extend to 25 crore rupees , or with both .

48. Other Grounds for Imposing penalties- Section Penalty Sec 23A Failure to furnish Min:- Rs 1 lakh may extend to Rs 1 lakh for information etc each day Failure to maintain Max:- Rs 1 cror e Books of Accounts or records Sec 23B Failure to enter into agreements with clients Same as Sec 23A

49. Section Penalty Sec 23C Failure to redress investors grievances Same as Sec 23A Sec 23D Failure to segregate securities or money’s of client or using securities or money’s of client for self or for other client Min:- Rs 1 lakh Max:- Rs 1 crore Sec 23E Failure to comply with listing conditions or delisting conditions or grounds Minimum Rs 5 lakhs Maximum Rs 25 crores

50. Section Penalty Sec 23F Excess dematerialization or delivery of unlisted securities. Same as Sec 23 E Sec 23G Failure to furnish Periodical returns etc Same as Sec 23E Sec 23H Any contravention for which no separate penalty has been provided elsewhere Min Rs 1 lakh Max Rs 1 crores

51. Power to adjudicate (Section 23I) T he SEBI shall appoint any officer not below the rank of a Division Chief of the SEBI to be an adjudicating officer for holding an inquiry. While holding an inquiry, the adjudicating officer shall have power to summon and enforce the attendance of any person and can impose penalty as he thinks fit in accordance with the provision of the act. The Board may call for and examine the record of any proceedings, can pass an order of enhancing the quantum of penalty.

52. Factors to be Taken into Account by Adjudicating Officer (Section 23J) (a) The amount of disproportionate gain or unfair advantage , wherever quantifiable, made as a result of the default; (b) The amount of loss caused to an investor or group of investors as a result of the default; (c) The repetitive nature of the default.

53. Thank You