By Saurav Yadav
Published on: January 18, 2024 at 16:00 IST
The Securities Contracts Regulation Act, 1956 (SCRA) is an important legislation in India that regulates the securities market. The Act was enacted to prevent Unauthorized transactions in stock exchange by regulating the business of dealing therein and by providing for certain other matters connected with it.
In simple words, it lays down rules to ensure fair and transparent dealings in buying and selling of securities, which include stocks, bonds, and other financial instruments.
In this article, the key provisions, components, objective of this Act will be discussed in detail.
Objective of Securities Contract Regulation Act 1956
In order to regulate the stock exchange and the contracts that are executed in stock exchange the government passed the Securities Contracts Regulation Act, 1956
The primary objective of the SCRA is to prevent malpractices and protect the interests of investors in the securities market. It seeks to ensure the orderly and healthy growth of the securities market.
The Securities Contracts Regulation Act, 1956, aims to create a regulatory framework that promotes fairness, transparency, and investor protection in the securities market, while also providing the flexibility to adapt to evolving market dynamics.
The Act Empowers the central government to prevent unauthorized trading.
Key Features of Securities Contracts Regulation Act, 1956
The Features of securities contract Regulation Act are listed below as:
- Regulation of Securities Contracts: At its core, the SCRA is dedicated to regulating securities contracts. All agreements for the purchase or sale of securities must adhere to the rules and conditions outlined by the SCRA. Failure to comply with these stipulations renders the contract void, as per Section 13 of the Act.
- Definition of Securities: The SCRA furnishes an extensive definition of securities under Section 2(h), encompassing shares, scrips, stocks, bonds, debentures, and other marketable securities of a similar nature. This broad definition ensures the inclusion of various financial instruments traded in the securities market.
- Recognition of Stock Exchanges: The Act establishes a legal framework for the recognition and operation of stock exchanges. Section 3 mandates that a stock exchange cannot operate without recognition from the Central Government, and provisions exist for the withdrawal of such recognition under specific circumstances. This ensures a regulated environment for all stock exchanges.
- Licensing of Brokers and Sub-brokers: The SCRA addresses the licensing and regulation of brokers and sub-brokers. This provision aims to guarantee the competence, reliability, and adherence to the Act’s framework by entities participating in the securities market.
- Prevention of Manipulative and Fraudulent Practices: A key focus of the SCRA is preventing manipulative and fraudulent practices in the securities market. The Act prohibits activities such as creating artificial prices, cornering, and short selling, which are deemed detrimental to market integrity.
- Regulatory Supervision: Empowering the Securities and Exchange Board of India (SEBI), the SCRA grants regulatory oversight of the securities market. SEBI, as per the Act, is entrusted with implementing its provisions and is equipped with broad powers to safeguard investor interests.
- Dispute Resolution: The SCRA establishes a dispute resolution system to address conflicts related to securities contracts. It delineates the rights and remedies available to parties in the event of contract breaches or other disputes.
- Submission of Returns and Annual Reports: Sections 6 and 7 of the SCRA mandate recognized stock exchanges to submit returns and annual reports. The Act provides the recognized stock exchange with the authority to frame rules, including those related to voting rights restrictions. Moreover, it requires the transfer of clearing houses into clearing corporations, converting them into corporate bodies as per the Companies Act, 1956. Stock exchanges are also required to formulate bye-laws regulating contracts and addressing matters specified in Section 9 of the Act.
- Government’s Supervisory Powers: The Central Government holds significant supervisory authority over the governing bodies of recognized stock exchanges. Under Section 11, the government can serve a notice to supersede the governing body for specific reasons, appointing individuals to perform its duties or powers. Similar powers of supersession can be exercised upon the business of the recognized stock exchange.
- Regulation of Contracts and Penal Provisions: The SCRA contains provisions regulating contracts, including circumstances under which contracts are deemed invalid or void. Persons dealing with securities in specified areas are required to obtain licenses as dealers from SEBI. Penal provisions under Section 23 define various offenses with penalties, including imprisonment and fines up to 25 crore rupees.
- Miscellaneous Provisions: The Act includes miscellaneous provisions, highlighting non-applicability to certain entities like the government, the Reserve Bank of India, local authorities, and corporations set up by special laws. The Central Government is endowed with powers to delegate authority to SEBI or RBI under specific circumstances, as notified.
Significance of SCRA, 1956, in Raising Investment
The SCRA encompasses key provisions that positively impact the perspective of raising investment for diverse economic activities across different sectors. Notable aspects include:
- Recognition of Stock Exchanges:
Section 3 of the SCRA outlines a specific procedure for stock exchanges seeking recognition from the government, with SEBI also empowered to grant recognition. The Act emphasizes that prior to granting recognition, the Central Government must be satisfied, through proper inquiry, that the rules and bylaws of the stock exchange align with prescribed conditions, ensuring fair dealing and investor protection.
- Corporatisation and Demutualisation of Stock Exchanges:
The SCRA, amended by the Security Laws (Amendment) Act, 2004, mandates corporatisation and demutualisation of stock exchanges under Section 4(B). This involves the conversion of a stock exchange into a corporate entity and the segregation of ownership and management from trading rights. The provision requires that at least 51% of a recognized stock exchange’s equity share capital be held by the public, facilitating effective investment from the public.
- Central Government’s Control over Recognized Stock Exchanges:
Various provisions, such as Sections 6, 7, and 8, empower the Central Government and SEBI to exert control over recognized stock exchanges. This control allows for actions necessary to ensure investment growth, protect trade interests, and promote public welfare. Requirements for periodic returns, inquiries, and rule-making authority contribute to robust governance.
- Provisions Related to Listing of Securities:
The SCRA addresses the listing of securities on recognized stock exchanges, emphasizing the admission of securities for dealings. Section 21 mandates compliance with listing conditions, and delisting provisions under Section 21A enable stock exchanges to take action based on prescribed grounds
The SCRA, under Section 3, establishes a procedure for stock exchanges seeking recognition from the government. The act outlines the conditions for granting recognition, ensuring adherence to prescribed rules and bylaws that safeguard fair dealings and investor interests. Additionally, SEBI is empowered to grant recognition, enhancing government control to protect investors.
The key amendments to the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, include:
- In regulation 22D: The words and symbol “participants” are inserted after “the clearing members” and before “and issuers of the debt securities.”
- In regulation 37:
a) In sub-regulation (2): The words “or a participant” are inserted after “the event of a clearing member” and before “failing to honour.”
b) In sub-regulation (3):
The words “or participant(s)” are inserted after “failure of clearing member(s).”
Important Case Laws
In R. Chellappan v. Secretary, Kerala State Electricity Board (1975) The Supreme Court held that the term securities includes a wide range of instruments, including shares, stocks, bonds, and debentures.
In Securities and Exchange Board of India (SEBI) v. Shriram Mutual Fund (1997): The Supreme Court clarified SEBI’s has authority to regulate mutual funds and protect the interests of investors.
In Sahara India Real Estate Corporation Ltd. and Ors. vs. SEBI (2012), The Supreme Court affirmed that optionally fully convertible debentures (OFCDs) offered by Sahara constituted ‘securities.’
Conclusion
The Securities Contracts (Regulation) Act, 1956, has played a crucial role in shaping India’s securities market. Through amendments and legal interpretations, it continues to provide a robust regulatory framework, ensuring transparency, fair practices, and investor protection in the ever-evolving financial dynamics. Understanding its provisions and implications is essential for all stakeholders in the securities market.
