Chapter 22 Securities Contract Regulation Act, 1956

Chapter 22: Securities Contract Regulation Act, 1956

Sec 28: Non-Applicability of Act

The Act does not apply to following persons or securities issued by them:
a. RBI b. Government
c. Local Authority d. Corporation set up by Special Law
e. Any person transacting with people referred above f. Any convertible instruments
g. Any class of contract exempted by CG by issuing a notification in Official Gazette (OZ).

Sec 4A: Compulsory Corporatisation and Demutualisation (C & D) of Stock Exchange

1. On and from the appointed date, every RSE (if not corporatized and demutualised before the appointed date) shall be corporatized and demutualised.
2. SEBI, if it is satisfied that any RSE was prevented by sufficient cause from being corporatized and demutualised on or after the appointed date, specify another
appointed date in respect of that RSE and such RSE may continue as such before such appointed date.
3. The C & D shall be done as per Sec 4B. The appointment date may differ for different RSE.

Sec 4B: Procedure for Corporatisation and Demutualisation

1. Submit a scheme: All RSE within such time as may be specified by the SEBI, submit a scheme for C&D for its approval.
2. Approval of scheme by SEBI: SEBI may, after making enquiry and after obtaining such further information, if it is satisfied that it would be in the interest of the
trade and that of the public, approve the scheme with or without modification.
3. Imposing of restriction: SEBI may while approving the scheme, by an order in writing, restrict:
a. the voting rights of the shareholders who are also stock brokers of the RSE;
b. the right of shareholders or a stock broker of the RSE to appoint the representatives on the governing board of the stock exchange;
c. the maximum number of representatives of the stock brokers of the RSE to be appointed on the governing board of the RSE, which shall not exceed 1/4th of the
total strength of the governing board.
4. Conditions for approval: Every RSE for which scheme has been approved shall by fresh issue of equity shares to the Public or in any other manner as specified by
SEBI ensure that at least 51% of its equity share capital is held, within 12 months from the date of publication of order by the Public other than shareholders
having trading rights. However, the SEBI may extend period by 12 months on sufficient cause in Public Interest.
5. Publication of Scheme: On approval of the scheme, it shall be published immediately by: (a) SEBI in the OZ; (b) RSE in 2 daily newspapers circulating in India, as
may be specified by SEBI.
6. Scheme becomes effective: Upon publication, the scheme shall have effect and be binding on all persons and authorities.
7. Rejection of scheme: Where SEBI is satisfied that it would not be in the interest of the trade or the public interest to approve the scheme, it may reject the scheme
and such order of rejection shall be published by it in the OZ. SEBI shall give a reasonable OOBH to all the persons concerned and to the RSE before passing an
order rejecting the scheme.

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Chapter 22 Securities Contract Regulation Act, 1956
Sec 5: Withdrawal of Recognition
1. If CG is of the opinion that recognition granted to an Exchange must be withdrawn in the interest of the trade or of the public, it may withdraw the recognition
after serving due notice on governing body of the Exchange.
2. However, the withdrawal will not affect validity of Contracts entered into before the date of withdrawal notification.
3. RSE has not been C/D or it fails to submit the scheme within the specified time therefore or the scheme has been rejected by SEBI, the recognition granted to such
stock exchange, shall stand withdrawn and the CG shall publish, by notification in the OZ, such withdrawal of recognition.
4. Withdrawal shall not affect the validity of any contract entered into or made before the date of the notification.

Sec 9: Power of Stock Exchange to make bye-laws

1. Any RSE may make bye-laws for the regulation and control of contracts relating to the purchase and sale of securities.
2. Bye-laws made by the stock exchange are subject to the previous approval of the SEBI.
3. The bye-laws made may: (i) Specify that the contravention shall make a contract void and (ii) Specify that contravention shall render the member concerned liable
to punishments, namely, fine or expulsion from membership or suspension from membership or any other penalty of a like nature not involving the payment of
money.
4. Any bye-laws made shall be subject to conditions as may be prescribed and, when approved by the SEBI, shall be published in the Gazette of India and also in the
Official Gazette of the State in which the principal office of the RSE is situated and shall have effect as from the date of its publication in the Gazette of India.
5. If the SEBI is satisfied that in the interest of the trade or in the public interest any bye-laws should be made immediately, it may, by order in writing specifying the
reasons therefore, dispense with the condition of previous publication.

Sec 6: Power of CG to call for

Sec 10: Power of SEBI to amend Bye
Sec 3 - 4: Recognition of Stock Exchange information. Sec 8: Power of CG to make rules
Laws
Sec 7: Annual Report
1. Stock Exchange (SE) shall apply to CG 1. Recognised Stock Exchange (RSE) 1. The CG after consultation with SE 1. SEBI may either on a request in
along with copies of Bye Laws, Rules, should furnish periodical returns to may by order in writing direct SE/s to writing received by it from the
& Application in Form A and with fees SEBI. make or amend rules within 2 governing body of a RSE or Suo-
of Rs. 500. 2. These Returns contain information months from the date of such order. motu amend any bye-laws made
2. CG may demand further information on current affairs (volume & value of 2. Amendment w.r.t. the governing by such SE.
regarding the following: transactions, short deliveries, body of SE, its constitution and 2. SEBI will have to be satisfied, after
a. Rules and Bye Laws are in important decisions taken by Board powers of management and the consultation with the governing
conformity regarding conditions etc.) manner of transacting a business. body of the SE that it is necessary
prescribed. 3. Every SE has to maintain BOA for a 3. If an Exchange fails to comply with or expedient to amend the bye-
b. SE is willing to comply with period of 5 years which may be order, CG on its own may make or laws and record its reasons also.
conditions imposed by CG. inspected by SEBI at any time. amend the rules. 3. Amended bye-laws should be
c. Recognition would be in interest of 4. SEBI may order in writing to call for 4. The amended rules should be published in the Gazette of India
trade & also in public interest. information or explanation relating published in the Gazette of India and and also in the Official Gazette of
3. CG may approve subject to following: to affairs of an Exchange or its also in the Official Gazette of the the State in which the principal

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 Chapter 22 Securities Contract Regulation Act, 1956
a. Qualification for membership member. State in which the principal office of office of the stock exchange is
b. Manner in which contracts shall be 5. SEBI also has the power to appoint the RSE is situated. situated.
entered into and enforced as one or more inquiry officers who 5. After such publication, the rules will 4. If the stock exchange has any
between members. may submit their report to SEBI. be valid, as if they had been made or objection to the amendments
c. Representation of CG on Board of 6. SEBI carries out regular inspection of amended by the stock exchange made by the SEBI, it may, within 2
Exchanges. all Exchanges at periodical intervals. itself. months apply to the SEBI for
d. Maintenance of accounts of If market condition warrants it revision.
members and their audit. carries out special investigation into
4. CG may refuse the application after the affairs of the Exchanges.
giving an opportunity of being heard.
Sec 17 read with sec 13: Power to
Sec 12: Power to suspend business of
Sec 11: Superseding of Stock Exchange Sec 7A: Rules restricting voting rights declare a transaction: prohibited,
Recognised Stock Exchange
void or illegal.
1. If in the opinion of the CG an 1. CG has above power in case of: RSE is empowered to amend the Rules 1. CG has power in Public and
emergency has arisen and for the a. Public Interest regarding following matters: Investors’ interest to declare few
purpose of meeting the emergency b. Investor’s Interest a. One member shall have one vote transactions as prohibited, void or
the CG considers it expedient to do c. Compliance of law maximum irrespective of number illegal or as a suspicion or
so, it may, by notification in the OZ d. Compliance of conditions and of shares held. consequence of fraud based on:
suspend such of its business for directions b. Voting on specific matters placed a. nature of transactions
period not exceeding 7 days. 2. CG are vested with power to before the meeting b. amount of transactions
2. The Central Government also has supersede the Board of SE after c. Powers to appoint proxy. c. volume of transactions
power to extend this period by a like serving on governing body a notice d. Supplementary & incidental d. geographical areas
notification. in writing and after giving OOBH to matters. e. Industrial areas, etc.
3. Examples: 1993 Bomb Blast-SE closed the governing Board. e. Today all SEs provide for one 2. Prohibition is a precaution, void is
for 10 days; Normally SE are closed on 3. CG may by notification in OZ declare member one vote and only members a consequence and illegal is
elections, etc. governing board of an Exchange as are allowed to be proxies. precaution as well as
superseded and may appoint consequence. To make a
person/s to perform and exercise all correction in already executed
powers of Board. fraud contracts CG has power to
give a license and ratify those
contracts by Licensed Traders.

Sec 8A: Clearing Corporation

1. A RSE may, with the prior approval of the SEBI, transfer the duties and functions of a clearing house to a clearing corporation, being a company incorporated under
the Companies Act, 1956, for the purpose of:
a. Periodical settlement of contracts and differences thereunder; b. Delivery of, and payment for, securities;

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Chapter 22 Securities Contract Regulation Act, 1956
c. Any other matter incidental with, such transfer.
2. Every clearing corporation shall make bye-laws & submit it to SEBI for its approval.
3. On being satisfied that it is in the interest of the trade and also in the public interest to transfer the duties and functions of a clearing house to a clearing
corporation, SEBI may grant approval to the bye-laws and approve transfer of the duties and functions of a clearing house to a clearing corporation.

Sec 12A: Power to issue directions

SEBI has the power to issue directions in Securities Market in the interest of Trade and Public and for compliance of Laws and Directions.

Sec 13A: Establishment of Additional Trading Floor

1. ‘Additional Trading Floor’ means a trading ring or trading facility offered by a RSE outside its area of operation to enable the investor to buy and sell securities
through such trading floor under the regulatory frame work of that Stock Exchange.
2. A Stock Exchange may establish additional trading floor with prior approval of the SEBI in accordance with the stipulated terms and conditions.

Sec 15: Members not to act as Principals

1. Members of Stock Exchange normally carry out transactions on behalf of investor and hence, principal agent relationship exists.
2. Member can enter into transaction as principal with another member of the Exchange only.
3. If he desires to enter into contract as principal with a Non-Member then he has to get written consent from such person to act as principal. Contract note should
indicate that member is acting as Principal. Simply speaking, broker works as the agent but when he invests in shares by himself he also works as a principal and
when he does this he is liable to disclose his interest in an agreement executed at the time of contract or within 3 days.
4. ‘Spot delivery’ contracts would be outside the purview of this section.

Sec 21 – 22F: Listing of Securities 21A: Delisting of Securities

Sec 21 Application for listing of securities: Every Company shall comply with Listing agreement. Reasons for delisting:
Sec 22 Refusal of SE to List Securities: The reason for refusal shall be given for refusing the listing of SEBI may delist the securities on any grounds prescribed
securities. under this Act.
Sec 22A Companies right to Appeal: Conditions for delisting:
1. Appeal shall be filed with Securities Appellate Tribunal (SAT). 1. Record the reason in writing.
2. Appeal shall be filed within 15 days of receipt of: 2. Reasonable opportunity of being heard shall be given
a. Order of refusal, or to the company.
b. Expiry of 10 weeks from closing of subscription list if refusal is not communicated. Appeal by Company against the order of delisting:
3. The delay can be condoned up to one month if appeal is not filed due to reasonable cause. 1. Appeal to SAT
Sec 22B Procedure adopted by SAT: 2. Within 15 days of order of RSE to delist the securities.
1. SAT shall give opportunity of being heard to the SE. 3. SAT may condone the delay in filing appeal not above 1
2. SAT shall try to dispose the appeal within 6 months. month on reasonable ground or cause is shown.
3. SAT may set aside or vary or confirm the order of SE. Proceedings by SAT:
4. Copies of order of SAT shall be sent to the parties of appeal. 1. Opportunity of being heard to SE.

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 Chapter 22 Securities Contract Regulation Act, 1956
5. SE shall comply with the order of SAT. 2. SAT may set aside or vary or confirm the order of SE.
Sec 22F Appeal to Supreme Court: 3. Copies of order of SAT shall be given to the parties to
1. Against the order of SAT appeal.
2. Appeal on question of law 4. The SE shall comply with order of SAT.
3. Within 60 days of receipt of order of SAT
4. Extension of period on reasonable cause up to 60 days by Supreme Court.

Sec 27: Title to Dividends; Sec 27A: Right to Receive Income from collective Investment Scheme;
Sec 27B: Right to receive income from mutual fund
a. Transferee shall have right to Dividend/ Income if the Transferee has made such claim within 15 days of such Dividend/ Income becoming due.
b. If the Transferee has not made such claim within the stipulated time, and if the delay is on account of the following reasons, even then the Transferee shall still
have the right to claim such dividend/ Income.
a. Death of Transferee b. Loss of Transfer deed c. Fault of Post
2. In cases other than mentioned above, Transferor has right over the said income.

Sec 23: Penalties

Sec Nature of contravention Quantum
23A a. Failure to furnish document return or report to SEBI Lower of:
b. Failure to file return or furnish any information, books or other documents to SEBI. 1. Rs. 1 lac per day
c. Failure to maintain books and records. or
23B Failure by Intermediary to enter into an agreement with his client. 2. Rs. 1 crore.
23C Failure to redress the investor grievances by any company or intermediary specified by SEBI in specified time
23D Failure to segregate securities or moneys of clients or using securities or moneys of clients for self or for any other client Up to Rs. 1 crore
23E Failure to comply with the provisions of the listing conditions or delisting conditions or grounds. Up to Rs. 25 crores
23F Excess dematerialisation or delivery of the securities
23G Failure to furnish periodical returns
23H Any contravention for which no separate penalty is given. Up to Rs. 1 crore

Sec 23I – 23J: Adjudication

Reason for appeal: Delisting or Non-listing of shares.
Appeal by: Company Appeal to: Securities Appellate Tribunal (SAT)
Appeal within:15 days from date of order of rejection or Expiry of 10 weeks from Order within: 6 months from appeal
date of application
Appeal to Supreme Court: within 60 days from the date of order of SAT Supreme Court: Gives Suo-motu decision
Common points for every Authority or Appeal:

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Chapter 22 Securities Contract Regulation Act, 1956
i. Every Court or Officer is setup by CG
ii. He will have such powers and salary as decided by CG
iii. He will have all powers of the Civil Court

Sec 23N: Composition of Offence

Any offence punishable under this Act which is not an offence punishable with imprisonment only, or with imprisonment and also with fine may either before or after
the institution of any proceeding, be compounded by a SAT or a court before which such proceedings are pending.

Sec 23O: Power to Grant Immunity

1. Immunity means entirely relieving a person from prosecution and penalties, etc. based on evidence, subject to such conditions.
2. After granting immunity offender is no more required to undergo trial for any offence.
3. Immunity shall not be granted by CG in cases where the proceedings for the prosecution for any such offence have been instituted before the date of receipt of
application for grant of such immunity. The recommendation of the SEBI shall not be binding upon the CG.
4. The immunity given by CG or SEBI can be withdrawn if the person has not complied with the conditions of immunity.

© CA Darshan D. Khare