analysis_scra, 1956

SECOND CONTINUING ASSIGNMENT

SECURITIES CONTRACTS (REGULATION) ACT, 1956

(THIS ASSIGNMENT IS SUBMITTED FOR THE PARTIAL

FULFILLMENT OF FINANCIAL MARKETS AND REGULATORY

SYSTEMS)

SUBMITTED TO -

PROF. ANINDHYA TIWARI

FACULTY OF LAW

NLU, JODHPUR

SUBMITTED BY-

AMIT AGARWAL

2ND SEMESTER

ROLL NO. 597

LL.M (BANKING AND FINANCE)

NLU, JODHPUR

(SEMESTER: JANUAURY 2015 - MAY 2015)


SUBMISSION OF ASSIGNMENT

TABLE OF CONTENTS

NO. CONTENTS PAGE

1. INTRODUCTION………………………………………………........................3-4

2. RELEVANT DEFINITIONS…...........................................................................4-5

3. RECOGNITION OF STOCK EXCHANGE..……………………………….......6

4. CORPORATISATION AND DEMUTUALISATION

OF STOCK EXCHANGE ………………………………………………………..7

5. POWERS OF CENTRAL GOVERNMENT....………………………………..7-8

6. POWERS OF STOCK EXCHANGE………………………..............................8-9

7. LISTING OF SECURITIES…………………………………………………..9-10

8. CASE ANALYSIS.……………………………………………………………10-12

a. SAHARA INDIA REAL ESTATE CORPORATION LIMITED

AND OTHERS VS. SECURITIES AND EXCHANGE BOARD

OF INDIA AND ANOTHER……………………………………………..10-11

b. SUDHIR SHANTILAL MEHTA Vs. CENTRAL BUREAU OF

INVESTIGATION……………………………………………………………11

c. DAHIBEN UMEDBHAI PATEL Vs. NORMAN JAMES

HAMILTON…………………………………………………………………..11

d. MYSORE FRUIT PRODUCTS LIMITED Vs. THE CUSTODIAN

AND OTHER…………………………………………………………………12

e. BHAGWATI DEVELOPERS PRIVATE LIMITED

Vs. PEERLESS GENERAL FINANCE AND INVESTMENT

COMPANY LIMITED……………………………………………………….12

9. CONCLUSION…….………………………………………………………….12-13

10. BIBLIOGRAPHY………………………………………………………………..14




1) INTRODUCTION:

Securities Exchange Board of India which established in the year 1992 is making

various efforts in order to ensure good corporate governance in the country. It is making

various regulations in order to channelize the conduct of the company in the interest of

various stakeholders. The main objective behind establishment of SEBI is to protect the

interest of investor and other stakeholders. For these purposes, various acts are passed like

Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of India Act,

1992 and Depositories Act, 1996.

As the transaction in securities market is increasing day by day, it is necessary to regulate

the speculation and to verify the transaction which is sham, with this objective the

Securities Contracts (Regulation) Act, 1956 was passed which came into force on 28th

February, 1957 and which also replaced the Bombay Securities Contracts Control Act,

1925. If Stock exchange wanted to register, then it has to apply to the Central Government

with its bye-laws which regulates the contracts and also details about the constitution of

stock exchange. It is also require to submit the annual report containing such particulars as

may be prescribed to the central government. Central Government can also asked the stock

exchange to defer the business for such period as the central government may direct on

ground of emergency.

At present, there are 15 stock exchanges in India with seven permanent stock exchanges1.

Board of Directors usually managed the Stock Exchange which consists of brokers who

are elected, government representatives and also SEBI appointed person. They frame and

enforce bye-laws and regulations which is binding on all members. Members of the stock

exchange are the persons who are financially sound and also experienced in stock

market. Broker who is a member of stock exchange is regulated by the SEBI and he is the

person who deals in securities on the behalf of the client and also on its own behalf.

Securities Contracts (Regulation) Amendment Act, 2007 is passed for the purpose of

amending the Securities Contracts (Regulation) Act, 1956 in order to include securitised

1 As per SEBI Site, http://www.sebi.gov.in/sebiweb/userview/detail/2/388/No%20of%20Stock%20Exchange

(Last Visited on March 13, 2015 at 11:07p.m.)



instruments within the definition of Securities and also requires disclosure for securitised

instruments.

Bombay Stock Exchange is the oldest stock exchange in India, established in the year

1875 even older than Tokyo Stock Exchange. Government of India granted permanent

recognition to this stock exchange in the year 1956 under the Securities Contracts

(Regulation) Act, 1956.

In order to give effect to the object of the Securities Contracts (Regulation) Act, 1956,

Government passed the Securities Contracts (Regulation) Rules, 1957. These rules

provides the procedure which is required to be followed by the stock exchange for its

registration, returns and annual reports to be submitted and requirements for listing of

securities. SEBI also framed the Securities Contracts (Regulation) (Stock Exchanges

and Cleaning Corporations) Regulations, 2012 in order to regulate the ownership and

governance of stock exchange.

However, provisions of this Act will not apply to the Government, The Reserve bank of

India, Local Authority or Corporation which is established under the special laws. It is

also depend on the Central Government who may exempt the contract from the provision

of this act subject to terms and conditions which it imposed if it is necessary in the interest

of trade, commerce or economic development of the country.

2) RELEVANT DEFINITIONS:

Section 2 of the act deals with various definitions, some of which are discussed below:

a) SECURITIES2:

Securities include 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; derivative; units or any other instrument issued by any collective investment

scheme to the investors in such schemes, security receipt as defined in clause (zg) of

section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement

of Security Interest Act, 2002, units or any other such instrument issued to the

investors under any mutual fund scheme, Government securities, such other

2 As per Sec. 2(h) of the SCRA, 1956



instruments as may be declared by the Central Government to be securities and rights

or interest in securities.

b) STOCK EXCHANGE3:

Stock Exchange means –

(a) any body of individuals, whether incorporated or not, constituted before

corporatisation and demutualisation under Sections 4A and 4B, or

(b) a body corporate incorporated under the Companies Act, 2013 whether under a

scheme of corporatisation or otherwise, for the purpose of assisting, regulating or

controlling the business of buying, selling or dealing in securities.

c) RECOGNISED STOCK EXCHANGE4:

Recognised Stock Exchange means a stock exchange which is for the time being

recognised by the Central Government.

d) GOVERNMENT SECURITY5:

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.

e) DERIVATIVE6:

A derivative includes –

(a) a security derived from a debt instrument, share, loan, whether secured or

unsecured, risk instrument or contract for differences or any other form of security

and;

(b) a contract which derives its value from the prices or index of prices, of underlying

securities.

3 As per Sec. 2(j) of the SCRA, 1956

4 As per Sec. 2(f) of the SCRA, 1956

5 As Per Sec. 2(b) of the SCRA, 1956

6 As per Sec. 2(ac) of the SCRA, 1956



3) RECOGNITION OF STOCK EXCHANGE:

Section 3 of the Act requires that if the stock exchange wants to register, then they have to

make an application to the Central Government in the prescribed manner. Application

must also be accompanied with the copy of bye-laws of the stock exchange which

regulates the contract and copy of the rules pertaining to the constitution of stock

exchange which deals with power and duties of the officers in the stock exchange,

admission, suspension, exclusion, qualification for members.

Section 4 of the Act provides that after making inquiry and taking further information, if

the Central Government is satisfied that

i) Rules and bye-laws made by the stock exchange are in line with the conditions

prescribed which is for protection of investor;

ii) Stock Exchange is eager to comply with the conditions which may be imposed on the

stock exchange;

iii) Grant of recognition is in the interest of trade and in public interest;

Can grant recognition subject to such condition as it may specified.

The conditions which the central government may impose relates to-

i) Qualification which must the member must possess.

ii) The manner of entering and enforcing the contract between members.

iii) Central Government representation on the stock exchange not exceeding three in

number.

iv) Maintenance of accounts of members and if the Central Government requires, then

audit by the Chartered Accountant.

If the government grants the permission, then it is required to be published in the

Official Gazette of the India and State and from the date of its publication, the recognition

comes into effect.

If the Central Government rejects the permission, then it is required to give an opportunity

of being heard and must also communicate the reason. If the stock exchange wants to

amend any rule, permission of the Central Government is required.



4) CORPORATISATION AND DEMUTUALISATION OF STOCK EXCHANGE:

Section 4A of the Act states that from the appointed date all stock exchange must be

corporatized and demutualised in accordance with the provision of Sec. 4B of the Act.

Sec. 4B of the Act provides that:

i) They have to submit a scheme to SEBI for corporatisation and demutualisation.

ii) SEBI after considering the information gathered from inquiry or by asking further

information, if it finds that the scheme is benefitting the trade and is in the interest of

public, then it may approve the scheme with or without modification.

iii) SEBI will not approve the scheme, if the stock exchange proposes dividend out of

reserves or assets or trading rights which is in lieu of membership card.

iv) If SEBI rejects the application then it is required to give an opportunity of being

heard and such order is also required to be published in the official Gazette.

SEBI while approving the scheme, may restrict the-

i) Voting rights of the shareholders who are stock brokers of the recognised stock

exchange.

ii) The right of the stock brokers to appoint the members of the governing board.

iii) Stock brokers can appoint only one-fourth of the total strength of the governing board.

Stock Exchange is also required to ensure that fifty-one percent of the shareholding must

be in the hands of public other than shareholders who have trading rights.

5) POWERS OF CETRAL GOVERNMENT:

Sec. 6 of the Act provides that stock exchange is required to submit the periodical returns

relating to its affairs to SEBI. Central Government after consultation with the stock

exchange concerned may prescribe the books of accounts and other documents which is

required to be prepared and must be maintained for a period of 5 years. SEBI can inspect

the books and other documents at a reasonable time.

SEBI can order in writing if it is in the interest of public that-

i) To furnish information as to affairs of the company.

ii) Appoint person to conduct inquiry and submit reports.



If any inquiry is conducted then every director, member and person who had dealings in

the course of business is required to furnish information relating thereto as required by the

authorities.

Stock exchange is also required to submit a copy of its annual report to Central

Government containing such particulars as may be prescribed.

Sec. 8 of the Act provides that rules can be made by the Central Government with

respect to Stock Exchange. Central Government can also direct the stock exchange to

make rules or to modify the rules already made. If the stock exchange fails to make rules,

then the Central Government itself makes the rules or modify the rules. This power is also

with the SEBI.

Sec. 11 of the Act, 1956 provides that the Central Government may supersede the

governing body of the stock exchange and can appoint persons to perform the functions of

governing board but is must be subject to an opportunity of being heard. Sec.12 of the Act

provides that the Central Government may direct the suspension of business for such

period as it may specify for the purpose of meeting emergency and can also extend the

period in the interest of public and trade.

Sec. 16 of the Act, 1956 provides that in order to prevent objectionable speculations in the

securities, the Central Government may direct that no person shall purchase and sell the

security within a notified area and also specify limits up to which permission is not

necessary from the government.

6) POWER OF STOCK EXCHANGE:

Sec. 7A of the Act, 1956 provides about the rules made by the stock exchange which may

be related to the restriction as to voting rights with respect to matters which are placed in

the meetings, the regulation of voting rights, restriction on the member to appoint other

person as proxy and other matters in order to give effect to the abovementioned

provisions.

Sec. 9 of the Act, 1956 provides that stock exchange may make bye-laws for regulating

the contract but it is subject to the approval of SEBI. Such bye-laws may provide for:



i) Closing and opening of trade and regulation of hours of trade.

ii) A Clearing House for settlements of contracts.

iii) Submission to SEBI by Clearing House such particulars as may be prescribed.

Sec. 13A of the Act, 1956 provides that additional trading floor may be established

subject to the approval of SEBI. Additional trading floor means a trading ring or trading

facility offered by a recognised stock exchange outside its area of operating to enable the

investors to buy and sell securities through such trading floor under the regulatory

framework of that stock exchange.

7) LISTING OF SECURITIES:

Sec. 21 of the Act, 1956 provides about the conditions for listing of securities which

requires that person who makes an application of listing of securities must comply with

the norms of listing agreements. Sec. 21A of the Act provides that stock exchange may

delist the securities after recording reasons in writing on the grounds prescribed under this

act. The opportunity of being heard must be given before ordering of delisting of

securities.

Rule 19(1) of the Securities Contracts (Regulations) Rules, 1957 provides that the

copies which are required to be submitted along with application for approval are:

i) Memorandum and Articles of Association.

ii) Deed of trust in case of debenture.

iii) Prospectus which provides the details of offer of shares.

iv) Duly audited Balance Sheet of the company for the past 5 years.

v) Documents pertaining to the agreements between the company and

vendors/underwriters/brokers/Sub-brokers.

vi) Brief History as to incorporation.

vii) if the company is previously amalgamated or reconstituted, then particulars relating

thereto.

viii) Necessary certified documents by the Industrial Credit and Investment Corporation,

Industrial Finance Corporation.

Rule 19(2)(b) also mandates that 10% of the total offering must be to the public through

advertisements.



Sec. 22 of the Act, 1956 provides that company who is refused to list its securities by the

stock exchange may appeal to the Securities Appellate Tribunal (SAT) within 15 days

from the date of furnishing reasons for refusal. SAT may vary or set aside the order of the

stock exchange and appeal shall be disposed within six months from the date of receipt of

appeal. Sec. 22F of the Act, 1956 provides that person who is aggrieved by the order of

the SAT, may prefer an appeal to the Supreme Court but appeal must be preferred within

60 days of the communication of order.

Section 23 of the Act, 1956 provides about the penalties by which imprisonment which

may extend to 10 years or with fine which may extend to 25 crore rupees or with both.

8) CASE ANALYSIS:

a) SAHARA INDIA REAL ESTATE CORPORATION LIMITED AND OTHERS VS.

SECURITIES AND EXCHANGE BOARD OF INDIA AND ANOTHER7:

In this case, an issue involve pertaining to the above Act is Whether the Hybrid

OFCD’s (Optionally Fully Convertible Debentures) is included within the

definition of Securities as per the Companies Act, SEBI Act and SCRA, 1956 so that

SEBI can investigate and adjudicate. The Hon‟ble Supreme Court held that as the

hybrid instrument OFCD‟s is issued by two companies [Sahara India Real Estate

Corporation Limited (SIRECL) and Sahara Housing Investment Corporation

Limited (SHICL)] and it is marketable although the term Hybrid Instruments is not

there in the definition of securities in the SCRA, 1956, it is a security within the

definition of Companies Act, 1956, SEBI Act, 1992 and SCRA, 1956.

Second Issue pertaining to the above Act is whether the OFCD‟s are convertible

bonds and thereby exempted from the application of SCRA, 1956 according to the

provision of Sec. 28(1)(b). The Hon‟ble Supreme Court held that Sec 28(1)(b) is apply

to the convertible bonds but this does not apply to the entitlement of a person to have

shares at his option to whom the such convertible bonds have been issued. The

Hon‟ble Supreme Court further held that Sec. 28(1)(b) is apply to the debentures

which is the different categories of securities as defined in Sec. 2(h) of the SCRA,

1956.

7 (2013)1 SCC 1



The judgment provides that the SEBI can investigate a company which is not yet listed

for the interest of investor.

b) SUDHIR SHANTILAL MEHTA Vs. CENTRAL BUREAU OF INVESTIGATION8:

This case is with reference to Section 2 of Special Court (Trial of Offences Relating to

Transactions in Securities) Act, 1992. The issue involved in this case is whether the

„bill discounting and rediscounting' come within the purview of shares as defined by

section 2(c) of the Act. The Hon’ble Supreme Court held that the definition of

securities which is provided by the act is not an exhaustive one but an inclusive one.

The Supreme Court gives an expansive meaning by holding that the term securities

include every securities which is commonly understood to be included.

c) DAHIBEN UMEDBHAI PATEL Vs. NORMAN JAMES HAMILTON9:

The issue in this case is regarding shares of private limited company as to whether it

includes in the definition of security.

The Division Bench of Bombay High Court while interpreting the definition of

„Securities‟ under sec. 2(h) of the SCRA held as follows:

“Now, it is difficult for us to accept the argument of the appellants that the definition

of "securities" must be so read that the words "other marketable securities of a like

nature" were not intended to indicate an element of marketability in so far as the

preceding categories were concerned. A reading of the inclusive part of the definition

shows that the Legislature has enumerated different kinds of securities and by way of a

residuary clause used the words "or other marketable securities of a like nature".

The use of these words was clearly intended to mean that the earlier categories of

securities had to be marketable and any other securities of "like nature", that is to say,

like those which were categorized or enumerated earlier were also to be marketable

before they could be held to fall within the definition of "securities".”

The Division Bench further held that, “the definition of "securities" will only take in

shares of a public limited company notwithstanding the use of the words "any

incorporated company or other body corporate" in the definition.”

8 (2009)8SCC1

9 (1985) 57 Comp Cas. 700 (Bom.)



d) MYSORE FRUIT PRODUCTS LIMITED Vs. THE CUSTODIAN AND

OTHERS10

:

In this case learned single judge held as follows:

“If one goes through the provisions of the Special Court (Trial of Offences relating to

Transactions in Securities) Act, 1992, the scheme of the Act makes it clear that no

restrictive interpretation can be placed on the terms used in the Act. If the provisions

of the Act are looked at, it is clear that it relates not merely to securities which are

listed but it also relates to securities which may not be listed in any stock exchange.

All that is required is that there must be “marketability”. In my view, it cannot be said

that any security which is not listed on any recognized stock exchange is not

“marketable”.

e) BHAGWATI DEVELOPERS PRIVATE LIMITED Vs. PEERLESS GENERAL

FINANCE AND INVESTMENT COMPANY LIMITED11

:

The issue before the court is that whether the provision of regulation will apply to the

shares of a public limited company which are not listed on any stock exchange.

The Hon’ble Supreme Court held that in order to be included in the definition of

securities as defined in the SCRA, 1956; shares of a company must be marketable

which means shares must be saleable. Securities which can be bought and sold is

marketable securities without having regard to the size and number of purchasers. The

court held that the SCRA, 1956 is also apply to the unlisted public companies.

9) CONCLUSION:

The Securities and Exchange Board of India regulates the functioning of stock

exchange, protects the interest of investors and also safeguards the development of

securities market. SEBI has power to ensure the compliances with the rules and

regulations through calling of information and returns and it also administer the SCRA,

1956.

The SCRA, 1956 was passed in order to control over the trading in securities through

which undesirable transaction are barred. It provides the control of Central Government

10

(2005) 107 BOMLR 955 11

[2013]179CompCas 421(SC)



and SEBI as regulatory authority over Stock Exchange which is required to registered,

contracts and listing of securities. Stock Exchange is also required to comply with the

conditions which are imposed by the Central Government. Even though the stock

exchange can make their own rules of listing but that must be confirm to the minimum

listing criteria set out in the rules. Central Government can also impose condition

subject to which recognition will be granted.

Hon’ble Supreme Court through various judgments discussed the marketability of the

securities which is necessary requirement for inclusion in the definition of “Securities”

that marketability means the securities which are saleable and also court gives wider

meaning to the term securities.

For improving the efficiency of the stock exchange, new provision was inserted as to

corporatisation and demutualisation under which a scheme is required to be submitted

to SEBI and after conducting due enquiry, it may approve or disapprove the scheme. SEBI

may also impose certain restriction. Stock exchanges are also required to submit the

periodicals returns and other documents in order to bring transparency in the functioning

of stock exchange.

Securities Appellate Tribunal is also established in order to hear appeals and to control

the power of authority. It has power to set aside or vary the order of the SEBI and also

further appeal can be preferred to Supreme Court from the Securities Appellate Tribunal.

Huge penalties and punishments is also imposed, if there is violation of the act.

Lastly, it is an act for the protection of interest of investor and to prevent frauds like

Satyam Scam as SEBI‟s main objective is to work for the welfare of the investors.



10) BIBLIOGRAPHY:

STATUTES:

Securities Contracts (Regulation) Act, 1956

Securities Contracts (Regulation) Rules, 1957

SEBI Act, 1992

Depositories Act, 1996

Companies Act, 2013

BOOKS:

SEBI Manual, Vol.1, 23rd Ed., (New Delhi: Taxmann Publications (P) Ltd, 2014)

ISBN: 978-93-5071-372-3

CASE LAWS:

SAHARA INDIA REAL ESTATE CORPORATION LIMITED AND OTHERS

Vs. SECURITIES AND EXCHANGE BOARD OF INDIA AND ANOTHER

{(2013)1SCC1}

SUDHIR SHANTILAL MEHTA Vs. CENTRAL BUREAU OF

INVESTIGATION { (2009)8 SCC1}

DAHIBEN UMEDBHAI PATEL Vs. NORMAN JAMES HAMILTON {(1985)

57 Comp Cas. 700 (Bom.)}

MYSORE FRUIT PRODUCTS LIMITED Vs. THE CUSTODIAN {(2005) 107

BOMLR 955}

BHAGWATI DEVELOPERS PRIVATE LIMITED Vs. PEERLESS GENERAL

FINANCE AND INVESTMENT COMPANY LIMITED

{[2013]179CompCas421(SC)}

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