Chapter 3

SECURITIES CONTRACTS (REGULATION)

ACT, 1956
Synopsis
1. Introduction
2. Short Notes
(1) Additional Trading Floor
(2) Derivative
(3) Securities
(4) Spot Delivery Contract
(5) Stock Exchange
3. Stock Exchange
(1) Corporatization of Stock Exchange
(2) Demutualization of Stock Exchange
(3) Membership of Stock Exchange
4. Trading procedure at Stock Exchanges
5. Types of Securities Traded in Stock Exchange
(1) Types of Delivery
(2) Settlement
6. Recognized Stock Exchange
(1) (Section 3, 4 & 5 of SCRA) Application for Recognition
(2) Grant of Recognition
(3) Publication of Recognition
(4) Withdrawal of Recognition
(5) (Sections 6 & 7) Power of the Central Government to call for periodical returns or direct
enquiries to be made
(6) (Section 7A) Power of Recognized Stock Exchange to make Rules Restricting Voting
Rights, Etc.
(7) (Section 8) Power of CG to make or amend the rules of a Stock Exchange
(8) (Section 8A) Clearing Corporation (CC)
(9) (Section 9) Power of RSE to make Bye-laws
(10) (Section 10) Power of SEBI to make or amend Bye-laws of Recognized Stock Exchange
7. Continuous listing requirement need to be complied by a company under SCRA Act, 1956
(1) (Section 12) Power of CG to suspend business of RSE
(2) (Section 15) Members not to act as Principal
8. [Section 23A - 23H] Penalty for failure to furnish information, return, etc.
(1) Penalty for failure by any person to enter into an agreement with clients
(2) Penalty for failure to redress investors’ grievances
(3) Penalty for failure to segregate securities or moneys of client or clients
(4) Penalty for failure to comply with listing conditions or delisting conditions or grounds
(5) Penalty for excess dematerialisation or delivery of unlisted securities
(6) Penalty for failure to furnish periodical returns, etc.
(7) Penalty for contravention where no separate penalty has been provided
(8) (Section 27) Right to receive dividend declared by the company
(9) Extension of 15 days
38 Securities Contracts (Regulation) Act, 1956 Chap. 3
(10) (Section 27A) Right to receive income from CIS
(11) Extension of 15 days
9. Securities Contract (Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012
PAST YEAR QUESTIONS

1. Introduction
Following are the important objective of SCRA:
(i) To provide for the regulation of :
• The Stock Exchanges.
• The transaction in securities.
(ii) To prevent undesirable speculation in securities.
(iii) To regulate the buying and selling of securities outside the limits of stock exchanges.
(iv) To provide for ancillary matters.
Quick Recap
Introduction and Objective of SCRA

Regulation Prevent Buying and Selling Regulation of

Speculation of Securities within Ancillary
and Outside Stock Matters
Exchange

Stock Trading
Exchange

2. Short Notes
(1) Additional Trading Floor
Additional Trading Floor means a trading ring or trading facility offered by a Recognized Stock
Exchange outside its area of operation to enable the investors to buy and sell securities through such floor
under regulatory framework of that Stock Exchange.
A Stock Exchange may establish additional trading floor with the prior approval of SEBI.
(2) Derivative
Derivative includes:
• A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument
or contract for differences or any form of security; and
• A contract, which derives its value from the prices or index of prices of underlying securities.
(3) Securities
‘Securities’ includes the following:
• Shares, scrips, stocks, bonds, debenture stock or other marketable securities of a like nature in any
incorporated company or other body corporate.
• Derivative
• Units or any other instrument issued by any CIS.
• Security receipt as defined in SARFAESI Act, 2002.
• Such other instruments as may be declared by the CG.
• Rights or interest in securities. (Bonus or Right issue).
Chap. 3 Securities Contracts (Regulation) Act, 1956 39
• Units or any other such instrument issued under any MF.
• Any certificate or instrument (by whatever name called), issued to an investor by any issuer being a
special purpose distinct entity which possesses any debt or receivable, including mortgage debt.
(Public Deposit).
(4) Spot Delivery Contract
Spot Delivery contract means a contract which provides for :
• 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 dispatch 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.
• 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.
(5) Stock Exchange
Stock Exchange means
• Anybody of individuals, whether incorporated or not, constituted before corporatization and
demutualization under SCRA
OR
• A body corporate incorporated under the companies Act, whether under a scheme of corporation
and demutualization or otherwise for the purpose of assisting, regulating or controlling the
business of buying, selling or dealing in securities.
Quick Recap

Securities

Shares + Instrument which

Scrips + Stock derives its value Units Bonus & Public Deposit
+ Bonds from underlying Right Issue
Asset

Security under
CIS AIF MF SARFAESI
Act, 2002

Additional Trading Floor

Additional Trading
Trading Floor Floor

Trading Ring

Prior
S.E SEBI
Approval
40 Securities Contracts (Regulation) Act, 1956 Chap. 3
Chap. 3 Securities Contracts (Regulation) Act, 1956 41
Quick Recap
Spot Delivery Contract

Actual delivery and payment of Transfer of Securities through

price on same or next day of Depositories
contract

Postage period is excluded if parties do not reside

in same locality

Stock Exchange

Body of Individuals (No Company

Or
Longer in Existence)

For regulating & controlling Transactions of Securities

3. Stock Exchange
■ Stock Exchanges constitute the primary institution of secondary market.
■ Stock Exchanges represent the market place for buying and selling of securities and ensuring
liquidity to them in the interest of the investors.
■ There are 23 recognized Stock Exchanges in India.
■ All of them are regulated in terms of SCRA, 1956 and the SEBI Act, 1992 and the rules and
regulations made there under.
■ The Stock Exchanges are managed by the Board of Directors or Council of Management consisting
of elected brokers and representatives of Government and public appointed by SEBI.
(1) Corporatization of Stock Exchange
■ Corporatization of Stock Exchange is the process of converting the organizational structure of the
Stock Exchange from a non-corporate structure to a corporate structure.
■ Traditionally, some of the stock exchanges in India were established as association of persons
such as Bombay Stock Exchange.
■ Corporatization of such exchanges is a process of converting them into companies.
(2) Demutualization of Stock Exchange
The process of demutualization is to convert the traditional “not for-profit” stock exchanges into a “for
profit” company and this process is to transform the legal structure from a mutual form to a business
corporation form.
SEBI had set up a committee under the Chairmanship of Justice Kania for the same which came up
with report on demutualization of Stock Exchanges through uniform scheme prescribed. Accordingly, SEBI
issued scheme of demutualization to BSE and other Regional Stock Exchanges.
The important features of the demutualization exercise are as follows:
The board of a stock exchange should consist of :
42 Securities Contracts (Regulation) Act, 1956 Chap. 3
• 75% public interest/shareholder directors;
• 25% broker directors;
The shareholding should be distributed as:
• 51% shareholding of the stock exchange should be divested to public/investors other than trading
member (brokers);
• 49% of shareholding can remain with the trading member brokers.
This will transform our broker-owned stock exchanges into professionally-run corporate stock exchanges.
■ Demutualization refers to transition process of an Exchange from mutually owned association to
a company owned by shareholders.
■ In other words, transforming the legal structure of an exchange from a mutual to a business
corporation form is referred to as demutualization.
■ The above, in effect, means that after demutualization, the ownership, the management and the
trading rights at the Exchange are segregated from one another.
Chap. 3 Securities Contracts (Regulation) Act, 1956 43
Quick Recap

Stock Exchange

Primary Institution Market Place for 23 Stock Managed by BOD

of Secondary Investors to Ensure Exchanges in Regulated by and Representative
Market Liquidity India of Government.

Buying and Selling

of Securities SEBI Act, SCRA, 1956
1992

BOD — Members (brokers) of stock exchange

Corporatization of Stock Exchange


(Conversion of SE into Corporate form)
And
Demutualisation of stock

(Dilution of ownership from partnership to joint stock company)
1991  23 Stock Exchanges
1992  SEBI Act
1996  Dematerialisation

SEBI

Online terminals Corporate  BSE

All Stock Conversion  NSE
Exchanges (Yes)

Note Corporatization has led to Demutualization.

44 Securities Contracts (Regulation) Act, 1956 Chap. 3
Quick Recap
Corporatization

Traditionally stock Conversion into Joint Stock Process of converting

exchanges were company incorporated under non-corporate structure
established by the Companies Act, 1956 of stock exchange into
individuals (In the year 2002) corporate structure

Demutualization

Transition Mutually owned Spreading of Transforming legal

Process association converted ownership from few structure of stock
into company owned individuals to many exchange
by shareholders shareholders

Features of Demutualization

Conversion of Not Features

For Profit Stock
Exchanges or Profit
Companies
Stock Exchanges Share holding
should consist

51% divested to 49% with

75% public 25% brokers public or non trading
interest directors directors trading members members
(broker)

(3) Membership of Stock Exchange

■ Membership of Stock Exchanges is generally given to persons who are financially sound and who
have adequate experience and training in the stock market.
■ Their enrolment as member is regulated and controlled by SEBI to who they have to pay an
annual charge.
■ A member of the Stock Exchange is called broker who can transact on behalf of his clients as well
as on his own behalf.
■ He can also take the assistance of sub-broker, whom he can appoint under the procedure of
registration.
Chap. 3 Securities Contracts (Regulation) Act, 1956 45
Quick Recap Membership of Stock Exchange

Financially Trained and Regulation Annual charges Known as May take

sound experienced by SEBI of membership broker assistance of
sub-broker
4. Trading Procedure At Stock Exchanges
The trading procedure involves the following steps:
(i) Placing of the order by the client. (P)
(ii) Entry in order book by the broker. (E)
(iii) Execution of order or contract.(E)
(iv) Preparation of contract note.(C)
(v) Entry in client register and settlement register.(R)
(vi) Actual delivery of the securities by the broker or by the client. (D)
(vii) Preparation of bill or delivery note. (D)
(viii) Entry in client register. (E)
(ix) Payment.(P)
Trading takes place regularly on each week day, except Saturdays, Sundays and notified holidays.
Stock Exchange used to have extra sessions for special occasions like Diwali, Budget, etc.
Quick Recap

Trading Procedure

Placing of order

Entry in order book

Execution of order

Preparation of contract note (T.D).

Entry into client or settlement

registers

Delivery of securities

Delivery of bill note

Re-entry in client register

NOTE

Trading on working Saturday and Extra trading session Eg:- Diwali

days only Sunday closed Mahaurat Trading
46 Securities Contracts (Regulation) Act, 1956 Chap. 3
5. Types of Securities Traded In Stock Exchange
Securities traded in the Stock Exchanges can be classified as follows:
(i) Specified Securities: The securities in which forward trading is allowed are referred as specified
securities. In this case the buyers can carry forward the transaction from one fortnightly settlement
of outstanding transactions to another for a total period not exceeding 90 days from the date of the
contract.
(ii) Unspecified Securities: The securities, which are traded on cash basis, are termed as unspecified
securities, and cannot be carried forward from one settlement to another but, have to be settled
within one settlement period.
(iii) Permitted Securities: The securities listed on some of the recognized Stock Exchanges, when
permitted to be traded by those Stock Exchanges where they are not listed are called permitted
securities. Such permission is given if suitable provisions exist in the regulations of the concerned
SE.
(1) Types of Delivery
Four types of delivery are permitted by the Stock Exchanges namely, spot delivery, hand delivery,
clearing delivery, and special delivery.
■ The delivery is said to be spot delivery if the delivery of and payment for securities are to be made
on the same day or the next day.
■ The delivery is said to be hand delivery if the delivery and payment are to be made on the delivery
date fixed by the Stock Exchange.
■ A special delivery is one where the delivery is to be made after the delivery period fixed by the
Stock Exchange authorities.
■ A clearing delivery is one where the delivery and payment are to be made through the clearing
house of the Stock Exchange. This method applies only in the case of securities in the specified list.
(2) Settlement
Settlement is the process of netting of transactions and actual delivery or receipt of securities against
receipts or payments of agreed amounts. It is necessary to make a settlement to know the net effect of a series
of transaction during a given period.
Following are the two types of settlement system in the Stock Exchanges:
(i) Accounting period system or Batch Settlement: In this system, the securities transacted on any day
of a specific period are settled in the form of a batch on the last date of the aforesaid specific period.
(ii) Rolling Settlement System: In this system, each day constitutes the settlement period. (T+2 System)
Quick Recap
Types of Securities

Specified Securities Unspecified Securities Permitted Securities

Future trading is Not listed on Stock

No future trading Exchange though
possible upto 90 days
traded.

Eg:- A company
Can be carried Cannot be carried which is listed on
forward forward BSE & not NSE,
then NSE can permit
for trading of such
shares.
Chap. 3 Securities Contracts (Regulation) Act, 1956 47

Types of Delivery

Spot Delivery Clearing Delivery Hand Delivery (Physical) Special Delivery

Same day or next day Settlement through Delivery & payment

Clearing Agent on date fixed by stock After date fixed by
[through NSCCL] exchange stock exchange

Known as delivery after hand delivery

Quick Recap
Settlement

Netting of transactions and actual delivery against payment

Kinds of Settlement

Accounting period settlement OR Rolling system on T+2

Batch settlement settlement system

Last day of specified period (Specified

by SEBI)

Hand Delivery

6. Recognized Stock Exchange

Recognized Stock Exchange means a Stock Exchange, which is for the time being recognized by the
CG.
(1) (Section 3, 4 & 5 of SCRA) Application for Recognition
Any Stock Exchange, desirous of being recognized for the purposes of Securities Contracts (Regulation)
Act, 1956, shall make an application to the CG in the prescribed manner. The application shall be
accompanied with the following documents:
• A copy of bye-laws of the Stock Exchange.
• A copy of the rules relating to the constitution of a Stock Exchange.
(2) Grant of Recognition
The CG shall make such enquiry as may be necessary in this behalf and if it is satisfied in all the
respects, it may grant recognition to the Stock Exchange.
The Central Government shall take into account the following considerations while granting the
recognition:-
• That the rules and bye-laws of the Stock Exchange are such that they ensure fair dealing and
investor protection.
• That the SE is willing to comply with any conditions which the CG may impose.
48 Securities Contracts (Regulation) Act, 1956 Chap. 3
• That grant of recognition to Stock Exchange is in the interest of securities trade and public interest.
(3) Publication of Recognition
Grant of recognition shall be published in the Gazette of India and also the Official Gazette of the
State in which the principal office of the Stock Exchange is situated.
(4) Withdrawal of Recognition
In the interest of securities trade or public interest, if the Central Government is of the opinion that
recognition granted to a Stock Exchange should be withdrawn, it shall serve a written notice on the
governing body of the Stock Exchange.
The Government Body shall be given a reasonable opportunity of being heard.
Thereafter if the CG is satisfied, it shall withdraw the recognition granted to the SE, by way of NIOG.
NOTE Withdrawal of recognition shall not affect the validity of any contract entered into before the date
of notification.
Quick Recap Recognised Stock Exchange (RSE)

RSE

ROC SEBI C.G

Application
SE CG
(+)
Bye laws
+
Rules regarding constitution

Considerations by C.G

Interest of public & Willingness of stock exchange to

Fairness of Bye laws
Investors comply conditions prescribed

CG will Grant Recognition

Publication

Notification in Official Gazette of India (NIOGI) (+) Notification in Official Gazette of India (NIOGS)
Chap. 3 Securities Contracts (Regulation) Act, 1956 49

Withdrawal of Recognition

Contravenes conditions prescribed

Against public interest
by CG

Audi Alterem Partem [Opportunity of being

heard]

Withdrawal of Recognition

Publication

(+)
NIOGI NIOGS
(5) (Sections 6 & 7) Power of the Central Government to call for periodical returns or direct enquiries to
be made
Every Recognized Stock Exchange (RSE) shall furnish to SEBI such periodical returns relating to its
affairs as may be prescribed.
Every RSE and every member thereof shall maintain and preserve books of accounts and other
documents for a period of 5 years. SEBI can inspect such books of accounts and other documents at any
time.
SEBI may, in the interest of securities trade or public interest, exercise the following powers:
(i) Call upon a RSE or any member thereof to furnish information and explanation in writing relating
to the affairs of the Stock Exchange or of the member thereof.
(ii) Appoint one or more persons to make any enquiry into the affairs of the Stock Exchange or the
member thereof.
Every RSE shall furnish the CG with a copy of the Annual Report and such AR shall contain
particulars as may be prescribed.
Quick Recap [Section 6-7] – Powers of CG

File Returns
RSE SEBI

Preservation of Records [5 years]

Inspection by SEBI

SEBI may call written SEBI may appoint enquiry

information from SE officer for SE

RSE Annual Returns

CG
50 Securities Contracts (Regulation) Act, 1956 Chap. 3
(6) (Section 7A) Power of Recognized Stock Exchange to make Rules Restricting Voting Rights, Etc.
In order to restrict the voting rights of members, RSE may make rules or amend any existing rules. Such
rules or amendments shall pertain to the following :
• Members shall have voting right only in respect of any matter placed at the meeting of SE.
• Each member shall be entitled to only one vote, irrespective of paid up share capital.
• Members shall have no right to appoint a proxy.
• Incidental, consequential, and supplemental matters related to aforesaid matters.
Such rules or amendments shall not have effect, until they have been approved by the CG.
Quick Recap Powers of RSE to Make Rules

Members (Brokers) Corporates Beneficial owner

[Section 7A]- Power of RSE to Make Rules

for Members

Voting right of One vote to every Members cannot Rules of RSE

members member appoint proxy approved by CG

(7) (Section 8)Power of CG to make or amend the rules of a Stock Exchange

Section 8 empowers the Central Government to make an order to a stock exchange to make or amend its
rules in accordance with the order of the Central Government.
The CG may make such an order only if it complies with the following requirements:
• The CG shall consult the governing body of the SE.
• The CG must form an opinion that it is necessary or expedient to make such an order.
• The CG shall specify the reasons for making such an order.
• The order to make any rules or to amend any rules already made shall be given only in respect of the
matters specified in section 3(2), i.e., the provisions relating to governing body, office bearers and
members of the stock exchange, and admission of firm as a member of the stock exchange.
It shall be the duty of such RSE(s) to make or amend the rules within 2 months from the date of the
order of the CG.
If any RSE fails or neglects to comply with the order of the Central Government within a period of 2
months, the CG may make or amend the rules.
Chap. 3 Securities Contracts (Regulation) Act, 1956 51

Quick Recap
[Section 8]- Power of CG to Make or amend
rules of RSE

Consult Form opinion if

CG RSE
necessary
governing body of

Specify Reasons
CG RSE
For amendment

Order Within
CG RSE CG will
To amend Amend
2 Months amend

(8) (Section 8A) Clearing Corporation (CC)

Clearing corporation means a company incorporated under the Companies Act, 2013, for the purpose
of-
• The periodical settlement of contracts and differences thereunder.
• The delivery of, and payment for, securities.
• Any other matter incident to, or connected with, such transfer.
A RSE with prior approval of SEBI, may transfer the duties and functions of a clearing house to a
clearing corporation. (NSE must have taken approval of SEBI to transfer its clearing house function to
NSCCL).
Every CC shall make bye-laws and submit the same to SEBI for its approval.
SEBI may grant approval to the bye-laws submitted to it by the clearing corporation.
SEBI shall not grant such approval, unless it is satisfied that such approval is in the interest of the trade
and also in the public interest.
DVP = Settlement
Quick Recap
[Section 8A] Clearing Corporation

Company under Companies Act, 2013

Delivery of securities + Payment of securities = Provides for settlement

Took Approval
NSE To form NSCCL
From SEBI

Submit Bye Laws

Approval SEBI
52 Securities Contracts (Regulation) Act, 1956 Chap. 3
Note NSE must have taken approval of SEBI to transfer its clearing house function to NSCCL.

CC Bye Laws
SEBI
Submit

(9) (Section 9)Power of RSE to make Bye-laws

Any RSE may, with prior approval of SEBI make bye-laws for the regulation and control of contracts.
Such byelaws may provide for the following:
• Opening and closing of markets and regulations of trade hours.
• Periodical settlement of contracts and differences there under by a clearing house.
• Submission of certain particulars to SEBI by a clearing house after each such settlement period.
• Prohibition of blank transfers.
• Class of contracts in respects of which settlement shall be made through the clearing house.
• Prohibition to carry-over facilities.
• Regulations for settlement days.
• Listing of securities on the Stock Exchange.
• Method and procedure for settlement of claims or disputes.
• Levy and recovery of fees, fines and penalties.
• Regulation of brokerage.
• Regulation of dealing by members for their own accounts.
Quick Recap [Section 9]- Power of RSE to Make Bye-Laws for Concerned Persons

Submit bye laws

RSE SEBI
Prior Approval

Settlement of dispute

Brokerage

Fees, Fine & Penalty

Laws regarding listing of securities

Settlement days on (T+2)

BYE LAWS
Prohibition on carry over facilities

No blank transfer

Submission of particulars by CC to SEBI

Periodical settlement of contracts

Opening & Closing time of stock exchange and trading hours

(10) (Section 10) Power of SEBI to make or amend Bye-laws of Recognized Stock Exchange
SEBI may, either on the request of a RSE or on its own motion, make byelaws for all or any of the
matters specified in Sec. 9 of Securities Contracts (Regulation) Act, 1956, or amend any byelaws made by
such Recognized Stock Exchange under that Section.
Chap. 3 Securities Contracts (Regulation) Act, 1956 53
New bye-laws made or existing byelaws amended by SEBI shall be published in the Gazette of India
and also the Official Gazette of the State in which the principal office of the RSE is situated.
Where SEBI makes new bye-laws or amends existing bye-laws on its own motion, the Governing Body
of the RSE may object to the same.
The Governing Body of the RSE may, within 2 months of the publication of bye-laws so made or
amended, apply to SEBI for revision of the Bye-laws so made or amended.
The Governing Body of the RSE shall be given a reasonable opportunity of being heard. Thereafter if
the SEBI is satisfied, SEBI shall revise the bye-laws so made or amended.
Admission to dealing
Admission to dealing is a process of granting permission to the securities of a company to be listed on a
dealing Stock Exchange and to provide trading facilities for the securities in the market.
Quick Recap

[Section 10]- Power of SEBI to amend/make bye laws

of RSE
RSE Section 9 Frame bye laws.
SEBI Section 10 Amendment of bye laws framed
by RSE u/s 9.

Quick Recap
Bye-laws
SEBI RSE
Amend

Publish

NIOGI NIOGS

Within 2 months

RSE can raise objection

Request
SEBI re-consider such
amendment

Admission to dealing

Process of granting permission to list the securities on designated stock exchange and provide trading facilities.

7. Continuous Listing Requirement Need To Be Complied By A Company Under Scra Act, 1956
Rule 19A (1) stipulates that every listed company other than public sector company shall maintain
public shareholding of at least 25%.
54 Securities Contracts (Regulation) Act, 1956 Chap. 3
However, any listed company which has public shareholding below 25%, shall increase its public
shareholding to at least twenty five per cent, within a period of three years from the date of
commencement of amendment to the said rules in 2010, in the manner specified by SEBI.
Sub-rule (2) provides that where the public shareholding in a listed company falls below 25 % at any
time, such company shall bring the public shareholding to 25% within a maximum period of twelve months
from the date of such fall in the manner specified by SEBI.
According to Sub rule 3, every listed public sector company shall maintain public shareholding of at
least 10%. However, a listed public sector company-
• which has public shareholding below 10%, on the date of commencement of the Securities
Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public shareholding to at
least 10 %, in the manner specified by SEBI, within a period of three years from the date of such
commencement;
• whose public shareholding reduces below ten per cent, after the date of commencement of the
Securities Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public
shareholding to at least ten per cent, in the manner specified by the Securities and Exchange Board
of India, within a period of twelve months from the date of such reduction.
Quick Recap
Continuous listing need to be complied by
Company under SCRA Act, 1956

Listed Company other than Pub Listed public sector

sector company company

Minimum public Listed Company increase Minimum public Listed Company

shareholding at 25% to 25% within 3 years of shareholding at 10% increase to 10% within 3
commencement. years of commencement

Note If the public shareholding falls below 25% or 10% respectively then company must increase within 12
months from the date of violation
(1) (Section 12) Power of CG to suspend business of RSE
Section 12 empowers the central government to make an order directing a recognized stock exchange to
suspend its business.
Following conditions are required to fulfill exercising the aforesaid power:
• The CG must from an opinion that some emergency has arisen and for the purpose of meeting the
emergency, it is expedient to suspend the business of the stock exchange.
• The CG shall issue a NIOGI that the business of the stock exchange has been suspended.
• The CG shall specify the reasons in the NIOGI.
• The suspension of such business shall be subject to such conditions as may be specified in the
notification.
• The suspension of business shall be for such period, not exceeding 7 days or such extended period,
as may be specified in the notification.
Chap. 3 Securities Contracts (Regulation) Act, 1956 55
Quick Recap

[Section 12]- Power of CG to Suspend Business

Suspend
CG RSE
Business of

NIOGI

Reasons

Suspension for 7 days generally

Or
Time prescribed in notification

(2) (Section 15) Members not to act as Principal

An investor cannot directly, by himself, trade on a stock exchange.
He can trade only through a member of a stock exchange. Therefore, a member of a stock exchange acts
as an intermediary between the two investors, i.e., he acts as an agent, since he carries out the transactions
on behalf of the investors.
As per section 15, no member of a recognized stock exchange shall enter into any contract as a
principal with any person other than a member of a recognized stock exchange.
However he can enter into a contract as principal in the following cases:
• Where the member of the RSE secures the consent of such other person in writing and makes a
disclosure in the note, memorandum of agreement of sale or purchase that he is acting as a principal.
• Where the member secures the consent of such other person otherwise than in writing he shall secure
written confirmation by such person of such consent within 3 days from the date of the contract.
• A member may, without obtaining any written consent of such person, close out any outstanding
contract entered into by such person in accordance with the bye-laws of the stock exchange.
However, the member shall disclose in the note, memorandum of agreement of sale or purchase in
respect of such closing out that he is acting as a principal.
• Where the contract is a spot delivery contract.
Quick Recap
[Section 15] Member Not to act, as Principal

Intermediary Broker as agent Exceptional cases

Prior consent of owner of Subsequent consent of Outstanding contracts

Spot delivery contract
securities in writing owner in writing within 3
days of contract
56 Securities Contracts (Regulation) Act, 1956 Chap. 3
8. [Section 23a - 23h] Penalty For Failure To Furnish Information, Return, Etc.
Any person, who is required under this Act or any rules made thereunder,–
(a) to furnish any information, document, books, returns or report to a recognized stock exchange, fails
to furnish the same within the time specified therefor in the listing agreement or conditions or bye-
laws of the recognised stock exchange, shall be liable to a penalty of one lakh rupees for each day
during which such failure continues or one crore rupees, whichever is less for each such failure;
(b) to maintain books of account or records, as per the listing agreement or conditions, or bye-laws of a
recognised stock exchange, fails to maintain the same, shall be liable to a penalty of one lakh rupees
for each day during which such failure continues or one crore rupees, whichever is less [Section
23A].
(1) Penalty For Failure By Any Person To Enter Into An Agreement With Clients
If any person, who is required under this Act or any bye-laws of a recognized stock exchange made
thereunder, to enter into an agreement with his client, fails to enter into such an agreement, he shall be
liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees,
whichever is less for every such failure. [Section 23B]
(2) Penalty For Failure To Redress Investors’ Grievances
If any stock broker or sub-broker or a company whose securities are listed or proposed to be listed in a
recognised stock exchange, after having been called upon by SEBI or a recognised stock exchange in writing,
to redress the grievances of the investors, fails to redress such grievances within the time stipulated by SEBI
or a recognised stock exchange, he or it shall be liable to a penalty of one lakh rupees for each day during
which such failure continues or one crore rupees, whichever is less [Section 23C].
(3) Penalty For Failure To Segregate Securities Or Moneys Of Client Or Clients
If any person, who is registered under Section 12 of SEBI Act, 1992 as a stock broker or sub-broker, fails
to segregate securities or moneys of the client or clients or uses the securities or moneys of a client or clients
for self or for any other client, he shall be liable to a penalty not exceeding one crore rupees. [Section 23D]
(4) Penalty for Failure To Comply with Listing Conditions or Delisting Conditions or Grounds
If a company or any person managing collective investment scheme or mutual fund, fails to comply with
the listing conditions or delisting conditions or grounds or commits a breach thereof, it or he shall be liable
to a penalty not exceeding twenty-five crore rupees. [Section 23E]
(5) Penalty For Excess Dematerialisation or Delivery of Unlisted Securities
If any issuer dematerialises securities more than the issued securities of a company or delivers in the
stock exchanges the securities which are not listed in the recognised stock exchange or delivers securities
where no trading permission has been given by the recognised stock exchange, he shall be liable to a penalty
not exceeding twenty-five crore rupees. [section 23F]
(6) Penalty For Failure To Furnish Periodical Returns, Etc.
If a recognized stock exchange fails or neglects to furnish periodical returns to SEBI or fails or neglects
to make or amend its rules or bye-laws as directed by SEBI or fails to comply with directions issued by
SEBI, such recognised stock exchange shall be liable to a penalty which may extend to twenty-five crore
rupees. [section 23G]
(7) Penalty For Contravention Where No Separate Penalty Has Been Provided
Whoever fails to comply with any provision of this Act, the rules or articles or bye-laws or the regulations
of the recognised stock exchange or directions issued by SEBI for which no separate penalty has been
provided, shall be liable to a penalty which may extend to one crore rupees. [section 23H]
(8) (Section 27) Right To Receive Dividend Declared By The Company
A person whose name appears on the books of a company in respect of certain shares is legally entitled to
receive and retain any dividend declared by the company, irrespective of the fact that he has already
transferred the shares for consideration.
However, where the transferee makes a claim for the dividend and furnishes the Share Certificate
and other documents relating to transfer to the company for registration of shares in his name, within 15 days
Chap. 3 Securities Contracts (Regulation) Act, 1956 57
of the date on which the dividend become due, the dividend shall be paid to the transferee.
(9) Extension of 15 days
It may be noted that the prescribed period of 15 days shall be extended by the following period:
• In case of death of the transferee, by the actual period taken by his legal representative to establish
his claim.
• In case of loss of transfer deed, by the actual period taken for the replacement thereof.
• In case of delay due to causes connected with post, by the actual period of delay.
(10) (Section 27A) Right To Receive Income From CIS
A person whose name appears on the books of a collective investment scheme in respect of certain
securities/units is legally entitled to receive and retain any income declared by the collective investment
scheme, irrespective of the fact that he has already transferred the securities/units for consideration.
However, where the transferee makes a claim for the income and furnishes the securities/units
Certificate and other documents relating to transfer to the collective investment scheme for registration of
securities/units in his name, within 15 days of the date on which the income become due, the income shall be
paid to the transferee.
(11) Extension of 15 days
It may be noted that the prescribed period of 15 days shall be extended by the following period:
• In case of death of the transferee, by the actual period taken by his legal representative to establish his
claim.
• In case of loss of transfer deed, by the actual period taken for the replacement thereof.
• In case of delay due to causes connected with post, by the actual period of delay.
Quick Recap
[Section 27] Right of Member to Receive Dividend by a Company

Dividend paid to Transferee shareholder can Within 15 days of

member also claim dividend dividend becoming due

Extension of 15 Days

Death of transferee Loss of transfer deed

[Section 27] Right of Member of Receive Return from a MF

Return paid to member Transferee unit holder can Within 15 days of

also claim return return becoming due

Extension of 15 Days

Death of transferee Loss of transfer deed

58 Securities Contracts (Regulation) Act, 1956 Chap. 3
9. Securities Contract (Regulation) (Stock Exchange And Clearing Corporations) Regulations, 2012
With an intent to regulate recognition, ownership and governance in stock exchanges and clearing
corporations, SEBI on June 20, 2012 issued the Securities Contracts (Regulation) (Stock Exchanges and
Clearing Corporations) Regulations, 2012.
With the notification of these Regulations, The Securities Contracts (Regulations) (Manner of Increasing
and Maintaining Public shareholding in recognized Stock Exchanges) Regulations, 2006, which dealt only
with the Stock Exchanges stand repealed.
Corporate Membership
Sub-rule 4 provides that a company as defined in the Companies Act, 2013, shall be eligible to be elected
as a member of a stock exchange if –
(i) such company is formed in compliance with the provisions of Companies Act, 2013.
(ii) a majority of the directors of such company are shareholders of such company and also members
of that stock exchange; and
(ii) the directors of such company, who are members of that stock exchange, have ultimate liability in
such company;
However where SEBI makes a recommendation in this regard, the governing body of a stock exchange
shall, in relaxation of the requirements of this clause, admit as member the following corporations, bodies
corporate companies or institutions, namely:
(a) the Industrial Finance Corporation, established under the Industrial Finance Corporation Act,
1948;
(b) the Industrial Development Bank of India, established under the Industrial Development Bank Act,
1964; (c) the Life Insurance Corporation of India, established under the Life Insurance
Corporation Act, 1956;
(d) the Unit Trust of India, established under the Unit Trust of India Act, 1963;
(e) the Industrial Credit and Investment Corporation of India, a company registered under the
Companies Act, 2013;
(f) the subsidiaries of any of the corporations or companies specified in (a) to (f ) and any subsidiary
of the State Bank of India or any nationalised bank set up for providing merchant banking services,
buying and selling securities and other similar activities;
(g) any bank included in the second schedule to RBI Act, 1934;
(h) the Export Import Bank of India, established under the Export Import Bank of India Act, 1981;
(i) the National Bank for Agriculture and Rural Development, established under the National Bank
for Agriculture and Rural Development Act, 1981 and
(j) the National Housing Bank, established under the National Housing Bank Act, 1987.
(k) Central Board of Trustees, Employees’ Provident Fund, established under the Employees’
Provident Funds and Miscellaneous Provisions Act, 1952.
(l) any pension fund registered or appointed or regulated by the Pension Fund Regulatory and
Development Authority under the Pension Fund Regulatory And Development Authority Act, 2013;
and
(m) any Standalone Primary Dealers authorised by the Reserve Bank of India constituted under the
Reserve Bank of India Act, 1934.
According to sub-rule 4A a company as defined in the Companies Act, 2013, shall also be eligible to be
elected as a member of a Stock Exchange if :
(i) such company is formed in compliance with the provisions of section 3 of the said Act;
(i) such company undertakes to comply with such financial requirements and norms as may be specified
by SEBI for the registration of such company under sub-section (1) of section 12 of SEBI Act, 1992;
(iii) the directors of the company are not disqualified for being members of a stock exchange except
clause (1) of sub- clause (b) and sub-clause (f ) thereof or clause (3) except sub-clause (a) and sub-
Chap. 3 Securities Contracts (Regulation) Act, 1956 59
clause (f ) thereof and the Director of the company had not held the offices of the Director in any
company which had been a member of the stock exchange and had been declared defaulter or
expelled by the stock exchange; and
(iv) not less than two directors of the company are persons who possess a minimum two years’
experience–
(a) in dealing in securities; or
(b) as portfolio managers; or
(c) as investment consultants.
Sub-rule 5 provides that where any member of a stock exchange is a firm, the provisions of sub-rules (1),
(3) and (4), shall, so far as they can, apply to the admission or continuation of any partner in such firm.
Sub-rule 6 lays down that a limited liability partnership as defined in the Limited Liability Partnership
Act, 2008, shall also be eligible to be elected its a member of a stock exchange if:
(i) such “limited liability partnership” undertakes to comply with such financial requirements and
norms as may be provided by SEBI for registration of such limited liability partnerships under
subsection (1) of section 12 of the SEBI Act, 1992;
(ii) the designate partners of the ‘limited liability partnership’ are not disqualified from being members
of a stock exchange under sub-rule (1) [except clause (b) and (f ) thereof or sub-rule (3) except clause
(a) and clause (f ) thereof and the designated partners of the ‘limited liability partnership’ had not
held the offices of Directors in any company or body corporate or partner in any firm or ‘limited
liability partnership’, which had been a member of the stock exchange and had been declared
defaulter or expelled by the stock exchange; and
(iii) not less than two designated partners of the ‘limited liability partnership’ are persons who possess a
minimum experience of two years:-
(a) in dealing in securities; or
(b) as portfolio managers; or
(c) as investment consultants.
Appointed date à It means the date which SEBI may, by notification in the Official Gazette, appoint and
different appointed dates may be appointed for different recognized stock exchanges.

Past Year Questions

Question 1: Write Comment on the following statement: (Dec-2010, 1 marks)
(a) “Demutualization of stock exchanges is to convert the traditional stock exchanges into a company.
Question 2: Write short notes on the following:
(a) Clearing corporation (Dec - 2011, 3 marks)
(b) Spot delivery contract (Dec - 2014, 3 marks)
Question 3: Comment briefly on the following statement: (Dec-2011, 3 marks)
(a) “Dematerialisation and immobilization are distinct activities.”
Question 4: Distinguish between the following:
(a) ‘Spot delivery’ and ‘special delivery’ (Dec-2011) 3 marks)
(b) ‘Listed securities’ and ‘permitted securities’. (June - 2015, 3 marks)
Question 5: Comment briefly on the following statement: (Dec-2012, 2 marks)
(a) “Stock exchanges are virtually the nerve Centre of the capital market.”
Question 6: Discuss briefly the conditions subjects to which a company may issue shares with differential
voting rights. (June - 2013, 3 marks)
Question 7: Briefly explain the provisions relating to continuous listing requirements as enshrined under the
Securities Contracts (Regulation) Rules, 1957. (Dec-2013, 5 marks)
60 Securities Contracts (Regulation) Act, 1956 Chap. 3
Question 8: The shares of Run fast Ltd. were listed in Delhi Stock Exchange. The stock exchange delisted the
shares company. The aggrieved company approaches you as a Company Secretary in Practice to know the
remedy available to the Company, Give your suggestions to the company keeping in view the provisions of
the Securities Contracts (Regulation) Act, 1956. (Dec-2014, 10 marks)
Question 9: What is meant by demutualisation of stock exchange? Explain the purpose of demutualisation.
(June - 2015, 5 marks)