Learn what is Corporatisation and Demutualisation of Securities.Know what are the penalties and offences under the Securities Contract (Regulation) Act, 1956 ©

1. Securities Contract
(Regulation) Act, 1956
Prepared by-
Dr Ramandeep
Assistant Professor
Deptt. of Commerce
GCW, Sirsa (Haryana)

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

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

4. Meaning of Corporatisation
Corporatisation means
the succession of a recognised stock exchange, being a
body of individuals, or a society registered under the
Societies Registration Act, 1860, by another stock
exchange, being a company incorporated for the purpose
of assisting, regulating or controlling the business of
buying, selling or dealing in securities carried on by
such individuals or society.” [Section 2(aa)]

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

6. Meaning of Demutualisation
Demutualisation
means the segregation of ownership and management
from the trading rights of the members of a recognised
stock exchange in accordance with a scheme approved by
the Securities and Exchange Board of India.”
[Section 2(ab)]

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

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

9. Definition of Stock Exchange
“Stock Exchange” means any body of individuals, whether
incorporated or not, constituted for the purpose of assisting,
regulating or controlling the business of buying, selling or dealing
in securities.

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

11. Recognition of
Stock Exchange
Section 3 –
Application for recognition
Application
should be in Form
A
Fee for
Application is Rs
500
Documents to be
filled with
application
Section 4 –
Grant of recognition
Power to make
enquiries
Form of
recognition in
Form B
Renewal of
recognition
Section 5 –
Withdrawal of recognition
Withdrawal of
recognition in
Form C

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

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•The application made to SEBI shall be accompanied by a copy of
the rules relating in general to the constitution of the stock exchange
and in particular, to –
(a) The governing body, its constitution and powers of
management;
(b) The powers and duties of the office bearers of the stock
exchange;
(c) The admission into the stock exchange of various classes
of members, the qualifications for membership, and the exclusion,
suspension, expulsion and re-admission of members;

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

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

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

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

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

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

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

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

22. Withdrawal of Recognition (Section 5)
The CG or SEBI may serve on the governing body of the stock
exchange, a written notice for the withdrawal of the recognition for
the reasons stated in the notice and after giving an opportunity to the
governing body to be heard in the matter, the Central Government
may withdraw by notification in the Official Gazette, the
recognition granted to the stock exchange.
The written notice for the withdrawal of recognition shall be in
Form C.

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

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

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

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

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

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

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

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Power of SEBI to make or amend bye-laws of
recognised stock exchanges (Sec 10)
The SEBI may either on a request from the governing body of a
recognised stock exchange or on its own motion make bye-laws
for all or any of the matters specified in section 9 or amend any
bye-laws made by such stock exchange under that section.

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

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

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

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

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

36. Conditions for listing (Section 21)
Where the securities are listed on the application of any person
in any recognised stock exchange, such person shall comply
with the conditions of the listing agreement with that stock
exchange.

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

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

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

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

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

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

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

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

45. Penalties & Offences

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

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

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

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

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

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

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

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

54. Thank You