A guide to the Securities Contracts (Regulation) Act, 1956

A guide to the Securities Contracts (Regulation) Act, 1956

15 min read

The Securities Contracts (Regulations) Act, 1956 (SCRA) aims “to prevent undesirable transactions in securities by regulating the business of dealing therein“. The SCRA defines critical terms including derivatives, securities, specific, and spot delivery contracts.

Relevant rules:
Securities Contracts (Regulation) Act, 1956

Brief History of the Act

Amendments till Date:

  1. Securities Contracts (Regulation) Amendment Act, 1959
  2. Securities Contracts (Regulation) Amendment Act, 1985
  3. Securities Laws (Amendment) Act, 1995
  4. Securities Laws (Amendment) Act, 1999
  5. Securities Laws (Second Amendment) Act, 1999
  6. Securities Laws (Amendment) Act, 2004
  7. Securities Contracts (Regulation) Amendment Act, 2007
  8. Securities and Insurance Laws (Amendment and Validation) Act, 2010
  9. Securities Laws (Amendment) Act, 2014
  10. Finance Act, 2015
  11. Finance Act, 2017
  12. Finance Act, 2018

1. Important Definitions

Some of the important definitions under The Securities Contracts (Regulation) Act, 1956 include:

Contract means a contract for or relating to the purchase or sale of securities.

 Corporatisation means the succession of a recognised stock exchange, being a body of individuals or a society registered under the Societies Registration Act, 1860 (21 of 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.

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.

Derivative includes,

(i) 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,

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

(iii) commodity derivatives, and

(iv) such other instruments as may be declared by the Central Government to be derivatives.

Non transferable specific delivery contract means a specific delivery contract, the rights or liabilities under which or under any delivery order, railway receipt, bill of lading, warehouse receipt or any other documents of title relating thereto are not transferable.

Scheme means a scheme for corporatisation or demutualisation of a recognised stock exchange which may provide for

(i) the issue of shares for a lawful consideration and provision of trading rights in lieu of membership cards of members of a recognised stock exchange,

(ii) the restrictions on voting rights,

(iii) the transfer of property, business, assets, rights, liabilities, recognitions, contracts of the recognised stock exchange, legal proceedings by, or against, the recognised stock exchange, whether in the name of the recognised stock exchange or any trustee or otherwise and any permission given to, or by, the recognised stock exchange, (iv) the transfer of employees of a recognised stock exchange to another recognised stock exchange; and (v) any other matter required for the purpose of, or in connection with, the corporatization or demutualisation, as the case may be, of the recognised stock exchange.

Securities include,

(i) 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,

(ii) derivative,

(iii) units or any other instrument issued by any collective investment scheme to the investors in such schemes,

(iv) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

(v) units or any other such instrument issued to the investors under any mutual fund scheme,

(vi) 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, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be,

(vii) Government securities,

(viii) such other instruments as may be declared Government to be securities, and

(ix) rights or interests in securities.

Specific Delivery Contract means a commodity derivative which provides for the actual delivery of specific qualities or types of goods during a specified future period at a price fixed thereby or to be fixed in the manner thereby agreed and in which the names of both the buyer and the seller are mentioned.

Spot Delivery Contract means a contract which provides for,

(i) actual delivery of securities and the payment of a price therefor either on the same day as the date of the contract or on the next day, the actual period taken for the despatch of the securities or the remittance of money therefor 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.

(ii) 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.

Transferable Specific Delivery Contract means a specific delivery contract which is not a non-transferable specific delivery contract and which is subject to such conditions relating to its transferability as the Central Government may by notification in the Official Gazette, specify in this behalf.


2. Recognized Stock Exchange

 Any stock exchange that desires to be recognized under this Act can apply to the Central Government in the prescribed form along with a list of particulars that include:

  1. the governing body of such stock exchange, its constitution, and powers of management and the manner in which its business is to be transacted,
  2. the powers and duties of the office-bearers of the stock exchange,
  3. 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 therefrom or thereinto, and
  4. the procedure for the registration of partnerships as members of the stock exchange in cases where the rules provide for such membership; and the nomination and appointment of authorized representatives and clerks.

The grant of recognition to stock exchanges is dependent upon the satisfaction of the Central Government. There are requirements of all recognized stock exchanges to be corporatized and demutualized under the SCRA.

If the Central Government is of the opinion that the recognition granted to a stock exchange should be withdrawn in the interest of trade or the public interest, the Central Government is empowered to withdraw the recognition by serving a notice to the concerned stock exchange and giving a reasonable opportunity of being heard.

The withdrawal has to be made by way of notification in the Official Gazette. If the recognized stock exchange fails to demutualize or corporatize, the Central Government is empowered to withdraw the recognition in such cases too.

Recognized stock exchanges are empowered to make bye-laws for the regulation and control of contracts which include the following:

  1. The opening and closing of markets and the regulation of the hours of trade
  2. A clearing house for the periodical settlement of contracts and differences thereunder, the delivery of and payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house
  3. The submission to the Securities and Exchange Board of India by the clearing house as soon as may be after each periodical settlement of all or any of the following particulars as the Securities and Exchange Board of India may, from time to time, require
  4. The publication by the clearing house of all or any of the particulars submitted to the Securities and Exchange Board of India
  5. The regulation or prohibition of blank transfers
  6. The number and classes of contracts in respect of which settlements shall be made or differences paid through the clearing house
  7. The regulation, or prohibition of budlas or carry-over facilities
  8. The fixing, altering or postponing of days for settlements
  9. The determination and declaration of market rates, including the opening, closing highest and lowest rates for securities
  10. The terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing
  11. The regulation of the entering into, making, performance, rescission and termination, of contracts, including contracts between members or between a member and his constituent or between a member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members who are not parties to such contracts
  12. The regulation of taravani business including the placing of limitations thereon
  13. The listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities
  14. The method and procedure for the settlement of claims or disputes, including settlement by arbitration
  15. The levy and recovery of fees, fines and penalties
  16. The regulation of the course of business between parties to contracts in any capacity
  17. The fixing of a scale of brokerage and other charges
  18. The making, comparing, settling and closing of bargains
  19. The emergencies in trade which may arise, whether as a result of pool or syndicated operations or cornering or otherwise, and the exercise of powers in such emergencies, including the power to fix maximum and minimum prices for securities
  20. The regulation of dealings by members for their own account; (u) the separation of the functions of jobbers and brokers
  21. The limitations on the volume of trade done by any individual member in exceptional circumstances
  22. The obligation of members to supply such information or explanation and to produce such documents relating to the business as the governing body may require
  23. Power to establish an additional trading floor
  24. Power to delist securities after recording reasons

3. Powers granted by the SCRA

 Powers granted to the Central Government by the SCRA:

  1. Granting recognition to stock exchanges
  2. Withdrawing recognition given to stock exchanges
  3. Power to call for periodical returns and conducting direct inquiries
  4. Power to require the furnishing of annual reports of recognised stock exchanges
  5. Power to make rules and to direct rules to be made
  6. Power to supersede governing body of a recognised stock exchange
  7. Power to suspend the business of recognised stock exchanges
  8. Power to notify contract as illegal in certain circumstances in notified areas
  9. Power to prohibit contracts in certain cases
  10. Power to license dealers in securities in certain areas
  11. Power to grant immunity
  12. Power to delegate its powers to the Securities and Exchange Board of India and the Reserve Bank of India
  13. Power to make rules
  14. Power to vary or set aside the decision of refusal to list securities made by the recognised stock exchange on appeal
  15. Power to grant or refuse listing of securities in appeal

 Powers granted to the Securities and Exchange Board of India (SEBI) by the SCRA:

  1. Power to approve the transfer of duties and functions of a clearing house to a clearing corporation
  2. Power to approve the making of bye-laws by recognised stock exchanges for the regulation and control of contracts
  3. Power to make or amend bye-laws of recognised stock exchanges
  4. Power to issue directions to stock exchanges, clearing corporations, agencies, persons or classes of persons associated with the securities market
  5. Power to issue directions to companies whose securities are listed or proposed to be listed in a recognised stock exchange
  6. Power to approve the establishment of additional trading floor in recognised stock exchanges
  7. Power to appoint adjudicating officers
  8. Power to make regulations

 Powers granted to the Securities Appellate Tribunal by the SCRA:

  1. Power to summon and enforce the attendance of any person and examine him on oath
  2. Power to require the discovery and production of documents
  3. Power to receive evidence on affidavits
  4. Power to issue commissions for the examination of witnesses or documents
  5. Power to review its decisions
  6. Power to dismiss application for default or deciding it ex- parte
  7. Power to set aside any order of dismissal of any application for default or any order passed by it ex- parte
  8. Power to vary or set aside decision of refusal to list securities made by the recognised stock exchange on appeal
  9. Power to grant or refuse listing of securities in appeal
  10. Power to exercise any other prescribed matter

4. Listing of Securities and Appeals

The first condition of listed securities is that if a person wishes to apply for such listed securities, then such a person has to comply with the conditions of the listing agreement with that stock exchange.

If a recognized stock exchange in pursuance of its bye-laws refuses to list the securities of any public company, then the recognized stock exchange has to give its reasons to the public company and the public company may choose to appeal to the Central Government within fifteen days of the furnishing of reasons for refusal by the recognized stock exchange.

The public company may also choose to appeal to the Securities Appellate Tribunal within 15 days.

If any person is aggrieved by the decision of the Securities Appellate Tribunal then such person may prefer to file an appeal before the Supreme Court within 60 days of the date of communication of the order of the Tribunal on questions of law arising in the order.


5. Penalties under the SCRA

The offenses and penalties under the SCRA include:

Particulars of the OffencePenalty
If a person fails to comply with any requisition made under sub-section (4) of section 6Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person enters into any contract in contravention of any of the provisions contained in section 13 or section 16Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person contravenes the provisions contained in section 17 or section 17A or section 19Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person enters into any contract in derivative in contravention of section 18A or the rules made under section 30Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person owns or keeps a place other than that of a recognised stock exchange which is used for the purpose of entering into or performing any contracts in contravention of any of the provisions of this Act and knowingly permits such place to be used for such purposesImprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person manages, controls, or assists in keeping any place other than that of a recognised stock exchange which is used for the purpose of entering into or performing any contracts in contravention of any of the provisions of this Act or at which contracts are recorded or adjusted or rights or liabilities arising out of contracts are adjusted, regulated or enforced in any manner whatsoeverImprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person not being a member of a recognised stock exchange or his agent authorised as such under the rules or bye-laws of such stock exchange or not being a dealer in securities licensed under section 17 wilfully represents to or induces any person to believe that contracts can be entered into or performed under this Act through himImprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person not being a member of a recognised stock exchange or his agent authorised as such under the rules or bye-laws of such stock exchange or not being a dealer in securities licensed under section 17, canvasses, advertises or touts in any manner either for himself or on behalf of any other persons for any business connected with contracts in contravention of any of the provisions of this ActImprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If a person joins, gathers or assists in gathering at any place other than the place of business specified in the bye-laws of a recognised stock exchange 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 ActImprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If any person enters into any contract in contravention of the provisions contained in section 15, section 21, section 21A or section 22Imprisonment for a term extendable up to 10 years or fine extendable up to rupees 25 crores or both.
If any person is required to furnish any information, document, books, returns or report to the recognised stock exchange or the Board, fails to furnish it within the specified time or furnishes false, incorrect or incomplete informationNot less than 1 lakh rupees but extendable up to 1 lakh rupees each day of offence subject to a maximum of 1 crore rupees.
If any person who is required to enter into an agreement with his client, fails to enter into such an agreementNot less than 1 lakh rupees but extendable up to 1 lakh rupees each day of offence subject to a maximum of 1 crore rupees.
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 the Securities and Exchange Board of India or a recognised stock exchange in writing, to redress the grievances of the investors, fails to redress such grievances within the time stipulated by the Securities and Exchange Board of India or a recognised stock exchangeNot less than 1 lakh rupees but extendable up to 1 lakh rupees each day of offence subject to a maximum of 1 crore rupees.
If any person, who is registered under section 12 of the Securities and Exchange Board of India 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 clientNot less than 1 lakh rupees which may extend up to 1 crore rupees.
If a company or any person managing collective investment scheme or mutual fund or real estate investment trust or infrastructure investment trust or alternative investment fund fails to comply with the listing conditions or delisting conditions or grounds or commits a breach thereofNot less than 5 lakh rupees which may extend up to 25 crore rupees.
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 exchangeNot less than 5 lakh rupees which may extend up to 25 crore rupees.
If a recognised stock exchange fails or neglects to furnish periodical returns or furnishes false, incorrect or incomplete periodical returns to the Securities and Exchange Board of India or fails or neglects to make or amend its rules or bye-laws as directed by the Securities and Exchange Board of India or fails to comply with directions issued by the Securities and Exchange Board of IndiaNot less than 5 lakh rupees which may extend up to 25 crore rupees.
Where a stock exchange or a clearing corporation fails to conduct its business with its members or any issuer or its agent or any person associated with the securities markets in accordance with the rules or regulations made by the Securities and Exchange Board of India and the directions issued by it under this Act, the stock exchange or the clearing corporations, as the case maybeNot less than 5 crore rupees which may extend up to 25 crore rupees or three times the amount of gains made out of such failure, whichever is higher.
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 the Securities and Exchange Board of India for which no separate penalty has been providedNot less than 1 lakh rupees which may extend up to 1 crore rupees

6. Important judgments under SCRA

Some of the important judgments under the Securities Contracts (Regulations) Act, 1956 are:

MCX Stock Exchange Limited Versus Securities & Exchange Board of India, Writ Petition No. 213 of 2011 dated 14th March, 2012 (Bombay High Court)

The Bombay High Court in this case, clarified the validity of option contracts under the Securities Contracts (Regulation) Act, 1956 and stated that option contracts are different from forward contracts. The distinction was specified because forward contracts are prohibited under the Act and the Bombay High Court held that option contracts are valid contracts under the Act.

The Madras Stock Exchange Limited Versus S.S.R. Rajakumar, Original Side Application No. 64 of 1995 dated 25th February, 2003 (Madras High Court)

The Madras High Court, in this case, reversed the wrongful expulsion of the respondent who was made liable to pay the applicant a sum of Rs. 30 lakhs by a subordinate court. The Madras High Court further held that the officers of a recognised stock exchange cannot be held liable for following the Articles of the recognised stock exchange.

Parikh Versus Union of India, Special Civil Application No. 17040 of 2012 with Writ Petition (Public Interest Litigation) No. 211 of 2012 dated 07th May, 2014 (Gujarat High Court)

In this case before the Gujarat High Court, the Petitioner had challenged the legality and validity of certain circulars and the Securities Contracts (Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012 issued by the Securities and Exchange Board of India stating that they are inconsistent with the provisions of the Indian Constitution, Securities Contracts (Regulation) Act, 1956 and the erstwhile Companies Act, 1956. The Gujarat High Court dismissed the petition of the Petitioner in this case and upheld the validity of all the challenged circulars and regulations.


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