Insights into the Securities Contracts (Regulation) Act: Legal Framework

A strong and regulated securities market gives a good impetus to the economy of a country. The securities market plays a huge role in the country’s progress. If a country has a safe marketplace for investors, only then can it attract foreign investors. The Securities Contracts (Regulation) (SCR) Act 1956 is largely responsible for the financial stability of India.

The SCR Act supervises and manages the securities markets of the nation and regulates the practice of dealing in securities, listing of securities, and prohibition of unfair dealings in securities. The principal objectives of the Act were to protect the interests of the investors and uphold the true nature of the securities market. The statute governs securities-related contracts.

The Act outlines the procedures for purchasing, selling, and transferring securities. Penalties are levied for evasive or deceptive actions. The Act provides regulatory agencies, such as the Securities and Exchange Board of India (SEBI), the authority to implement laws.

What is the SCR Act About?

The SCR Act of 1956 stipulates the requirement for stock exchanges to be recognised and governed. SEBI was founded as the regulating body and allowed to evaluate the requirements of the stock exchange. The SCR Act received assent on 4 September 1956 and has a total of 6 Chapters and 32 Sections.

Recognised Stock Exchange

Section 6

Section 6 of the SCR Act, 1956, details the power of the Central Government to call for periodic returns or conduct inquiries:

1. Every recognised stock exchange must submit periodic reports of its operations to the SEBI as per the regulations.
2. Both recognised stock exchanges (SENSEX and NIFTY) and their members are obligated to maintain and keep financial records, documents, and account books for up to 5 years. These records can be inspected by SEBI at any time. The Central Government determines the specific laws related to record-keeping in consultation with the respective stock exchanges.

3. SEBI has the authority to:

   • Request written information or explanations from recognised stock exchanges or their members regarding their dealings related to the stock exchange.
   • Appoint one or more individuals to inquire the affairs of the stock exchange’s governing body or any of its members. These inquiry results must be reported to SEBI within the specified time. If the inquiry is related to the members, then the governing body has to submit its findings to the Central Government after conducting the inquiry.

4. When an inquiry is initiated under Section 3 of the Act, the following individuals or entities must cooperate:

   • Every director, manager, secretary, or officer of the stock exchange.
   • Every member of the stock exchange.
   • In the case of a member being a firm, every partner, manager, secretary, or officer of that firm has to cooperate.

Any other individual or entity who has conducted dealings with any of the individuals mentioned in above clauses (a), (b), and (c), whether directly or indirectly, must provide relevant financial records, documents, and information when inquired within the stipulated time to the authority.

Section 7

As per Section 7 of the Securities Contracts (Regulation) Act,1956, the annual reports must be submitted to the Central Government by stock exchanges.

Every officially recognised stock exchange is required to provide the Central Government with a copy of its annual report. This annual report must include specific details and information as per the stipulated regulations and requirements.

Section 8

Section 8 states that the Central Government has the authority to make rules:

1. After discussion with recognised or specific stock exchanges, if the Central Government thinks that it is necessary to make rules, then it can order or instruct recognised or specific stock exchanges to either create new rules or modify existing rules related to matters given in Section 3(2). The time limit for compliance is 2 months from the date of issuance of the order.
2. In case a recognised stock exchange does not adhere to the order issued under subsection (1) within the stipulated time, then the Central Government can establish the rules or alter the existing ones on behalf of the recognised stock exchange. These rules will be in the form agreed upon between the stock exchange and the Central Government.
3. When rules are created or amended as per this section, they must be published in both the Gazette of India and the Official Gazette of the relevant state where the primary office of the recognized stock exchange is located.

Section 9

Section 9 of the SCR Act 1956 describes the authority of recognised stock exchanges to create bye-laws, subject to prior approval from the SEBI:

1. These bylaws cover various aspects such as market operations, contract settlements, clearinghouses, and penalties for rule violations.
2. These bylaws specify rules that their violation can render contracts void as per Section 14(1). These violations can lead to penalties such as fines, membership expulsion, suspension for a defined period, or non-monetary penalties.
3. The creation of these bylaws stipulates an obligation to stick to prescribed conditions. When they receive approval from SEBI, they are published in the Gazette of India and the relevant state’s Official Gazette, where the primary office of the recognised stock exchange is located.

Section 12

Section 12 of the SCR Act describes the authority to suspend operations of recognised stock exchanges:

1. In case of an emergency, the Central Government can issue an official notification in the Official Gazette. This notification will include the reasons for its decision.
2. Through this notification, the Central Government can instruct a recognised stock exchange to suspend specific operations for a period of up to 7 days as per the conditions of notification.
3. The Central Government can extend the suspension for the emergency. If the suspension is extended beyond the initial period, then the Central Government will provide a hearing to the governing body of the recognised stock exchange association, and only then extend it.

Contracts and Options in Securities Under the SCR Act

Section 13 of the Act describes Contracts turning illegal in notified areas under certain circumstances:

1. Because of the nature or volume of securities transactions in a particular state or area, the Central Government can declare that contracts will become illegal in that area.
2. However, if the contract is between the members of two or more recognised stock exchanges in the designated state or area, then they must adhere to specific terms and conditions set by the respective stock exchanges.
3. These terms and conditions require prior approval from India’s SEBI.

Listing of Securities Under the SCR Act

Section 21 of the Act details the conditions for listing. When a person applies for the listing of securities in a recognised stock exchange, they must adhere to the conditions specified in the listing agreement with that of a particular stock exchange.

Section 21 A of the Act states that the delisting of securities can be done by a recognised stock exchange after recording reasons for such delisting. The other company provides a reasonable opportunity of being heard before delisting.

A listed company or an investor who feels aggrieved can submit an appeal to the Securities Appellate Tribunal within 15 days from the date when a recognised stock exchange decides to delist the securities.

Penalties and Procedure

Section 23 imposes penalties for an individual who engages in the following activities:

Any action under Clause (a) to (i) is punishable in addition to any penalties imposed by the Adjudicating Officer or the SEBI under this Act. The person can face imprisonment of up to 10 years and a fine of up to 25 crore rupees, or both.

Section 23-I of the Act describes the Power to Adjudicate:

1. The SEBI has the authority to designate an officer with a rank not lower than that of a Division Chief of the SEBI as an adjudicating officer. This person is appointed for adjudicating the cases under sections 23A, 23B, 23C, 23D, 23E, 23F, 23G, and 23H.
2. This officer will conduct an inquiry by following prescribed procedures and will provide a fair chance to be heard. The purpose of this inquiry is to impose potential penalties.
3. The Adjudicating Officer is authorised to summon and compel the presence of any individual to provide testimony and present any documents by the person who possesses knowledge about the facts and details of the case in the opinion of the Adjudicating Officer.
4. If, during this inquiry, the Adjudicating Officer is convinced that the individual has violated the regulations outlined in subsection (1), then they can impose an appropriate penalty.
5. The Board has the authority to request and review the documentation of any proceedings conducted under this section. If the Board determines that the order is incorrect and inappropriate for the securities market, then it can order an increase in the penalty amount after conducting necessary investigations.

Conclusion

India’s securities markets have reached a turning point due to enacting the SCR Act of 1956. This Act established a framework for a well-regulated, open, and investor-friendly market environment. The increasing adoption of cutting-edge technologies, such as blockchain, smart contracts, and digital assets, is anticipated to affect the regulation of securities contracts in the future. The implications of these technologies on conventional securities contracts, settlement procedures, and regulatory compliance may necessitate the formulation of specific laws.

To ensure the safeguarding of investor information and mitigate cyber threats, regulatory bodies may emphasise data privacy and cybersecurity aspects of securities contract regulation.

Furthermore, efforts can be directed towards ensuring the smooth transmission of market data and enhancing transparency in trading practices. The regulations of high-frequency trading, algorithmic trading, and market manipulation could be under this purview.

Numerous adjustments and modifications have been implemented to align with the SCR Act and evolving market dynamics. These adaptations aim to harmonise the legal framework with the changing landscape of the securities market.