Security and Security Market Operations - THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 - Notes - Financial Management, Study notes for Financial Management. Agra University

Financial Management

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THE SECURITIES CONTRACTS (REGULATION) ACT, 1956
PRELIMINARY
This Act may be called the Securities Contracts (Regulation) Act, 1956. It extends to the
whole of India. It shall come into force on such date as the Central Government may, by
notification in the Official Gazette appoint.
Definitions
In this Act, unless the context otherwise requires,-
(a) "contract" means a contract for or relating to the purchase or sale of securities;
(aa) "derivative" includes -
A. a security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security;
B. a contract which derives its value from the prices, or index or prices, of
underlying securities;
(b) "Government security" means a security created and issued, whether before or after the
commencement of this Act, by the Central Government or a State Government for the
purpose of raising a public loan and having one of the forms specified in clause (2) of
section 2 of the Public Debt Act, 1944 (18 of 1944);
(c) "member" means a member of a recognised stock exchange;
(d) "option in securities" means a contract for the purchase or sale of a right to buy or sell, or
a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli,
a put, a call or a put and call in securities;
(e) "prescribed" means prescribed by rules made under this Act;
(f) "recognised stock exchange" means a stock exchange which is for the time being
recognised by the Central Government under section 4;
(g) "rules", with reference to the rules relating in general to the constitution and
management of a stock exchange, includes, in the case of a stock exchange which is an
incorporated association, its memorandum and articles of association;
(ga) "Securities Appellate Tribunal" means a Securities Appellate Tribunal established under
sub-section (1) of section 15K of the Securities and Exchange Board of India Act,
1992.4
(h) "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;
(ia)derivative;
(ib) units or any other instrument issued by any collective investment scheme to the
investors in such schemes
(ii) Government securities;
(iia) such other instruments as may be declared by the Central
Government to be securities; and
(iii) rights or interests in securities;
[(i) spot delivery contract means a contract which provides for,-
(a) 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;
(b) 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;]
7
(j) "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.
2A. Words and expressions used herein and not defined in this Act but defined in the
Companies Act, 1956 or the Securities and Exchange Board of India Act, 1992 or the
Depositories Act, 1996 shall have the same meanings respectively assigned to them in those
Acts.
CONTRACTS AND OPTIONS IN SECURITIES
Contracts in notified areas illegal in certain circumstances
If the Central Government is satisfied, having regard to the nature or the volume of
transactions in securities in any State or area, that it is necessary so to do, it may, by
notification in the Official Gazette, declare this section to apply to such State or area, and
thereupon every contract in such State or area which is entered into after date of the
notification otherwise than between members of a recognised stock exchange in such State
or area or through or with such member shall be illegal. [Additional trading floor
13A. A stock exchange may establish additional trading floor with the prior approval of the
Securities and Exchange Board of India in accordance with the terms and conditions
stipulated by the said Board.
Explanation: For the purposes of this section additional trading floor' means a trading ring
or trading facility offered by a recognised stock exchange outside its area of
operation to enable the investors to buy and sell securities through such trading floor under
the regulatory framework of the stock exchange.
Contracts in notified areas to be void in certain circumstances .
(1) Any contract entered into in any State or area specified in the notification under section
13 which is in contravention of any of the bye- laws specified in that behalf under clause (a)
of sub-section (3) of section 9 shall be void:
(i) as respects the rights of any member of the recognised stock exchange who has entered
into such contract in contravention of any such bye-laws, and also
(ii) as respects the rights of any other person who has knowingly participated in the
transaction entailing such contravention.
(2) Nothing in sub-section (1) shall be construed to affect the right of any person other than
a member of the recognised stock exchange to enforce any such contract or to recover any
sum under or in respect of such contract if such person had no knowledge
that the transaction was in contravention of any of the bye-laws specified in clause (a) of
sub-section (3) of section 9.
Members may not act as principals in certain circumstances
No member of a recognised stock exchange shall in respect of any securities enter into any
contract as a principal with any person other than a member of a recognised stock exchange,
unless he has secured the consent or authority of such person and discloses in the note,
memorandum or agreement of sale or purchase that he is acting as a principal:
Provided that where the member has secured the consent or authority of such person
otherwise than in writing he shall secure written confirmation by such person of such
consent or authority within three days from the date of the contract:
Provided further that no such written consent or authority of such person shall be
necessary for closing out any outstanding contract entered into by such person in
accordance with the bye-laws, if the member discloses in the note, memorandum or
agreement of sale or purchase in respect of such closing out that he is acting as a
principal.
Power to prohibit contracts in certain cases
(1) If the Central Government is of opinion that it is necessary to preve nt undesirable
speculation in specified securities in any State or area, it may, by notification in the Official
Gazette, declare that no person in the State or area specified in the notification shall, save
with the permission of the Central Government, enter into any contract for the sale or
purchase of any security specified in the notification except to the extent and in the manner,
if any, specified therein.
(2) All contracts in contravention of the provisions of sub-section (1) entered into after the
date of the notification issued thereunder shall be illegal.
Licensing of dealers in securities in certain cases
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