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

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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

(1) Subject to the provision of sub-section (3) and to the other provisions contained in this

Act, no person shall carry on or purport to carry on, whether on his own behalf or on behalf

of any other person, the business of dealing in securities in any State or area to which section

13 has not been declared to apply and to which the Central Government may, by notification

in the Official Gazette declare this section to apply, except under the

authority of a licence granted by the [Securities and Exchange Board of India]30 in this

behalf.

(2) No notification under sub- section (1) shall be issued with respect to any State or area

unless the Central Government is satisfied, having regard to the manner in which

securities are being dealt with in such State or area, that it is desirable or expedient in the

interest of the trade or in the public interest that such dealings should be regulated by a

system of licensing.

(3) The restrictions imposed by sub-section (1) in relation to dealings in securities shall not apply to the doing of anything by or on behalf of a member of any recognised stock

exchange.

Exclusion of spot delivery contracts

If the Central Government is of opinion that in the interest of the trade or in the public

interest it is expedient to regulate and control the business of dealing in spot delivery

contracts also in any State or are (whether section 13 has been declared to apply to that State

or area or not), it may, by notification in the Official Gazette, declare that the provisions of

section 17 shall also apply to such State or area in respect of spot deliver y contracts

generally or in respect of spot delivery contract for the sale or purchase of such securities as

may be specified in the notification, and may also specify the manner in which, and the

extent to which, the provision of that section shall so app ly.

18A. Notwithstanding anything contained in any other law for the time being in force,

contracts are -

a. traded on a recognised stock exchange;

b. settled on the clearing house of the recognised stock exchange in accordance with the

rules and bye-laws of such stock exchange.

Stock exchanges other than recognised stock exchanges prohibited

(1) No person shall, except with the permission of the Central Government, organise or

assist in organising or be a member of any stock exchange (other than a recognised stock

exchange) for the purpose of assisting in, entering into or performing any contracts in

securities.

(2) This section shall come into force in any State or area on such date, as the Central

Government may, by notification in the Official Gazette, appoint. LISTING OF SECURITIES Conditions for listing

Where 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.]

Right of appeal against refusal of stock exchanges to list securities of public companies

Where a recognised stock exchange acting in pursuance of any power given to it by its bye-

laws, refuses to list the securities of any public company or collective investment scheme

the company or scheme shall be entitled to be furnished with reasons for such refusal, any

may,-

(a) within fifteen days from the date on which the reasons for such refusal are furnished to it,

or

(b) where the stock exchange has omitted or failed to dispose of, within the time specified in

sub-section (1) of section 73 of the Companies Act, 1956 (1 of 1956)

(hereafter in this section referred to as the "specified time"), the application for permission

for the shares or debentures to be dealt with on the stock exchange, within fifteen days from

the date of expiry of the specified time or within such further period, not exceeding one

month, as the Central Government may, on sufficient cause being shown, allow,

appeal to the Central Government against such refusal, omission or failure, as the case may be, and thereupon the Central Government 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 and where the Central Government sets

aside the decision of the recognised stock exchange or grants the permission, the stock

exchange shall act in conformity with the orders of the Central Government.

Provided that no appeal shall be preferred against refusal, omission or failure, as the case

may be, under this section on and after the commencement of the Securities Laws

(Second Amendment) Act, 1999.

Right of Appeal to Securities Appellate Tribunal against refusal of stock exchange to list securities of public companies

(1) Where a recognised stock exchange, acting in pursuance of any power given to it by its

bye-laws, refuses to list the securities of any public company, the company shall be entitled

to be furnished with reasons for such refusal, and may, -

a. within fifteen days from the date on which the reasons for such refusal are furnished

to it, or

b. where the stock exchange has omitted or failed to dispose of, within the time specified in

sub-section (1A) of section 73 of the Companies Act, 1956 (hereafter

in this section referred to as the "specified time"), the application for permission for the

shares or debentures to be dealt with on the stock exchange, within fifteen days from the

date of expiry of the specified time or within such further period, not exceeding one month,

as the Securities Appellate Tribunal may, on sufficient cause being shown, allow,appeal to

the Securities Appellate Tribunal having jurisdiction in the matter against such refusal,

omission or failure, as the case may be, and thereupon the Securities Appellate Tribunal

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,

and where the Securities Appellate Tribunal sets aside the decision of the recognised

stock exchange or grants the permission, the stock exchange shall act in conformity with the

orders of the Securities Appellate Tribunal.

(2) Every appeal under sub-section (1) shall be in such form and be accompanied by such

fee as may be prescribed.

(3) The Securities Appellate Tribunal shall send a copy of every order made by it to the

Board and parties to the appeal.

(4) The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be

dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of

the appeal finally within six months from the date of receipt of the appeal.

Procedure and powers of Securities Appellate Tribunal

(1) The Securities Appellate Tribunal shall not be guided by the principles of natural justice

and, subject to the other provisions of this Act and of any rules, the Securities

Appellate Tribunal shall have powers to regulate their own procedure including the places

at which they shall have their sittings.

(2) The Securities Appellate Tribunal shall have for the purpose of discharging their

functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:-

a. summoning and enforcing the attendance of any person and examining him on oath;

b. requiring the discovery and production of documents;

c. receiving evidence on affidavits;

d. issuing commissions for the examination of witnesses or documents;

e. reviewing its decisions;

f. dismissing an application for default or deciding it ex-parte;

g. setting aside any order of dismissal of any application for default or any order passed by

it ex-parte; and

h. any other matter which may be prescribed.

(3) Every proceeding before Securities Appellate Tribunal shall be deemed to be a judicial

proceeding, within the meaning of sections 193 and 228, and for the purposes of section 196

of the Indian Penal Code and the Securities Appellate Tribunal shall b deemed to be a civil

court for all the purposes of section 195 and Chapter XXVI of the Code of Criminal

Procedure, 1973.

Right to legal representations

The appellant may either appear in person or authorise one or more chartered accountants or

company secretaries or cost accountants or legal practitioners or any of its officers or present

his or its case before the Securities Appellate Tribunal.

Explanation. - For the purposes of this section, -

a. "chartered accountant" means a chartered accountant as defined in clause (b) of sub-

section (1) of section 2 of the Chartered Accountants Act, 1949 and who has obtained a

certificate of practice under sub-section (1) of section 6 of that Act;

b. "company secretary" means a company secretary as defined in clause (c) of sub- section (1) of section 2 of the Company Secretaries Act, 1980 and who has obtained a certificate

of practice under sub-section (1) of section 6 of that Act;

c. "cost accountant" means a cost accountant as defined in clause (b) of sub-section (1) of

section 2 of the Cost and Works Accountants Act, 1959 and who has obtained a certificate

of practice under sub-section (1) of section 6 of that Act;

d. "legal practitioner" means an advocate, vakil or an attorney of any High Court, and includes a pleader in practice.

Limitation

The provisions of the Limitation Act, 1963 shall as far as may be apply to an appeal made to

a Securities Appellate Tribunal.

Civil court not to have jurisdiction

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 in respect of

any action taken or to be taken in pursuance of any power conferred by or under this Act.

Appeal to High Court

Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file

an appeal to the High Court within sixty days from the date of communication of the

decision or order of the Securities Appellate Tribunal on any question of fact or law arising

out of such order;

Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days..

PENALTIES AND PROCEDURES

Penalties

(1) Any person who-

(a) without reasonable excuse (the burden of proving which shall be on him) fails to comply

with any requisition made under sub- section (4) of section 6; or

(b) enters into any contract in contravention of any of the provisions contained in section

13 or section 16; or

(c) contravenes the provisions contained in section 17 or section 19; or

(d) enters into any contract in derivative in contravention of section 18 A or the rules made

under section 30.

(e) 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 purposes; or

(f) 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 whatsoever; or

(g) 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

(h) 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 person for any business connected with contracts in contravention of any of the

provisions of this Act; or

(i) 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 Act; shall, on conviction, be punishable with imprisonment for a term

which may extend to one year, or with fine, or with both.

(2) Any person who enters into any contract in contravention of the provisions

contained in section 15 [or who fails to comply with the provisions of section 21 or with the

orders of] the Central Government under section 22 or with the orders of the

Securities Appellate Tribunal shall, on conviction, be punishable with fine which may

extend to one thousand rupees.

Offences by companies

(1) Where an offence has been committed by a company, every person who, at the time

when the offence was committed, was in charge of, and was responsible to, the company for

the conduct of the business of the company, as well as the company, shall be deemed to be

guilty of the offence, and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any

punishment provided in this Act, if he proves that the offence was committed without his

knowledge or that he exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act

has been committed by a company and it is proved that the offence has been

committed with the consent or connivance of, or is attributable to any gross negligence on

the part of any director, manager, secretary or other officer of the company, such director,

manager, secretary or other officer of the company, shall also be deemed to be guilty of that

offence and shall be liable to be proceeded against and punished accordingly.

Certain offences to be cognizable

Notwithstanding anything contained in the [Code of Criminal Procedure, 1898 (5 of

1898)], any offence punishable under sub-section (1) of section 23, shall be deemed to be a

cognizable offence within the meaning of that Code. Jurisdiction to try offences under this Act 26. No court inferior to that of a presidency magistrate or a magistrate of the first class

shall take cognizance of or try any offence punishable under this Act.

MISCELLANEOUS

Title to dividends

(1) It shall be lawful for the holder of any security whose name appears on the books of the

company issuing the said security 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 fifteen days of the date on which the dividend became due.

(2) Nothing contained in sub- section (1) shall affect -

a. the right of a company to pay any dividend which has become due to any person whose

name is for the time being registered in the books of the company as the holder of the

security in respect of which the dividend has become due; or

b. the right of the transferee of any security to enforce against the transferor or any other

person his rights, if any, in relation to the transfer in any case where the company has

refused to register the transfer of the security in the name of the transferee.

Right to receive income from collective investment scheme. –

(1) It shall be lawful for the holder of any securities, being units or other instruments issued

by collective investment scheme, whose name appears on the books of the collective

investment scheme issuing the said security to receive and retain any income in respect of

units or other instruments issued by the collective investment scheme declared by the

collective investment scheme in respect thereof for any year notwithstanding that the said

security, being units or other instruments issued by collective investment scheme, has

already been transferred by him for consideration, unless the transferee who claims the

income in respect of units or other instruments issued by collective investment scheme

from the transfer or has lodged the security and all other documents relating to the transfer which may be required by the collective investment scheme with the collective

investment scheme for being registered in his name within fifteen days of the date on which

the income in respect of units or other instruments issued by the collective investment

scheme became due.

(2) Nothing contained in sub-section (1) shall affect -

a. the right of a collective investment scheme to pay any income from units or other

instruments issued by collective investment scheme which has become due to any person

whose name is for the time being registered in the books of the collective investment scheme

as the holder of the security being units or other instruments

issued by collective investment scheme in respect of which the income in respect of units or

other instruments issued by collective scheme has become due; or

b. the right of transferee of any security, being units or other instruments issued by

collective investment scheme, to enforce against the transferor or any other person his rights,

if any, in relation to the transfer in any case where the company has refused to register the

transfer of the security being units or other instruments issued by collective investment

scheme in the name of the transferee.

Act not to apply in certain cases

(1) The provisions of this Act shall not apply to-

(a) the Government, the Reserve Bank of India, any local authority or any

corporation set up by a special law or any person who has effected any transaction with or

through the agency of any such authority as is referred to in this clause;

(b) any convertible bond or share warrant or any option or right in relation thereto, in so

far as it entitles the person in whose favour any of the foregoing has been issued to obtain at

his option from the company or other body corporate, issuing the same or from any of its

shareholders or duly appointed agents, shares of the company or other body corporate,

whether by conversion of the bond or warrant or otherwise, on the basis of the price agreed

upon when the same was issued.

(2) Without prejudice to the provisions contained in sub-section (1), if the Central

Government is satisfied that in the interests of trade and commerce or the economic

development of the country it is necessary or expedient so to do, it may, by notification in

the Official Gazette, specify any class of contracts as contracts to which this Act or any

provision contained therein shall not apply, and also the conditions, limitations or

restrictions, if any, subject to which it shall not so apply.

Protection of action taken in good faith

No suit, prosecution or other legal proceeding whatsoever shall lie in any court against the

governing body or any member, office bearer or servant of any recognised stock exchange

or against any person or persons appointed under sub-section (1) of section 11 for anything

which is in good faith done or intended to be done in pursuance of this Act or of any rules or

bye-laws made thereunder.

Power to delegate

The Central Government may, by order published in the Official Gazette, direct that the

powers (except the power under section 30) exercisable by such conditions, if any, as may

be specified in the order, be exercisable also by the Securities and Exchange Board of India or the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act,

1934.

Power to make rules

(1) The Central Government may, by notification in the Official Gazette, make rules for the

purpose of carrying into effect the objects of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such

rules may provide for,

(a) the manner in which applications may be made, the particulars which they should

contain and the levy of a fee in respect of such applications;

(b) the manner in which any inquiry for the purpose of recognizing any stock exchange may

be made, the conditions which may be imposed for the grant of such recognition, including

conditions as to the admission of members if the stock exchange concerned is to be the only

recognised stock exchange in the area; and the form in which such recognition shall be granted;

(c) the particulars which should be contained in the periodical returns and annual reports to

be furnished to the Central Government;

(d) the documents which should be maintained and preserved under section 6 and the

periods for which they should be preserved;

(e) the manner in which any inquiry by the governing body of a stock exchange shall be

made under section 6;

(f) the manner in which the bye-laws to be made or amended under this Act shall

before being so made or amended be published for criticism;

(g) the manner in which applications may be made by dealers in securities for licences

under section 17, the fee payable in respect thereof and the period of such licences, the

conditions subject to which licences may be granted, including conditions relating to

the forms which may be used in making contracts, the documents to be maintained by

licensed dealers and the furnishing of periodical information to such authority as may be

specified and the revocation of licences for breach of conditions;

(h) the requirements which shall be complied with -

(A) by public companies for the purpose of getting their securities listed on any stock

exchange;

(B) by collective investment scheme for the purpose of getting their units listed on any stock

exchange.

(ha) the form in which an appeal may be filed before the Securities Appellate

Tribunal under section 22A and the fees payable in respect of such appeal. (i) any

other matter which is to be or may be prescribed.

(3) Any rules made under this section shall, as soon as may be, after their publication in the

Official Gazette, be laid before both Houses of Parliament. Repeal 31. Repealed by the

Repealing and Amending Act, 1960 (58 of 1960), section 2 and Schedule 1.

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