THE SECURITIES CONTRACTS (REGULTION) ACT, 1956

Introduction:

The Securities Contracts (Regulation) Act, 1956 “Act” was enacted in order to prevent
undesirable transactions in securities and to regulate the working of stock exchanges in the
country. The provision of the Act came into force with effect from 20th February, 1957 vide
Notification No. SRO 528 dated 16th February, 1957.

Definitions: Stock exchange [Section 2(j)]

a. any body of individuals, whether incorporated or not, constituted before

corporatisation and demutualisation under sections 4A and 4B, or
b. a body corporate incorporated under the Companies Act, 1956 whether under a
scheme of corporatisation and demutualisation or otherwise,
for the purpose of assisting, regulating or controlling the business of buying, selling or
dealing in securities.

Recognised Stock Exchange [Section 2(f)] means a stock exchange which is for the time
being recognized by the Central Government under Section 4 of the Act.

Corporatisation [Section 2(aa)] 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 [Section 2(ab)] 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 (SEBI).

The main parts of the Act are as follows and the powers of Central Government with
regard to this Act are exercisable by SEBI:
(A) Recognised Stock Exchanges (B) Penalties Brief description of important sections
of the Act: (A) Recognised Stock Exchanges
i. Application for recognition of stock exchanges (Section 3)

3(1): Every stock exchange which desirous of being recognized for the purposes of
this Act, may make an application in the prescribed manner to the Central
Government (the powers of Central Government with regard to this Act are
exercisable by SEBI)

3(2) : Every such application shall contain required particulars and be accompanied
by a copy of the bye-laws of the stock exchange for the regulation and control of
contracts and also a copy of the rules relating in general to the constitution of the
stock exchange

ii. Grant of recognition to stock exchanges (Section 4)

4(1): If the Central Government is satisfied, after making such inquiry as may be
necessary may grant recognition to the stock exchange subject to some conditions.

iii. Corporatisation and demutualisation of stock exchanges (Section 4A)

On and from the appointed date, all recognised stock exchanges (if not corporatised
and demutualised before the appointed date) shall be corporatised and demutualised in
accordance with the provisions contained in section 4B.

iv. Procedure for corporatisation and demutualisation (Section 4B)

4B(1): All recognised stock exchanges referred to in section 4A shall, within such
time as may be specified by the SEBI, submit a scheme for corporatisation and
demutualisation for its approval

4B(2): On receipt of the scheme, the SEBI after making such enquiry as may be
necessary and if it is satisfied that it may approve the scheme with or without
modification.
 Note: “appointed date” means the date which the SEBI may, by notification in
the Official Gazette, appoint and different appointed dates may be appointed for
different recognised stock exchanges.
v. Power of Central Government to call for periodical returns or direct inquiries to
be made (Section 6)

Every recognised stock exchange shall furnish to SEBI periodical returns relating to
its affairs as may be prescribed. Every recognised stock exchange and every member
thereof shall preserve such books of accounts and other documents for period of not
exceeding five years.

vi. Annual reports to be furnished to Central Government by stock exchanges

(Section 7)

Every recognised stock exchange shall furnish the Central Government a copy of the
annual report.

vii. Power of recognised stock exchanges to make bye-laws (Section 9)

9(1) Any recognised stock exchange may, subject to the previous approval of the
SEBI, make bye-laws for the regulation and control of contracts.

viii. Power of SEBI to make or amend bye-laws of recognised stock exchanges

(Section 10)

10(1) 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.

ix. Power to suspend business of recognised stock exchanges (Section 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, provided that
no such period of suspension can be extended, unless the governing body of the
recognised stock exchange has been given an opportunity of being heard in the matter.

x. Conditions for listing (Section 21)

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.

xi. Delisting of securities (Section 21A)

21A(1): A recognised stock exchange may delist the securities, after recording the
reasons therefor, on any of the ground or grounds as may be prescribed under this
Act, provided that the securities of a company shall not be delisted unless the
company concerned has been given a reasonable opportunity of being heard.

21A(2): A listed company or an aggrieved investor may file an appeal before the
Securities Appellate Tribunal (SAT) against the decision of the recognised stock
exchange within fifteen days from the date of the decision of the recognised stock
exchange, provided that SAT may, if it is satisfied that the company was prevented
by sufficient cause from filing the appeal within the said period, allow it to be filed
within a further period not exceeding one month.

xii. Section 22 - Right of appeal against refusal of stock exchanges to list securities of
public companies

Where a recognised stock exchange refuses to list the securities of any public
company or collective investment scheme, the company or scheme may appeal to the
Central Government against such refusal, omission or failure, as the case may be:

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.
xiii. Section 22A - Right of appeal to Securities Appellate Tribunal against refusal of
stock exchange to list securities of public companies

Where a recognised stock exchange refuses to list the securities of any public
company or collective investment scheme, the company or scheme may appeal to the
SAT against such refusal, omission or failure, as the case may be:

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 (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 Securities
Appellate Tribunal may, on sufficient cause being shown, allow.
xiv. Section 22D – Limitation

The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply
to an appeal made to a Securities Appellate Tribunal.

(B ) Penalties :
Section Contravention/Non-compliance Penalty Prescribed
One lakh rupees for
each day during which
Failure to furnish information, return, etc and maintain
23A such failure continues
books of accounts and records.
or one crore rupees,
whichever is less.
Any person who is required under this Act or bye-laws One lakh rupees for
23B
of a recognised stock exchange to enter into an each day during which
 agreement with clients, fails to enter into such such failure continues
agreement or one crore rupees,
whichever is less.
Any stock broker or sub-broker or a company whose One lakh rupees for
securities are listed or proposed to be listed in a each day during which
23C recognised stock exchange, fails to redress the such failure continues
grievances within the time stipulated by the SEBI or a or one crore rupees,
recognised stock exchange whichever is less.
Any stock broker or sub-broker who fails to segregate
securities or moneys of the client(s) or uses the Penalty not exceeding
23D
securities or moneys of a client(s) for self or for any one crore rupees.
other client
If a company or any person managing collective Penalty not exceeding
23E investment scheme or mutual fund, fails to comply twenty-five crore
with the listing conditions or delisting conditions rupees.
If any issuer dematerialises securities more than the
issued securities of a company or delivers in the stock
Penalty not exceeding
exchanges the securities which are not listed in the
23F twenty-five crore
recognised stock exchange or delivers securities where
rupees.
no trading permission has been given by the
recognised stock exchange
If a recognised Stock exchanges fails to furnish the
Penalty which may
periodical returns to the SEBI or fails to amend the
23G extend to Twenty-Five
bye laws as directed by SEBI or fails to comply with
Crores Rupees.
the directions of the Board
Who fails to comply with any provision of this Act,
the rules or articles or bye-laws or the regulations of Penalty which may
23H the recognised stock exchange or directions issued by extend to one crore
the SEBI for which no separate penalty has been rupees.
provided-Section 23H
 Offences:
Section Contravention/Non-compliance Fine Prescribed
Any person who contravenes the elsewhere in this Act Imprisonment
provisions of this Act or of any rules or for a term which may extend to ten
23M(1) regulations or bye-laws made years, or with fine, which may
thereunder, for which no punishment is extend to twenty-five crore rupees or
provided both.
Imprisonment for a term which shall
If any person fails to pay the penalty
not be less than one month but which
imposed by the adjudicating officer or
23M(2) may extend to ten years, or with fine,
fails to comply with any of his
which may extend to twenty-five
directions or orders
crore rupees, or both
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
24(1) 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
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 is attributable to any gross
24(2) 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
Conclusion:

The Securities Contract (Regulation) Act, 1956 deals with stock exchanges, contracts in
securities, and listing of securities on stock exchanges, and keeps a vigil over all the stock
exchanges of India and prevents undesirable contracts in Securities market through a process
of recognition and continued supervision.