CS Executive · Capital Market and Securities Laws

Secondary Market in India: formula sheet

Full chapter guide

Key formulas

SEBI's basic duty: Duty = protect investors + promote development of securities market + regulate securities market; Section 11(1) of the SEBI Act, 1992. SEBI acts by such measures as it thinks fit.
Registration of intermediaries: Brokers, sub-brokers, share transfer agents, bankers to an issue, registrars, merchant bankers, underwriters, portfolio managers, investment advisers: s.11(2)(b); Depositories, participants, custodians, FIIs and credit rating agencies fall under s.11(2)(ba). Mutual funds, venture capital funds and collective investment schemes fall under s.11(2)(c).
Interim orders by SEBI: s.11(4): order with written reasons, in interests of investors or the market, pending or after investigation; Measures include suspending trading of a security, restraining persons from the market, impounding proceeds, attaching bank accounts or property for up to ninety days (confirmation from Special Court needed within ninety days), and directing not to dispose of assets. SEBI must give a hearing before or after the order.
Civil court powers: s.11(3): powers of a civil court under the Code of Civil Procedure, 1908; Used for discovery and production of documents, summoning and examining on oath, inspection of records, and issuing commissions, when SEBI exercises inspection or information powers.
Who may run an exchange: Securities exchange business lawfully = Recognised stock exchange only; A body that is not recognised cannot carry on as a stock exchange. Recognition is by notification in the Official Gazette.
Test for granting recognition: Recognition = Application + Rules/bye-laws + Governing body details + Authority's satisfaction (investor protection, interest of trade and public); The authority decides on satisfaction, not as a matter of right. Conditions can be attached.
Continuing control: Recognised ≠ free of control: bye-laws, governing body, listing, inspection stay under regulator; Say this in every answer. Recognition does not end regulation.
Consequence of default: Breach of conditions → suspension or withdrawal of recognition (after giving the exchange an opportunity to be heard); Add that the regulator may also supersede the governing body where needed.
SEBI Act link: stock exchange regulation: Section 11(2)(a), SEBI Act: SEBI may regulate the business in stock exchanges and other securities markets; Cite with Section 11(1), the duty to protect investors and develop and regulate the market.
SEBI interim orders: Section 11(4), SEBI Act: by a reasoned written order SEBI may, for example, suspend trading of a security on a recognised stock exchange; SEBI must give an opportunity of hearing to the persons concerned either before or after passing the order.
Listing requirements: Section 11A(2), SEBI Act: SEBI may specify requirements for listing and transfer of securities; This is without prejudice to section 21 of the SCRA, which deals with listing conditions.
Three stages of a trade: Trading (order matching) → Clearing (obligation determination) → Settlement (delivery of securities and funds); Always define each stage separately and in this order.
Rolling settlement: Settlement date = Trade day (T) + fixed number of business days; Under T+1, a trade on Monday settles on Tuesday, if both are business days. Check the current SEBI circular for the cycle in force.
Net obligation of a member: Net obligation = Total buys − Total sells (in each security, and in funds); This is the netting that the clearing corporation does for each clearing member.
Novation: Clearing corporation = buyer to every seller + seller to every buyer; This removes counterparty risk between the original parties.
Bye-law power, SCRA Section 9(1): Recognised stock exchange + previous approval of SEBI → bye-laws for regulation and control of contracts; Section 9(2) lists the matters, including the clearing house, margins, settlement days and default consequences.
SEBI directions, SCRA Section 12A(1): Inquiry + satisfaction that it is necessary → SEBI may issue directions; The grounds are investor interest or orderly market development, preventing detrimental conduct of affairs, and securing proper management.
Direction power under the SEBI Act: Inquiry + satisfaction of necessity → directions (section 11B, SEBI Act); Save as otherwise provided in section 11. Directions go to persons under section 12 or associated with the securities market, or to companies in matters under section 11A.
Direction power under the SCRA: Inquiry + satisfaction of necessity → directions (section 12A, SCRA); Directions may go to stock exchanges, clearing corporations, agencies, persons associated with the securities market, and listed or to-be-listed companies.
Three grounds for directions: (i) investors' interest or orderly market development; (ii) prevent detrimental conduct of affairs; (iii) secure proper management; These grounds are the trigger. State all three in a full answer.
Disgorgement: Amount directed = wrongful gain made or loss averted; Covered by the Explanation to section 11B (SEBI Act) and section 12A (SCRA).
Penalty by order: Reasons recorded in writing + inquiry in prescribed manner → penalty; Section 11B(2) of the SEBI Act and section 12A(2) of the SCRA.
Crediting of penalties: Penalties realised → Consolidated Fund of India; Section 15JA (SEBI Act); section 23K (SCRA).
Factors for quantum of penalty (section 15J): (a) disproportionate gain or unfair advantage, where quantifiable; (b) loss caused to investors; (c) repetitive nature of default; Applies when adjudging penalty under section 15-I, 11 or 11B of the SEBI Act.
Central Government directions: Policy directions in writing; SEBI bound; given an opportunity to express views as far as practicable; Section 16, SEBI Act. The Central Government's decision on whether a question is one of policy is final.
SEBI's core duty: Section 11(1): protect investors + promote development of + regulate the securities market; Use this as the opening line in any answer on SEBI's role in investor protection.
Interim measures by order (Section 11(4)): Reasons recorded in writing + interests of investors or market + pending or after investigation; Measures include suspending trading of a security, restraining persons from the market, suspending office-bearers of an exchange, impounding proceeds, attaching bank accounts or property, and directing not to dispose of assets. A hearing must be given before or after the order.
Attachment limit (Section 11(4)(e)): Attachment up to 90 days; confirmation from the Special Court within 90 days; Only property, bank accounts or transactions relating to proceeds actually involved in the violation may be attached.
Cease and desist (Section 11D): Inquiry + person has violated or is likely to violate the Act, rules or regulations = order to cease and desist; For a listed public company, or a public company intending to list (other than intermediaries under Section 12), SEBI needs reasonable grounds to believe it has indulged in insider trading or market manipulation.
Prohibited conduct (Section 12A): No person shall directly or indirectly use manipulative or deceptive devices, defraud, engage in insider trading, or deal while in possession of material or non-public information; Applies to securities listed or proposed to be listed on a recognised stock exchange.
Insider trading penalty (Section 15G): Not less than ₹10 lakh; may extend to the higher of ₹25 crore or 3 × profits made; Covers dealing on the basis of UPSI, communicating UPSI (except in the ordinary course of business or as required by law), and counselling or procuring another to deal.
Disgorgement (Section 11(5)): Amount disgorged → credited to the Investor Protection and Education Fund; Used by SEBI in accordance with the regulations made under the Act.

Quick revision

The secondary market is where already issued securities are traded; the issuer receives no new funds.
A recognised stock exchange may make bye-laws for regulation and control of contracts, subject to SEBI's previous approval (Section 9(1)).
Section 9(2) bye-laws can cover trading hours, clearing house, margins, listing, disputes, fees and fines, and emergencies in trade.
Bye-laws can specify which contraventions make a contract void under Section 14 (Section 9(3)(a)).
Penalties for bye-law breach by a member can be fine, expulsion, suspension for a specified period, or a similar non-monetary penalty.
Approved bye-laws are published in the Gazette of India and take effect from that date; SEBI may dispense with previous publication if urgent.
Section 12A lets SEBI issue directions only after an inquiry and when satisfied they are necessary.
Grounds under Section 12A: investor interest or orderly market development, preventing detrimental conduct, or securing proper management.
Directions can go to exchanges, clearing corporations, associated persons, or companies whose securities are listed or proposed to be listed.
The Section 12A explanation allows SEBI to direct disgorgement of the wrongful gain made or loss averted.
Section 12A(2) allows SEBI to levy penalty by a reasoned written order after an inquiry in the prescribed manner.
Always end a written answer with a clear conclusion.

Common mistakes

Saying the company receives money when shares trade in the secondary market. Fix: Remember that the money passes between investors. The company only gets funds in the primary market.
Calling depositories and depository participants the same. Fix: Depositories hold securities electronically. Depository participants are their agents who deal with investors and open demat accounts.
Saying recognition is granted automatically once the application is filed. Fix: Write that the authority must be satisfied about the rules, bye-laws and the interest of trade and the public. Recognition is discretionary and conditional.
Treating recognition as permanent and unconditional. Fix: State that recognition carries conditions and can be suspended or withdrawn, with an opportunity of being heard.
Using clearing and settlement as the same thing. Fix: Say that clearing determines the obligations through netting, and settlement is the actual transfer of securities and funds.
Saying that the stock exchange itself settles the trades. Fix: Name the clearing corporation as the body that clears and guarantees the trades, and the depository and banks as the channels for delivery and payment.
Writing that section 12A of the SEBI Act gives power to issue directions. Fix: Cite section 11B for the SEBI Act and section 12A for the SCRA. Always name the Act beside the section.
Saying SEBI can issue directions without any inquiry. Fix: Begin with: after making or causing to be made an inquiry, SEBI is satisfied that it is necessary.
Saying SEBI can attach property indefinitely. Fix: Write that attachment under Section 11(4)(e) is for up to 90 days, within which the Special Court must confirm it.
Stating fixed circuit breaker percentages as permanent law. Fix: Explain the purpose and mechanism. Quote percentages only from the latest study material and say they are set by SEBI and the exchanges.

Exam tips

Always link the secondary market to the primary market in your opening lines. Examiners like the liquidity connection.
Write participant roles as one-line pairs (participant: role). It is quick and easy to mark.
Cite section 11 of the SEBI Act, 1992 whenever regulation is mentioned. Use the correct sub-section for the point.
For a distinction question, give at least four points of difference and a closing line.
Keep unrelated detail out. Trading and settlement mechanics belong to their own topics, so only mention them briefly here.
Begin every answer with the definition of stock exchange and the rule that recognition is compulsory. Examiners look for this first.
Use the sequence application, satisfaction, conditions, continuing control, withdrawal. It fits both 5-mark notes and long case questions.
Always tie the SCRA to SEBI's powers by citing section 11 of the SEBI Act. This shows you can connect the two Acts.