Securities Contracts (Regulation) Act, 1956: formula sheet

Key formulas

Extent (Section 1)

Extends to the whole of India

Commencement was by notification of the Central Government; the Act came into force on 20 February 1957.

Securities (Section 2(h))

Securities = shares, scrips, stocks, bonds, debentures, debenture stock and like marketable securities + derivative + CIS units + security receipts + mutual fund units + pooled investment vehicle units + SPDE certificates + Government securities + rights or interests in securities

The definition says 'include', so it is inclusive. Unit linked insurance policies are excluded.

Spot delivery contract (Section 2(i))

Actual delivery and payment on the same day or the next day; or depository transfer between beneficial owners' accounts

Postal transit time is excluded from the period if the parties are not in the same town or locality.

Option in securities (Section 2(d))

Contract for purchase or sale of a right to buy or sell, or buy and sell, securities in future

Includes teji, mandi, teji mandi, galli, put, call, put and call.

Derivative (Section 2(ac))

Includes a security derived from a debt instrument, share, loan, risk instrument or contract for differences; a contract deriving value from prices or index of prices of underlying securities; commodity derivatives; other instruments declared by the Central Government

The definition is inclusive.

Exclusion of spot delivery (Section 18)

Sections 13, 14, 15 and 17 do not apply to spot delivery contracts

The Central Government may apply section 17 to them by notification, in trade or public interest.

Ready delivery contract (Section 2(ea))

Delivery of goods and payment immediately or within a period not exceeding eleven days, not extendable by mutual consent

It is not a ready delivery contract if performed by paying differences or if actual tender or full payment is dispensed with.

Application for recognition (Section 3)

Application to Central Government + prescribed particulars + copy of bye-laws + copy of constitution rules

Rules cover governing body, office bearers, membership classes and exclusion, partnerships, authorised representatives and clerks.

Conditions for grant (Section 4(1))

Rules and bye-laws conform to prescribed conditions + willingness to comply with other conditions + interest of trade and public interest

The Central Government must be satisfied on all three after inquiry. It may then grant recognition subject to conditions.

Prescribed conditions (Section 4(2))

Membership qualifications; contracts between members; Government nominees not exceeding three; accounts of members audited by chartered accountants where required

The list is inclusive ('among other matters'), not exhaustive.

Effect and refusal (Section 4(3) and (4))

Effective from date of publication in the Gazette of India; refusal only after hearing, with written reasons

Publication is also required in the State Official Gazette where the principal office is situated.

Amendment of rules (Section 4(5))

Rules on Section 3(2) matters amended only with Central Government approval

Do not confuse with bye-laws, which need SEBI approval under Section 9.

Bye-laws (Section 9)

Recognised exchange + previous approval of SEBI = bye-laws for regulation and control of contracts

Bye-laws are published in the Gazette of India and the State Official Gazette, and take effect from the date of publication in the Gazette of India.

Withdrawal under Section 5(1)

Opinion in interest of trade or public interest + written notice to governing body + hearing + notification in Official Gazette

Contracts made before the notification date remain valid.

Withdrawal under Section 5(2)

Not corporatised or demutualised, or scheme not submitted in time, or scheme rejected by SEBI = recognition stands withdrawn

The Central Government publishes the withdrawal by notification. Earlier contracts remain valid.

Section 4A: duty to corporatise and demutualise

All recognised stock exchanges (not already done) → corporatised and demutualised as per section 4B, from the appointed date

Appointed date is notified by SEBI in the Official Gazette. It can differ for different exchanges.

Scheme submission and approval (s. 4B(1), (2))

Exchange submits scheme to SEBI → SEBI approves (with or without modification) if in the interest of the trade and also in the public interest

SEBI may notify exchanges already corporatised and demutualised. They need not submit a scheme.

Bar on use of reserves (s. 4B(3))

No approval if shares, trading rights in lieu of membership card, or dividends to members are proposed out of reserves or assets of the exchange

The shares must be issued for a lawful consideration.

Publication (s. 4B(4))

Approved scheme published by SEBI in the Official Gazette and by the exchange in two daily newspapers → scheme binding on all

It binds members, creditors, depositors, employees and others, despite any contrary law or agreement.

Rejection (s. 4B(5))

Reject by order, published in the Official Gazette, after reasonable opportunity of being heard

The hearing must be given to all persons concerned and to the exchange.

Restrictions on brokers (s. 4B(6))

Broker representatives on governing board ≤ 1/4 of total board strength

SEBI may also restrict voting rights of broker-shareholders and their right to appoint representatives. This is done by a written order.

Public shareholding (s. 4B(8))

Public (other than shareholders having trading rights) holds ≥ 51% of equity share capital within 12 months of publication of the s. 4B(7) order

SEBI may extend by another 12 months on sufficient cause and in the public interest.

Bye-law making power

Section 9(1): recognised stock exchange + previous approval of SEBI = bye-laws for regulation and control of contracts

The approving authority is SEBI, not the Central Government. The Central Government was replaced by SEBI by an amendment effective 30-1-1992.

Listing in bye-laws

Section 9(2)(m): listing, inclusion for dealings, suspension or withdrawal of securities, suspension or prohibition of trading

Listing is one item in the list of matters bye-laws may cover. The list is illustrative, not exhaustive.

Void contracts

Section 9(3)(a): specified bye-laws, if contravened, make a contract void under section 14(1)

Only bye-laws specified for this purpose have this effect. Not every breach makes a contract void.

Punishment of members

Section 9(3)(b): fine, expulsion, suspension for a specified period, or any other like penalty not involving money

These are the four heads of punishment the bye-laws may provide.

Effect of bye-laws

SEBI approval, then publication in the Gazette of India and the State Gazette; effective from the date of publication in the Gazette of India

SEBI may dispense with previous publication by a written order giving reasons, in the interest of trade or the public.

Voting rights rules

Section 7A: one member, one vote; restriction of proxies; rules effective only after Central Government approval and publication

Approval here is by the Central Government.

Supersession of governing body

Section 11: written notice, hearing, then notification in the Official Gazette

Members of the governing body cease to hold office from the date of the notification.

SEBI regulations

Section 31: SEBI makes regulations by notification in the Official Gazette, laid before Parliament for 30 days

Parliament may modify a regulation or annul it, without affecting anything done earlier.

Derivative (Section 2)

Derivative = security derived from debt/share/loan/risk instrument/contract for differences + contract deriving value from securities' prices or index + commodity derivatives + instruments declared by the Central Government

The definition says 'includes', so it is not a closed list.

Option in securities (Section 2)

Option = contract for the purchase or sale of a right to buy, sell, or buy and sell securities in future (teji, mandi, teji mandi, galli, put, call, put and call)

Learn the named forms; examiners ask you to list them.

Validity of derivatives (Section 18A)

Valid if [(a) traded on a recognised stock exchange AND (b) settled on its clearing house per its rules and bye-laws] OR [(c) between such parties and on such terms as the Central Government notifies]

The section overrides any other law on the point.

Ready delivery contract (Section 2(ea))

Delivery and payment immediately or within a period not exceeding 11 days; period not extendable; subject to notified conditions

Loses this character if settled by differences or if actual tender of goods or full payment is dispensed with.

Spot delivery contract (Section 2(i))

Actual delivery of securities and payment on the same day or the next day; or depository transfer between beneficial owners' accounts

Transit time by post is excluded where parties live in different towns.

Specific delivery contract (Section 2(ha))

Commodity derivative with actual delivery of specific qualities or types of goods in a specified future period, at a fixed or agreed price, naming both buyer and seller

Transferable or non-transferable; Section 30A treats them differently.

Transfer to a clearing corporation (Section 8A(1))

Recognised stock exchange + prior SEBI approval → transfers clearing house duties → clearing corporation (a company)

Purposes: periodical settlement of contracts and differences; delivery of and payment for securities; matters incidental or connected.

Bye-laws and approval (Section 8A(2) and (3))

Clearing corporation makes bye-laws → submits to SEBI → SEBI approves bye-laws and transfer if in interest of trade and public interest

Both conditions, trade interest and public interest, appear in the text.

Application of other sections (Section 8A(4))

Sections 4, 5, 6, 7, 8, 9, 10, 11 and 12 apply to a clearing corporation as far as may be

Applies as they apply to a recognised stock exchange. Section 3 is not in this list.

SEBI directions (Section 12A(1))

Inquiry + satisfaction of necessity → directions to stock exchange or clearing corporation

Grounds: investor interest or orderly development; preventing detrimental conduct; securing proper management.

Penalty (Section 23GA)

Not less than ₹5 crore; may extend to the higher of ₹25 crore or three times the gains from the failure

Applies to a stock exchange or clearing corporation that fails to conduct business per SEBI rules, regulations and directions.

Clearing house in bye-laws (Section 9(2)(b))

Bye-laws may provide for a clearing house for settlement of contracts and differences, delivery and payment, delivery orders

Exchange bye-laws need SEBI's previous approval under Section 9(1).

Punishment for contravention (s. 23M(1))

Imprisonment up to 10 years, or fine up to ₹25 crore, or both

Applies to contravention, attempt or abetment where no punishment is provided elsewhere. Without prejudice to penalty by the adjudicating officer or SEBI.

Failure to pay penalty or comply with order (s. 23M(2))

Imprisonment of at least 1 month and up to 10 years, or fine up to ₹25 crore, or both

The one-month minimum applies only here.

Offences by companies (s. 24(1))

Company + every person in charge of and responsible for the business = deemed guilty

Defence: offence committed without his knowledge, or he exercised all due diligence to prevent it.

Officers liable by consent, connivance or gross negligence (s. 24(2))

Director, manager, secretary or other officer is also deemed guilty

Applies where the contravention is proved to be with their consent or connivance, or attributable to their gross negligence.

General appeal to SAT (s. 23L)

45 days from receipt of copy of order or decision

SAT may allow a late appeal on sufficient cause. Appeal is against exchange, adjudicating officer or specified SEBI orders.

SAT disposal target (s. 23L(5))

Endeavour to dispose of finally within 6 months from receipt of appeal

It is an endeavour, not a strict mandate.

Appeal against delisting (s. 21A(2))

15 days from date of the exchange's decision; further period up to 1 month on sufficient cause

Listed company or aggrieved investor may appeal.

Appeal against refusal to list (s. 22A)

15 days from date reasons for refusal are furnished

Where the exchange fails to decide in time: 15 days from expiry of the specified time, extendable by up to one month on sufficient cause.

Appeal to High Court (s. 22F)

60 days from communication of SAT order; further period up to 60 days on sufficient cause

On any question of fact or law arising out of the SAT order.

Quick revision

• SCRA 1956 regulates dealing in securities through recognised stock exchanges.
• Section 3: a stock exchange applies to the Central Government for recognition, with its bye-laws and constitution rules.
• Section 9: a recognised exchange makes bye-laws for regulation and control of contracts, with SEBI's previous approval.
• Bye-laws take effect from publication in the Gazette of India after SEBI approval.
• Under section 9(3)(b), bye-laws may provide that a contravention makes the member liable to fine, expulsion, suspension for a specified period, or any other penalty of a like nature not involving payment of money.
• Section 4A: recognised exchanges not already corporatised and demutualised must do so from the appointed date set by SEBI; SEBI may specify another appointed date for an exchange prevented by sufficient cause.
• Section 4B: the exchange submits a scheme to SEBI, which approves it with or without modification, or rejects it after a hearing.
• A scheme cannot be approved if shares, trading rights or dividends are proposed out of the exchange's reserves or assets.
• If SEBI restricts the number of broker representatives on the governing board, the maximum it fixes shall not exceed one-fourth of the board's strength (section 4B(6)(c)).
• Where a scheme is approved, the exchange must ensure that within twelve months of publication of SEBI's order, at least fifty-one per cent of equity is held by the public other than shareholders with trading rights; SEBI may extend by twelve months.
• Section 18A: derivative contracts are valid if traded on a recognised exchange and settled on its clearing house or under its rules, or as the Central Government specifies.
• Section 19: no one may organise or be a member of an unrecognised stock exchange without the Central Government's permission.

Common mistakes

• Treating the definition of securities as a closed list. Fix: Say the definition is inclusive, then give the main categories.
• Saying a spot delivery contract needs delivery on the same day only. Fix: Write 'same day or the next day' and mention the depository transfer limb.
• Saying SEBI grants recognition to a stock exchange. Fix: Under Section 4 the Central Government grants recognition. SEBI's role in these provisions is approving bye-laws under Section 9.
• Mixing up rules and bye-laws when asking who approves amendments. Fix: Amendment of rules on Section 3(2) matters needs Central Government approval (Section 4(5)). Bye-laws need SEBI's previous approval (Section 9).
• Treating corporatisation and demutualisation as the same thing. Fix: Corporatisation is a change of legal form into a company. Demutualisation separates ownership, management and trading rights. Write both definitions.
• Saying the 51% must be held by the public including broker-shareholders. Fix: Section 4B(8) says the public other than shareholders having trading rights. Include that phrase.
• Saying the Central Government approves stock exchange bye-laws. Fix: Remember that under section 9 the approval is by SEBI. Central Government approval applies to voting rights rules under section 7A and to supersession under section 11.
• Writing that every breach of a bye-law makes a contract void. Fix: State that only the bye-laws specified for the purpose under section 9(3)(a) make a contract void under section 14(1).
• Saying all options in securities are illegal. Fix: Say that the Act prohibits options in securities, but that derivative contracts, which include exchange-traded options, are legal and valid under Section 18A if they are traded on a recognised stock exchange and settled on its clearing house, or fall in a notified category. Contrast them with unregulated options.
• Writing that a derivative is valid if it is traded OR settled, mixing up the clauses. Fix: Treat clauses (a) and (b) as the exchange route, trading plus settlement on the clearing house, and clause (c) as the separate notified route.

Exam tips

• Learn section 2(h), 2(i) and section 18 almost word for word, because short-note questions target them.
• Write the clause number next to each definition, such as 2(h) for securities and 2(i) for spot delivery contract.
• For applied questions, quote the time limit or category in the definition and then match it to the facts.
• Do not skip the exclusions, such as unit linked insurance policies and the scope of section 18.
• Use bullet points for the list in the securities definition so the examiner can see each limb quickly.
• Always quote the section: 3 for application, 4 for grant, 5 for withdrawal, 9 for bye-laws.
• Name the correct authority every time. Central Government for recognition and withdrawal, SEBI for bye-laws.
• In a 'discuss the conditions' question, give the three Section 4(1) tests as separate points and then the Section 4(2) examples.