Capital Market and Securities Laws · Securities Contracts (Regulation) Act, 1956

Derivatives, Options and Prohibited Contracts under SCRA 1956

Updated 11 October 2026 · Fact-checked

Under the SCRA, 1956, a derivative contract is legal and valid under Section 18A if it is traded on a recognised stock exchange and settled through its clearing house, or falls in a category notified by the Central Government. Contracts outside these routes lose that protection. Solve questions by defining the contract, testing it against Section 18A, and concluding.

Understand Derivatives, Options and Prohibited Contracts

A derivative is a contract whose value comes from something else, such as a share, a debt instrument or an index of prices. Section 2 of the Act says a derivative includes a security derived from a debt instrument, share, loan, risk instrument or contract for differences; a contract that derives its value from the prices or index of prices of underlying securities; commodity derivatives; and any other instrument the Central Government declares to be a derivative.

An option in securities is a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future. The definition expressly includes a teji, a mandi, a teji mandi, a galli, a put, a call and a put and call. The Act also prohibits options in securities (Section 20). For the validity of exchange-traded derivatives, rely on Section 18A, which gives protection to derivative contracts that meet its conditions.

Section 18A starts with the words 'notwithstanding anything contained in any other law for the time being in force'. It says contracts in derivatives are legal and valid if they are (a) traded on a recognised stock exchange and (b) settled on the clearing house of the recognised stock exchange in accordance with the rules and bye-laws of that exchange, or (c) between such parties and on such terms as the Central Government notifies in the Official Gazette. Clauses (a) and (b) work together for exchange-traded contracts. Clause (c) is the separate notified route.

Commodity derivatives need care. Section 2(bc) defines a commodity derivative as a contract for delivery of goods notified by the Central Government that is not a ready delivery contract, or a contract for differences deriving value from prices or indices of notified underlyings. A ready delivery contract (Section 2(ea)) provides for delivery and payment immediately or within a period not exceeding eleven days, and the period cannot be extended by mutual consent or otherwise. If such a contract is settled by paying differences, or in any way that avoids actual delivery or full payment, it is not a ready delivery contract.

Section 30A then deals with specific delivery contracts. The Act does not apply to non-transferable specific delivery contracts, but this is subject to a proviso: no person may organise, assist in organising or be a member of an association (other than a stock exchange) in an area where section 13 applies that lets parties perform such a contract without actual delivery. The Central Government can also notify that all or some provisions of the Act apply to non-transferable contracts. For transferable ones, where section 13 has been made applicable in an area in relation to commodity derivatives for particular goods or a class of goods, the Central Government may by notification declare that all or any provisions of the Act do not apply to transferable specific delivery contracts for those goods.

Key rules to remember

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.

How to solve Derivatives, Options and Prohibited Contracts questions

Use this order for any question on derivatives, options or the validity of a contract under the SCRA, 1956.

1Identify what the contract is: derivative, option in securities, ready delivery, spot delivery or specific delivery. Quote the definition from Section 2.
2Note the underlying: securities, an index of securities, or notified goods. This decides whether it is a securities derivative or a commodity derivative.
3Apply Section 18A: ask whether the contract is traded on a recognised stock exchange and settled through its clearing house under the exchange's rules and bye-laws.
4If it fails that test, check clause (c): is it between parties and on terms notified by the Central Government?
5For goods contracts, check the delivery period and settlement method against Section 2(ea), and then Section 30A for specific delivery contracts.
6Write the conclusion in one line: legal and valid under Section 18A, or outside its protection, with the reason.

Quickest way: Three-question validity check

When to use it: Use when a short-note or case question asks whether a given contract is valid.

Question 1: Is it a derivative or an option as defined in Section 2? Name it.
Question 2: Was it traded on a recognised stock exchange and settled via its clearing house, or is it of a notified kind (Section 18A)?
Question 3: If goods are involved, is it ready delivery (up to 11 days, no differences settlement) or specific delivery (Section 30A)?
Write: provision, facts, conclusion.

Common mistakes in Derivatives, Options and Prohibited Contracts

Saying all options in securities are illegal.
Students remember that the Act prohibits options in securities (Section 20) but forget that Section 18A protects derivative contracts that meet its conditions.
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.
The clauses are written as a list and the 'or' appears before clause (c).
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.
Calling any contract with delivery in 11 days a ready delivery contract.
Students remember the period but forget the other conditions.
Fix: Add that the period cannot be extended, notified conditions apply, and settlement by differences takes the contract out of the definition.
Confusing spot delivery (same or next day) with ready delivery (up to eleven days).
Both involve prompt delivery and the names sound alike.
Fix: Spot delivery is for securities, with a same-day or next-day limit. Ready delivery is for goods, with a period of up to eleven days.
Treating Section 30A as applying fully to every specific delivery contract.
Students read only the heading.
Fix: Sub-section (1) takes non-transferable specific delivery contracts outside the Act, subject to its proviso, which bars associations (other than a stock exchange) in areas where section 13 applies from facilitating performance without actual delivery. Sub-section (3) allows the Central Government to apply provisions by notification. Sub-section (2) applies to transferable ones: where section 13 applies in relation to commodity derivatives for particular goods, the Central Government may by notification declare that all or any provisions of the Act do not apply to transferable specific delivery contracts for those goods.

Worked examples

Example 1

A trader in Mumbai buys a Nifty index futures contract on a recognised stock exchange. It is settled through the exchange's clearing house under the exchange's bye-laws. Is the contract valid under the SCRA, 1956?

Show the solution

Provision: Section 2 includes in 'derivative' a contract which derives its value from the prices, or index of prices, of underlying securities.
A Nifty futures contract takes its value from an index of share prices, so it is a derivative.
Section 18A makes derivative contracts legal and valid, notwithstanding any other law, if they are traded on a recognised stock exchange and settled on its clearing house in accordance with its rules and bye-laws.
Facts: the contract was traded on a recognised stock exchange and settled through its clearing house under its bye-laws.

Answer: The contract is a derivative that meets the conditions of Section 18A, so it is legal and valid.

Example 2

Meera agrees with Ravi to buy 500 quintals of notified goods. Delivery and payment are to be made within 8 days, and the period cannot be extended. In another case, Kiran and Sunil make a similar contract, but it is settled by paying only the price difference without delivery. Discuss whether each is a ready delivery contract.

Show the solution

Provision: Section 2(ea) defines a ready delivery contract as one providing for delivery of goods and payment either immediately or within a period not exceeding eleven days, not capable of extension by mutual consent or otherwise, and subject to conditions notified by the Central Government.
Meera and Ravi: 8 days is within eleven days, and the period cannot be extended. Subject to any notified conditions, it satisfies the definition.
Kiran and Sunil: the proviso says a contract performed by realising the difference between contract rate and settlement rate, or by other means that dispense with actual tender of goods or payment of the full price, is not a ready delivery contract.
Such a contract can be a commodity derivative under Section 2(bc) if the goods are notified.

Answer: Meera and Ravi's contract is a ready delivery contract, subject to notified conditions. Kiran and Sunil's contract is not, because it is settled by differences.

Exam tips

Quote Section 18A almost word for word. Examiners reward the routes: traded and settled on the clearing house, or notified by the Central Government.
Learn the definitions in Section 2 as short lists: derivative, option, ready delivery, spot delivery and specific delivery.
When you write on options, mention that the Act prohibits options in securities, and base the validity of exchange-traded derivatives on Section 18A.
Use a compare-and-contrast layout for questions on ready delivery, spot delivery and specific delivery contracts, focusing on period, subject matter and settlement.
End every answer with a clear conclusion on validity, after the provision and the facts.

Practice questions from Securities Contracts (Regulation) Act, 1956

Derivatives, Options and Prohibited Contracts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Derivatives, Options and Prohibited Contracts: frequently asked questions

Are options in securities legal under the SCRA, 1956?

The Act defines options in securities and prohibits them (Section 20). Section 18A makes derivative contracts legal and valid if they meet its conditions, such as trading on a recognised stock exchange and settlement through its clearing house. Base the validity of exchange-traded options on Section 18A.

What is the difference between a ready delivery contract and a forward contract?

A ready delivery contract under Section 2(ea) requires delivery and payment immediately or within eleven days, with no extension and no settlement by differences. A contract for later delivery of notified goods that is not a ready delivery contract can be a commodity derivative under Section 2(bc). Check your study material for any further distinction it draws.

What does Section 18A of the SCRA say?

It declares that contracts in derivatives are legal and valid, notwithstanding any other law, if they are traded on a recognised stock exchange and settled on its clearing house under its rules and bye-laws, or are between parties and on terms notified by the Central Government.

Does the definition of derivative include commodity derivatives?

Yes. Section 2 states that a derivative includes commodity derivatives and such other instruments as the Central Government declares to be derivatives. Commodity derivatives are defined in Section 2(bc).