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

Ravi Traders enters into a Nifty index futures contract through a member of a recognised stock exchange. The contract is traded on the exchange and settled through its clearing house. Under the Securities Contracts (Regulation) Act, 1956, what is the legal status of this derivative contract?

The contract is legal and valid. Section 18A of the SCRA, 1956 validates derivative contracts notwithstanding any other law, provided they are traded on a recognised stock exchange and settled on its clearing house or under its rules and bye-laws. Ravi's trade satisfies both conditions.

  1. ALegal and valid, because it is traded on a recognised stock exchange and settled on its clearing houseCorrect
  2. BVoid, because contracts in derivatives are wagering contracts
  3. CValid only if the Central Government separately approves each contract
  4. DValid only if actual delivery of the underlying is made

Explanation

Section 18A makes contracts in derivatives legal and valid despite any other law if they are traded on a recognised stock exchange and settled on the clearing house of that exchange or per its rules and bye-laws. Ravi's contract meets both conditions. The wagering-void view is overridden by the non-obstante clause, and no per-contract approval or delivery condition is stated.

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