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SRI GANESH COLLEGE OF ARTS AND SCIENCE,SALEM

Name : Sri priya Class : III

B.Com

Subject : Financial market operations

SECURITIES CONTRACTS (REULATION) ACTTrading in Securities became a central subject under the

Constitution adopted in 1951. The law which regulates this is theSecurities Contract (Regulation) Act (the SCR Act) which was enacted in1956 to prevent undesirable transactions in securities, and came intoforce on Feb. 20,1957. It regulates the business of trading in the stockexchanges and options trading and provides for recognition of stock

exchanges and related matters like listing of securities transfer ofsecurities etc.Objectives

The Act defines what is a security and the powers of Government onthe stock exchanges and their members. The Government can instituteenquiries, direct investigations, call for books of accounts, reports andinformation. The Act also lays down what transactions in insecurities arelegal and what are void and illegal.Coverage

The Scheme of the SCR Act can broadly be divided under three mainheadings as under:

(i) Sections 3 to 12, which deal with constitution of, recognizedstock exchanges.

(ii) Sections 13 to 20, which deal with contracts and options insecurities.

(iii) Section 21 to 22 A, which deal with listing of securities by publiccompanies and the free transferability thereof.

The rest of the Sections in the Act relate to miscellaneous matters likepenalties, etc.Recognized Stock Exchanges

Section 3 of the SCR lays down that a stock exchange is required toapply toThe Central Government for recognition. In terms of Rule 3 of theSecurities Contracts (Regulation) Rules, 1957 (the SCR Rules), thisapplication has to be made in the prescribed Form A. The application forrecognition in Form A, has to be accompanied by a copy of the bye laws ofthe stock exchange and also a copy of the rules of the stock exchange.

On receiving such application, the Central Government, in terms ofSection 4 of the SCR Act read with Rule 5 A of the SCR Rules, makes aninquiry as to whether the rules and bye-laws are in conformity withprescribed conditions and whether it would be in the interest of the tradeand public, to grant recognition to the applicant stock exchange.

After making such an enquiry and if the Central Government issatisfied that the prescribed conditions have been met, it grants

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recognition to the stock exchange. Such recognition is granted in Form Bas prescribed under Rule 6 of the SCR Rule and it may be for a temporaryperiod or on a permanent basis. The Bombay Stock Exchange was theonly Exchange, which was recognized on a permanent basis from thebeginning of the operation of the Act.

Section 5 of the SCR Act empowers the Central Government towithdraw recognition granted to a stock exchange, if the CentralGovernment is of the opinion that in the interest of the trade or in thepublic interest, such recognition should be withdrawn.

Section 6 of the SCR Act, empowers the Central Government to callfor periodical returns from a recognized stock exchange and also to directinquiries to be made in relation to prescribed matters. Under Section 7 ofthe SCR Act, a copy of the Annual Report is to be furnished to theGovernment and such Annual Report has to contain the particularsprescribed in Rule 17 of the SCR Rules.

Section 9 of the SCR Act empowers a registered stock e exchange tomake byelaws for the regulation and control of contracts. These rules,bye-laws and regulations lay down all the details about the functioning ofthe Stock exchange and its members and dealings by and between themembers.

Section 10 of the SCR Act empowers the Central Government tosupercede the governing body of a recognized stock exchange. Section12 of the SCR Act empowers the Central Government, in the case of anemergency, to direct a recognized stock exchange to suspend its businessfor such period as the Central Government may direct. These powers arenow exercised by SEBI.

Options in ContractsThe word contract has been defined in Section 2 (a) of the SCR Act

to mean a contract for or relating to the purchase of securities.The expression option in securities means a contract for the

purchase or sale of a right to buyer or sell securities in future and acontract for the purchase or sale of a right to buy and sell securities infuture.

The expression spot delivery contract and an option in securitiesis that the latter is a contract in future of an intangible right to buy or sellthe securities or to buy and sell the securities, while the former providesfor actual purchase and delivery of securities.

Listing of Securities by Public CompaniesListing is not compulsory under the Companies Act but where a

public limited company desires to issue shares/debentures to the publicthrough a prospectus, listen is necessary under Section 73 of theCompanies Act, 1956.

Section 21 of the SCR Act empowers the Central Government tocompel a company to list its securities, if the Central Government is of theopinion that having regard to the nature of the securities issued by apublic company or to the dealings in them it is necessary or expedient inthe interest of the trade or in the public interest to do so.

When a public company applies for listing it has to furnish to therecognized stock exchange various particulars as prescribed in Rule 19.

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The said Rule 19 also lays down that unless this requirement is relaxed bythe Central Government, a public company, which applied for listing mustensure that at least 60% of each class or kind of securities issued by thecompany was offered to the public for subscription and that applicationsreceive of such offer were allotted fairly and unconditionally.

Restrictions on TransferabilitySection 22A was introduced I the SCR Act and has come into force

effective from 17the Jan. 1986. The net effect of this Section is that apublic company whose securities are listed on a recognized stockexchange cannot refuse to transfer shares lodged with it for transfer,unless the case for refusal falls under the specific provisions laid down inSection 22 A.

Thus, a public company whose shares are listed on a recognizedstock exchange can refuse an application for transfer only on the followinggrounds, viz.:

(i) That the instrument of transfer is not proper or has not been dulystamped and executed or that the certificate relating to thesecurity has not been delivered to the company, or that anyother requirement under the law relating to registration of suchtransfer has not been complied with;

(ii) That the transfer is in contravention of any law;(iii) That the transfer is likely to result in such change in the

composition of the board of directors as would be prejudicial tothe interests of the company or to the public interest

(iv) That the transfer is prohibited by any order of any court, tribunalor other authority under any law for the time being in force.

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