A New India
Chapter 187 - 187: Securities Contracts (Regulation) Act

Title: Securities Contracts (Regulation) Act, 1954

Preamble:

The objective of this act is to regulate trading in securities, ensure fair practices, protect investors, and prevent malpractices in the securities markets. The act establishes rules for licensing stock exchanges, the registration of securities, and oversight of market intermediaries.

It also seeks to establish a foundation for the proper functioning of the stock exchanges under the oversight of SEBI (Securities and Exchange Board of India).

Section 1: Short Title, Extent, and Commencement

This act shall be called the Securities Contracts (Regulation) Act, 1954.

It extends to the whole of India and shall come into force immediately upon its enactment.

Section 2: Definitions

Securities: Includes shares, stocks, bonds, debentures, debenture stock, government securities, and any other marketable securities of like nature in or of any incorporated company or body corporate.

Stock Exchange: An organized marketplace where securities are bought and sold.

Broker: Any individual or firm acting as an intermediary between buyers and sellers of securities.

Clearing Corporation: An organization that handles the confirmation, settlement, and delivery of securities transactions.

Section 3: Licensing of Stock Exchanges

No stock exchange shall operate in India without obtaining a license from SEBI.

SEBI has the authority to issue, suspend, or revoke licenses based on compliance with the regulations under this Act.

To be eligible for a license, a stock exchange must adhere to the governance structure, operating standards, and trading norms set forth by SEBI.

Stock exchanges are required to furnish periodic reports to SEBI, including information on trading volumes, governance, and financial status.

Section 4: Conditions for Licensing

To obtain a license, a stock exchange must:

Have a recognized legal entity with a formal organizational structure.

Appoint an independent board of directors, including representatives from the investor community, brokers, and regulators.

Ensure that it has adequate infrastructure, including trading floors, communication networks, and a reliable clearing and settlement system.

Establish a code of conduct for brokers and intermediaries operating on the exchange.

Stock exchanges must also demonstrate their ability to operate a fair and transparent marketplace by implementing surveillance systems to monitor trading activity and detect fraud or manipulation.

Section 5: Inspection and Oversight

SEBI shall have the authority to inspect stock exchanges and audit their activities periodically. This may include reviewing internal procedures, records, and financial statements.

If a stock exchange violates any provisions of this Act or SEBI's directives, SEBI may issue a warning, impose fines, or suspend/revoke the license.

Stock exchanges must maintain a register of brokers and other intermediaries and provide updates to SEBI on their status.

Section 6: Standardization of Contracts

All securities traded on licensed stock exchanges must be based on standardized contracts approved by SEBI.

This includes standard terms for buying and selling securities, settlement dates, delivery schedules, and payment methods.

Section 7: Prohibition of Unauthorized Securities Contracts

No person or entity shall engage in securities trading outside the recognized stock exchanges or in any contract that is not approved by SEBI.

Over-the-counter (OTC) trading in securities shall be prohibited unless specifically exempted by SEBI through formal regulation.

Section 8: Penalties for Unauthorized Contracts

Engaging in unauthorized securities contracts shall be punishable by fines, imprisonment, or both.

SEBI shall have the authority to take civil or criminal action against entities involved in fraudulent or unauthorized trading activities.

Section 9: Registration of Brokers and Intermediaries

Every broker, sub-broker, merchant banker, portfolio manager, and other intermediaries dealing in securities must be registered with SEBI.

Registration requires meeting minimum capital adequacy, professional qualifications, and ethical standards as defined by SEBI.

Intermediaries must submit annual financial disclosures, maintain proper records, and comply with SEBI's regulatory directives.

Section 10: Code of Conduct for Brokers

SEBI shall define a Code of Conduct for brokers to ensure fair trading practices, including:

Avoiding conflict of interest between their role and their clients' interests.

Maintaining confidentiality of client information.

Ensuring honest and transparent communication regarding fees, commissions, and risk factors.

Brokers shall not engage in front-running, insider trading, or market manipulation.

Violations of the code may result in penalties, suspension, or revocation of registration.

Section 11: Establishment of Clearing Corporations

SEBI shall authorize the creation of Clearing Corporations that will oversee the clearing and settlement of all transactions on recognized stock exchanges.

The Clearing Corporation will:

Guarantee the settlement of trades executed on the exchange.

Ensure that all trades are completed within the settlement cycle specified by SEBI.

Operate a centralized risk management system to monitor and manage potential settlement risks.

The corporation must establish margin requirements for brokers and maintain a settlement guarantee fund.

Section 12: Settlement Procedures

Trades must be settled within a time frame specified by SEBI (preferably T+2 days, meaning two days after the trade date).

Clearing Corporations shall introduce mechanisms to handle failed trades and mitigate the impact on the broader market.

In case of non-settlement of trades, penalties will be imposed on the defaulting party, and SEBI shall have the power to blacklist such parties from future trading activities.

Section 13: Investor Grievance Redressal

Stock exchanges shall establish Investor Grievance Cells to address complaints related to fraud, non-settlement of trades, or unethical practices by brokers.

Investors have the right to approach SEBI directly if their complaints are not adequately resolved by the exchange.

Section 14: Disclosure Requirements for Listed Companies

Listed companies must provide quarterly and annual disclosures, including balance sheets, income statements, and other material information, to SEBI and their shareholders.

Companies must also disclose material events, such as mergers, acquisitions, or significant financial changes, within 24 hours of occurrence.

Section 15: Prohibition of Insider Trading

Insider trading (i.e., trading based on material, non-public information) is prohibited, and severe penalties shall be imposed for violations.

SEBI will require listed companies to maintain a record of insiders (directors, officers, significant shareholders) and monitor their trading activity.

Section 16: Prevention of Market Manipulation

SEBI shall establish a Market Surveillance Division tasked with monitoring trading activity to detect and prevent market manipulation, such as pump and dump schemes, price rigging, or cornering.

SEBI has the authority to impose immediate trading halts or bans on securities involved in suspicious activity.

Section 17: Imposition of Penalties

SEBI has the power to impose penalties, including fines, imprisonment, and market bans, for those found guilty of violating the provisions of this Act.

The severity of penalties will depend on the scale of the violation and the damage caused to market integrity and investor confidence.

Section 18: Delegation of Powers

SEBI may delegate certain functions, such as inspection or audit, to recognized professional bodies or agencies, provided these bodies operate under SEBI's supervision.

Section 19: Appeals and Adjudication

Any party aggrieved by a SEBI decision may appeal to a Securities Appellate Tribunal (SAT) within 60 days of receiving the order.

The SAT will have the power to uphold, modify, or reverse SEBI's decisions based on merit.

Section 20: Rulemaking Authority

SEBI has the authority to frame rules, regulations, and guidelines to carry out the provisions of this Act effectively. These regulations shall be reviewed periodically and updated as necessary to keep pace with market developments.