Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 – CA Final Law Study Material

Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 – CA Final Law Study Material

Question 1.
A company Cookies Private Limited has two shareholders, Mr. Rock and Mr. Salt. Mr. Rock decides to sell his part of shares in Cookies Private Limited to another company, Crispy Private Limited for a specified monetary consideration. How should Mr. Rock proceed to document the transaction so as to make it legally binding on both the parties? [RTP-May 18]
Answer:
Requirement as to Share Purchase Agreement:
Such an understanding of transfer of the shares of Mr. Rock to Crispy Private Limited shall be recorded in Share Purchase Agreement, which is a legally binding contract, and lists down all the terms and conditions which are relevant to the sale of shares.

A Share Purchase Agreement (commonly known as SPA) is an agreement that sets out the terms and conditions relating to the sale and purchase of shares in a company. Such an agreement principally outlines the following:
(a) the exact description of shares, i.e. the number of shares, price per share, premium amount, if any;
(b) the conditions that must be satisfied before the sale takes place;
(c) the date on which the sale will be completed;
(d) the manner in which the transfer will be made;
(e) any indemnities or protections available to the parties;
(f) the representations and warranties made by either party; and
(g) the conditions upon which the agreement will terminate.

Question 2.
Mr. Vivaan is having 400 shares of M/s Travel Everywhere Limited and the current price of these shares in the market is INR100. Vivaan’s goal is to sell these shares in 6 months’ time. However, he is worried that the price of these shares could fall considerably, by then. At the same time, Vivaan doesn’t want to sell off these shares today, as he conjectured that the share price might appreciate in the near future. How should Mr. Vivaan protect his security and reduce the risk of loss on the share price? [RTP-May 18, MTP-Oct. 19, May 20]
Answer:
Suggestive ways to protect the security and reduce the risk of loss on share price:

Suggestive way to protect the security and reduce the risk of loss on share price is to opt for a ‘Option’ derivative contract. Options are contracts, through which a seller giver the buyer, a right, but not the obligation, to buy or sell a specified number of shares at a pre-determined price, within a set time period. These contracts are essentially derivatives, since they derive their value from an underlying security on which the option is based. With options, one can tailor his position according to his own situation and stock market outlook.

In this case, Vivaan may opt for ‘Option’ derivative contract. However, it is not obligatory for him to hold the terms of the agreement, since he has an ‘option’ to exercise the contract. For example, if the current market price of the share is ₹ 100 and he buy an option to sell the shares to Mr. X at ₹ 200 after 3 month, so Vivaan bought a put option.

Now, if after 3 months, the current price of the shares is ₹ 215, Mr. Vivaan may opt not to sell the shares to Mr. X and instead sell them in the market, thus making a profit of ₹ 115. Had the market price of the shares after three months would have been ₹ 80, Mr. Vivaan would have obliged the option contract and sold those shares to Mr. X, thus making a profit, even though the current market price was below the contracted price.

Question 3.
Mr. Veer a newly entered investor in the field of securities business seeks your advice on the investments to be made in securities of large Companies for long term purposes. With this object in view, he wants to know the meaning of the following terms commonly used in any stock exchange.
(i) Derivative
(ii) Option in securities
(iii) Spot delivery contract.
Advise suitably.
Or
Explain the meaning of the following terms used in the Securities Contracts (Regulation) Act, 1956:
(i) Option in Securities
(ii) Spot delivery contract. [May 17 (4 Marks)]
Or
Define the term “Derivative” as appearing in the Securities Contracts (Regulation) Act, 1956. [May 19 – New Syllabus (2 Marks)]
Answer:
Meaning of Terms:
(i) Derivatives: Sec.2(ac) of Securities Contracts (Regulation) Act, 1956 defines the term derivative so as to include:
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for difference or any other form if security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
(C) Commodity derivatives;
(D) Such other instruments as may be declared by the C.G. to be derivatives.

(ii) Option in Securities: Sec. 2(d) of Securities Contracts (Regulation) Act, 1956 defines the term Option in Securities so as to means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and a call in securities.

(iii) Spot Delivery contract: Sec. 2(f) of Securities Contracts (Regulation) Act, 1956 defines the term spot delivery contract so as to mean a contract which provides for—

(a) Actual delivery of securities and the payment of a price therefor either on the same day as . the date of the contract or on the next day, the actual period taken for the despatch of the securities or the remittance of money therefor through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality;

(b) Transfer of securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository.

Question 4.
Explain the meaning of the term “Demutualisation” used under the Securities Contracts (Regulation) Act, 1956. (May 18 – New Syllabus (3 Marks)]
Answer:
Meaning of Demutualisation:

Section 2 (ab) defines the term demutualisation as the segregation of ownership and management from the trading rights of the members of a recognised stock exchange in accordance with a scheme approved by the SEBI.

Demutualisation of stock exchanges was made mandatory by the Central Government in 2003, to end the broker’s control over the exchanges. Post that the access to trading became a matter of contract with the stock exchange, wherein the dealers were just operating as users or participants. The stock exchanges, which were previously operating as an unorganised sector, started acting a service provider to market intermediaries and listed companies, after adopting the scheme of demutualisation.

India’s two largest demutualised stock exchanges are the National Stock Exchange and Bombay Stock Exchange. Its shareholders are largely the state-owned banks.

Question 5.
Rampur Stock Exchange wants to get itself recognized. Explain:
(a) Who enjoys the power to recognize stock exchange?
(b) What information will have to be provided with the application for recognition?
Answer:
(a) Power to recognize stock exchange:
As per Sec. 3 of the Securities Contracts (Regulation) Act, 1956, power to recognize Stock Exchange vests with Central Government. However, Central Government has delegated the powers to SEBI.

(b) Information to be provided along with application for recognition:
As per Sec. 3 of the Securities Contracts (Regulation) Act, 1956, every application made to SEBI shall be accompanied by a copy of the bye laws and the rules relating in general to the constitution of the stock exchange and in particular, to
(a) the governing body of such stock exchange, its constitution and powers of management and the manner in which its business is to be transacted;
(b) the powers and duties of the office bearers of the stock exchange;
(c) the admission into the stock exchange of various classes of members, the qualifications for membership, and the exclusion, suspension, expulsion and re-admission of members therefrom or there into.
(d) the procedure for the registration of partnerships as members of the stock exchange in cases where the rules provide for such membership; and the nomination and appointment of authorised representatives and clerks.

Question 6.
Referring to the provisions of the Securities Contracts (Regulation) Act, 1956: The C.G. has granted recognition to a Stock Exchange. To what conditions may such a recognition be subject to?
Answer:
Condition subject to which stock exchange is being recognized:
As per Sec. 4(2) of the Securities Contracts (Regulation) Act, 1956, the conditions which the C.G. may prescribe for the grant of recognition to the stock exchanges may include, among other matters, conditions relating to:

the qualifications for membership of stock exchanges;
the manner in which contracts shall be entered into and enforced as between members;
the representation of the C.G. on each of the stock exchange by such number of persons not exceeding 3 as the C.G. may nominate in this behalf; and
the maintenance of accounts of members and their audit by chartered accountants whenever such audit is required by the C.G.

Question 7.
Working of City Stock Exchange Association Ltd., is not being carried on by its governing Board in public interest. On receipt of representations from various investors and Investors’ Association, the Central government is thinking to withdraw the recognition granted to the said Stock Exchange. You are required to state the procedure for withdrawal of such recognition as per the provisions of Securities Contracts (Regulation) Act, 1956 in this regard. Also state the effect of such withdrawal on the contracts outstanding on the date of withdrawal.
Or
The Central Govt, has formed its opinion on certain grounds that the recognition granted to a Stock-Exchange be withdrawn. Examining the provisions of the Securities (Contracts) Regulation Act, 1956, explain the procedure that must be followed by the Central Govt, to give effect to the above. Also state whether any such withdrawal of recognition shall affect the validity of the contracts already entered into by Stock-Exchange before withdrawal of recognition. [Nov. 10 (5 Marks)]
Or
The Delhi Stock Exchange Ltd. was granted recognition by SEBI. SEBI received compliant alleging that the said stock exchange is indulging in fraudulent activities. SEBI is of the opinion that the recognition granted should be withdrawn m the interest of trade and public. State the provisions to withdraw the recognition under the Securities Contracts (Regulation) Act, 1956.
Examine the validity of the contracts entered by the stock exchange prior to such withdrawal order. [May 18 – New Syllabus (6 Marks)]
Answer:
Withdrawal of Recognition of Stock Exchange:

As per Section 5 of Securities Contracts (Regulation) Act, 1956, recognition of a stock exchange may be withdrawn if the C.G./SEBI is of the opinion that the recognition granted to a stock exchange under the provisions of this Act, should, in the interest of the trade or in the public interest, be withdrawn.

In this case the C.G./SEBI may serve on the governing body of the stock exchange, a written notice that the C.G./SEBI is considering the withdrawal of the recognition for the reasons stated in the notice and after giving an opportunity to the governing body to be heard in the matter, the C.G./SEBI may withdraw by notification in the Official Gazette, the recognition granted to the stock exchange.

Validity of Contracts:

Sec. 5 provides that withdrawal of recognition shall not affect the validity of any contract entered into or made before the date of the notification.

SEBI may, after consultation with the stock exchange, make such provision as it deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due performance of any contracts outstanding on that date.

Question 8.
‘X’ Stock Exchange Limited was granted recognition by Securities and Exchange Board of India (SEBI). The stock brokers of the Stock Exchange did not pay much heed to the concept of governance and focused on increasing their wealth and snubbed the protection of investors. Their activities were against the interest of the trade and general public.
(i) Examine whether the Central Government/SEBI has the power to withdraw the recognition granted to ‘X’ Stock Exchange Limited under the provisions of Securities Contracts (Regulation) Act, 1956?
(ii) Whether a person can be a member of an unrecognized Stock Exchange for the purpose of performing any contracts in Securities? [Nov. 19 – New Syllabus (4 Marks), RTP-Nov. 20]
Answer:
(i) Withdrawal of Recognition of Stock Exchange:

Conclusion: C.G./SEBI has power to withdraw the recognition granted to Stock Exchange.

(ii) Membership of unrecognized Stock Exchange:
’ As per Sec. 19 of the SCRA, 1956, no person shall, except with the permission of the Central
Government or SEBI, organise or assist in organising or be a member of any stock exchange (other than a recognised stock exchange) for the purpose of assisting in, entering into or performing any contracts in securities.
Hence, to be a member of an unrecognized Stock exchange, permission of CG or SEBI is required.

Question 9.
Ms. Ashmita D’Sou/.a recently graduated from National Law School, Bangalore and made her parents proud. While working on one of her assignments, she got really interested in knowing about the securities and gained expertise in the day-to-day working of financial markets. Meanwhile, her father got a wonderful opportunity at work to move to Germany and the whole family is very excited to make the move and settle there.

Ashmita, along with her family applied for residence there and also gained the citizenship of Germany. She got married to a German, named Vincent, and they both came to India to start a career. After working with Ashmita on a couple of assignments, Vincent got interested to become a member of the Chennai Stock Exchange, Chennai. Discuss, whether Vincent or Ashmita can become a member of the stock exchange, stating the provisions of Securities Contract Regulations in India. [MTP-March 18]
Answer:
Membership of recognised stock exchange:

Rule 8 of the Securities Contract (Regulations) Rules, 1957 details the qualifications for becoming the member of a recognised stock exchange.

Rule 8(3) prescribes that the persons that can be admitted as the members of the recognised stock exchange and mentions that no person who is a member at the time of application for recognition or subsequently admitted as a member if he ceases to be a citizen of India.

Conclusion: Ashmita cannot become the member of the Chennai Stock Exchange since she ceased to be a citizen of India, as she has gained the citizenship of Germany.

Mr. Vincent cannot be elected as the member of the recognised stock exchange since he is not a citizen of India. However, the governing body of the Chennai Stock Exchange may take the prior approval of SEBI, in case they are interested in electing Vincent as a member of the stock exchange.

Question 10.
Mr. G applied to be appointed as a member in the place of his brother Mr. Kumar, who was financial analyst (who met with an accident) in Bombay stock exchange. Governing body of the Stock exchange finds him to be eligible as member, considering him a close relative of Mr. Kumar. Rather experience and knowledge of Mr. G was not in alliance with the required skill for the conduct of business in securities. Determine the validity as to the appointment of the Mr. G in the Stock exchange with the reference to the provisions of the SCRA, 1956. [MTP-Aug. 18]
Answer:
Membership of recognised stock exchange:

Rule 8 of the Securities Contracts (Regulation) Rules, 1957 details the qualifications for becoming the member of a recognised stock exchange.

As per Rule 8, no person eligible for admission as a member under Rule 8(1) shall be admitted as a member unless he succeeds to the established business of a deceased or retiring member who is his father, uncle, brother or any other person who is, in the opinion of the governing body, a close relative.

It is also provided that the rules of the stock exchange may authorise the governing body to waive compliance with any of the foregoing conditions if the person seeking admission is in respect of means, position, integrity, knowledge and experience of business in securities, considered by the governing body to be otherwise qualified for membership.

Conclusion: Though Mr. G was brother of Mr. Kumar, but was not eligible due to lack of his experience and knowledge in the business of securities.

Question 11.
The Securities and Exchange Board of India received serious complaints against Mr. Satyanarayan, a member of Mavli Stock Exchange. State as to what powers can be exercised by the Securities and Exchange Board of India to make enquiries and to take action in this matter, under the provisions of the Securities Contracts (Regulation) Act, 1956? [May 13 (6 Marks)]
Answer:
Powers of SEBI to make inquiries and to take action:

As per Sec. 6(3) of Securities Contracts (Regulation) Act, 1956, SEBI, if it is satisfied that it is in the interest of the trade or in the public interest so to do, may, by order in writing:

(a) call upon a recognised stock exchange or any member thereof to furnish in writing such information or explanation relating to the affairs of the stock exchange or of the members in relation to the stock exchanges as SEBI may require; or

(b) appoint one or more persons to make an inquiry in relation to the affair of the governing body of a stock exchange and submit a report of the result of such inquiry to SEBI within specified time or in relation to the affairs of any of the members of a stock exchange, direct the governing body to make the inquiry and submit its report to SEBI.

In case of adverse findings, SEBI can direct Mavli Stock Exchange to take disciplinary action against Mr Satyanarayan, such as fine, expulsion from membership, suspension from membership for a specified period and any other penalty of a like nature not involving the payment of money.

Question 12.
In public interest; HEM Stock Exchange Limited was issued an order by the Stock Exchange Board of India to produce certain information and explanation relating to its operation in writing. The management of the stock exchange were reluctant to part with such information with SEBI and approached you to seek your advice in the following matters:
(i) Duty of HEM Stock Exchange Limited to furnish periodic returns to SEBI;
(ii) Power of SEBI to ask for the information asked as stated above, over and above the periodic returns;
(iii) Period for which the Stock Exchange is required to maintain the books of account which may be inspected by SEBI;
(iv) Duty of the Stock Exchange and the persons dealing with the stock exchange with regard to the information sought for by SEBI.
Advise them referring to the relevant provisions of the Securities Contracts (Regulation) Act, 1956. [May 18 – Old Syllabus (4 Marks), RTP – Nov. 18]
Answer:
Powers of SEBI to call for periodical returns, etc:
(i) As per Sec. 6(1) of the Securities Contracts (Regulation) Act, 1956, every recognised stock exchange shall furnish to the SEBI such periodical return relating to its affairs as may be prescribed. These Returns contain information on current affairs of the Exchange including volume and value of transactions, short deliveries, important decisions taken by Board etc.

(ii) As per Sec. 6(3) of the Securities Contracts (Regulation) Act, 1956, SEBI may call for information and explanation from the member.

(iii) As per Sec. 6(2) of the Securities Contracts (Regulation) Act, 1956, every recognised stock exchanges and every member thereof shall maintain and preserve for such periods not exceeding 5 years such books of account as prescribed and these books may be inspected by SEBI at any point of time.

(iv) As per Sec. 6(4) of the Securities Contracts (Regulation) Act, 1956, every Director, Manager, Secretary or officer of the Exchange; every member of such stock exchange; if the member of the stock exchange is a firm, every partner, manager, secretary or other officer of the firm and every other person or body of persons who has had dealings in the course of business with any of the persons mentioned above whether directly or indirectly, is bound to provide information to Enquiry officer or SEBI representative who are looking into the affairs of the Exchange.

Question 13.
PQR Ltd. is holding 33% of the paid-up equity capital of Koya Stock Exchange. The company ap: points MNL Ltd. as its proxy who is not a member of the Koya Stock Exchange, to attend and vote at the meeting of the stock exchange. Examine whether the Koya Stock Exchange can restrict the appointment of MNL Ltd. as proxy for PQR Ltd. and further restrict, the voting rights of PQR Ltd. in the Koya Stock Exchange. [MTP – Oct. 18, RTP-May 20]
Or
Examine with reference to the provisions of the Securities Contracts (Regulation) Act, 1956 whether it is possible for City Stock Exchange Limited, a company incorporated under the Companies . Act, 1956 and a recognized Stock Exchange, to insist that its members should appoint only other members as their proxies to attend and vote at the meeting of the Stock Exchange.
Answer:
Power of recognised stock exchange to make rules restricting voting rights, etc.:

As per Sec. 7A of the Securities (Contracts) Regulation Act, 1956, a recognised stock exchange may make rules or amend any rules made by it to provide for all or any of the following matters, namely:
(a) the restriction of voting rights to members only;
(b) the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only, irrespective of his share of the paid-up equity capital;
(c) the restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting of the stock exchange.

Conclusion: Koya Stock Exchange can restrict the appointment of MNL Ltd., as proxy and can also restrict the voting rights of PQR Ltd., if rules of the exchange so provide. If it is not so provided, rules may be amended and after getting approval of the C.G. regarding amendment, these rights can be exercised.

Question 14.
SEBI is of the opinion that in the interest of investors it is desirable to amend the rules of XYZ Stock Exchange prohibiting the appointment of the broker-member as President of the stock exchange. Explain with reference to the provisions of the Securities Contracts (Regulation) Act, 1956 whether it is possible for SEBI to amend the rules of the Stock Exchange if the rules are not amended by the stock exchange.
Answer:
Power of Central Government/SEBI to direct rules to be made or to make rules:

Sec, 8 of the Securities Contracts (Regulation) Act, 1956 empowers the SEBI to issue written order directing all or any of the recognized stock exchanges to make any rules or to amend any rules already made within 2 months from the date of the order in respect of matters specified in section 3(2).

One of the matters specified in Sec. 3 (2) is the governing body of stock exchange, its constitution and powers of management and the manner in which its business is to be transacted.

Hence, SEBI is empowered to direct the Stock Exchange in respect of prohibition of broker-member being appointed as president of the stock exchange.

If stock exchange fails or neglects to comply with any order made by SEB1 within 2 months, SEBI may itself make the rules made, either in the form prepared in the order or with such modifications thereof as may be agreed to between the stock exchange and SEBI. The amended rules should be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognized stock exchange is situated. After such publication, the rules will be valid, as if they had been made or amended by the stock exchange itself.

Question 15.
The management of Rainpur Stock Exchange desires to transfer its duties and functions to a clearing corporation. Advise the management oi the said stock exchange about the extent of control which may be exercised by the clearing corporation under the Securities Contracts (Regulation) Act, 1956.
Answer:
Clearing Corporation:
Sec. 8A of the Securities (Contracts) Regulation Act, 1956 provides that a recognised stock exchange may, with the prior approval of SEBI, transfer the duties and functions of a clearing house to a clearing corporation, being a company incorporated under the Companies Act for the purpose of –

the periodical settlement of contracts and differences thereunder;
the delivery of, and payment for, securities;
any other matter incidental to, or connected with, such transfer.

Every clearing corporation shall, for the purpose of transfer of the duties and functions of a clearing house to a clearing corporation make bye-laws and submit the same to the SEBI for its approval.
SEBI may grant the approval to the bye-laws submitted to it, upon being satisfied that the same is in public interest.

Question 16.
A recognized stock exchange proposes to make bye-laws for the regulation and control of contracts relating to the purchase and sale of securities. State the legal requirements under the Securities Contracts (Regulation) Act, 1956 to give effect to the proposal. Explain the powers of the Securities and Exchange Board of India to amend the bye-laws of a recognized stock exchange. [Nov. 13 (6 Marks)]
Answer:
Power of Stock Exchange to make bye-laws:

Sec. 9 of the Securities (Contracts) Regulation Act, 1956 provides the provisions relating to powers of recognised stock exchange to make bye-laws. Accordingly, any recognized stock exchange may make bye-laws for the regulation and control of contracts relating to the purchase and sale of securities subject to the previous approval of the SEBI. The bye-laws made under this section may

(i) specify the bye-laws, the contravention of which shall make a contract void and

(ii) provide that the contravention of any of the bye-laws shall render the member concerned liable to punishments, namely, fine or expulsion from membership or suspension from membership or any other penalty of a like nature not involving the payment of money.

Any bye-laws made under this section shall be subject to such conditions in regard to previous publication as may be prescribed, and, when approved by the SEBI, shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognized stock exchange is situated, and shall have effect as from the date of its publication in the Gazette of India.

If the SEBI is satisfied, in any case, that in the interest of the trade or in the public interest any bye-laws should be made immediately, it may, by order in writing specifying the reasons therefore, dispense with the condition of previous publication.

Power of SEBI to amend bye-laws:
Section 10 of the Securities Contracts (Regulation) Act, 1956 empowers the SEBI to amend bye-laws of a recognized stock exchange. Accordingly,

SEBI may either on a request in writing received by it in this behalf from the governing body of a recognised stock exchange or on its own motion amend any bye-laws made by such stock exchange. SEBI will have to be satisfied, after consultation with the governing body of the stock exchange that it is necessary or expedient to amend the bye-laws and record its reasons also.

Amended bye-laws should be published in the Gazette of India and also in the Official Gazette
of the State in which the principal office of the stock exchange is situated.
If the stock exchange has any objection to the amendments made by the SEBI, it may, within 2 months apply to the SEBI for revision.

Question 17.
Describe the provisions of the Securities Contracts (Regulation) Act, 1956 regarding the powers of the Central Government to supersede the Governing Body of a recognized Stock Exchange and the consequences of such supersession.
Answer:
Power of C.G. to supersede the governing body of a recognised stock exchange:

As per Sec. 11 of the Securities Contracts (Regulation) Act, 1956, If the C.G. is of the opinion that the governing body of any recognised stock exchange should be superseded, then C.G. may serve a written notice to the governing body of such stock exchange that the C.G. is considering the supersession of the governing body for the reasons specified in the notice.

The C.G. after giving an opportunity to the governing body to be heard in the matter, may, by notification in the Official Gazette,
(a) declare the governing body of such stock exchange to be superseded, and
(b) may appoint any person or persons to exercise and perform all the powers and duties of the governing body, and, where more persons than one are appointed, may appoint one of such persons to be the chairman and another to be the vice-chairman thereof.

(b) the person or persons appointed by C.G. may exercise and perform all the powers and duties of the governing body which has been superseded;

(c) all such property of the recognised stock exchange as specified in the order, issued by the person appointed by C.G. may, as being necessary for the purpose of enabling him to carry on the business of the stock exchange, shall vest in such person.

Question 18.
Complaints of unethical practices have been received against members of the Governing Body of a Recognized Stock Exchange. Examine whether the Government has any power to take action against the Governing Body of the said exchange.
Or
Determine with the reference to the provisions of the SCRA, 1956: Where the working of the governing body of the stock exchange is unethical. The Central Government served a written notice for the supersession of the governing body. [MTP-Aug. 18]
Answer:
Power of C.G. to supersede the governing body of a recognised stock exchange:
In case of complaints of unethical practices being received against members of the Governing Body of a Recognized Stock Exchange, C.G. may take action u/s 11 to supersede the governing body of stock exchange.

Power of C.G. to supersede the governing body of a recognised stock exchange:

Consequences of supersession:
On the publication of a notification in the Official Gazette of supersession, the following consequences
shall ensue, namely:
(a) the members of the governing body which has been superseded shall, as from the date of the notification of supersession, cease to hold office as such members;
(b) the person or persons appointed by C.G. may exercise and perform all the powers and duties of the governing body which has been superseded;
(c) all such property of the recognised stock exchange as specified in the order, issued by the person appointed by C.G. may, as being necessary for the purpose of enabling him to carry on the business of the stock exchange, shall vest in such person.

Question 19.
Complaints of unethical practices have been received against members of a recognized Stock Exchange by the Government. Examine whether the government has any power to suspend the business of such a recognized Stock Exchange. [Nov. 14 (6 Marks)]
Or
Referring to the provisions of the Securities Contracts (Regulation) Act, 1956: Examine the extent to which the Central Government is empowered to suspend business of a recognized Stock Exchange.
Answer:
Power to suspend business of recognised stock exchange:

As per Sec. 12 of the Securities Contracts (Regulation) Act, 1956,if in the opinion of the C.G. an emergency has arisen and for the purpose of meeting the emergency the C.G. considers it expedient so to do, it may, by notification in the Official Gazette, direct a recognised stock exchange to suspend such of its business for such period not exceeding 7 days and subject to such conditions as may be specified in the notification.

If, in the opinion of the C.G., the interest of the trade or the public interest requires that the period should be extended, the C.G. may, by like notification extend the said period from time to time.

Question 20.
RSE Stock Exchange Limited, a recognised stock exchange is involved in trading of shares of Son Limited. The SEBI on receiving a complaint from a group of investors enquired and found that trading of shares of Son Limited is being conducted in a manner detrimental to the interest of the general investors. In order to curb the same, the SEBI wants to issue some directions to RSE Stock Exchange Limited.

Referring to the provisions of the Securities Contracts (Regulation) Act, 1956, discuss whether the SEBI has power to issue such directions. Can such directions be given to an individual who made some profit in any transaction in contravention of any provision of the Securities Contracts (Regulation) Act, 1956, or regulations made thereunder?
[Nov. 19 – Old Syllabus (6 Marks)]
Answer:
Power to issue directions
As per Sec. 12A of the Securities Contract (Regulation) Act,’ 1956, where the SEBI is satisfied after an inquiry, that it is necessary –
(a) in the interest of investors, or orderly development of securities market; or
(b) to prevent the affairs of any recognised stock exchange, or, clearing corporation, or such other agency or person, providing trading or clearing or settlement facility in respect of securities, being conducted in a manner detrimental to the interests of investors or securities market; or
(c) to secure the proper management of any such stock exchange or clearing corporation or agency or person, referred to in clause (b),
it may issue such directions, –
(i) to any stock exchange or clearing corporation or agency or person referred to in clause (b) or any person or class of persons associated with the securities market; or
(ii) to any company whose securities are listed or proposed to be listed in a recognised stock exchange,
as may be appropriate in the interests of investors in securities and the securities market.
Conclusion: SEBI may issue such direction to RSE Stock Exchange Ltd.

Explanation given in the section clarifies that power to issue directions under Sec. 12A shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.

So, accordingly the directions can be given to an individual who had made some profit in any transaction in contravention of any provision of the Securities Contracts (Regulation) Act, 1956.

Question 21.
Delhi Stock Exchange wants to establish additional Trading Floor. Explain briefly the meaning of and procedure for establishing additional Trading Floor.
Answer:
Additional Trading Floor:

Additional Trading Floor means a trading facility offered by a recognized stock exchange outside its area of operation to enable the investors to buy and sell securities through such trading floor under the regulatory frame work of that stock exchange.

As per Sec. 13A of the Securities Contracts (Regulation) Act, 1956 a stock exchange may establish additional trading floor with the prior approval of the SEBI in accordance with the terms and conditions stipulated by the said Board.
Conclusion: Delhi Stock Exchange may establish an additional trading floor with prior approval of the SEBI.

Question 22.
M/s AB & Company, a member of a recognised stock exchange proposes to buy and sell shares of a particular company on behalf of investors as well as on their own account. They seek your advice as to restrictions, if any, under Securities Contracts (Regulation) Act, 1956 for dealing in securities on their own account. Advise. [MTP-April 18]
Or
M/s Ganesliam & Company is a member of recognized stock exchange. Nova Crafts Export Limited desires that shares of the company may be bought and sold by M/s Ganesham & Company on their own as well as on behalf of the investors.
Advise M/s Ganesham & company whether they can do so under the provisions of the Securities Contracts (Regulation) Act, 1956. [May 11 (5 Marks)]
Answer:
Members not to act as principals in certain circumstances:

As per section 15 of the Securities Contract (Regulation) Act, 1956, no member of a recognised stock exchange shall enter into any contract as a principal with any person, other than a member of a recognised stock exchange, unless he has secured the consent or authority of such person and discloses the same in the note, memorandum or agreement of sale or purchase that he is acting as a principal.

However, where the member has secured the consent or authority of such person, otherwise than in writing, he shall secure written confirmation by such person or such consent or authority within 3 days from the date of contract.

Further, no such written consent or authority of such person shall be necessary for closing out any outstanding contract entered into by such persons in accordance with the bye-laws, if the member discloses in the note, memorandum or agreement of sale or purchase in respect of such closing out that he is acting as a principal.

Conclusion: Member of a recognised stock exchange may buy and sell shares on their own account after complying with the requirements of Sec. 15.

Question 23.
MNC Limited whose shares are listed on a recognized Stock Exchange, are delisted by the Stock Exchange. The company seeks your advise on the remedies available to the company against the order of the Stock Exchange. Referring to the provisions of the Securities Contracts (Regulation) Act, 1956, advise the company.
Answer:
Delisting of Securities:
Sec. 21A of the Securities Contracts (Regulation) Act, 1956 describes the provisions regarding delisting of securities by a recognised stock exchange. Accordingly,

A recognised stock exchange may delist the securities, after recording the reasons therefore, from any recognised stock exchange on any of the ground or grounds as may be prescribed under this Act.

The securities of a company shall not be delisted unless the company concerned has been given a reasonable opportunity of being heard.

A listed company or an aggrieved investor may file an appeal before the Securities Appellate Tribunal against the decision of the recognised stock exchange within 15 days from the date of the decision and the provisions of sections 22B to 22E of this Act, shall apply, as far as may be, to such appeals.

Securities Appellate Tribunal may, if it is satisfied that the company was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding one month.
Conclusion: MNC Ltd. may lodge appeal with Securities Appellate Tribunal within 15 days.

Question 24.
DVJ Ltd., a company incorporated under the Companies Act, 1956 applies to Bombay Stock Exchange for listing of its shares. The Stock Exchange refuses to grant listing without assigning any reasons for refusal. Company seeks your advice on the options available to it against the Stock Exchange and wants to move the Court. Examining the provisions of the Securities Contracts (Regulation) Act, 1956, advise the company. [May 12 (6 Marks)]
Or
Softskin Soaps and Consumer Goods Limited has applied to Delhi Stock Exchange to list its securities. The Board of the Stock Exchange after one month refused to list the securities and returned the application. The information of refusal is received by the company on 10th April 2021. The company is aggrieved by the refusal of stock exchange. What is the remedy available under the Securities Contracts (Regulations) Act, 1956? [Nov. 20 – Old Syllabus (3 Marks)]
Answer:
Right of appeal to Securities Appellate Tribunal (SAT) against refusal of stock exchange to list securities of public companies:

As per Sec. 22 A of the Securities Contracts (Regulation) Act, 1956, where a recognised stock exchange, acting in pursuance of any power given to it by its bye-laws, refuses to list the securities of any company, the company shall be entitled to be furnished with reasons for such refusal, and may:

(a) within 15 days from the date on which the reasons for such refusal are furnished to it, or
(b) where the stock exchange has omitted or failed to dispose of, within the time specified, the application for permission for the shares or debentures to be dealt with on the stock exchange, within 15 days from the date of expiry of the specified time or within such further period, not exceeding 1 month, as the SAT may, on sufficient cause being shown, allow,
appeal to the SAT having jurisdiction in the matter against such refusal, omission or failure.
Conclusion: DVJ Ltd. may lodged an appeal with Securities Appellate Tribunal within 15 days.

Question 25.
Securities of Herbal Products Limited were listed in Madras Stock Exchange, which is a recognized stock exchange. The company has incurred losses during the preceding three consecutive years and it has also negative net worth. On having such information, Madras Stock Exchange decided to delist the securities of the company.

Decide the validity of the decision and explain the provisions of Securities Contract (Regulation) Act, 1956along with the grounds made under the Securities Contracts (Regulation) Rules regarding delisting of securities. [May 18 – New Syllabus (6 Marks)]
Or
MNK Limited has incurred heavy losses during the preceding 3 consecutive financial years and has a negative net worth of ₹ 525 crore as at 31st March, 2020. Trading in securities of Company has remained suspended for a period of more than 9 months. CSE, a recognized Stock Exchange, delisted the securities of MNK Limited. Mr. Y was having 25,000 shares of MNK Limited, purchased at ₹ 100 per share, aggrieved against the decision of the Stock Exchange to delist the securities of MNKLimited.Referringtotheprovisions of the Securities Contracts (Regulation) Act, 1956 examine:
(i) Whether CSE, a recognized Stock Exchange can delist the securities of MNK Limited?
(ii) If yes, state the grounds for delisting.
Answer:
Delisting of Securities:

As per Section 21A of Securities Contract (Regulation) Act, 1956, a recognised stock exchange may delist the securities, after recording the reasons therefore, on any of the ground as may be prescribed. However, securities shell not be delisted unless the company concerned has been given a reasonable opportunity of being heard.

As per Rule 21 of Securities Contract (Regulation) Rules, 1957, a recognized stock exchange may, delist any securities listed thereon on any of the following grounds:
(a) the company has incurred losses during the preceding 3 consecutive years and it has negative networth;
(b) trading in the securities of the company has remained suspended for a period of more than 6 months;
(c) the securities of the company have remained infrequently traded during the preceding 3 years;
(d) the company or any of its promoters or any of its director has been convicted for failure to comply with any of the provisions of the Act or the SEBI Act, 1992 or the Depositories Act, 1996 or rules, regulations, agreements made thereunder, as the case may be and awarded a penalty of not less than ₹ 1 Cr. or imprisonment of not less than 3 years;
(e) the addresses of the company or any of its promoter or any of its directors, are not known or false addresses have been furnished or the company has changed its registered office in contravention of the provisions of the Companies Act; or
(f) shareholding of the company held by the public has come below the minimum level applicable to the company as per the listing agreement under the Act and the company has failed to raise public holding to the required level within the time specified by the recognized stock exchange.

In the present case. Stock Exchange decided to delist the securities of the company on the ground that the company has incurred losses during the preceding three consecutive years and it has also negative net worth.
Conclusion: Stock Exchange can delist the securities after providing a reasonable opportunity of being heard to the company.

Question 26.
Aggrieved by the order of Securities Appellate Tribunal (SAT), MNO Ltd. decided to prefer an appeal with the supreme court. Identify the provisions governing further appeal on the order by the company under the provision of Securities Contracts (Regulation) Act, 1956. Also state whether any question of fact arising out of the order of SAT can be challenged in the appeal? [Nov. 18-New Syllabus (3 Marks)]
Answer:
Right of appeal to Supreme Court:

As per Sec. 22F of the Securities Contracts (Regulation) Act, 1956, any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within 60 days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order.

However, the Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding 60 days.
Conclusion: Appeal can be made for any question of law and not for any question of fact arising out of order.

Question 27.
Referring to the provisions of the Securities Contracts (Regulation) Act, 1956 state how a recognized stock exchange may delist the securities and how an appeal may be filed by an aggrieved investor against the decision of stock exchange for delisting of securities. [RTP-Nov. 19]
Answer:
Delisting of Securities:

As per Rule 21 of Securities Contract (Regulation) Rules, 1957, a recognized stock exchange may, delist any securities listed thereon on any of the following grounds:

(a) the company has incurred losses during the preceding 3 consecutive years and it has negative networth;

(b) trading in the securities of the company has remained suspended for a period of more than 6 months;

(d) the company or any of its promoters or any of its director has been convicted for failure to comply with any of the provisions ofthe Act or the SEBI Act, 1992 or the Depositories Act, 1996 or rules, regulations, agreements made thereunder, as the case may be and awarded a penalty of not less than ₹ 1 Cr. or imprisonment of not less than 3 years;

(e) the addresses of the company or any of its promoter or any of its directors, are not known or false addresses have been furnished or the company has changed its registered office in contravention of the provisions of the Companies Act; or

(f) shareholding of the company held by the public has come below the minimum level applicable to the company as per the listing agreement under the Act and the company has failed to raise public holding to the required level within the time specified by the recognized stock exchange.

Delisting of Securities:
Sec. 21A of the Securities Contracts (Regulation) Act, 1956 describes the provisions regarding delisting of securities by a recognised stock exchange. Accordingly,

A recognised stock exchange may delist the securities, after recording the reasons therefore, from any recognised stock exchange on any of the ground or grounds as may be prescribed under this Act.

The securities of a company shall not be delisted unless the company concerned has been given a reasonable opportunity of being heard.

Question 28.
RPS Ltd. got its shares listed with a Stock Exchange. It has been regularly paying the listing fees. Certain information about shareholding pattern etc. was asked by the Stock Exchange, which the company could not supply in the prescribed time. It was then given a further opportunity to furnish the desired information along with supporting document, but in vain, as the company did not maintain any record. What are the penalties leviable against the company under the Securities Contracts (Regulation) Act, 1956 for the failure to furnish the information? [Nov. 15 (4 Marks)]
Answer:
Penalties leviable against the company for the failure to furnish the information:
As per Sec. 23A of the Securities Contracts (Regulation) Act, 1956, any person who is required under this Act or any rules made thereunder;

(a) to furnish any information, document, books, returns or report to a recognized stock exchange or to the Board fails to furnish the same within the time specified therefore in the listing agreement or conditions or bye-laws of the recognized stock exchange or the Act or rules made thereunder or who furnishes false, incorrect or incomplete information, document, books, return or report shall be liable to a penalty of ₹ 1 lakh for each day during which such failure continues or ₹ 1 crore, whichever is less for each such failure;

(b) to maintain books of account or records, as per the listing agreement or conditions, or bye-laws of a recognised stock exchange and if there is failure to maintain the same, shall be liable to a penalty of ₹ 1 lakh for each day during which such failure continues or ₹ 1 crore whichever is less.

Conclusion: RPS Ltd. is liable u/s 23A of the Securities Contracts (Regulation) Act, 1956 as it could not supply the certain information asked by the stock exchange and also did not maintain any record. Fine of at least ₹ 1,00,000 but may extend to ₹ 1,00,000 per day during which such failure continues, subject to a maximum of ₹ 1 crore shall be imposed over the company.

Question 29.
SEBI has asked Jaipur Stock Exchange to furnish their books of account and audited financial statements for the period 1st April 2018 to 31st March 2020 within 30 days of the receipt of the communication by the stock exchange. The communication was received by the company on 30th April 2020 and no documents were furnished to SEBI in reply to the notice till 15th June 2019. Can the stock exchange be penalised for this inaction? [MTP – Oct. 18, April 19]
Answer:
Penalties leviable against the company for the failure to furnish the information:

As per Sec. 23A of the Securities Contracts (Regulation) Act, 1956, any person who is required under this Act or any rules made thereunder to furnish any information, document, books, returns or report to a recognized stock exchange or to the Board, fails to furnish the same within the time specified therefore in the listing agreement or conditions or bye-laws of the recognized stock exchange or the Act or rules made thereunder, or who furnishes false, incorrect or incomplete information, document, books, return or report shall be liable to a penalty of at least ₹ 1 lakh which may extend to ₹ 1 lakh for each day during which such failure continues, subject to a maximum of ₹ 1 crore, for each such failure.

In the instant case, communication was received by the company on 30th April 2020 and no documents were furnished to SEBI in reply to the notice till 15th June 2020.

Conclusion: Fine of at least ₹ 1,00,000 but may extend to ₹ 1,00,000 per day during which such failure continues, subject to a maximum of ₹ 1 crore shall be imposed over the company.

Question 30.
XYZ, a recognized stock exchange fails to comply with certain directions issued by the SEBI and the adjudicating officer initiated proceedings for the purpose of imposing penalty. The stock exchange seeks your advice whether it is possible loj>o for settlement of the proceedings. Advise explaining the relevant provisions of the Securities Contracts (Regulation) Act, 1956? [May 16(4 Marks)]
Answer:
Settlement of administrative and civil proceedings:
Sec. 23JA of the Securities Contracts (Regulation) Act, 1956 deals with the provisions relating to settlement of administrative and civil proceedings-. Accordingly,

Any person against whom any proceedings have been initiated or may be initiated under section 12A or section 23-I, may file an application in writing to SEBI proposing for settlement of the proceedings initiated for the alleged defaults.

The Board may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for settlement, on payment of such sum by the defaulter or on such other terms as may be determined by the Board.

For the purposes of settlement under this section, the procedure as specified by the Board under the SEBI Act, 1992 shall apply.

No appeal shall lie under section 23L against any order passed by the Board or the adjudicating
officer, as the case may be, under this section.

All settlement amounts, excluding the disgorgement amount and legal costs, realised under this Act shall be credited to the Consolidated Fund of India.
Conclusion: Stock Exchange may apply to SEBI in writing proposing for settlement of the proceedings initiated for the alleged defaults.

Question 31.
Upon complaints been received by SEBI, regarding the listed securities of Blue Rock Limited at the Guwahati Stock Exchange, SEBI has passed an order to delist the securities of the company from the said stock exchange. Blue Rock Limited is aggrieved by the order of the SEBI. Advise the company on the further step that the company can take against the order of SEBI to delist the securities. [RTP – May 19]
Answer:
Appeal to Securities Appellate Tribunal (SAT)

As per Sec. 23L of the Securities Contracts (Regulation) Act, 1956, any person aggrieved, by the order or decision of the recognized stock exchange or the adjudicating officer or any order made by the SEBI, may prefer an appeal before the SAT.

Appeal shall be filed within a period of 45 days from the date on which a copy of the order or decision is received by the appellant. The SAT may entertain an appeal after the expiry of the said period of 45 days if it is satisfied that there was sufficient cause for not filing it within that period.

On receipt of an appeal, the SAT may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.

The SAT shall send a copy of every order made by it to the parties to the appeal and to the concerned adjudicating officer.
Conclusion: Blue Rock Ltd. may prefer appeal with Securities Appellate Tribunal within 45 days.

Question 32.
The Securities and Exchange Board of India issued an order against a stock broker to redress the grievances of the investors within the stipulated time. The stock broker failed to do so, which is an offence under the provisions of the Securities Contracts (Regulation) Act, 1956. Decide:
(a) Whether the offence committed by the stock broker is compoundable? If so, by whom?
(b) Whether this offence can he compounded after institution of proceedings against the stock broker? [Nov. 12 (6 Marks)]
Answer:
Compounding of Offences:

As per Sec. 23C of the Securities Contracts (Regulation) Act, 1956, if any stock broker or subbroker or a company whose securities are listed or proposed to be listed in a recognised stock exchange, after having been called upon by the SEBI or a recognised stock exchange in writing, to redress the grievances of the investors, fails to redress such grievances within the time stipulated by the SEBI or a recognised stock exchange, he or it shall be liable to a penalty which shall not be less than ₹ 1 lakh but which may extend to ₹ 1 lakh for each day during which such failure continues subject to a maximum of 11 crore.

As per Sec. 23N of the Act, any offence punishable under Securities Contracts (Regulation) Act, 1956, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.

Conclusion: Based on the provisions of Secs. 23C and 23N, following conclusions may be drawn:
(a) Offence committed by the stock broker is compoundable as he is punishable with fine only as provided u/s 23C.
(b) Offence can be compounded after institution of proceedings against the stock broker as it is clearly stated u/s 23N.

Question 33.
Primex Securities (P) Ltd. is a Company involved in stock broking and is registered with SEBI. The said broking company failed to:

Redress the grievances of the investors within the stipulated time.
Segregate securities or money of clients and used the same for self use for or for any other clients.

The Securities and Exchange Board of India issued an Order against the said Company for committing the above offences. The Managing Director of the Company seeks your advice on the following under the provisions of the Securities Contracts (Regulation) Act, 1956.
(i) What is the penalty for the above offences?
(ii) Whether the offence committed by the stock broking company is compoundable? If so, by whom?
(iii) Whether this offence can be compounded after institution of proceedings against the stock broking Company? [Nov. 18-New Syllabus (6 Marks)]
Answer:
Provisions of Securities Contracts (Regulation) Act, 1956:

(i) Penalties leviable for offences committed under Securities Contracts (Regulation) Act, 1956:
Penalty for failure to redress investors grievances: As per Section 23C of Securities Contracts (Regulation) Act, 1956, if any stock broker or sub-broker or a company whose securities are listed or proposed to be listed in a recognised stock exchange, after having been called upon by the SEBI or a recognised stock exchange in writing, to redress the grievances of the investors, fails to redress such grievances within the time stipulated by the SEBI or a recognised stock exchange, he or it shall be liable to a penalty which shall not be less than ₹ 1 lakh but which may extend to ₹ 1 lakh for each day during which such failure continues subject to a maximum of ₹ 1 crore.

Penalty for failure to segregate securities or moneys of client or clients: As per Section 2 3D of Securities Contracts (Regulation) Act, 1956, if any person, who is registered u/s 12 of the SEBI Act, 1992 as a stock broker or sub-broker, fails to segregate securities or moneys of the client or clients or uses the securities or moneys of a client or clients for self or for any other client, he shall be liable to a penalty which shall not be less than ₹ 1 lakh but Which may extend to ₹ 1 crore.

(ii) Compounding of Offences:
As per Sec. 23N ofthe Securities Contracts (Regulation) Act, 1956, any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.

(iii) Compounding of Offence after institution of proceedings:
Offence can be compounded after institution of proceedings against the stock broker as it is clearly stated u/s 23N.

Question 34.
What are the factors to be considered by the Adjudicating Officer while adjudicating the quantum of penalty under Sec. 23-1 of the Securities Contracts (Regulation) Act, 1956? [May 19 – New Syllabus (2 Marks)]
Answer:
Factors to be considered by the Adjudicating Officer while adjudicating the quantum of penalty under Sec. 23-1 of the SCRA, 1956:
As per Sec. 23J of SCRA, 1956, while adjudging the quantum of penalty u/s 23-1, the SEBI or the adjudicating officer shall have due regard to the following factors –
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
(b) the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default.
The power of the adjudicating officer to adjudge the quantum of penalty under sections 23A to 23C shall be and shall always be deemed to have exercised under the provisions of this section.

Question 35.
Mr. Gupta has transferred his shares in a listed company in his name to Mr. Patel. Due to his busy schedule, Mr. Patel has failed to get the shares registered in his name before the company declared and paid dividend on those shares.
Examine with reference to the provisions of the Securities Contracts (Regulation) Act, 1956, whether Mr. Gupta is entitled to receive and retain the dividend even though he has transferred his shares before declaration of dividend. [May 15 (4 Marks)]
Answer:
Title to dividends:
As per Sec. 27(1) of the Securities Contracts (Regulation) Act, 1956, it shall be lawful for the holder of any security whose name appears on the books of the company issuing the said security to receive and retain any dividend declared by the company in respect thereof for any year, notwithstanding that the said security has already been transferred by him for consideration, unless the transferee who claims the dividend from the transferor has lodged the security and all other documents relating to the transfer which may be required by the company with the company for being registered in his name within 15 days of the date on which the dividend became due.

The period of 15 days shall be extended as follows :

In case of death of the transferee by the actual period taken by his legal representative to establish his claim to the dividend
In the case of loss of the transfer deed by theft or any other cause beyond the control of the transferee, by the actual period taken for the replacement thereof and
In case of delay in the lodging of any security and other documents relating to the transfer due to causes connected with the post, by the actual period of delay.

Conclusion: Considering the provisions of Sec. 27(1), it can be concluded that Mr. Gupta is entitled to receive and retain the dividend received by him if the transferee, Mr. Patel has not lodged the transfer deed with the company withinl5 days of the date on which dividend became due or the extended period.

Question 36.
What is the right of any person to receive the income from collective investment scheme?
Answer:
Right to receive income from collective scheme:
Sec. 27A of the Securities Contracts (Regulation) Act, 1956 set out the provisions relating to right to receive income from collective scheme. Accordingly,

It shall be lawful for the holder of any securities, being units or other instruments issued by the collective investment scheme, whose name appears on the books of the collective investment scheme issuing the said security to receive and retain any income in respect of units or other instruments issued by the collective investment scheme declared by the collective investment scheme in respect thereof for any year, not withstanding that the said security, being units or other instruments issued by the collective investment scheme, has already been transferred by him for consideration, unless the transferee who claims the income in respect of units or other instruments issued by the collective investment scheme from the transfer or has lodged the security and all other documents relating to the transfer which maybe required by the collective investment scheme with the collective investment scheme for being registered in his name within 15 days of the date on which the income in respect of units or other instruments issued by the collective investment scheme became due.

Question 37.
Mr. Bansal holds certain securities on 31st March, 2008, issued in his favour under the “Collective investment Scheme.” For a consideration, Mr. Bansal transferred the said securities in favour of another person. One month after the date on which the income on these securities became due, the transferee lodged the instrument of transfer. Decide in the light of the provisions of the Securities Contracts (Regulation) Act, 1956.
(i) Whether in the given case Mr. Bansal is entitled to receive and retain the income on these securities for the financial year ended 31st March, 2008?
(ii) What would be your answer in case the transferee lodged the instrument of transfer 10 days after the date on which the income on these securities became due?
Answer:
Right to receive income from collective scheme:
Sec. 27Aofthe Securities Contracts (Regulation) Act, 1956 set out the provisions relating to right to receive income from collective scheme. Accordingly, it shall be lawful for the holder of any securities, being units or the other instruments issued by collective investment scheme, whose name appears on the books of the scheme, issuing the said security to receive and retain any income in respect of units issued by the scheme in respect thereof for any year, notwithstanding that the said security, being units issued by the scheme, has already been transferred by him for consideration, unless the transferee who claims the income in respect of units issued by the scheme from the transferor has lodged the security and all other documents relating to the transfer which may be required by the scheme with the scheme for being registered in his name within 15 days of the date on which the income in respect of units or other instruments issued under the scheme become due.

The period of 15 day can be extended in certain contingencies as stated in Explanation to section 27A (1) of the said Act.

Conclusion: Considering the provisions of Sec. 27A, following conclusions may be drawn:
(i) Mr. Bansal, the transferor has right to receive or retain the income of the said securities for the financial year ended 31st March 2008, since the instrument for transfer was lodged 1 month after the date on which the income became due.

(ii) Mr. Bansal, the transferor will not be entitled to receive and retain the income as the instrument for transfer was lodged with the company within the period of 15 days by the transferee.

Question 38.
The Mewar Rural Financial Corporation, Udaipur, established under a special statute issued 5 years bonds to public directly and not through any Stock Exchange. Decide whether the said act of the Mewar Rural Financial Corporation is in violation of the provisions of the Securities Contracts (Regulation) Act, 1956.
Or
Industrial Finance Corporation of India, established under the Industrial Finance Corporation Act, 1948 having its registered office at Mumbai issued 8% Redeemable Bonds redeemable after 7 years. These bunds were issued directly to the members of the public and not through mechanism of Stock exchanges.

You are required to state with reference to the provisions of Securities Contracts (Regulation) Act, 1956, whether such direct issue of bonds by the Industrial Finance Corporation of India is not violating the provisions of the said Act. [May 09 (6 Marks)]
Answer:
Non-Applicability of the Act:

As per Sec. 28 of the Securities Contracts (Regulation) Act, 1956, provisions of this Act shall not apply to the Government, the Reserve Bank of India, any local authority, or corporation set up by a special law or any person who has affected any transaction with or through the agency of any such authority as stated earlier.

In the instant case, Financial institution is a corporation set up under a special statute enacted by the Parliament.

Conclusion: Corporation does not need any permission from a Stock Exchange to issue any Bond or other securities. Accordingly, it has not violated the provisions of the Securities Contracts (Regulation) Act, 1956. The nature and tenure of the Bonds are immaterial.

Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 – CA Final Law Study Material

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