{"id":19344,"date":"2023-03-29T17:08:08","date_gmt":"2023-03-29T11:38:08","guid":{"rendered":"https:\/\/gstguntur.com\/?p=19344"},"modified":"2023-05-10T16:40:13","modified_gmt":"2023-05-10T11:10:13","slug":"securities-contract-regulation-act-1956-and-scr-rules-1957-ca-final-law-study-material","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/securities-contract-regulation-act-1956-and-scr-rules-1957-ca-final-law-study-material\/","title":{"rendered":"Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 \u2013 CA Final Law Study Material"},"content":{"rendered":"

Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 \u2013 CA Final Law Study Material<\/a> is designed strictly as per the latest syllabus and exam pattern.<\/p>\n

Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 \u2013 CA Final Law Study Material<\/h2>\n

Question 1.
\nA 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]
\nAnswer:
\nRequirement as to Share Purchase Agreement:
\nSuch 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.<\/p>\n

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:
\n(a) the exact description of shares, i.e. the number of shares, price per share, premium amount, if any;
\n(b) the conditions that must be satisfied before the sale takes place;
\n(c) the date on which the sale will be completed;
\n(d) the manner in which the transfer will be made;
\n(e) any indemnities or protections available to the parties;
\n(f) the representations and warranties made by either party; and
\n(g) the conditions upon which the agreement will terminate.<\/p>\n

Question 2.
\nMr. 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]
\nAnswer:
\nSuggestive ways to protect the security and reduce the risk of loss on share price:<\/p>\n

Suggestive way to protect the security and reduce the risk of loss on share price is to opt for a \u2018Option’ 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.<\/p>\n

In this case, Vivaan may opt for \u2018Option\u2019 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 \u20b9 100 and he buy an option to sell the shares to Mr. X at \u20b9 200 after 3 month, so Vivaan bought a put option.<\/p>\n

Now, if after 3 months, the current price of the shares is \u20b9 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 \u20b9 115. Had the market price of the shares after three months would have been \u20b9 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.<\/p>\n

\"Securities<\/p>\n

Question 3.
\nMr. 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.
\n(i) Derivative
\n(ii) Option in securities
\n(iii) Spot delivery contract.
\nAdvise suitably.
\nOr
\nExplain the meaning of the following terms used in the Securities Contracts (Regulation) Act, 1956:
\n(i) Option in Securities
\n(ii) Spot delivery contract. [May 17 (4 Marks)]
\nOr
\nDefine the term “Derivative” as appearing in the Securities Contracts (Regulation) Act, 1956. [May 19 – New Syllabus (2 Marks)]
\nAnswer:
\nMeaning of Terms:
\n(i) Derivatives: Sec.2(ac) of Securities Contracts (Regulation) Act, 1956 defines the term derivative so as to include:
\n(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;
\n(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
\n(C) Commodity derivatives;
\n(D) Such other instruments as may be declared by the C.G. to be derivatives.<\/p>\n

(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.<\/p>\n

(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\u2014<\/p>\n

(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;<\/p>\n

(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.<\/p>\n

Question 4.
\nExplain the meaning of the term “Demutualisation\u201d used under the Securities Contracts (Regulation) Act, 1956. (May 18 – New Syllabus (3 Marks)]
\nAnswer:
\nMeaning of Demutualisation:<\/p>\n

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.<\/p>\n

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.<\/p>\n

India\u2019s two largest demutualised stock exchanges are the National Stock Exchange and Bombay Stock Exchange. Its shareholders are largely the state-owned banks.<\/p>\n

\"Securities<\/p>\n

Question 5.
\nRampur Stock Exchange wants to get itself recognized. Explain:
\n(a) Who enjoys the power to recognize stock exchange?
\n(b) What information will have to be provided with the application for recognition?
\nAnswer:
\n(a) Power to recognize stock exchange:
\nAs 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.<\/p>\n

(b) Information to be provided along with application for recognition:
\nAs 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
\n(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;
\n(b) the powers and duties of the office bearers of the stock exchange;
\n(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.
\n(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.<\/p>\n

Question 6.
\nReferring 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?
\nAnswer:
\nCondition subject to which stock exchange is being recognized:
\nAs 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:<\/p>\n

    \n
  1. the qualifications for membership of stock exchanges;<\/li>\n
  2. the manner in which contracts shall be entered into and enforced as between members;<\/li>\n
  3. 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<\/li>\n
  4. the maintenance of accounts of members and their audit by chartered accountants whenever such audit is required by the C.G.<\/li>\n<\/ol>\n

    \"Securities<\/p>\n

    Question 7.
    \nWorking 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\u2019 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.
    \nOr
    \nThe 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)]
    \nOr
    \nThe 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.
    \nExamine the validity of the contracts entered by the stock exchange prior to such withdrawal order. [May 18 – New Syllabus (6 Marks)]
    \nAnswer:
    \nWithdrawal of Recognition of Stock Exchange:<\/p>\n

    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.<\/p>\n

    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.<\/p>\n

    Validity of Contracts:<\/p>\n

    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.<\/p>\n

    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.<\/p>\n

    Question 8.
    \n\u2018X\u2019 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.
    \n(i) Examine whether the Central Government\/SEBI has the power to withdraw the recognition granted to \u2018X\u2019 Stock Exchange Limited under the provisions of Securities Contracts (Regulation) Act, 1956?
    \n(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]
    \nAnswer:
    \n(i) Withdrawal of Recognition of Stock Exchange:<\/p>\n

    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.<\/p>\n

    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.<\/p>\n

    Conclusion: C.G.\/SEBI has power to withdraw the recognition granted to Stock Exchange.<\/p>\n

    (ii) Membership of unrecognized Stock Exchange:
    \n\u2019 As per Sec. 19 of the SCRA, 1956, no person shall, except with the permission of the Central
    \nGovernment 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.
    \nHence, to be a member of an unrecognized Stock exchange, permission of CG or SEBI is required.<\/p>\n

    \"Securities<\/p>\n

    Question 9.
    \nMs. Ashmita D\u2019Sou\/.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.<\/p>\n

    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]
    \nAnswer:
    \nMembership of recognised stock exchange:<\/p>\n

    Rule 8 of the Securities Contract (Regulations) Rules, 1957 details the qualifications for becoming the member of a recognised stock exchange.<\/p>\n

    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.<\/p>\n

    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.<\/p>\n

    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.<\/p>\n

    \"Securities<\/p>\n

    Question 10.
    \nMr. 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]
    \nAnswer:
    \nMembership of recognised stock exchange:<\/p>\n

    Rule 8 of the Securities Contracts (Regulation) Rules, 1957 details the qualifications for becoming the member of a recognised stock exchange.<\/p>\n

    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.<\/p>\n

    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.<\/p>\n

    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.<\/p>\n

    \"Securities<\/p>\n

    Question 11.
    \nThe 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)]
    \nAnswer:
    \nPowers of SEBI to make inquiries and to take action:<\/p>\n

    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:<\/p>\n

    (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<\/p>\n

    (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.<\/p>\n

    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.<\/p>\n

    Question 12.
    \nIn 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:
    \n(i) Duty of HEM Stock Exchange Limited to furnish periodic returns to SEBI;
    \n(ii) Power of SEBI to ask for the information asked as stated above, over and above the periodic returns;
    \n(iii) Period for which the Stock Exchange is required to maintain the books of account which may be inspected by SEBI;
    \n(iv) Duty of the Stock Exchange and the persons dealing with the stock exchange with regard to the information sought for by SEBI.
    \nAdvise them referring to the relevant provisions of the Securities Contracts (Regulation) Act, 1956. [May 18 – Old Syllabus (4 Marks), RTP – Nov. 18]
    \nAnswer:
    \nPowers of SEBI to call for periodical returns, etc:
    \n(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.<\/p>\n

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

    (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.<\/p>\n

    (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.<\/p>\n

    Question 13.
    \nPQR 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]
    \nOr
    \nExamine 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.
    \nAnswer:
    \nPower of recognised stock exchange to make rules restricting voting rights, etc.:<\/p>\n

    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:
    \n(a) the restriction of voting rights to members only;
    \n(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;
    \n(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.<\/p>\n

    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.<\/p>\n

    \"Securities<\/p>\n

    Question 14.
    \nSEBI 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.
    \nAnswer:
    \nPower of Central Government\/SEBI to direct rules to be made or to make rules:<\/p>\n

    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).<\/p>\n

    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.<\/p>\n

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

    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.<\/p>\n

    Question 15.
    \nThe 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.
    \nAnswer:
    \nClearing Corporation:
    \nSec. 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 –<\/p>\n