Laws relating to Securities Transactions:

Laws relating to Securities Transactions:

Governing Laws

Two Acts mainly govern Securities Transactions in India at present.

1.The Securities Contracts (Regulation) Act, 1956; and

2.The Securities & Exchange Board of India Act, 1992.

The paper based ownership and transfer of securities has been a major drawback of the Indian Securities Markets since it often results in delay in settlement and transfer of securities and also lead to "bad delivery", theft, forgery etc. The Depositories Act, 1996 was therefore enacted to pave the way of smooth and free transfer of securities.

The other relevant laws, which affect the capital market, are: -

1.The Depositories Act, 1996;

2.The Foreign Exchange Regulations Act, 1973;

3. Arbitration and Conciliation Act, 1996;

4.Companies Act, 1956;

5. Debt Recovery Act (Bank and Financial Institutions Recovery of Dues Act, 1993);

6.Banking Regulation Act;

7.Benami Prohibition Act;

8.Indian Penal Code;

9.Indian Evidence Act, 1872 and;

10.Indian Telegraph Act, 1885.



The Securities Contracts (Regulation) Act, 1956

The Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the Act), containing a mere 31 sections, keeps a tight vigil over all the Stock Exchanges of India since 20th February 1957. The provisions of the Act were formerly administered by the Central Government. However, since the enactment of The Securities and Exchange Board of India Act, 1992 the Board established under it (SEBI) concurrently has powers to administer almost all the provisions of the Act.

By virtue of the provisions of the Act, the business of dealing in securities cannot be carried out without a license from SEBI. Any Stock Exchange which is desirous of being recognized has to make an application under Section 3 of the Act to SEBI, who is empowered to grant recognition and prescribe conditions including that of having SEBI's representation (maximum three persons) on the Stock Exchange and prohibiting the Stock Exchange from amending its rules without SEBI's prior approval. This recognition can be withdrawn in the interest of the trade or public. SEBI is authorized to call for periodical returns from the recognized Stock Exchanges and make enquiries in relation to their affairs. Every Stock Exchange is obliged to furnish annual reports to SEBI. Stock Exchanges are allowed to make rules only with the prior approval of SEBI. The Central Government and SEBI can direct Stock Exchanges to frame rules. Recognized Stock Exchanges are allowed to make bylaws for the regulation and control of contracts but subject to the previous approval of SEBI and SEBI has the power to amend the said bylaws. The Central Government and SEBI have the power to supersede the governing body of any recognized stock exchange and to suspend its business.

A public limited company has no obligation to have its shares listed on a recognized Stock Exchange. But if a company intends to offer its shares or debentures to the public for subscription by issue of a prospectus, it must, before issuing such prospectus apply to one or more recognized stock exchanges for permission to have the shares or debentures intended to be so offered to the public to be dealt with in each of such stock exchange in terms of Section 73 of the Companies Act, 1956. SEBI can, however, under the provisions of Section 21 of the Securities Contracts (Regulation) Act, 1956 compel the listing of securities by public Companies if it is of the opinion that it is necessary or expedient in the interest of the trade or public. In the event of the Stock Exchange refusing to list the securities of any public company, an appeal to SEBI is provided under the Act. A Company as per the present provisions of law is obliged to get listed on the regional exchange, in addition to other exchanges. (There has been a recommendation that this restriction be removed).

A company on the grounds specified in Section 22A of the Act is entitled to refuse to register transfer of any of its securities, notwithstanding anything contained in its articles or Section 82 or Section 111 of the Companies Act, 1956 (See Table A).



TABLE A

GROUNDS SPECIFIED IN SECTION 22A FOR REFUSAL TO REGISTER TRANSFER

i) The instrument of transfer is not proper;

ii) It has not been duly stamped and executed;

iii) The certificate relating to the security has not been delivered to the company;

iv) Requirement under the law relating to the registration of such transfer has not been complied with;

v) The transfer is in contravention of any law, rules, administrative instructions or conditions of listing agreement;

vi) The transfer is likely to result in change in the composition of the Board of Directors, which would be prejudicial to the interest of the company or public;

vii) The transfer is prohibited by order of any Court, Tribunal, or other legal authority





The Securities and Exchange Board of India Act, 1992.

The Securities and Exchange Board of India Act, 1992 (hereinafter referred as "The SEBI Act") is having retrospective effect and is deemed to have come into force on January 30, 1992. Relatively a brief act containing only 35 sections, the SEBI Act governs all the Stock Exchanges and the Securities Transactions in India.

A Board by the name of the Securities and Exchange Board of India (SEBI) consisting of one Chairman and five members, one each from the department of Finance and Law of the Central Government, one from the Reserve Bank of India and two other persons and having its head office in Bombay and regional offices in Delhi, Calcutta and Madras has been constituted under the SEBI Act to administer its provisions. The Central Government has the right to terminate the services of the Chairman or any member of the Board. The Board decides all questions in its meeting by majority vote with the Chairman having a second or casting vote.

Section 11 of the SEBI Act provides that it shall be the duty of the Board to protect the interest of investors in securities and to promote the development of and to regulate the securities market by such measures, as it thinks fit. It empowers the Board to regulate the business in Stock Exchanges, to register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, etc., to register and regulate the working of collective investment schemes including mutual funds, to prohibit fraudulent and unfair trade practices and insider trading, to regulate take-overs, to conduct enquiries and audits of the stock exchanges, etc.

As all Stock Exchanges are required to be registered with SEBI under the provisions of the Act, under Section 12 of the Sebi Act all the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediary who may be associated with the Securities Markets are obliged to register with the Board and the Board has the power to suspend or cancel such registration. The Board is bound by the directions given by the Central Government from time to time on questions of policy and the Central Government has the right to supersede the Board. The Board is also obliged to submit a report to the Central Government every year, giving true and full account of its activities, policies and programmes. Any one aggrieved by the Board's decision is entitled to appeal to the Central Government.

The Central Government uptill now has framed ten Rules by virtue of Section 29 of the Sebi Act.(See Table B)



TABLE B

RULES FRAMED BY THE CENTRAL GOVERNMENT

i) SEBI (stock-brokers and sub-brokers) Rules, 1992;

ii) SEBI (Merchant Bankers) Rules, 1992;

iii) SEBI (Portfolio Managers) Rules, 1993;

iv) SEBI ( Appeal to Central Govt.) Rules 1993;

v) SEBI (Registrars to an issue and Share transfer agents) Rules, 1993;

vi) SEBI (Underwriters) Rule 1993;

vii) SEBI (Debenture Trustees) Rules 1993;

viii) SEBI (Annual Report) Rules 1994;

ix) SEBI (Form of Annual Statement of Accounts and Records) Rules 1994;

x) SEBI (Bankers to an issue) Rules, 1994.





The Board empowered by Section 30 of the SEBI Act has till now with the previous approval of the Central Government made twelve regulations. (See Table C)



TABLE C

REGULATIONS MADE BY THE BOARD

i) SEBI (Stock-brokers and Sub-brokers) Regulations,1992;

ii) SEBI (Merchant Bankers) Regulations, 1992;

iii) SEBI (Insider Trading) Regulations, 1992;

iv) SEBI (Portfolio Managers) Regulations, 1993;

v) SEBI (Mutual Funds) Regulations, 1993;

vi) SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993;

vii) SEBI (Underwriters) Regulations, 1993;

viii) SEBI (Debenture Trustees) Regulations, 1993;

ix) SEBI (Substantial Acquisition of Shares and Take Overs) Regulations, 1994.

x) SEBI (Bankers to an Issue) Regulations, 1994.

xi) SEBI (Foreign Institutional Investors) Regulations, 1995.

xii) SEBI (Depositaries and Participants) Regulations, 1996