Evolution of Securities and Investment Laws in India
Evolution of Securities and Investment Laws in India
1. Pre-Independence Era
During British rule, there was no comprehensive legal framework regulating securities markets.
Financial markets were informal with limited regulation.
Early trading in stocks primarily centered around the Bombay Stock Exchange (BSE), established in 1875.
Companies were mostly governed under the Indian Companies Act, 1913, which was limited in regulating securities.
2. Post-Independence Developments
The need for a regulated securities market grew with the growth of the Indian economy.
The government focused on creating laws to protect investors and regulate capital markets.
3. Companies Act, 1956
The primary legislation governing companies and their securities.
Introduced provisions related to disclosure, prospectus, and issue of shares.
However, it was not sufficient to regulate securities trading or protect investors in a growing capital market.
4. Establishment of Securities and Exchange Board of India (SEBI) – 1988
SEBI was established initially as a non-statutory body in 1988.
Purpose: To regulate and develop the securities market, and protect investor interests.
Given statutory powers through the SEBI Act, 1992.
5. SEBI Act, 1992
Provided SEBI with comprehensive powers to regulate the securities market.
SEBI's functions include:
Regulating stock exchanges and intermediaries
Registration of brokers, merchant bankers, and other market participants
Prohibiting fraudulent and unfair trade practices
Conducting inquiries and inspections
Investor education and protection
6. Key Securities Laws and Regulations
Securities Contracts (Regulation) Act, 1956 (SCRA)
Regulates trading in securities and stock exchanges.
Defines ‘securities’ and regulates contracts related to securities.
Depositories Act, 1996
Introduced the concept of electronic holding of securities.
Enabled dematerialization of shares.
Foreign Exchange Management Act (FEMA), 1999
Regulates foreign investment in Indian securities.
Companies Act, 2013
Modernized company law including provisions on disclosures and shareholder protection.
Insider Trading Regulations (under SEBI)
Prohibits trading based on unpublished price-sensitive information.
7. Development of Market Infrastructure
Introduction of Electronic Trading and Dematerialization:
Shift from paper-based shares to electronic shares (Demat).
Boosted transparency and reduced fraud.
Launch of National Stock Exchange (NSE) in 1992
Modern electronic stock exchange, competing with BSE.
Introduction of derivatives and commodity markets regulation
8. Recent Trends and Amendments
Continuous strengthening of regulations post major scams (e.g., Harshad Mehta scam in 1992, Satyam scam in 2009).
Introduction of Know Your Customer (KYC) norms.
Tightening disclosure norms, insider trading rules, and corporate governance standards.
Emphasis on investor education and awareness.
9. Summary Timeline
| Year | Event / Development |
|---|---|
| 1875 | Bombay Stock Exchange (BSE) established |
| 1913 | Indian Companies Act introduced |
| 1956 | Companies Act enacted |
| 1956 | Securities Contracts (Regulation) Act |
| 1988 | SEBI constituted as non-statutory body |
| 1992 | SEBI Act enacted giving statutory powers |
| 1992 | National Stock Exchange (NSE) launched |
| 1996 | Depositories Act enacted |
| 1999 | FEMA enacted (Foreign Investment regulation) |
| 2013 | Companies Act modernized |
Why is this important?
Securities and investment laws ensure fairness, transparency, and investor protection in capital markets.
They support the development of the Indian economy by encouraging investment.
Help maintain trust in financial markets.
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