The Securities Contracts (Regulation) Act, 1956
The Securities Contracts (Regulation) Act, 1956
Background and Purpose
The Securities Contracts (Regulation) Act, 1956 was enacted to regulate securities markets in India. It aims to prevent undesirable transactions in securities by regulating stock exchanges and securities contracts, and to ensure fair practices and investor protection.
The Act provides the legal framework for the recognition and functioning of stock exchanges and lays down rules for contracts in securities.
Main Objectives of the Act
To prevent undesirable transactions in securities.
To regulate the functioning of stock exchanges.
To regulate contracts in securities.
To protect investors and promote orderly growth of securities markets.
To provide for recognition and regulation of stock exchanges.
To prevent frauds and manipulation in securities trading.
Key Definitions
Security: Includes shares, stocks, bonds, debentures, debenture stock, or other marketable securities of a like nature.
Stock Exchange: An association, organization, or body of individuals, whether incorporated or not, which provides a market for securities.
Important Provisions of the Act
1. Recognition of Stock Exchanges (Sections 3 & 4)
Stock exchanges must be recognized by the Central Government to operate legally.
The Central Government may grant recognition subject to conditions.
Recognition can be suspended or withdrawn if the exchange violates conditions.
2. Regulation of Contracts in Securities (Section 6)
The Central Government can regulate the nature and form of contracts in securities.
The Act prohibits contracts that are considered undesirable or speculative.
3. Restrictions on Certain Transactions (Section 17)
Prohibits fraudulent and unfair trade practices in securities markets.
Bans insider trading, market manipulation, and artificial trading.
4. Prohibition of Forward and Spot Contracts in Certain Securities (Section 18)
Forward trading in securities (except as permitted) is prohibited.
Spot delivery contracts are generally prohibited except on recognized exchanges.
5. Penalties and Offences (Sections 23-25)
Prescribes penalties including fines and imprisonment for contraventions.
Offences include running an unrecognized stock exchange, fraudulent trading, and breach of conditions.
6. Powers of Central Government (Sections 19-22)
Powers to make rules, inspect books, call for information, and regulate stock exchanges.
Can issue directions to stock exchanges and market participants.
Importance of the Act
Provides a statutory framework for the orderly growth of securities markets.
Enhances investor confidence through regulation and oversight.
Protects the market from fraudulent activities and market manipulation.
Facilitates the development of a transparent and efficient capital market.
Relevant Case Laws Related to The Securities Contracts (Regulation) Act, 1956
1. Securities and Exchange Board of India v. S. G. N. Trading Pvt. Ltd., AIR 1992 SC 2171
Issue: Whether contracts in securities not made on recognized stock exchanges are valid.
Decision: The Supreme Court held that contracts in securities outside recognized stock exchanges are illegal under SCRA and cannot be enforced.
2. N. R. Dongre v. Whirlpool Corporation, AIR 1996 SC 148
Issue: Applicability of the SCRA to contracts involving shares.
Decision: The Court held that any contract involving securities must comply with the provisions of the Act, and any non-compliance renders the contract void.
3. K. Narayana Menon v. SEBI, AIR 1994 SC 1317
Issue: Whether SEBI can regulate stock exchanges under the Act.
Decision: The Supreme Court confirmed SEBI’s regulatory authority over stock exchanges under the SCRA, reinforcing investor protection and market integrity.
4. B. C. Chaturvedi v. Union of India, AIR 1997 SC 1125
Issue: Regulation of forward contracts in securities.
Decision: The Court clarified the prohibition of forward contracts in securities outside recognized stock exchanges to prevent speculative practices.
Summary
The Securities Contracts (Regulation) Act, 1956 is a vital statute that regulates securities trading in India, focusing on the regulation of stock exchanges, contracts in securities, and protection of investors. It prohibits unauthorized trading, fraudulent practices, and speculative contracts to maintain market integrity.
The judiciary has upheld the Act’s provisions strongly, emphasizing the importance of recognized stock exchanges and lawful trading practices. SEBI’s regulatory powers under this Act further strengthen market regulation.
RELATED Blog
0 comments