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Regulatory Framework To Govern Securities In India- Kashish Goyal

Updated: Nov 22, 2021



INTRODUCTION

Firstly, does the term security state, It is a financial instrument or a financial asset which is traded or sold? It is an investment for an owner on which the holder has a right of ownership.

For example, Stock, Bonds, Shares, etc. The main objective of the investor behind this to convert his money into assets. These are mainly issued by companies and corporations to increase their funds[1]. These securities are traded in the market which is the subset of the financial market known as the Securities Market.


WHY THERE IS A NEED FOR A REGULATORY FRAMEWORK FOR GOVERNING THE SECURITIES IN INDIA?

  • It helps in dealing with human issues such as fraud, manipulations, insider trading, etc.

  • To survive a competitive market or to gain profits.

  • To facilitate systematic development.

  • To ensure the smooth working of the security market.

  • The regulation provides a good environment that further encourages the investor and also protects the interest of the investor.

  • To govern the participants of the security market.

  • To formulate the policies and standards for fair trading.

  • To ensure the long-term liabilities and safety of the investor.

  • To ensure a transparent and efficient market system.


REGULATORY FRAMEWORKS IN INDIA [2]


  • The SEBI Act (1992)

This Act was enacted to regulate and promote the securities market. SEBI has full autonomy over the security market. It can conduct inquiries of all the adjudicate offences under the 1992 Act. This Act provides for the power of registration of all intermediaries in the market. If in any case, any company violates the provisions of the act, SEBI has the power to penalize them according to the provisions of the act.

  • The Companies Act (1956)

  • This Act mainly deals with the aspects which are related to the company management .it regulates the provisions related to the use of premium, discount on issues , payment of interest or dividend.


  • The Securities Contracts (Regulations) Act 1956

The main objective of this act is to stop undesirable transactions in the securities market. This Act gives the Central government authority to contract in securities, organize a trading activity in securities on a specified recognized stock exchange and listing of securities on the stock exchange.

  • The Depositories Act 1996

The main objective of this act was to ensure the free transferability of the securities with accuracy. It provides for the maintenance of the records in a book. All the securities of public listed companies will be freely transferable by dematerializing the securities and depository mode.


STOCK EXCHANGE

It plays an important role in the capital market. It is the place where any person can trade securities including shares, bonds and other financial instruments. It helps in the mobilization of the funds from savings into the different developed sectors of the economy. This has also some limitations for which there is a need for regulation to control such activities. For this, An Act was passed by the Central government named “The Securities Contracts (Regulations) Act 1956”.


This Act deals with regulations for control of all types of securities or aims to prevent undesirable transactions of the securities. This Act deals with various procedures for the stock exchange, the listing of the securities, operation of the brokers, recognition of the stock exchange, rules and guidelines for the market participants.


FUNCTIONS OF STOCK EXCHANGE

  • Economic Growth

It is a channel or platform through which an investor invests according to their interests. The process of trading means disinvestment and reinvestment. It offers various opportunities to the investors for the formation of capital and which leads to economic growth.

  • Mobilization of Savings

All the transactions in the market ensure the protection of the investor. Investment can be done through mutual funds for those who cannot afford to invest in huge amounts of securities. It helps in increasing the confidence of the small investors.

  • Liquidity

It helps in ensuring the liquidity of the investment. If any investor needs money, then he can liquidate or sell the securities during any trade days. This gives the investors’ confidence to the investors that he can convert his existing security into the cash.

  • Barometer of National Economy

It is considered an economic barometer as it represents progress at national or international levels. It also records the change in share prices.

  • Transaction safely and protection of investor interest[3]

Securities are traded in the stock exchange which are listed and this is done after verifying the position of the company. The SEBI also keeps an eye on the functioning in the system. It protects the interest of the investor as it is controlled by the exchange.


DELISTING OF THE SECURITIES UNDER THE 1956 ACT

It is the reverse procedure of the listing and sometimes also known as the Reverse Book Building process. The term “delisting” means the removal of the securities from the stock exchange which further means that a particular company would no longer be able to trade in the stock exchange. It happens because of mainly three reasons:

  • When the company or any association does not comply with the direction or the guidelines given by the stock exchange,

  • When any particular company voluntarily wants to get a delisting of the shares.

  • When the Company is not trading for many years[4]

It is of two types:

1. Compulsory Delisting: It means permanent removal of the securities from the exchange with some penalty for complying with the directions.

2. Voluntary Delisting: When a company decides on its own to remove the securities from the stock exchange.

STATUTES

  • The SEBI (Delisting of Securities) Guidelines 2003 provides for the procedure and guidelines for delisting of the securities.

  • Section 21 A of Securities Contracts (Regulation) Act 1956 which states that a recognized stock exchange may delist the securities from any recognized stock exchange on the grounds specified in the act. But the company should be given a reasonable opportunity to be heard before delisting. If any company is not satisfied with the decision of the stock exchange, then he may file an appeal before the Security Appellate Tribunal within 15 days of the decision. If in case the Tribunal is satisfied that the company was prevented by sufficient cause from filing an appeal then the tribunal may exceed the period but not more than one month.


ROLE OF STOCK EXCHANGE UNDER THE 1956 ACT

The term Stock exchange is defined under Section 2(j) of the 1956 Act “A body of individuals which is constituted before the corporatization and demutualisation under Section 4 A and 4 B or a corporate body which is constituted under the Companies Act 1956 to regulate or control the business of buying or selling in securities.

The Recognized Stock exchange is given under Section 3 to 12:

  • Firstly, the stock exchange has to apply to the central government to be recognized in the form prescribed by the central Government, if the central government satisfies then he will grant the recognition. (Section 3 & 4).

  • After this all-recognized stock exchanges will submit a scheme for corporatization and demutualisation for its approval. (section 4B)

  • All recognized stock exchange shall submit a periodical return of the affairs prescribed and every member should also maintain books of accounts for period not exceeding five years (section-6)

  • Every recognized stock exchange shall furnish a copy of the annual report to the Central government. (section -7)

POWERS OF STOCK EXCHANGE

  • In Respect of the matter which is placed before the Stock exchange meeting, a recognized stock exchange may restrict, regulate the voting rights to members or amend any rules regarding the restriction on the right of members to appoint another person. (Section 7A)

  • A recognized stock exchange may transfer the duties of clearinghouse to a clearing corporation without the approval of SEBI. (Section 8 A).

  • Any recognized stock Exchange has the power to make bye-laws for regulation and control of contracts. (Section 9)[5].


SECURITY EXCHANGE BOARD OF INDIA[6]

It is a statutory regulatory body that regulates the security market and financial securities in India. The SEBI also makes such regulations that protect the interest of the investor. It is composed of One Chairman (who is nominated by the Union government), two officers from the Union Finance Ministry and another member is from the Reserve Bank of India. The main role played in the stock exchange are by Issuers of security, Investors and Financial Intermediaries.


SECURITY EXCHANGE BOARD OF INDIA ACT 1992

It is a law made by the Parliament for maintaining such an environment that is free from fraudulent practices or to develop the security market in India. This act has a supreme authority to make laws and regulations which shall be applied to all the listed companies.

Under this act there is an establishment of the security exchange Board of India which states about the management and office of the board. The power and functions of the board are specified by the act which they are bound to follow. It also deals with the registration of stock brokers and sub-brokers.

POWERS[7]:

  • Quasi Legislative Powers: To formulate such rules and regulations like insider trading regulations and essential disclosure requirements. This also helps in consolidating the provisions of existing listing agreements of the financial market.

  • Quasi Executive Powers- If any document or book of account violates of any regulation, then they have the power to examine the documents. They are also empowered to take legal action or to pass judgments against the person who violates the rules.

  • Quasi-Judicial Powers - It empowers the authority to deliver the judgment related to fraud or other unethical activities.


FUNCTIONS OF SEBI[8] (Section 11 of SEBI ACT 1992 )

  • PROTECTIVE FUNCTIONS

1. To protect the interest of the investors in the securities market.

2. It prohibits insider trading and unfair trade practices.

3. It serves as a platform for stockbrokers, investment, registrars, and other people.

4. It also checks price rigging.

5. It also educates the investors about the securities markets.

  • REGULATORY FUNCTIONS

1. It regulates the operations of custodians of securities, depositories, and participants.

2. To regulate the business operations in the securities market.

3. To monitor the acquisition of the shares.

4. It regulates the working of mutual funds.

5. It also conducts inquiries of the stock exchange.

6. Registration of brokers and sub- brokers

7. It also establishes the rules for taking over the company.


  • DEVELOPMENTAL FUNCTIONS[9]

1. It promotes the development of the securities market.

2. It takes care of research and development to ensure an efficient security market.

3. It also promotes the free functioning of the market.

4. It also promotes the training of the intermediaries.

5. It also provides online trading.


· REGULATIONS BY SEBI

  • Issue of capital and Disclosure Agreement (2009) - It helps in the issues related to capital by improving the trading in securities.

  • Regulation on the prohibition of Insider Trading (2015) - It introduced the new provisions for insider trading for fair trading in India.

  • Regulation on Substantial Acquisition of the shares and Takeovers (2011) - This regulation is made to solve the problems related to the fair acquisition of shares.


DEMATERIALISATION OF SHARES


It is a process from which a certificate of shares which is in physical form is converted into electronic form. Dematerialisation eliminated the risk of loss of the important share certificate. It is also known as Demat. It is an optional process as the investor can also hold the shares in physical form[10].

Section 68 B of the Companies Act which is inserted by the Companies (Amendment) Act 2000. This provision talks about the initial public offers of every listed public company for a sum of ten crores or more shall be in the dematerialized form as per the provisions of the Depositories Act 1996[11]. The Ministry of Corporate Affairs made a new amendment in 2018 which inserted a provision of Admission of Unlisted Company for offering the facilities of dematerialization. The Depository Act 1996 regulates the matters related to operations of the depositories and Demat operations. There are two depositories in operation i.e., National Securities Depository limited and Central depository Service Limited.

Benefits of Dematerialisation[12]:

  • There is no threat of the fraudulent interception of certificates.

  • There is no need to file a transfer form for transfer of shares.

  • In electronic securities, no stamp duty is levied.

  • You can do any transactions from anywhere.

  • No time-consuming in the case of posting certificates.

References

[1] https://www.thesecuritiesblawg.in/post/what-is-a-securities-market-and-why-does-it-need-regulating#:~:text=Securities%20Regulation%20provides%20a%20healthy,and%20to%20facilitate%20systematic%20development. [2] https://www.yourarticlelibrary.com/investment/the-four-main-legislations-governing-the-securities-markets-of-india/1279 [3] https://www.niftytradingacademy.com/functions-of-stock-exchange/ [4] http://www.legalserviceindia.com/article/l329-Listing-&-Delisting-Of-Securities.html [5] https://www.sebi.gov.in/acts/contractact.pdf [6] https://blog.ipleaders.in/features-of-sebi/ [7] https://groww.in/p/sebi-securities-and-exchange-board-of-india/#:~:text=To%20regulate%20the%20tasks%20entrusted,market%20and%20related%20to%20it. [8] https://www.niftytradingacademy.com/sebi/ [9] https://cleartax.in/s/sebi [10]https://taxguru.in/sebi/dematerialisation-securities.html#:~:text=Dematerialization%20(Commonly%20known%20as%20'Demat,the%20same%20number%20of%20holding.&text=Dematerialization%20of%20shares%20is%20optional,hold%20shares%20in%20physical%20form. [11] https://www.angelbroking.com/knowledge-center/demat-account/what-is-dematerialisation [12]http://www.legalserviceindia.com/articles/dematerialized_securities.htm

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