Module 2

I. Security Contract (Regulation) Act 1956

 Salient Features:

i. Regulation of Securities Markets:

 SCRA provides for the regulation of securities markets in

India.

 It governs stock exchanges, stockbrokers, and other

intermediaries involved in securities transactions.

ii. Definition of Securities:

 SCRA defines various types of securities, including shares,

stocks, bonds, debentures, and derivatives.

 This definition helps in determining the scope of the Act and

the securities regulated under it.

iii. Regulation of Stock Exchanges:

 SCRA empowers the government to recognize and regulate

stock exchanges.

 It lays down the criteria for recognition of stock exchanges

and provides guidelines for their functioning, including the

listing of securities, trading rules, and investor protection

measures.
iv. Prohibition of Certain Transactions:

 SCRA prohibits certain types of transactions in securities,

such as bucketing transactions (where brokers engage in

speculative transactions without executing trades on stock

exchanges) and badla transactions (where shares are sold

for future delivery with the intention of repurchasing them

at a lower price).

v. Regulation of Contracts:

 SCRA regulates the manner in which securities contracts are

entered into and enforced.

 It specifies the requirements for the form and validity of

contracts related to securities transactions.

vi. Regulation of Intermediaries:

 SCRA imposes regulations on intermediaries such as

stockbrokers, sub-brokers, and other market participants.

It requires them to obtain registration and adhere to

certain standards of conduct and professionalism.

vii. Prohibition of Insider Trading:

 SCRA prohibits insider trading, which involves trading in

securities based on non-public information.

 It aims to ensure fairness and integrity in the securities

market by preventing unfair advantages for insiders.

 viii. Regulatory Authority:

 SCRA established the Securities and Exchange Board of

India (SEBI) as the regulatory authority for the securities

market in India. SEBI has been entrusted with the

responsibility of enforcing the provisions of SCRA and

regulating various aspects of the securities market.

ix. Penalties and Enforcement:

 SCRA specifies penalties for violations of its provisions,

including fines, imprisonment, and suspension or cancellation

of registration for intermediaries.

 It empowers SEBI to investigate and take enforcement

actions against violations of the Act.

II. SEBI Act 1992

 The Securities and Exchange Board of India (SEBI) Act of 1992 is a

crucial piece of legislation that established SEBI as the regulatory

authority for the securities market in India. Here are some essential

provisions of the SEBI Act, 1992:

i. Establishment of SEBI:

 The SEBI Act, 1992, established SEBI as a statutory

regulatory body to oversee and regulate securities markets

in India.
ii. Regulatory Authority:

 SEBI is vested with the authority to regulate and supervise

various segments of the securities market, including stock

exchanges, intermediaries, and other entities involved in

securities trading.

iii. Functions of SEBI:

 Regulating the business of stock exchanges and other

securities markets.

 Registering and regulating intermediaries such as brokers,

merchant bankers, and portfolio managers.

 Registering and regulating collective investment schemes.

 Promoting and regulating self-regulatory organizations

(SROs) in the securities market.

 Prohibiting fraudulent and unfair trade practices in

securities markets.

 Promoting investor education and awareness.

 Conducting research and promoting the development of the

securities market.

iv. Powers of SEBI:

 Issue regulations, guidelines, and circulars for regulating

various segments of the securities market.

 Conduct inspections, audits, and investigations of market

participants to ensure compliance with securities laws.

  Impose penalties and take enforcement actions against

entities violating securities laws or regulations.

 Take measures to protect the interests of investors and

promote market integrity.

 Adjudicate disputes and grievances arising in the securities

market.

v. Appeals and Tribunal:

 The Act provides for the establishment of the Securities

Appellate Tribunal (SAT), which serves as an appellate

authority for appeals against SEBI's orders and decisions.

vi. Cooperation and Coordination:

 SEBI is authorized to cooperate and enter into agreements

with other regulatory authorities and organizations, both

domestic and international, to promote the development and

regulation of the securities market.

vii. Amendments and Modifications:

 The SEBI Act allows for amendments and modifications as

deemed necessary to address emerging challenges, enhance

regulatory effectiveness, and align with international best

practices in securities regulation.

III. SEBI guidelines on allotment

 SEBI (Securities and Exchange Board of India) has laid down guidelines

for the allotment of shares to ensure fairness, transparency, and

investor protection in the capital markets. The guidelines cover various

aspects of the allotment process such as:

i. Disclosure Requirements:

 Issuers are required to provide detailed information about

the offer, including the terms and conditions, risks involved,

and financial information.

 This information is typically disclosed in the offer document,

such as the prospectus or offer for sale document.

ii. Allotment Process:

 The allotment of shares must be done in a fair and

transparent manner.

 Issuers cannot discriminate among investors based on

factors such as race, religion, or nationality.

 The allotment process should be conducted electronically

through a recognized stock exchange or depository.

iii. Price Discovery Mechanism:

 The price at which shares are allotted should be determined

through a transparent price discovery mechanism.

 This may involve methods such as book building, fixed price

offers, or a combination of both.

 iv. Minimum Subscription Requirements:

 Issuers must ensure that a minimum percentage of the offer

is subscribed to avoid the risk of failure of the issue.

 SEBI specifies the minimum subscription requirements

based on the type of offer (e.g., initial public offering, rights

issue).

v. Refund Mechanism:

 In case of undersubscription or failure of the issue, issuers

are required to refund the application money to investors

within a specified timeframe.

vi. Allotment to Promoters, Directors, and Related Parties:

 Allotment of shares to promoters, directors, and related

parties must comply with SEBI's regulations to prevent any

conflict of interest or insider trading.

vii. Listing Requirements:

 Companies whose shares are allotted to the public must

comply with listing requirements prescribed by stock

exchanges and SEBI. This includes timely disclosure of

financial results, corporate governance practices, and other

regulatory obligations.
 viii. Monitoring and Enforcement:

 SEBI continuously monitors the allotment process to ensure

compliance with regulations. Non-compliance may result in

penalties or other enforcement actions.

IV. Insider trading

 Legislative Framework:

o Insider trading regulations in India are primarily governed by the

Securities and Exchange Board of India (SEBI) Act, 1992, and the

SEBI (Prohibition of Insider Trading) Regulations, 2015.

o These regulations were introduced to safeguard the integrity of

the securities market, ensure fair and equitable treatment of

investors, and promote transparency and investor confidence.

 Definition of Insider:

o SEBI defines insiders broadly to encompass not only directors,

officers, and employees of a company but also individuals or

entities connected to the company, such as consultants, advisors,

and immediate relatives of insiders.

o This expansive definition aims to prevent the misuse of privileged

information by anyone associated with the company.

 Material, Non-public Information (MNPI):

 o Insider trading regulations revolve around the concept of material,

non-public information (MNPI).

o MNPI refers to any information that could affect the price of

securities if disclosed to the public and is not yet available to the

general public.

o This includes information about financial performance, mergers and

acquisitions, regulatory decisions, and other significant

developments within the company.

 Prohibited Activities:

o The regulations prohibit insiders from trading in securities while in

possession of MNPI.

o This prohibition extends to communication or tipping others about

such information to facilitate trading.

o Additionally, insiders are barred from recommending or inducing

others to trade based on MNPI.

 Disclosure Requirements:

o Insiders are required to disclose their trades in securities of the

company to both the company and the stock exchanges within

specified timelines.

o This disclosure includes details such as the nature of the

transaction, the quantity of securities traded, the price, and the

date of the transaction.

o By mandating disclosure, regulators aim to enhance transparency

and allow market participants to assess the legitimacy of insider

transactions.
 Penalties and Enforcement:

o SEBI has the authority to investigate suspected instances of

insider trading through surveillance, inquiries, and inspections.

o Upon finding evidence of insider trading, SEBI can impose

penalties, including monetary fines, disgorgement of profits, and

debarment from participating in the securities market.

o SEBI's enforcement actions serve as a deterrent against unethical

behavior and help maintain market integrity.

 Continuous Monitoring and Updates:

o SEBI continuously monitors market activities and reviews its

regulatory framework to address emerging risks and loopholes.

o It periodically updates regulations to align with international best

practices and evolving market dynamics.

o Additionally, SEBI conducts awareness programs, seminars, and

workshops to educate market participants about insider trading

regulations and promote ethical conduct in the securities market.

 International Cooperation:

o Recognizing the global nature of financial markets, SEBI

collaborates with international regulatory bodies and law

enforcement agencies to combat cross-border insider trading and

enhance regulatory cooperation.

 o Such collaboration strengthens the effectiveness of enforcement

efforts and contributes to maintaining the integrity of the global

securities market.

V. Depositories Act 1996 including DEMAT system

1. What is a Depository?

i. A depository serves as a central repository for holding and

safeguarding securities in electronic form.

ii. It acts as a custodian of securities and facilitates their electronic

transfer and trading.

iii. Think of it as a highly secure digital vault where investors'

securities are stored.

2. How Does a Depository Work?

i. Dematerialization:

 Dematerialization is the process of converting physical share

certificates into electronic form. This process eliminates

the need for paper certificates, reducing paperwork and the

risk of loss or damage.

ii. Recording Ownership:

 In the depository system, ownership of securities is

recorded electronically. When you dematerialize your shares,

your name as an investor is recorded as the beneficial owner

of the securities in the depository's records.

 iii. Role of Depository Participant (DP):

 A Depository Participant (DP) acts as an intermediary

between the investors and the depository.

 Investors interact with DPs to access depository services

such as opening Demat accounts, dematerializing shares, and

transferring securities.

3. Services Provided by a Depository:

i. Opening a Demat Account:

 A Demat account is similar to a bank account but holds

securities in electronic form. It provides a convenient way

for investors to hold and manage their investments.

ii. Dematerialization:

 The depository facilitates the conversion of physical shares

into electronic form, making them easier to manage and

trade.

iii. Rematerialization:

 In case an investor wishes to convert electronic shares back

into physical form, the depository supports the process of

rematerialization.

iv. Other Services:

  Depositories offer a range of services including pledging

shares, receiving IPO credits, dividends, and facilitating

stock lending and borrowing transactions.

4. Dematerialization Process:

i. Appointing a Depository participant:

 Investors choose a DP and open a Demat account by

completing the necessary documentation.

 The DP acts as a gateway to access depository services.

ii. Demat Request:

 Investors submit their physical share certificates to the DP

along with a dematerialization request form.

 The certificates are cancelled and surrendered to the DP

for dematerialization.

iii. Verification by Registrar:

 The depository electronically notifies the issuer (company)

about the dematerialization request.

 The issuer's registrar verifies the request, ensuring it

meets the necessary criteria.

iv. Crediting Your Account:

  Upon verification, the depository credits the investor's

Demat account with the electronic shares equivalent to the

physical certificates surrendered.

 The investor receives a statement confirming the

dematerialization.

5. Role of SEBI (Securities and Exchange Board of India):

i. Regulatory Oversight:

 SEBI regulates the depository system to ensure

transparency, investor protection, and market integrity.

 It sets and enforces guidelines and regulations governing the

operations of depositories and DPs.

ii. Investor Protection:

 SEBI's regulations aim to safeguard the interests of

investors by ensuring fair practices, adequate disclosure,

and compliance with legal and regulatory requirements.

iii. Penalties for Non-Compliance:

 SEBI has the authority to impose penalties on entities that

violate regulations or fail to comply with prescribed norms.

These penalties serve as deterrents against misconduct and

promote adherence to regulatory standards.

6. Key Features of Depository System in India:

 i. Dematerialized Securities:

 The depository system enables securities to be held and

traded in electronic form, eliminating the need for physical

share certificates.

ii. Fungibility:

 Securities of the same class held in electronic form are

interchangeable, allowing for seamless trading and

transferability.

iii. Registered and Beneficial Ownership:

 While the depository is the registered owner of securities,

investors are recognized as the beneficial owners with rights

and entitlements associated with their holdings.

iv. Easy Transferability:

 Electronic securities can be transferred between investors

through simple electronic instructions, streamlining the

process and reducing paperwork.

v. No Stamp Duty:

 Unlike physical share transfers, there is no stamp duty

payable on the transfer of securities held in electronic form,

resulting in cost savings for investors.

 vi. Reduced Risk: Electronic securities mitigate risks associated with

physical certificates such as loss, theft, forgery, or damage,

enhancing the safety and security of investments.

7. Legal Framework

 The depository system in India operates within a robust legal framework

comprising:

i. Depositories Act, 1996:

 The primary legislation governing depositories, their

operations, and regulation.

ii. SEBI Regulations:

 SEBI issues regulations and guidelines to govern the

functioning of depositories, DPs, and other market

intermediaries.

iii. Depository Bye-Laws and Business Rules: Depositories establish

bye-laws and business rules to govern their internal operations and

procedures.

iv. Other Relevant Laws: The operation of depositories is also

subject to compliance with other applicable laws such as the

Companies Act, Income Tax Act, Securities Contracts (Regulation)

Act, and various other regulations related to securities market

intermediaries.