The Securities Contracts (Regulation) Act, 1956

What it does

The Act regulates the trading of securities in India. It provides for the recognition of stock exchanges by the Central Government, the listing of securities on them, and the control of contracts in securities, so that trading takes place under supervision and is not left to private arrangements.

It defines securities widely, to include shares, bonds, units of collective investment schemes and, since an amendment of 1999, derivatives. It also provides that a contract in securities is valid in the ways the Act contemplates: contracts made on a recognised exchange are valid, and the Act regulates, and in some cases prohibits, contracts made outside one. Rules and regulations under the Act deal with listing, with the continuing requirements of listed companies and with delisting.

The Securities and Exchange Board of India exercises most of the powers under the Act, as the securities market regulator. The Government keeps the powers of recognition of exchanges and the making of rules.

Who it binds

Stock exchanges and their members, companies that list securities, and persons who deal in securities. A person who enters a contract in securities that falls outside the exceptions the Act allows may find the contract unenforceable, and an issuer whose securities are listed is bound by the conditions of listing. Brokers and other market intermediaries are regulated under the Securities and Exchange Board of India Act, 1992, with which this Act is read.

What has changed, and when

The Act has been amended many times. The 1999 amendment brought derivatives within the definition of securities and made it lawful to trade them on a recognised exchange. The 2004 amendment provided for the demutualisation of stock exchanges, which separated the ownership of an exchange from the trading rights of its members. The same amendment inserted section 21A, on delisting. The Finance Act, 2015 brought commodity derivatives under the Act and the regulator when the Forward Markets Commission was merged into it.

What turns on it in practice

The point that arises most often in transactions is whether a private contract about shares is valid. A put option, a call option or a right of first refusal in a shareholders' agreement is a contract in securities, and for a long time it was uncertain whether it was enforceable if it was not settled on an exchange. The site's note on a put option against a resident cites a notification of the Securities and Exchange Board of India dated 3 October 2013, made under sections 16(1) and 28(2) of the Act, which addressed that question. The note explains what makes such an option enforceable and at what price, and the glossary term for a put option rests on the Act for that reason.

The second point is listing. A company that raises capital from the public, and the advisers who act for it, deal with the Act through the rules and regulations made under it. The firm's capital markets practice works under the Act in advising on listing, continuing obligations and delisting, with the Securities and Exchange Board of India Act, 1992 and the regulations on listing.

The third is the difference between regulated and unregulated trading. A transaction that looks like a contract in securities but is made outside the framework may fall foul of the Act, and the structure of a deal is chosen with that in mind.