Lesson 16

Regulatory Framework Governing

Stock Exchanges

LESSON OUTLINE
LEARNING OBJECTIVES
Introduction
Securities Contracts (Regulation) Act, Stock Market plays a significant role in
1956 development of Economy. Stock Market
facilitates mobilization of funds from small
Corporatisation and Demutualisation of
Stock Exchanges investors and channelizes these resources into
various development needs of various sectors
Procedure for corporatisation and
of the economy. In order to prevent undesirable
demutualisation
transactions in securities by regulating the
Contracts in Securities business of dealing therein, and by providing
Public Issue and Listing of Securities for certain other matters connected therewith,
the Securities Contracts (Regulation)
Act, 1956
Penalties and Procedures
was enacted by Parliament.
Offences
After going through this lesson, the student will
Rights of Investors
be able to know about the Powers of Stock
Securities Contract (Regulation) (Stock Exchange and SEBI under the SCRA Act, the
Exchange and Clearing Corporations) penal provisions, procedures, offences,
Regulations, 2012
procedure for appeal to SAT, Right of Investors,
Securities Contracts (Regulation) Rules, Securities Contracts (Regulation) (Stock
1957 Exchanges and Cleaning Corporations)
Requirements of listing of securities with Regulations, 2012 and Securities Contract
recognised stock exchanges (Regulation) Rules, 1957 etc.

Continuous Listing Requirement

Delisting of securities

LESSON ROUND UP

GLOSSARY

SELF TEST QUESTIONS

365
366 EP-CM&SL
z
5
)
o
o

o
z

As a condition of recognition, a stock exchange complies with the requirements prescribed by the Central
Government. The stock exchange frame their own listing regulations in consonance with the minimum listing
criteria set out in Securities contracts (Regulation) Rules, 1957.

The Government promulgated the Securities Contracts (Regulation) Rules, 1957 for carrying into effect the
objects of the Securities Contracts ( Regulation) Act. These rules provide among other things, for the procedure
to be followed for recognition of Stock Exchanges; Submission of periodical returns and annual reports by
recognised stock exchanges; inquiry into the affairs of stock exchanges and their members ; and requirements
for listing of securities. The rules are statutory and they constitute a code of standardised regulations uniformly
applicable to all the recognised stock exchanges.

SECURITIES CONTRA (REGULATION)

ACT, 1956

=
>
>
Q
a
@o
®

5
@
»
various terms in relation to securities and provides the detailed procedure for the stock exchanges to get
recognition from Government/SEBI, procedure for listing of securities of companies and operations of the brokers
in relation to purchase and sale of securities on behalf of investors.

However, the provisions of this Act shall not apply to -

If the Central Government is satisfied that in the interest of trade and commerce or the economic development
of the country, it is necessary or expedient so to do, it may, by notification in the Official Gazette, specify any
class of contracts as contracts to which this Act or any provision contained therein shall not apply, and also the
conditions, limitations or restrictions, if any, subject to which it shall not so apply.

DEFINITIONS
Section 2 of this Act contains definitions of various terms used in the Act. Some of the important definitions are
given below:

Securities
Securities include —
Lesson 16 » Regulatory Framework Governing Stock Exchanges 36

k<
n:
15§
=
S
)
3
D

Spot delivery contract means a contract which provides for —

the actual period taken for the dispatch of the securities or the remittance
of money therefore through the post being excluded from the computation of the period aforesaid if the
parties to the contract do not reside in the same town or locality;

Stock Exchange means —

(a) any body of individuals, whether incorporated or not, constituted before corporatisation and

(b) abody corporate incorporated under the Companies Act, 2013 whether under a scheme of comporatisation

Recognised Stock Exchange

Government security means a security created and issued whether before or after the commencement of this
Act, by the Central Government or a State Government for the purpose of raising a public loan and having one
of the forms specified in clause (2) of section 2 of the Public Debt Act, 1944.

A derivative includes —
368 EP-CM&SL

() & security derived from a debt instrument, share, loan, whether secured or nsecured, fisk instrument
or contract for differences or any other form of security and;

(b) a contract which derives its value from the prices or index of prices, of underlying securities.

(c) Commodity derivatives; and

(d) such other instruments as may be declared by the Central Government to be derivatives.

Non-transferable specific delivery contract

Ready Delivery Contract

However, where any such contract is performed either wholly or in part:

(1) by realisation of any sum of money being the difference between the contract rate and the settlement
rate or clearing rate or the rate of any offsetting contract; or

(Il) by any other means whatsoever, and as a result of which the actual tendering of the goods covered by
the contract or payment of the full price therefore is dispensed with, then such contract shall not be
deemed to be a ready delivery contract.

Transferable specific delivery contract

“Transferable specific delivery contract’ means a specific delivery contract which is not a non-transferable specific
delivery contract and which is subject to such conditions relating to its transferability as the Central Government
may by notification in the Official Gazette specify in this behalf.

RECOGNITION OF STOCK EXCHANGES Most Important

Section 3 lays down that any stock exchange, desirous of being recognized for the purposes of this Act may
make an application in the prescribed manner to the Central Government.

Every application shall contain such particulars as may be prescribed, and shall be accompanied by a copy of
the bye-laws of the stock exchange for the regulation and control of contracts and also a copy of the rules
relating in general to the constitution of the stock exchange and in particular to —

(a) the governing body of such stock exchange, its constitution and powers of management and the manner
in which its business is to be transacted;

(b) the powers and duties of the office bearers of the stock exchange;

(c) the admission into the stock exchange of various classes of members, the qualifications, for membership,
and the exclusion, suspension, expulsion and re-admission of members therefrom or thereinto;

(d) the procedure for the registration of partnerships as members of the stock exchange in cases where the
rules provide for such membership; and the nomination and appointment of authorized representatives
and clerks.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 369

Section 4 lays down that if the Central Government is satisfied (powers are exercisable by SEBI also) after
making such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as it
may require;

(a) that the rules and bye-laws of a stock exchange applying for registration are in conformity with such
conditions as may be prescribed with a view to ensure fair dealing and to protect investors;

(b) thatthe stock exchange is willing to comply with any other conditions (including conditions as to the number
of members) which the Central Government, after consultation with the goveming body of the stock exchange
and having regard to the area served by the stock exchange and its standing and the nature of the securities
dealt with by it, may impose for the purpose of carrying out the objects of this Act; and

(c) that it would be in the interest of the trade and also in the public interest to grant recognition to the stock
exchange;

It may grant recognition to the stock exchange subject to the conditions imposed upon it as aforesaid and in
such form as may be prescribed.

The conditions which the Central Government can prescribe for the grant of recognition to the stock exchanges
may include, among other matters, conditions relating to —

(i) the qualifications for membership of stock exchanges;

(i) the manner in which contracts shall be entered into and enforced as between members;

(iii) the representation of the Central Government on each of the stock exchanges by such number of
persons not exceeding three as the Central Government may nominate in this behalf; and

(iv) the maintenance of accounts of members and their audit by chartered accountants whenever such
audit is required by the Central Government.

Every grant of recognition to a stock exchange under this section shall be published in the Gazette of India and
also in the Official Gazette of the State in which the principal office of the stock exchange is situated, and such
recognition shall have effect as from the date of its publication in the Gazette of India.

No application for the grant of recognition shall be refused except after giving an opportunityto the stock exchange
concemed to be heard in the matter; and the reasons for such refusal shall be communicated to the stock
exchange in writing.

No rules of a recognised stock exchange relating to any of the matter specified above as conditions for grant of
recognition by the Central Government shall be amended except with the approval of the Central Government.

CORPORATISATION AND DEMUTUALISATION OF STOCK EXCHANGES

Section 4A of the Act provides that on and from the appointed date, all recognized stock exchanges (if not
corporatized and demutualised before the appointed date) shall be corporatized and demutualised in accordance
with the provisions contained in Section 4B.

Further SEBI may, if it is satisfied that any recognized stock exchange was prevented by sufficient cause from
being corporatized and demutualised on or after the appointed date, specify another appointed date in respect
of that recognized stock exchange and such recognized stock exchange may continue as such before such
appointed date.
370 EP-CM&SL

PROCEDURE FOR CORPORATISATION AND DEMUTUALISATION

All Recognised stock exchange shall

submit a scheme for corporatisation
and demutualisation to SEBI for
its approval. After making enquiry

If SEBI satisfied that this scheme is in If SEBI is not satisfied and believe that
the interest of the public and trade. this scheme is not in the interest of
public and trade.

] |
Then SEBI shall approve the scheme Then, SEBI may reject the scheme and
and such scheme shall be published by rejection order shall be published in
Official Gazette. Before rejecting the
— SEBI;
scheme, SEBI shall give a reasonable
— therecognised stock exchange opportunity of being heard to all persons
in such two daily newspapers concerned and recognised stock
circulating in India, exchange.

|
Every recognised stock exchange, in
respect of which the scheme so
approved by SEBI shall, either by fresh
issue of equity shares to the public orin
any other manner as may be specified
by SEBI regulations, ensure that at least
51% equity share capital is held, within
12 months from the date of publication
of the order by the public other than
shareholders having trading rights and
SEBI may extend the period for the
interest of public.

Note :- 1. SEBI may, while approving the scheme by an order in writing, restrict—

(a) the voting rights of the shareholders who are also stock brokers of the recognised stock exchange;

(b) the right of shareholders or a stock broker of the recognised stock exchange to appoint the representatives
on the governing board of the stock exchange;

(c) the maximum number of representatives of the stock brokers of the recognised stock exchange to be
appointed on the governing board of the recognised stock exchange, which shall not exceed one-fourth
of the total strength of the governing board.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 3N

2. No scheme shall be approved by SEBI f the issie of shares for a lawful consideration or provision of trading
rights in lieu of membership card of the members of a recognised stock exchange or payment of dividends to
mermbers have been proposed oLt of any reserves or assets of that stock exchange.
3. The scheme so approved shall be bindingion;alljpersons andauthorities includingall members; creditors;
depositors and employees of the recognised stock exchange and on all persons having any contract, right,
power; obligation;or liabilty:with; against over toor inconnection with the recognised stock exchange or its
members.

WITHDRAWAL OF RECOGNITION

Section
5 lays down that f the Central Goverment is of opinion that the recognition granted to a stock
exchange should n the interest of the trade or in the publi interest, be withdrawn, the Central Government
may serve on the governing body of the stock exchange a written notice that the Central Government is
considering the withdrawal of the recognition for the reasons stated in the notice and after giving an
opportunity to the governing body to be heard in the matter, the Central Government may withdraw, by
notification
in the Official Gazette, the recognition granted to the stock exchange;

However, the withdrawal shall not affect the validity of any contract entered into or made before the date of the
notification, and the Central Government may, after consultation with the stock exchange, make such provision
as it deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due
performance of any contracts outstanding on that date.

Where the recognized stock exchange has not been corporatized or demutualised or it submit
fails to the
scheme within the specified time therefore or the scheme has been rejected by the SEBI, the recognition
granted to such stock exchange, shall, notwithstanding anything to the contrary contained in this Act, stand
withdrawn and the Central Government shall publish, by nofification in the Official Gazette, such withdrawal
of recognition.

However, such withdrawal shall not affect the validity of any contract entered into or made before the date of the
notification, and SEBI may, after consultation with the stock exchange, make such provisions as it deems fit in
the order rejecting the scheme published in the Official Gazette under sub-Section (5) of Section 4B.

Itis to be noted that the powers under Section 4 (3), 4(5) and Section 5 have been delegated concurrently
to SEBI also. Hence, SEBI may exercise these powers.

POWER OF CENTRAL GOVERNMENT TO CALL FOR PERIODICAL RETURNS AND MAKE

DIRECT ENQUIRIES

Section6 enjoins that every recognised stock exchange shall furnish to SEBI, such periodical
retums relatingto
itsvaffairsiasimay be prescribed. Every such stock exchange and every member thereof shall maintain and
preserve for such periods not exceeding five years such books of accounts, and other documents as the Central
Government, after consultation with the stock exchange concerned, may prescribe in the interest of the trade or
in the public interest, and such books of account, and other documents shall be subject to inspection to all
reasonable times by SEBI.

Ifsatisfied
SEBI is that it is in the interest of the trade or in public interest so to do, may by order in writing —
(a) call upon a recognised stock exchange or any member thereof to furnishrinwriting suchrinformation or
explanation relating to the affairs of the stock exchange or of the member in relation to the stock exchange
as SEBI may require; or

(b) appointone ormore persons to make:aninguiry in the prescribed manner in relation to the affairs of the
governing body of a stock exchange or the affairs of any of the members of the stock exchange in
relation to the stock exchange and submit a report of the result of such inquiryto the SEBI within such
372 EP-CM&SL

time as may be specified in the order or, in the case of an inquiry in relation to the affairs of any of
the members of a stock exchange, direct the governing body to make the inquiry and submitits report to
SEBI.

Where an inquiry in relation to the affairs of a recognised stock exchange or the affairs of any of its members in
relation to the stock exchange has been undertaken —

(a) every director, manager, secretary or other officer of such stock exchange;
(b) every member of such stock exchange;

(d) every other person or body of persons who has had dealings in the course of business with any of the
persons mentioned in clauses (a), (b) and (c) whether directly or indirectly; shall be bound to produce
before the authority making the inquiry all such books of account, and other documents in his custody or
power relating to or having a bearing on the subject-matier of such inquiry and also to furnish the
authorities within such time as may be specified with any such statement or information relating thereto
as may be required of him.

Every stock exchange shall furnish to the Central Government and to SEBI a copy of its annual report which
shall contain such particulars as may be prescribed by Central Government/SEBI.

POWER OF RECOGNISED STOCK EXCHANGE TO MAKE RULES RESTRICTING VOTING

RIGHTS ETC.
Section 7A of the Act stipulates that a recognised stock exchange may make rules or amend any rules made by
it to provide for all or any of the following matters, namely —

so that each member may be entitled to have one vote only, irrespective of his share of the paid-up
equity capital of the stock exchange;

() the restriction on the right of a member to appoint another person as his proxy to attend and vote at a
meeting of the stock exchange; and

(d) such incidental, consequential and supplementary matters as may be necessary to give effect to any of
the matters specified in clauses (a) (b) and (c).

Norules of a recognised stock exchange made or amended in relation to any matter referred in the above paragraph
shall have effect until they have been approved by the Central Government and published by that Government in
the Official Gazette and, in approving the rules so made or amended, the Central Government may make such
modifications therein as it thinks fit, and on such publication, the rules as approved by the Central Government
shall be deemed to have been validly made, notwithstanding anything to the contrary contained in the Companies
Act, 2013. The powers have been delegated concurrently to SEBI also in this regard.

POWER OF CENTRAL GOVERNMENT TO DIRECT RULES OR MAKE RULES

Section
8 deals with the power of Central Government to make rules or direct rules to be made in respect of
recognised stock exchange. Where after consultation with the governing bodies of stock exchanges generally
or with the governing body of any stock exchange in particular, the Central Government is of opinion that it is
necessary or expedient so to do, it may, order
by in writing together with a statement of the reasons therefor,
direct the recognised stock exchanges generally or any recognised stock exchange in particular, as the case
Lesson 16 » Regulatory Framework Governing Stock Exchanges 373

may be, to make any rules or to amend any rules already made in respect of all or any of the matters or to amend
any rules already made in respect of all or any of the matters as specified, within a period of two months from the
date of the order.
If any recognised stock exchange fails or neglects to comply with any order; within the period specified therein,
the SEnrElSoVEmMENtMayIMakeheruIes oforamendihETIESIMAUEIDY, te recognised stock exchange,
either in the form proposed in the order or with such modifications thereof as may be agreed to between the
stock exchange and the Central Government.

Where in pursuance of this section any rules have been made or amended, the rules so made or amended shall
be published in the Gazette of India and also in the Official Gazette or Gazettes of the State or States in which
the principal office or offices of the recognised stock exchange or exchanges is or are situate, and, on the
publication thereof in the Gazette of India, the rules so made or amended shall, notwithstanding anything to the
contrary contained in the Companies Act, 2013 or in any other law for the time being in force, have effect as if
they had been made or amended by the recognised stock exchange or stock exchanges, as the case may be.

Powers have been delegated concurrently to SEBI also.

CLEARING CORPORATION
Section 8A(1) provides that a recognised stock exchange may, with the prior approval of SEBI, transfer the
duties and functions of a clearing house to a clearing corporation, being a company incorporated under the
Companies Act, 2013, for the purpose of —

(a) the periodical settiement of contracts and differences thereunder;

(b) the delivery of, and payment for, securities;

(c) any other matter incidental to, or connected with, such transfer.

Sub-section (2) provides that every clearing corporation shall, for the purpose of transfer of the duties and
functions of a clearing house to a clearing corporation referred to in sub-section (1), make bye-laws and submit
the same to the SEBI for its approval.

Sub-section (3) provides that SEBI may, on being satisfied that it is in the interest of the trade and also in the
public interest to transfer the duties and functions of a clearing house to a clearing corporation, grant approval
to the bye-laws submitted to it and approve transfer of the duties and functions of a clearing house to a clearing
corporation.

POWER OF RECOGNISED STOCK EXCHANGES TO MAKE BYE-LAWS

According to Section9, any recognised stock exchange may, subject to the previous approval of SEBI, make
bye-laws for the regulation and control of contracts. In particular, and without prejudice to the generality of the
foregoing power, such bye-laws may provide for:

(a) the opening and closing of markets and the regulation of the hours of trade;
(b) a clearing house for the periodical settiement of contracts and differences thereunder, the delivery of
and payment for securities, the passing on of delivery orders and the regulation and maintenance of
such clearing house;

(c) the submission to SEBI by the clearing house as soon as may be after each periodical settlement of all
or any of the following particulars as SEBI may, from time to time, require, namely:

(i) the total number of each category of security carried over from one settlement period to another;

(i) the total number of each category of security, contracts which have been squared up during the
course of each settlement period;
374 EP-CM&SL

(iii) the total number of each category of security actually delivered at each clearing;

(d) the
publication by the clearing house of all or any of the particulars submitted to SEBI subject to the
directions, if any, issued by SEBI in this behalf;

(e) the regulation or prohibition of blank transfers;

(f) the number and classes of contracts in respect of which setiements shall be made or differences paid
through the clearing house;

(9) the regulation, or prohibition of budlas or carry-over faciliies;

(h) the fixing, altering or postponing of days for settlements;
(i) the
determination and declaration of market rates, including the opening, closing, highest and lowest
rates for securities;

() the terms, conditions and incidents of contracts, including the prescription of margin requirements, if
any, and conditions relating thereto, and the forms of contracts in writing;

(k) the regulation of the entering into making, performance, rescission and termination, of contracts, including
contracts between members or between a member and his constituent or between a member and a
person who is not a member, and the consequences of default or insolvency on the part of a seller or
buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility
of members who are not parties to such contracts;

(l) the regulation

of faravani business including the placing of limitations thereon;
(m) the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings
and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in
any specified securities;

(n) the method and procedure for the settiement of claims or disputes, including setiement by arbitration;
(0) the levy and recovery of fees, fines and penalties;
(p) the regulation of the course of business between parties to contracts in any capacity;
(q) the fixing of a scale of brokerage and other charges;
(r) the making, comparing, settiing and closing of bargains;
(s) the emergencies in trade which may arise, whether as a result of pool or syndicated operations or
concerning or otherwise, and the exercise of powers in such emergencies including the power to fix
maximum and minimum prices for securities;

(t) the regulation of dealings by members for their own account

(u) the separation of the functions of jobbers and brokers;
(v) the limitations on the volume of trade done by any individual member in exceptional circumstances;
(w) the
relating to the business as the governing body may require.

PUNISHMENTS FOR CONTRAVENTIONS

The bye-laws made under Section
9 may;
(a) specify the bye-laws, the contravention of which shall make a contract entered into otherwise than in
accordance with the bye- laws void under sub-section (1) of section 14 (which specifies contract in
notified areas to be void).
Lesson 16 » Regulatory Framework Governing Stock Exchanges 375

(b) provide that the contravention of any of the bye-laws shall render the member concerned liable to one
or more of the following punishments, namely;

(i) fine,

(i) expulsion from membership,

(iii) suspension from membership for a specified period,

(iv) any other penalty of a like nature not involving the payment of money.

Any bye-laws made under this section shall be subject to such conditions in regard to previous publication as
may be prescribed, and when approved by SEBI, shall be published in the Gazette of India and also in the
Official Gazette of the State in which the principal office of the recognised stock exchange is situated, and shall
have effect as from the date of its publication in the Gazette of India.

However, if SEBI is satisfied in any case that in the interest of the trade or in the public interest any bye-laws
should be made immediately, it may, by order in writing specify the reasons therefor, dispense with the condition
of previous publication.

POWER OF SEBI TO MAKE OR AMEND BYE-LAWS OF RECOGNISED STOCK EXCHANGES

SEBI may, either on arequest
in writing received by it in this behalf from the governing body of a recognised stock
exchange or on its own motion, if it is satisfied after consultation with the governing body of the stock exchange that
itis necessary or expedient so o do and after recording its reasons for so doing, make bye- laws, for al o any of
the matters specified in section 9 or amend any bye-laws made by such stock exchange under that section.

Where in pursuance of this section, any bye-laws have been made or amended, the bye-laws so made or
amended shall be published in the Gazete of India and also in the Offiial Gazette of the State in which the
principal office of the recognised stock exchange is situated, and on the publication thereof in the Gazette of
India, the bye-laws so made or amended shall have effect as if they had been made or amended by the recognised
stock exchange concerned.

Where the governing body of a recognised stock exchange objects to any bye-laws made or amended by SEBI
on its own motion, it may, within two months of the publication thereof in the Gazette of India/apply to SEBI for
revision thereof and SEBI may, after giving an opportunity to the governing body of the stock exchange to be
heard in the matter, revise the bye-laws so made o amended, and where any bye-laws so made or amended
are revised as a result of any action taken under this sub-section, the bye-laws so revised shall be published
and shall become effective as provided in sub-section (2) of Section 10.

The making or the amendment or revision of any bye-laws shall in all cases be subject to the condition of
previous publication.

However, if SEBI is satisfied in any case that in the interest of the trade or in the public interest any bye-laws
should be made, amended or revised immediately, it may, by order in writing specifying the reasons therefor,
dispense with the condition of previous publication.

POWER OF CENTRAL GOVERNMENT TO SUPERSEDE COMPANIES OF STOCK EXCHANGES

OR SUSPEND BUSINESS THEREOF
Without prejudice to any other powers vested in the Central Government under this Act, where the Central

then, notwithstanding anything contained in any other law for the time being in force, the Central Government
may serve on the governing body a written notice that the Central Government is considering the super session
of the goveming body for the reasons specifiedin the notice and afier giving an opportunity to the governing
bodyto be heard in the matter, it may, notification
by in the Official Gazette, declare the governing body of such
376 EP-CM&SL

stock
exchange to be superseded, and may appoint any person or persons to exercise and perform all the
powers and duties of the governing body, and, where more persons than one are appointed,
may appoint one of
On the publication of a notification in the Official Gazette, the following consequences shall ensure, namely —

(a) the members of the governing body which has been superseded shall, as from the date of the notification
of super session, cease to hold office as such members;

(b) the person or persons appointed may exercise and perform all the powers and duties of the governing
body which has been superseded;

(c) all such property of the recognised stock exchange as the person or persons appointed may, by order
in writing, specify in this behalf as being necessary for the purpose of enabling him or them to carry on
the business of the stock exchange, shall vest in such person or persons.

Notwithstanding anything to the contrary contained in any law or the rules or bye-laws of the recognised stock
exchange the governing body of which is superseded, the person or persons appointed under that sub-section

The Central Government, may at any time before the determination of the period of office of any person or
persons appointed under this section call upon the recognised stock exchange to reconstitute the governing
body in accordance with its rules and on such re-constitution all the property of the recognised stock exchange
which has been vested in, or was in the possession of, the person or persons appointed, shall vest or re-vest, as
the case may be, in the governing body so re-constituted;

However, until a governing body is so re-constituted, the person or persons appointed, shall continue to exercise
and perform their powers and duties.

Power to Suspend Business of Recognised Stock Exchange

Ifin the opinion of the Central Government an emergency, has arisen, for the purpose of meeting the emergency,
the Central Government considers it expedient so to do, it may, netification
by in the Official Gazette, for
reasons
to be set out therein, direct a recognised stock exchange to suspend such of ifs business for such period ot
exceeding seven days and subject to such conditions as may be specified in the nofification, and if, in the
opinion of the Central Government, the interest of the trade or the public interest requires that the period should
be extended, may, by like notification extend the said period from time to time;

However, where the period of suspension is to be extended beyond the first period, no notification extending the
period of suspension shall be issued unless the governing body of the recognised stock exchange has been
given an opportunity of being heard in the matter.

Power to Issue Directions

Section 12A provides that if, after making or causing to be made an inquiry, SEBI is satisfied that itis necessary —

(a) intheinterest
of investors, or orderly development of securities market; or

(b) topreventthesaffairs
of any recognisedstock exchange; or, clearing corporation, or such other agency
or person, providing trading or clearing or settlement facility in respect of securities, being conducted in
a manner detrimental to the interests of investors or securities market; or

(c) to'secure
the proper management of any such stock exchange or clearing corporation or agency or
person, referred to in clause (b), it may issue such directions —

(i) to any stock exchange or clearing corporation or agency or person referred to in clause (b) or any
person or class of persons associated with the securities market; or
Lesson 16 » Regulatory Framework Governing Stock Exchanges 377

(i) to any company whose securities are listed or proposed to be listed in a recognised stock exchange,
as may be appropriate in the interests of investors in securities and the securities market.

Explanation : The power to issue directions under this section shall include and always be deemed to
have been included the power to direct any person, who made profit or averted loss by indulging in
any transaction or activity in contravention of the provisions of this Act or regulatons made thereunder,
to disgorge an amount equivalent to the wrongful gain made or loss averted by such contraventions.

CONTRACTS IN SECURITIES
If the Central Government is satisfied, having regard to the nature or the volume of transactions in securities in any
State or States or area, that it is necessary so to do, it may, by notification in the Official Gazette, declare that
section 13 to apply to such State or States or area, and thereupon every contract in such State or States or area

However, any contract entered into between members of two or more recognised stock exchanges in such State
or States or area, shall —

(i) be subject to such terms and conditions as may be stipulated by the respective stock exchanges with
prior approval of SEBI;

(i) require prior permission from the respective stock exchanges if so stipulated by the stock exchanges
with prior approval of SEBI.

Additional Trading Floor

A stock exchange may establish additional trading floor with the prior approval of SEBI in accordance with the
terms and conditions stipulated by SEBI.

Additional trading floor means a trading ring or trading facility offered by a recognised stock exchange outside its
area of operating to enable the investors to buy and sell securities through such trading floor under the regulatory
framework of that stock exchange.

Contract in certain areas to be void

Any contract entered into in any State or area specified in the notification under section 13 which is in contravention
of any of the bye-laws specified in that behalf under clause(a) of sub-section (3) of section 9 shall be void:

(i) as respects the rights of any member of the recognised stock exchange who has entered into such
contract in contravention of any such bye-laws, and also

(i) as respects the rights of any other person who has knowingly participated in the transaction entailing
such contravention.
Nothing in sub-section (1) shall be construed to affect the right of any person other than a member of the
recognised stock exchange to enforce any such contract or to recover any sum under or in respect of such
contract if such person had no knowledge that the transaction was in contravention of any of the bye-laws
specified in clause (a) of sub-section (3) of section 9.

Members may not act as principals in certain circumstances.

No member of a recognised stock exchange shall in respect of any securities enter into any contract as a
principal with any person other than a member of a recognised stock exchange, unless he has secured the
consent or authority of such person and discloses in the note, memorandum or agreement of sale or purchase
that he is acting as a principal.
378 EP-CM&SL

However, where the member has secured the consent or authority of such person otherwise than in writing he
shall secure written confirmation by such person or such consent or authority within 3 days from the date of
contract.

Further that no such written consent or authority of such person shall be necessary for closing out any
outstanding contract entered into by such person in accordance with the bye-laws, if the member discloses in
the note, memorandum or agreement of sale or purchase in respect of such closing out that he is acting as a
principal.

Power to Prohibit Contracts in Certain Cases

If the Central Government is of opinion that it is necessary to prevent undesirable speculation in specified
securities in any State or area, it may, by notification in the Official Gazette, declare that no person in the State
or area specified in the notification shall, save with the permission of the Central Government, enter into any
contract for the sale or purchase of any security specified in the notification except to the extent and in the
manner, if any, specified therein.

All contracts in contravention of the provisions of sub-section (1) entered into after the date of the notification
issued thereunder shall be illegal.

Licensing of dealers in certain areas

Subjectto the provision of sub-section (3) and to the other provisions contained in this Act, no person shall carry
on or purport to carry on, whether on his own behalf or on behalf of any other person, the business of dealing in
securities in any State or area to which section 13 has not been declared to apply and to which the Central
Government may, by notification in the Official Gazette, declare this section to apply, except under the authority
of a license granted by SEBI in this behalf.

No notification under sub-section (1) shall be issued with respect to any State or area unless the Central
Government is satisfied, having regard to the manner in which securities are being dealt with in such State or
area, that itis desirable or expedient in the interest of the trade or in the public interest that such dealings should
be regulated by a system of licensing.

The restrictions imposed by sub-section (1) in relation to dealings in securities shall not apply to the doing of
anything by or on behalf of a member of any recognised stock exchange.

PUBLIC ISSUE AND LISTING OF SECURITIES

Section 17A provides for public issue and listing of securifies.

Without prejudice to the provisions contained in this Act or any other law for the time being in force, no securities
of the nature referred to in sub-clause (ie) of clause (h) of section 2 shall be offered to the public or listed on any
recognized stock exchange unless the issuer fuffils such eligibility criteria and complies with such other
requirements as may be specified by regulations made by SEBI.
Every issuer intending to offer the certificates or instruments referred therein to the public shall application,
make an
3 for
such certificates or instruments to be listed on the stock exchange or each such stock exchange.

any of them, thelissuer shall forthwith repay allmoneys, if any, received from applicants in pursuance of the offer
document, and f any such money is not repaid within eight days after the issuer becomes liable to repay i, the
[ cludony el Geler @ Tbis Taisi 2o uaetaluty e Wi [T eEEil Sl ey el i L@l
ofannum.
the eighth day, be jointly and severally liable to repay that money with interest at the rate of fifteen per cent per
Lesson 16 » Regulatory Framework Governing Stock Exchanges 379

In reckoning the eighth day after another day, any intervening day which is a public holiday under the
Negotiable Instruments Act, 1881, shall be disregarded, and if the eighth day (as so reckoned) is itself
such a public holiday, there shall for the said purposes be substituted the first day thereafter which is
not a holiday.

All the provisions of this Act relating to listing of securities of a public company on a recognized stock exchange
shall, mutates mutandis, apply to the listing of the securities of the nature referred to in sub-clause (ie) of clause
(h) of section 2 by the issuer, being a special purpose distinct entity.

EXCLUSION OF SPOT DELIVERY CONTRACTS

If the Central Government is of opinion that in the interest of the trade or in the public interest, it is expedient to
regulate and control the business of dealing in spot delivery contracts also in any State or area (whether section
13 has been declared to apply to that State or area or not), it may, by notification in the Official Gazette, declare
that the provisions of section 17 shall also apply to such State or area in respect of spot delivery contracts
generally or in respect of spot delivery contract for the sale or purchase of such securities as may be specified
in the notification, and may also specify the manner in which, and the extent to which, the provisions of that
section shall so apply.

CONTRACTS IN DERIVATIVES
Notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be
legal and valid if such contracts are —

(a) traded on a recognised stock exchange;

(b) settled on the clearing house of the recognised stock exchange, or

(c) between such parties and on such terms as the Central Government may, by notification in the official
Gazette, specify, in accordance with the rules and bye-laws of such stock exchange.

CONDITIONS FOR LISTING

Section 21 of the Act provides that where securities are listed on the application of any person in any recognised
stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.

DELISTING OF SECURITIES
Section 21A provides that a recognised stock exchange may delistthe securities, after recording the reasons therefor,
from any recognised stock exchange on any of the ground or grounds as may be prescribed under this Act.
The securities of a company shall not be delisted unless the company concerned has been given a reasonable
opportunity of being heard.

A listed company or an aggrieved investor may file an appeal before the Securities Appellate Tribunal (SAT)
against the decision of the recognised stock exchange delisting the securities within fifteen days from the date
of the decision of the recognized stock exchange delisting the securities and the provisions of Sections 22B to
22E of this Act, shall apply, as far as may be, to such appeals.

The Securities Appellate Tribunal may, if it is satisfied that the company was prevented by sufficient cause from
filing the appeal within the said period, allow it to be filed within a further period not exceeding one month.

RIGHT OF APPEAL TO SAT AGAINST REFUSAL TO LIST SECURITIES OF PUBLIC COMPANIES

BY STOCK EXCHANGES
Where a recognised stock exchange, acting in pursuance of any power given toit by its bye-laws, refuses to list the
securities of any company, the company shall be entitled to be furnished with reasons for such refusal, and may, —
380 EP-CM&SL

(a) from the date on which the reasons for such refusal are furnished to it, or

(b) where the stock exchange has omitted or failed to dispose of, within the time specified in sub-section
(1A) of section 40 of the Companies Act, 2013, the application for permission for the shares or debentures
to be dealt with on the stock exchange, within fifteen days from the date of expiry of the specified time or
within such further period, not exceeding one month, as the Securities Appellate Tribunal may, sufficient
on
cause being shown, allow appeal to the Securities Appellate Tribunal having jurisdiction in the matter
against such refusal, omission or failure, as the case may be, and thereupon the Securities Appellate
Tribunal may, after giving the stock exchange, an opportunity of being heard, —

Wwhere the stock exchange has omitted or failed to dispose of the application within the specified
time, grant or refuse the permission, and where the Securities Appellate Tribunal sets aside the
decision of the recognised stock exchange or grants the permission, the stock exchange shall act in
conformity with the orders of the Securities Appellate Tribunal.

Every appeal under sub-section (1) shall be in such form and be accompanied by such fee as may be prescribed.
The Securities Appellate Tribunal shall send a copy of every order made by it to SEBI and parties to the appeal.

PROCEDURE AND POWERS OF SAT

The Securities Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure,
1908, but shall be guided by the principles of natural justice and, subject to the other provisions of this Act and
of any rules, the Securities Appellate Tribunal shall have powers to regulate their own procedure including the
places at which they shall have their sittings.

The Securities Appellate Tribunal shall have, for the purpose of discharging their functions under this Act, the
same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect
of the following matters, namely —

Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding within the
meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code, 1860 and the
Securities Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter
XXVI of the Code of Criminal Procedure, 1973.

RIGHT TO LEGAL REPRESENTATION

The appellant may either appear in person or authorise one or more chartered accountants or company secretary
oraccountant
cost or legal practitioners or any of its officers to present his or its case before the SAT.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 381

APPEAL TO SUPREME COURT

Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the
of communication of the decision or order of the Securities
Appellate Tribunal to him on any question of fact or law arising out of such order;

However, the Supreme Court may, if itis satisfied that the appellant was prevented by sufficient cause from filing
the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.

PENALTIES AND PROCEDURES

The Act prescribes various penalties against persons who might be found guilty of offences under section 23 the
Act. These offences are listed below —
Any person who —

(a) without reasonable excuse (the burden of proving which shall be on him) fails to comply with any
requisition made under sub-section (4) of section 6; or
(b enters into any contract in contravention of any of the provisions contained in section 13 or section 16; or

(c) contravenes the provisions contained in section 17 or section 17A or section 19; or
(d) enters into any contract in derivative in contravention of section 18A or the rules made under section 30; or

(e) owns or keeps a place other than that of a recognised stock exchange which is used for the purpose of
entering into or performing any contracts in contravention of any of the provisions of this Act and knowingly
permits such place to be used for such purposes; or

( manages, controls, or assists in keeping any place other than that of a recognised stock exchange
which is used for the purpose of entering into or performing any contracts in contravention of any of the
provisions of this Act or at which contracts are recorded or adjusted or rights or liabilities arising out of
contracts are adjusted, regulated or enforced in any manner whatsoever; or

(9 not being a member of a recognised stock exchange or his agent authorised as such under the rules or
bye-laws of such stock exchange or not being a dealer in securities licensed under section 17 willfully
represents to or induces any person to believe that contracts can be entered into or performed under
this Act through him; or

(h not being a member of a recognised stock exchange or his agent authorised as such under the rules or
bye-laws of such stock exchange or not being a dealer in securities licensed under section 17, canvasses,
advertises or touts in any manner either for himself or on behalf of any other person for any business
connected with contracts in contravention of any of the provisions of this Act; or

(i) joins, gathers or assists in gathering at any place other than the place of business specified in the bye-
laws of a recognised stock exchange any person or persons for making bids or offers or for entering into
or performing any contracts in contravention of any of the provisions of this Act,

shall, without prejudice to any award of penalty by the Adjudicating Officer under this Act, on conviction, be
punishable with imprisonment for a term which may extend to ten years or with fine, which may extend to twenty-
five crore rupees or with both.

Any person who enters into any contract in contravention of the provisions contained in section 15 or who fails
to comply with the provisions of section 21 or section 21A or with the orders of or the Central Government under
section 22 or with the orders of the Securities Appellate Tribunal shall, without prejudice to any award of penalty
by the Adjudicating Officer under this Act, on conviction, be punishable with imprisonment for a term which may
extend to ten years or with fine, which may extend to twenty five crore rupees, or with both.
382 EP-CM&SL

Penalty for failure to furnish information, return, etc.

+ Any person, who is required under this Act or any rules made thereunder, fails to furnish any information,
document, books, returns or report to a recognised stock exchange or fail to maintain books of account
or records, as per the listing agreement or conditions, or bye-laws of a recognised stock exchange,
shall be liable to a penalty which shall not be less than 1 lakh rupees and which may extend to one
crore rupees for each day during which such failure continues.

Penalty for failure by any person to enter into an agreement with clients

+ Any person, who is required under this Act or any bye-laws of a recognised stock exchange made
thereunder, fails to enter into an agreement with his client, then he shall be liable to a penalty which
shall not be less than 1 lakh rupees which may extend to one crore rupees for each day during which
such failure continues.

Penalty for failure to redress investors’ grievances

« Any stock broker or sub-broker or a company whose securities are listed or proposed to be listed in a
recognised stock exchange, after having been called upon by SEBI or a recognised stock exchange in
writing, to redress the grievances of the investors, fails to redress such grievances within the time ,
shall be liable to a penalty which shall not be less than 1 lakh rupees and which may extend to one
crore rupees for each day during which such failure continues.

Penalty for failure to segregate securities or moneys of client or clients

« Any person, who is registered as a stock broker or sub-broker with SEBI, fails to segregate securities
ormoneys of the client or clients or uses the securities or moneys of a client or clients for self or for any
other client, he shall be liable to a penalty which shall not be less than 1 lakh rupees and which may
extend to one crore rupees.
p

Penalty for failure to comply with provision of listing conditions or delisting conditions or grounds

« If a company or any person managing collective investment scheme or mutual fund, fails to comply
with the listing conditions or delisting conditions or grounds or commits a breach thereof, he shall be
liable to a penalty which shall not be less than 5 lakh rupees and which may extend to 25 crore rupees.

Penalty for excess dematerialisation or delivery of unlisted securities

« If any company dematerialises securities more than the issued securities of a company or delivers in
the stock exchanges the securities which are not listed in the recognised stock exchange or delivers
securities where no trading permission has been given by the recognised stock exchange, he shall be
liable to a penalty which shall not be less than 5 lakh rupees and which may extend to 25 crore rupees.

Penalty for failure to furnish periodical returns, etc.

« Ifarecognised stock exchange fails or neglects to furnish periodical returns to SEBI or fails or neglects
to make or amend its rules or bye-laws as directed by SEBI or fails to comply with directions issued by
SEBI, such recognised stock exchange shall be liable to a penalty which shall not be less than 5 lakh
rupees and which may extend to 25 crore rupees.

Penalty for contravention where no separate penalty has been prescribed

+ Where contravenues of any provision of this Act, the rules or articles or bye- laws or the regulations of
the recognised stock exchange or directions issued by SEBI for which no separate penalty has been
provided, shall be liable to a penalty which shall not be less than 1 lakh rupees and which may extend
to 1 crore rupees.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 383

POWER TO ADJUDICATE
Section 23-| deals with power to adjudicate by SEBI.

SEBIstalEprointenyciceguotheloNteEnqofEyRivisioniehisfof
S ER Iobegnyad picativglofficegioy
holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of
being heard for the purpose of imposing any penalty.

While holding an inquiry, the adjudicating officer shall have power to summon and enforce the attendance of any
person acquainted with the facts and circumstances of the case to give evidence or to produce any document,
which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry
and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions, he may impose
such penalty as he thinks fit in accordance with the provisions of this Act.

SEBI may callfor and examine the record of any proceedings under ths Secfion and if it considers that the order
passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it
may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the
quantum of penalty, if the circumstances of the case so justify. However, no such order shall be passed unless
the person concerned has been given an opportunity of being heard in the matter.

Further, nothing contained in this sub-section shall be applicable after an expiry of a period of three months from
the date of the order passed by the adjudicating officer or disposal of the appeal under section 23L, whichever
iseatiier.
FACTORS TO BE TAKEN INTO ACCOUNT BY THE ADJUDICATING OFFICER
Section 23J provides for the factors to be taken into account by the adjudicating officer. While adjudging the
quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely —

(a) itietamountofidisproporfionateoainjounfaif=dvant-uenwhereyerquantifisblegmadasEyesulofte
HefEmIY
L) Uiscluteltlilie LekS ealsal Uwelu sl Gl gl @ [WEEE S e el Uk el eI
(c) the repefitive nature of the default.
Settlement of Administrative and Civil Proceedings
Section 23JA states that any person, against whom any proceedings have been initiated or may be initiated
under section 12A or section 23-1, may file an application in writing to SEBI proposing for settiement of the
proceedings initiated or to be initiated for the alleged defaults.

SEBI may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for
settlement, on payment of such sum by the defaulter or on such other terms as may be determined by SEBI in
accordance with the regulations made under the SEBI Act, 1992.

For the purpose of settlement under this section, the procedure as specified by SEBI under the SEBI Act, 1992
shall apply.

No appeal shall lie under section 23L against any order passed by SEBI or adjudicating officer, as the case may
be, under this section.

Recovery of Amounts
Section 23JB deals with recovery of amounts. liEpersonfailsioypaytepEEitymposEtibyjtisatiodication
officer or fails to comply with any direction of SEBI for refund of monies or fails to comply with a direction of
disgorgement order issued under Section 12A or fails to pay any fees due to SEBI, the Recovery Officer may
384 EP-CM&SL

draw up under his signature a statement in the specified form specifying the amount due from the person (such
statement being hereafter in this Chapter referred to as certificate) and shall proceed to recover from such

and for this purpose, the provisions of section 220 to 227, 228A, 229, 232, the Second and Third Schedules to
the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to
time, in so far as may be, apply with necessary modifications as if the said provisions and the rules thereunder
were the provisions of this Act and referred to the amount due under this Act instead of to income-tax under the
Income-tax Act, 1961.

CREDITING SUM REALISED BY WAY OF PENALTIES TO CONSOLIDATED FUND OF INDIA

All sums realised by way of penalties under this Act shall be credited to the Consolidated Fund of India.

APPEAL TO SECURITIES APPELLATE TRIBUNAL (SAT)

Any person aggrieved by the

decision of the recognised stock
exchange or adjudicating officer or
any order of SEBI may appeal to
SAT

SAT shall
Within 60days from the date of on which a Dispose of
copy of order or receiving of decision by the the appeal
appellant in such form and on such fees as within 6
prescribed. months

On receipt of appeal and after giving the

parties to opportunity of being heard, pass
order as thinks fit, confirming, modifying or
setting aside the order.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 385

OFFENCES
(1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes
or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations or
byelaws made thereunder, for which no punishment is provided elsewhere in this Act, he shall be punishable
with imprisonment for a term which may extend to ten years, or with fine, which may extend to twenty-five crore
rupees or with both.
(2) If any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions
or orders, he shall be punishable with imprisonment for a term which shall not be less than one month but which
may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or with both. [Section 23M].

COMPOSITION OF CERTAIN OFFENCES

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence punishable under this
Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either
before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court
before which such proceedings are pending. [Section 23N]

POWER TO GRANT IMMUNITY

Section 23-0O deals with the power to grant immunity.
(1) The Central Government may, on recommendation by SEBI, if the Central Governments satisfied, that
any person, who is alleged to have violated any of the provisions of this Act or the rules or the regulations
made thereunder, has made a full and true disclosure in respect of alleged violation, grant to such
person, subject to such conditions as it may think fit to impose, immunity from prosecution for any
offence under this Act, or the rules or the regulations made thereunder or also from the imposition of any
penalty under this Act with respect to the alleged violation.

No such immunity shall be granted by the Central Government in cases where the proceedings for the
prosecution for any such offence have been instituted before the date of receipt of application for grant
of such immunity.

Further that the recommendation of the SEBI under this sub-section are not binding upon the Central
Government.
@ An immunity granted to a person under sub-section (1) may, at any time, be withdrawn by the Central
Government, if it is satisfied that such person had, in the course of the proceedings, not complied with
the condition on which the immunity was granted or had given false evidence, and thereupon such
person may be tried for the offence with respect to which the immunity was granted or for any other
offence of which he appears to have been guilty in connection with the contravention and shall also
become liable to the imposition of any penalty under this Act to which such person would have been
liable, had not such immunity been granted.

OFFENCES BY COMPANIES
(1) Where an offence has been committed by a company, every person who, at the time when the offence was
committed, was in charge of, and was
responsibleto, the company for the conduct of the business of the
company, as well as the company, shall be deemed to be guilty of the offence, and shall be liable to be proceeded
against and punished accordingly:

However, nothing contained in this sub-section shall render any such person liable to any punishment provided
in this Act, if he proves that the offence was committed without his knowledge or that he exercised all due
diligence to prevent the commission of such offence.

(2) Where an offence under this Act has been committed by a company and is proved that the offence has been
committed with the consent or connivance of, or is attributable to any gross negligence on the part of any director,
386 EP-CM&SL

manager, secretary or other officer of the company, such director, manager, secretary or other officer of the company
shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

(3) The provisions of this section shall be in addition to and not in derogation of, the provisions of section 22A.

CERTAIN OFFENCES TO BE COGNIZABLE

Notwithstanding anything contained in the Code of Criminal Procedure, 1898, any offence punishable under
section 23 shall be deemed to be cognizable offence within the meaning of that Code.

COGNIZANCE OF OFFENCES BY COURTS

No court shall take cognizance of any offence punishable under this Act or any rules or regulations or bye-laws
made thereunder, save on a complaint made by the Central Government or State Government or SEBI or a
recognised stock exchange or by any person.

Establishment of Special Courts

Section 26A lays down the provisions for establishment of special courts by Central Govt. for the purpose of
speedy trial.

(1) The Central Government may, for the purpose of providing speedy trial of offences under this Act, by notification,
establish or designate as many Special Courts as may be necessary.

(2) A Special Court shall consist of a single judge who shall be appointed by the Central Government with the
concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working.

(3)A person shall not be qualified for appointment as a judge of a Special Court unless he is, immediately before
such appointment, holding the office of a Sessions Judge or an Additional Sessions Judge, as the case may be.

Offences triable by Special Courts

Section 26B provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973, all
offences under this Act committed prior to the date of commencement of the Securities Laws (Amendment)
Ordinance, 2014 or on or after the date of such commencement, shall be taken cognizance of and triable by the
Special Court established for the area in which the offence is committed or where there are more Special Courts
than one for such area, by such one of them as may be specified in this behalf by the High Court concerned.

Application of Code to proceeding before special court

Section 26D provides that the Code of Criminal Procedure, 1973 shall apply to the proceeding before a special
court and for the purposes of the said provisions, the special court shall be deemed to be Court of Session and
the person conducting prosecution before a special court shall be deemed to be a public prosecutor within the
meaning of the Code of Criminal Procedure, 1973. The persons conducting prosecution should have been in
practice as an Advocate for not less than seven years or shall have held a post, for a period of not less than
seven years, under the Union or a State, requiring special knowledge of law.

RIGHTS OF INVESTORS

Entitlement of the Investors to Di dend declared by the Company

It shall be lawful for the holder of any security whose name appears on the books of the company issuing the
said security to receive and retain any dividend declared by the company in respect thereof for any year,
notwithstanding that the said security has already been transferred by him for consideration, unless the transferee
who claims the dividend from the transferor has lodged the security and all other documents relating to the
transfer which may be required by the company with the company for being registered in his name within fifteen
days of the date on which the dividend became due.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 387

Explanation. — The period specified in this section shall be extended —

(i) in case of death of the transferee, by the actual period taken by his legal representative to establish his
claim to the dividend;

(i) in case of loss of the transfer deed by theft or any other cause beyond the control of the transferee, by
the actual period taken for the replacement thereof; and

(iii) in case of delay in the lodging of any security and other documents relating to the transfer due to causes
connected with the post, by the actual period of the delay.
Nothing contained in sub-section (1) shall affect —
(a) the right of a company to pay any dividend which has become due to any person whose name is for the
time being registered in the books of the company as the holder of the security in respect of which the
dividend has become due; or
(b) the right of the transferee of any security to enforce against the transferor or any other person his rights,
if any, in relation to the transfer in any case where the company has refused to register the transfer of
the security in the name of the transferee.

Right to Receive Income From Collective Investment Scheme

It shall be lawful for the holder of any securities, being units or other instruments issued by collective investment
scheme, whose name appears on the books of the collective investment scheme issuing the said security to
receive and retain any income in respect of units or other instruments issued by the collective investment
scheme declared by the collective investment scheme in respect thereof for any year, though the said security,
being units or other instruments issued by collective investment scheme, has already been transferred by him
for consideration, unless the transferee who claims the income in respect of units or other instruments issued by
collective investment scheme from the transfer or has lodged the security and all other documents relating to the
transfer which may be required by the collective investment scheme with the collective investment scheme for
being registered in his name within fifteen days of the date on which the income in respect of units or other
instruments issued by the collective investments scheme became due.

Explanation — The period specified in this section shall be extended —

(i) in case of death of the transferee, by the actual period taken by his legal representative to establish
his claim to the income in respect of units or other instruments issued by collective investment scheme;

(i) in case of loss of the transfer deed by theft or any other cause beyond the control of the transferee, by
the actual period taken for the replacement thereof; and

(iii) in case of delay in the lodging of any security, being units or other instruments issued by the collective
investment scheme, and other documents relating to the transfer due to causes connected with the
post, by the actual period of the delay.

This shall not affect —

(a) therightof a collective investment scheme to pay any income from units or other instruments issued
by collective investment scheme which has become due to any person whose name is for the time
being registered in the books of the collective investment scheme as the registered holder in the
books of the collective investment scheme being units or other instruments issued by collective
investment scheme in respect of which the income in respect of units or other instruments issued by
collective scheme has become due; or

(b the right of transferee of any security, being units or other instruments issued by collective investment
scheme, to enforce against the transferor or any other person his rights, if any, in relation to the
transfer in any case where the company has refused to register the transfer of the security being
units or other instruments issued by the collective investment scheme in the name of the transferee.
388 EP-CM&SL

Right to receive Income from Mutual Fund

Section 27B provides that it shall be lawful for the holder of any securities, being units or other instruments
issued by any mutual fund, whose name appears on the books of the mutual fund issuing the said security to
receive and retain any income in respect of units or other instruments issued by the mutual fund declared by the
mutual fund in respect thereof for any year, notwithstanding that the said security, being units or other instruments
issued by the mutual fund, has already been transferred by him for consideration, unless the transferee who
claims the income in respect of units or other instruments issued by the mutual fund from the transferor has
lodged the security and all other documents relating to the transfer which may be required by the mutual fund
with the mutual fund for being registered in his name within fifteen days of the date on which the income in
respect of units or other instruments issued by the mutual fund became due.
The period specified in this Section may be extended —

(i) in case of death of the transferee, by the actual period taken by his legal representative to establish his
claim to the income in respect of units or other instrument issued by the mutual fund;
(i) in case of loss of the transfer deed by theft or any other cause beyond the control of transferee, by the
actual period taken for the replacement thereof;

(iii) in case of delay in the lodging of any security, being units or other instruments issued by the mutual
fund, and other documents relating to the transfer due to cause connected with the post, by the actual
period of the delay.

Sub-section (2) provides that nothing contained in Sub-section (1) shall affect —
(a) theright of a mutual fund to pay any income from units or other instruments issued by the mutual fund which
has become due to any person whose name is for the time being registered in the books of the mutual fund
as the holder of the security being units or other instruments issued by the mutual fund in respect of which the
income in respect of units or other instruments issued by mutual fund has become due; or

(b the right of transferee of any security, being units or other instruments issued by the mutual fund, to
enforce against the transferor or any other person his rights, if any, in relation to the transfer in any case
where the mutual fund has refused to register the transfer of the security being units or other instruments
issued by the mutual fund in the name of the transferee.

POWER OF CENTRAL GOVERNMENT TO DELEGATE OR TO MAKE RULES

Section 29A of the Securities Contracts (Regulation) Act, 1956 provides that the Central Government may, by
order published in the Official Gazette, direct that the powers (except the power under section 30) exercisable
by it under any provision of this Act shall, in relation to such matters and subject to such conditions, if any, as
may be specified in the order, be exercisable also by SEBI or the Reserve Bank of India constituted under
section 3 of the Reserve Bank of India Act, 1934.
Section 30 empowers the Central Government to make rules for the purpose of carrying into effect the objects
of this Act by notification in the Official Gazette.

In particular, and without prejudice to the generality of the foregoing power, such rules may provide for,
(a) the manner in which applications may be made, the particulars which they should contain and the levy
of a fee in respect of such applications;
(b) the manner in which any inquiry for the purpose of recognizing any stock exchange may be made, the
conditions which may be imposed for the grant of such recognition, including conditions as to the
admission of members if the stock exchange concerned is to be the only recognised stock exchange in
the area; and the form in which such recognition shall be granted;

(c) the particulars which should be contained in the periodical returns and annual reports to be furnished to
the Central Government;
Lesson 16 » Regulatory Framework Governing Stock Exchanges 389

(d documents which should be maintained and preserved under section 6 and the periods for which they
should be preserved;
(e manner in which any inquiry by the governing body of a stock exchange shall be made under section 6;

( the manner in which the bye-laws to be made or amended under this Act shall before being so made or
amended be published for criticism;

(9 ) the manner in which applications may be made by dealers in securities for licences under section 17,
the fee payable in respect thereof and the period of such licences, the conditions subject to which
licences may be granted, including conditions relating to the forms which may be used in making contracts,
the documents to be maintained by licensed dealers and the furnishing of periodical information to such
authority as may be specified and the revocation of licences for breach of conditions;
(h the requirements which shall be complied with —

(A) by public companies for the purpose of getting their securities listed on any stock exchange;
(B) by collective investment scheme for the purpose of getting their units listed on any stock exchange;

(ha) the grounds on which the securities of a company may be delisted from any recognised stock exchange
under sub-section (1) of Section 21A;

(hb) the form in which an appeal may be filed before the Securities Appellate Tribunal under sub-section (2)
of Section 21A and the fees payable in respect of such appeal;

(he, ) the form in which an appeal may be filed before the Securities Appellate Tribunal under Section 22A and
the fees payable in respect of such appeal;

(hd) the manner of inquiry under sub-Section (1) of Section 23-I;

(he) the form in which an appeal may be filed before the Securities Appellate Tribunal under Section 23L and
the fees payable in respect of such appeal.

(0] any other matter which is to be or may be prescribed.

Every rule made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament,
while it is in session, for a total period of thirty days which may be comprised in one session or in two or more
successive sessions, and if, before the expiry of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the rule or both Houses agree that the rule
should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the
case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of
anything previously done under that rule.

SPECIAL PROVISIONS RELATED TO COMMODITY DERIVATIVES

Section 30A deals with following special provisions relating to commodity derivatives:-
(1) This Act shall not apply to non-transferable specific delivery contracts.

However, no person shall organise or assist in organising or be a member of any association in any
area to which the provisions of section 13 have been made applicable (other than a stock exchange)
which provides facilities for the performance of any non-transferable specific delivery contract by any
party thereto without having to make or receive actual delivery to or from the other party to the contract
or to or from any other party named in the contract.

@ Where in respect of any area, the provisions of section 13 have been made applicable in relation to
commodity derivatives for the sale or purchase of any goods or class of goods, the Central Government
may, by notification, declare that in the said area or any part thereof as may be specified in the notification
all or any of the provisions of this Act shall not apply to transferable specific delivery contracts for the
sale or purchase of the said goods or class of goods either generally, or to any class of such contracts
in particular.
390 EP-CM&SL

(3) If the Central Government is of the opinion that in the interest of the trade or in the public interest it is
expedient to regulate and control non-transferable specific delivery contracts in any area, it may, by
notification in the Official Gazette, declare that all or any of the provisions of this Act shall apply to such
class or classes of non-transferable specific delivery contracts in such area in respect of such goods or
class of goods as may be specified in the notification, and may also specify the manner in which and the
extent to which all or any of the said provisions shall so apply.

POWER OF SEBI TO MAKE REGULATIONS

Section 31 provides that without prejudice to the provisions contained in Section 30 of SEBI Act, 1992, SEBI
may, by notification in the Official Gazette, make regulations consistent with the provisions of this Act and the
rules made thereunder to carry out the purposes of this Act.

In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all
or any of the following matter namely : (a) the manner, in which at least fifty-one per cent of equity share capital
of a recognised stock exchange is held, within twelve months from the date of publication of the order under
sub-section (7), of Section 4B by the public other than shareholders having trading rights under sub-section (8)
of that section; (b) the eligibility criteria and other requirements under Section 17A; (c) The terms determined
SEBI for settlement of proceeding under sub-section (2) of section 23JA and (d) any other matter which is
required to be, or may be, specified by regulations or in respect of which provision is to be made by regulation.

Every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of
Parliament, while it is in session for a total period of thirty days which may be comprised in one session or in two
or more successive sessions, and if, before the expiry of the session immediately following the session or the
successive sessions aforesaid, both Houses agree in making any modification in the regulation or both Houses
agree that the regulation should not be made, the regulation shall thereafter have effect only in such modified
form or be of no effect, as the case may be; so, however, that any such modification or annuiment shall be
without prejudice to the validity of anything previously done under that regulation.

SECURITIES CONTRACT (REGUL ION) (STOCK EXCHANGE AN EARING

CORPORATIONS) REGULATIONS, 2012
With an intent to regulate recognition, ownership and governance in stock exchanges and clearing corporations,
EIEET ol dlaie 20 ZDIZ el e Sl Ceielss (Raellelin) (Sl [2iea /= clal Clzii]
CompoEtiouReo o202
With the notification of these Regulations, the Securities Contracts (Regulations) (Manner of Increasing and
Maintaining Public shareholding in recognized Stock Exchanges) Regulations, 2006, which dealt only with the
Stock Exchanges stand repealed.

Definitions
“Associate” in relation to a person shall include another person:

(i) who, directly or indirectly, by himself, or in combination with other persons, exercises control over the
first person;
(ii) who holds more than fifteen per cent shares in the paid up equity capital of the first person;
(iii) who is a holding company or a subsidiary company of the first person;
(iv) who is a relative of the first person;
(v) who is a member of a Hindu Undivided Family wherein the first person is also a member;
(vi) such other cases where SEBI is of the view that a person shall be considered as an associate based on
the facts and factors including the extent of control, independence, conflict of interest.

“Commodity derivatives exchange” means a recognized stock exchange which assists, regulates or controls
Lesson 16 » Regulatory Framework Governing Stock Exchanges 391

the business of buying, selling or dealing only in commodity derivatives and option in securities with the prior
approval of SEBI.
“National commodity derivatives exchange” means a commodity derivatives exchange that is demutualized,
has an electronic trading platform and is permitted to assist, regulate or control the business of buying, selling or
dealing in commodity derivatives and option in securities with the prior approval of SEBI.
“Netting” means the determination by Clearing Corporation of net payment or delivery obligations of the clearing
members of a recognised clearing corporation by setting off or adjustment of the inter se obligations or claims
arising out of buying and selling of securities including the claims and obligations arising out of the termination
by the Clearing Corporation or Stock Exchange, in such circumstances as the Clearing Corporation may specify
in bye-laws, of the transactions admitted for settiement at a future date, so that only a net claim be demanded,
or a net obligation be owed.”

“Public” includes any member or section of the public but does not include any trading member or clearing
member or their associates and agents.

However, a public sector bank, public financial institution, an insurance company, mutual fund and alternative
investment fund in public sector, that has associate(s) as trading members or clearing members, shall be deemed
as public for the purposes of these regulations.
“Public interest director” means an independent director, representing the interests of investors in securities
market and who is not having any association, directly or indirectly, which in the opinion of SEBI, is in conflict
with his role.
“Shareholder director’ means a director who represents the interest of shareholders, and elected or nominated
by such shareholders who are not trading members or clearing members, as the case may be, or their associates
and agents.

Recognition of Stock Exchanges and Clearing Corporations

As per the provisions of these Regulations, all Stock Exchanges and Clearing Corporations are required to apply for
recognition by the SEBI. The Stock Exchanges which have been recognized under the Act as on the date of
commencement of these Regulations, shall be deemed to have been recognized under these Regulations and all the
provisions shall be applicable on them. The existing Clearing Corporations will continue for a period of 3 months from
the date of applicability of these Regulations until an application made for the recognitions is disposed of.

The Regulations provides for manner of making application, fees, documents required and consideration for
grant of recognition by SEBI. The regulations also provides for the period of recognition, regulatory fees as well
as provisions with respect to renewal and withdrawal of recognition.

Networth Requirements
Recognised Stock Exchanges and Clearing Corporations are required to maintain minimum networth requirements
of Rs. 100 crores at all times. The existing recognized Stock Exchanges and Clearing Corporations are required
to fulfill the networth requirement within a maximum period of 3 years from the date of commencement of these
Regulations. The limit is not applicable to an applicant performing clearing functions of a recognized stock
exchange on the date of commencement of these regulations. It is further provided that the recognized Stock
Exchange or the recognized Clearing Corporation shall not distribute profit in manner to its shareholders until
specified networth limit is achieved. Recognised stock exchange or clearing corporation is required to submit an
audited networth certificate from the statutory auditor on a yearly basis by the thirtieth day of September of every
year for the preceeding financial year.

The eligible instruments for investment such as fixed deposits, central government securities and liquid schemes
of debt mutual funds to the extent permissible, other instruments as may be specified by SEBI from time to time,
and cash and bank balance, shall be considered asliquid assets, for the purpose of calculation of net worth of a
clearing corporation.
392 EP-CM&SL

Ownership of Stock Exchanges (Replace with the following)

As per the provisions of the Regulations, the shareholding or ownership of a stock exchange shall be as following:

Shareholder Equity share holding limit

Equity Share Capital to be held by Public Atleast 51% of paid up equity capital

Individual resident in India [either directly or indirectly and either Not more than 5%
individually or with person acting in concert (PAC)]

Further
« Stock exchange

« Depository

« Banking company

« Insurance company
« Public Financial Institution (acquire or hold either directly or up to 15% of the paid up equity capital
indirectly and either individually or with PAC)

An Individual resident outside India (either directly or indirectly Not more than 5% of the paid up equity
and either individually or with PAC) shall acquire or hold capital

However, -

(i) a foreign stock exchange;

(ii) a foreign depository;

(iii) a foreign banking company;

(iv) an foreign insurance company; and

(v) a foreign commodity derivatives exchange, (may acquire or Upto 15 per cent of the paid up equity
hold, either directly or indirectly, either individually or together share capital of a recognised stock
with persons acting in concert) exchange.

All the residents outside India taken together Not more than 49% oftotal paid up equity
capital

No Clearing Corporation shall hold any right, stake or interest in any recognized Stock Exchange.

Any person who directly or indirectly and either individually or with PAC acquires 2% or more in equity capital
would require to apply for approval of SEBI within 15 days of such acquisition. If the approval is not granted
the shares so acquired shall be forthwith divested. Shareholders of existing recognized Exchange holding
more than 2% equity may apply for approval within 90 days of commencement of these Regulations.

Stock exchange, Depository, Banking company, Insurance company, Public Financial Institution allowed to
hold upto 15% equity capital, cannot acquire either directly or indirectly and either individually or with PAC
any holding over and above 5% without the prior approval from SEBI.

Every shareholder of the recognized Stock Exchange is required to be a Fit & Proper person.

Every shareholder of the recognized Stock Exchange is required to be a Fit & Proper person.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 393

Ownership of Clearing Corporations

The provisions with respect to ownership and shareholding of recognized Clearing Corporations as similar to
the aforesaid provisions as applicable to recognized Stock Exchanges except for as following:
— 51% or more equity share capital to be held by one or more recognized Stock Exchanges.
— Asingle Stock Exchange cannot hold more than 15% of equity share capital in one Clearing Corporation.

Governance of Stock Exchanges and Clearing Corporations

The provisions with respect to management and governance of recognized Stock Exchanges as well as Clearing
Corporations are also provided in the Regulation broadly covering the following:

— Composition of Goverance Board

— Guidelines for election of chairperson as well as number of public interest directors, appointment of
Shareholder director, etc on the Governing Board.

— Conditions for appointment of Directors and the Managing director.

— Code of conduct for Directors and Key Managerial Personnel.

— Compensation and Tenure for Key Managerial Personnel.

— Segregation of regulatory department from other departments.

— Constitution of Oversight committee

— Constitution of Advisory Committee

— Constitution of Risk Management committee (in case of clearing corporations)

— To formulate and implement a comprehensive detail risk management policy.

— Appointment of compliance officer

— Transfer of Profits
— Transfer of penalties

— Disclosure and Corporate Governance norms.

As per section 23(7) of SECC Regulations, 2012 provides that:-

a) No trading member or clearing member, or their associates and agents, irrespective of the stock exchange/
clearing corporation of which they are members, shall be on the governing board of any recognised
stock exchange or recognised clearing corporation.

b A person who is a director in an entity, that itself is a trading member or clearing member or has
associate(s) as trading member(s) or clearing member(s) in terms of regulation 2(1) (b), he/she will be
deemed to be trading member or clearing member.

However, a person will not be deemed to be clearing member and/or trading member or their associate
for the purpose of these regulations, if he/she is on the board of a PFI or bank which is in Public Sector
or which either has no identifiable ultimate promoter or the ultimate promoter is in Public Sector or has
well diversified shareholding, and such PFI or bank or its associate is a clearing member and/or trading
member.
c) The appointment shall be subject to fulfilment of other requirements and satisfaction of SEBI.

d Recognised stock exchange and recognised Clearing Corporation, shall monitor and ensure the
compliance of governance of stock exchanges and clearing corporations on continuous basis, to ensure
394 EP-CM&SL

that directors appointed, on their governing board, do not get associated with trading member or clearing
member after approval and appointment.

Listing of Securities

As per the provisions of the Regulations, a recognized stock exchange can apply for the listing of its securities
on any recognized stock exchange other than itself if:

~ It complies with the provisions of these regulations.

— It has completed 3continuous
years of trading operations immediately preceding the date of application
of listing.

- EStEEpEIRGSER)
Though as per the provisions of these Regulations, the securities of a recognized Clearing Corporation shall not
be listed on a stock exchange.

The Regulations also requires securities of both the recognized Stock Exchanges as well as Clearing Corporations
to be held in dematerialized form.

As per Regulation 45(2) of the SECC Regulations, 2012 —

~ Ensuring holding of 51 per cent by public at all times by the listed stock exchange. The listed stock
exchange shall disseminate the details of its shareholding with category wise breakup, on a continuous
basis, on its website. Similarly, the stock exchange where the shares are listed, shall also display the
above information.

~ Ensuring
shareholders
that all are fit and proper.
~ Ensuring that shareholders holding shares above 2 per cent are fitand proper.In addition to the criteria
mentioned above, on acquisition of shares above 2 per cent, shall seek approval of SEBI within 15 days
of acquisition as per Regulation 19(2) and those intending to acquire beyond 5 per cent as per Regulation
19(3) have to seek prior approval of SEBI.

Contribution to the Settlement Guarantee Fund

According to regulation 33 of SECC Regulations, 2012 states that the contribution to the Settlement Guarantee
Fund or the Trade Guarantee Fund as specified in regulation 39 of SECC Regulations, 2012 shall be made by
the recognised stock exchange, the recognised clearing corporation and the clearing members, in the manner
as may be specified by SEBI from time to time.

In case of any shortfall in the Fund, the recognised clearing corporation and the recognised stock exchange
shall replenish the Fund to the threshold level as may be specified by SEBI from time to time.

Investment Policy of Clearing Corporation

Regulation 40 of SECC Regulations, 2012 states that the utilization of profits and investments by recognised
clearing corporations shall be in accordance with the norms specified by SEBI which is discussed below:

While framing the Investment policy, the clearing corporations shall consider the following principles —

a) The investment policy of the clearing corporation, shall be built on the premise of highest degree of
safety and least market risk.

b) The investments shall be broadly in fixed deposits/central government securities and liquid schemes of
debt mutual funds.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 395

The clearing corporations shall align the investment policy in line with the principles for investment laid down
above, subject to the following —

a) Fixed deposit with banks [only those banks which have a net worth of more than INR 500 crore and are
rated A1 (or A1+) or equivalent,]

b) Central government securities; and

c) Liquid schemes of debt mutual funds:

— Investment in liquid scheme of debt mutual funds, shall not exceed a limit of 10 per cent of the total
investible resources held by the clearing corporation, at any point in time.

— In case the clearing corporation has investments in mutual funds beyond the limits specified above,
then such excess investments shall be liquidated by the clearing corporation. Fresh investments by
the clearing corporation beyond the threshold limit prescribed above are not permitted.

Risk Management Practices

« Clearing corporation shall not accept Fixed Deposit Receipts (FDRs) from trading/clearing members as
collateral, which are issued by the trading/ clearing member themselves or banks who are associate of
trading/ clearing member.

Explanation - for this purpose, ‘associate’ shall have the same meaning as defined under Regulation 2
(b) of SECC Regulations 2012.

Trading/Clearing Members who have deposited their own FDRs or FDRs of associate banks shall
replace such collateral, with other eligible collateral as per extant norms, within a period of six months
from the date of issuance of the circular.

Disclosure by Clearing Corporation

In order to improve transparency in disclosing the regulatory orders and arbitration matters as issued by Clearing
Corporation, the clearing corporations shall post all the past regulatory orders as well as arbitration and appellate
awards (i.e., issued since June 20, 2012) on their websites within 30 days, while fresh orders should be uploaded
immediately.

The Clearing Corporation shall disseminate information with respect to brief profile, qualification, areas of
experience / expertise, number of arbitration matters handled, pre-arbitration experience, etc. of the arbitrators
on their website and the status of the implementation of the norm in the monthly development report shall be
communicate to SEBI.

SECURITIES CONTRACTS (REGULATION) RULES, 1957

These rules were made by the Central Government in exercise of the powers conferred by Section 30 of the
Securities Contracts (Regulation) Act, 1956 and notified on 21st February, 1957.

Definition
“Public” means persons other than —

(i) the promoter and promoter group;

(i) subsidiaries and associates of the company.

Explanation : Here “promoter” and “promoter group” shall have the same meaning as assigned to them under
the SEBI (ICDR) Regulations, 2009.
396 EP-CM&SL

“Public Sector Company” means a body corporate constituted by an Act of Parliament or any State Legislature
and includes a government company.

“Public Shareholding” means equity shares of the company held by public including shares underlying the
depository receipts if the holder of such depository receipts has the right to issue voting instruction and
such depository receipts are listed on an international exchange in accordance with the Depository Receipts
Scheme, 2014.

However, the equity shares of the company held by the trust set up for implementing employee benefit
schemes under the regulations framed by SEBI shall be excluded from public shareholding.

Application for recognition

Under rules 3, it is laid down that an application under section 3 of the SCRA for recognition of a stock
exchange shall be madeto SEBI in Form A. This form is to be used for seeking recognition as well as renewal
of recognition of a stock exchange. The annexure to form A requires the applicant stock exchange to furnish
general information about itself and also details about its membership, governing body, trading and
miscellaneous matters.
The application shall be accompanied by 4 copies of the rules (including the memorandum and articles of
association where the applicant stock exchange is an incorporated body) and bye-laws of the stock exchange
applying for recognition and the receipt obtained for payment of fees.

Before granting recognition to a stock exchange, SEBI may make such enquiries and require such further
information to be fumished as it deems necessary, in relation to the information furnished in the Annexure to the
application.

Form of Recognition
Rule 6 provides that the recognition granted to a stock exchange shall be in Form B and subject to the following
conditions, namely —

(a) that the recognition unless granted on a permanent basis, shall be for such period not less than one
year as may be specified in the recognition;

(b) that the stock exchange shall comply with such conditions as are or may be prescribed or imposed
under the provisions of the Act and these rules from time to time.

In case of a recognised stock exchange, renewal of such recognition should be sought from SEBI not later than
3 months before expiry of the period of recognition.

In case SEBI desires to withdraw recognition from a stock exchange, SEBI shall first issue a show-cause notice
in Form C and obtain information. Only after considering the submissions of the stock exchange SEBI can take
a decision on withdrawal of recognition.

Qualification prescribed for Membership of a recognised Stock Exchange

Rule 8 contains detailed provisions on this subject and they are as follows:

No person shall be liable to be elected as a member if—

(a) heis less than twenty-one years of age;

(b) heis not a citizen of India;

However, the governing body may in suitable cases relax this condition with the prior approval of SEBI;

(c) he has been adjudged bankrupt or a receiving order in bankruptcy has been made against him or he
has been proved to be insolvent even though he has obtained his final discharge;
Lesson 16 » Regulatory Framework Governing Stock Exchanges 397

(d) he has compounded with his creditors unless he has paid 100 paise in the rupee;

(e) he has been convicted of an offence involving fraud or dishonesty;

(f) he is engaged as principal or employee in any business other than that of securities or commodity
derivatives except as a broker or agent not involving any personal financial liability unless he undertakes
on admission to severe his connection with such business;

However no member may conduct business in commodity derivatives, except by setting up a separate
company which shall comply with the regulatory requirements, such as, networth, capital adequacy, margins
and exposure norms as may be specified by the Forward Market Commission, from time to time:

Further that nothing herein shall be applicable to any corporations, bodies corporate, companies or
institutions referred to in items (a) to (n) of the proviso to sub-rule (4).

(9 ) he has been at any time expelled or declared a defaulter by any other stock exchange;

(h ) he has been previously refused admission to membership unless a period of one year has elapsed
since the date of such rejection.

No person eligible for admission as a member under sub-rule (1) shall be admitted as a member unless:

(a) he has worked for not less than two years as a partner with, or as an authorised assistant or authorised
clerk or remisier or apprentice to, a member; or

(b) he agrees to work for a minimum period of two years as a partner or representative member with
another member and to enter into bargains on the floor of the stock exchange and not in his own name
but in the name of such other member; or

(c) he succeeds to the established business of a deceased or retiring member who is his father, uncle,
brother or any other person who is, in the opinion of the governing body, a close relative;

However the rules of the stock exchange may authorise the governing body to waive compliance with any of the
foregoing conditions if the person seeking admission is in respect of means, position, integrity, knowledge and
experience of business in securities, considered by the governing body to be otherwise qualified for membership;

No person who is a member at the time of application for recognition or subsequently admitted as a member
shall continue as such if—
(a) he ceases to be a citizen of India;

However this shall not affect those who are not citizens of India but who were members at the time of
such application or were admitted subsequently under the provisions of clause (b) of sub- rule (1) of this
rule, subject to their complying with all other requirements of this rule;

(b he is adjudged bankrupt or a receiving order in bankruptcy is made against him or he is proved to be

insolvent;

(c he is convicted of an offence involving fraud or dishonesty;

( he engages either as principal or employee in any business other than that of securities or commodity
derivatives except as a broker or agent not involving any personal financial liability, provided that—

(i) the governing body may, for reasons, to be recorded in writing, permit a member to engage himself
as principal or employee in any such business, if the member in question ceases to carry on business
on the stock exchange either as an individual or as a partner in a firm.

(i) in the case of those members who were under the rules in force at the time of such application
permitted to engage in any such business and were actually so engaged on the date of such
398 EP-CM&SL

application, a period of three years from the date of the grant of recognition shall be allowed for
severing their connection with any such business,

(iii) nothing herein shall affect members of a recognised stock exchange which are corporations, bodies
corporate, companies or institution referred to in item (a) to (n) of the proviso to sub-rule (4).

Corporate Membership

Sub-rule 4 provides that a company as defined in the Companies Act, 2013, shall be eligible to be elected as a
member of a stock exchange if —

(i) such company is formed in compliance with the provisions of Companies Act, 2013.

(ii) a majority of the directors of such company are shareholders of such company and also members of
that stock exchange; and

(iii) the directors of such company, who are members of that stock exchange, have ultimate liability in such
company;
However where SEBI makes a recommendation in this regard, the governing body of a stock exchange shall, in
relaxation of the requirements of this clause, admit as member the following corporations, bodies corporate
companies or institutions, namely—

(a) the Industrial Finance Corporation, established under the Industrial Finance Corporation Act, 1948;

(b) the Industrial Development Bank of India, established under the Industrial Development Bank Act,
1964;

(c) any insurance company granted registration by the Insurance Regulatory Development Authority under
the Insurance Act, 1938;

(d) the Unit Trust of India, established under the Unit Trust of India Act, 1963;

(e) the Industrial Credit and Investment Corporation of India, a company registered under the Companies
Act, 2013;

( the subsidiaries of any of the corporations or companies specified in (a) to (f) and any subsidiary of the
State Bank of India or any nationalised bank set up for providing merchant banking services, buying and
selling securities and other similar activities;

(9 any bank included in the second schedule to RBI Act, 1934;

(h the Export Import Bank of India, established under the Export Import Bank of India Act, 1981;

(i) the National Bank for Agriculture and Rural Development, established under the National Bank for
Agriculture and Rural Development Act, 1981 and

i) the National Housing Bank, established under the National Housing Bank Act, 1987.

(K Central Board of Trustees, Employees’ Provident Fund, established under the Employees’ Provident
Funds and Miscellaneous Provisions Act, 1952.

(I) any pension fund registered or appointed or regulated by the Pension Fund Regulatory and Development
Authority under the Pension Fund Regulatory And Development Authority Act, 2013; and

(m) any Standalone Primary Dealers authorised by the Reserve Bank of India constituted under the Reserve
Bank of India Act, 1934.

According to sub-rule 4A a company as defined in the Companies Act, 2013, shall also be eligible to be elected
as a member of a Stock Exchange if —
Lesson 16 » Regulatory Framework Governing Stock Exchanges 399

(i) such company is formed in compliance with the provisions of section 3 of the said Act;

(i) such company undertakes to comply with such financial requirements and norms as may be specified
by SEBI for the registration of such company under sub-section (1) of section 12 of SEBI Act, 1992;

(iii) the directors of the company are not disqualified for being members of a stock exchange except clause
(1) of sub-clause (b) and sub-clause (f) thereof or clause (3) except sub-clause (a) and sub-clause (f)
thereof and the Director of the company had not held the offices of the Director in any company which
had been a member of the stock exchange and had been declared defaulter or expelled by the stock
exchange; and

(iv) not less than two directors of the company are persons who possess a minimum two years’ experience—

(a) in dealing in securities; or

(b) as portfolio managers; or

(c) as investment consultants.

Sub-rule 5 provides that where any member of a stock exchange is a firm, the provisions of sub-rules (1), (3)
and (4), shall, so far as they can, apply to the admission or continuation of any partner in such firm.

Sub-rule 6 lays down that a limited liability partnership as defined in the Limited Liability Partnership
Act, 2008,
shall also be eligible to be elected its a member of a stock exchange if:

(i) such “limited liability partnership” undertakes to comply with such financial requirements and norms as
may be provided by SEBI for registration of such limited liability partnerships under sub-section (1) of
section 12 of the SEBI Act, 1992;

(i) the designate partners of the ‘limited liability partnership’ are not disqualified from being members of a
stock exchange under sub-rule (1) [except clause (b) and (f) thereof or sub-rule (3) except clause (a)
and clause (f) thereof and the designated partners of the ‘limited liability partnership’ had not held the
offices of Directors in any company or body corporate or partner in any firm or ‘limited liability partnership’,
which had been a member of the stock exchange and had been declared defaulter or expelled by the
stock exchange; and

(iii) not less than two designated partners of the ‘limited liability partnership’ are persons who possess a
minimum experience of two years:-

(a) in dealing in securities; or

(b) as portfolio managers; or

(c) as investment consultants.

Sub-rule 7 lays down that any provident fund represent by its trustees, of an exempted establishment under the
Employee’s Provident Funds and Miscellaneous Provisions Act, 1952, shall be also be eligible to be elected as
a member of a stock exchange.

Regulation of transaction in the stock exchange

All contracts between the members of a recognised stock exchange shall be confirmed in writing and shall be
enforced in accordance with the rules and bye-laws of the stock exchange of which they are members.

SEBImay nominate one or more persons not exceeding three in number, as member or members of the governing
body of every recognised stock exchange. Such member or members shall enjoy the same status and powers
as other members of the governing body.

After receiving the report of the result of an enquiry made under clause (b) of sub-section (3) of Section 6 of the
400 EP-CM&SL

Act, SEBI may take such action as they deem proper and, in particular, may direct the governing body of the
stock exchange to take such disciplinary action against the offending member, including fine, expulsion,
suspension or any other penalty of a like nature not involving the payment of money, as may be specified by
SEBI; notwithstanding anything to the contrary contained in the rules or bye-laws of the stock exchange concerned,
the governing body shall give effect to the directions of SEBI in this behalf and shall not in any manner commute,
revoke or modify the action taken in pursuance of such directions, without the prior approval of SEBI. SEBI may
however, either on its own motion or on the representation of the member concerned, modify or withdraw its
direction to the governing body.

Every member shall get his accounts audited by a chartered accountant whenever such audit is required by
SEBI.

Books and documents to be maintained and preserved

(A) By every recognised stock exchange

Every recognised stock exchange shall maintain and preserve the following books of account and documents
for a period of five years;

(1) Minute books of the meetings of —

(a) members;

(b) governing body;

(c) any standing committee or committees of the governing body or of the general body of members.

Register of members showing their full names and addresses. Where any member of the —

(1) Stock exchange is a firm,

(2) Full names and addresses of all partners shall be shown.

3 Register of authorised clerks.

4 Register of remisiers of authorised assistants.

(5) Record of security deposits.

® Margin deposits book.

(7) Ledgers.

(8) Journals.

(9) Cash Book.

(10) Bank pass-book.

(B) By every member of a recognised stock exchange

Every member of a recognised stock exchange shall maintain and preserve the following books of account and
documents for a period of five years;

(a) Register of fransactions (Sauda book).

(b) Clients’ ledger.

(c) General ledger.

(d) Journals.

(e) Cash book.

Lesson 16 » Regulatory Framework Governing Stock Exchanges 401

® Bank pass-book.
(@) Documents register showing full particulars of shares and securities received and delivered.

Every member of a recognised stock exchange shall maintain and preserve the following documents for a
period of two years;

(@) Members’ contract books showing details of all contracts entered into by him with other members of the
same exchange or counter- foils or duplicates of memos of confirmation issued to such other members.

(b) Counter-foils or duplicates of contract notes issued to clients.

(c) Written consent of clients in respect of contracts entered into as principals.

Manner of Enquiry in the Affairs of Stock Exchange

Rule 16 lays down that any enquiry in relation to the affairs of the governing body of a recognised stock exchange
or the affairs of any member in relation to the stock exchange can be conducted only by the person or persons
appointed by SEBI under section 6(3)(b) of the Act. The person or persons are so appointed are refer to as the
inquiring authority.

The procedure relating to the conduct of inquiry is stated below —

where the inquiring authority consists of two or more persons, one of them shall be appointed as the
chairman or senior member thereof;

the inquiring authority shall hand over a statement of issues to be inquired into to the governing body or
the member concerned, as the case may be, who will be given a reasonable opportunity to state their or
his side of the case;

if any witness is called for examination, an opportunity shall be provided to the governing body or the
member whose affairs are being inquired into, as the case may be, to cross-examine such witness;

where the inquiring authority consists of more than one person, the views of the majority shall be deemed
to represent the findings of such authority and, in the event of an equality of votes, the chairman or
senior member shall have a casting vote;

the inquiring authority shall submit its report in writing to the SEBI within the period specified in the order
of appointment;

temporary absence from any hearing or hearings of any member of the inquiring authority shall not
vitiate its proceedings.

Where SEBI has directed the governing body of a stock exchange to make an inquiry SEBI, the governing body
concemed shall appoint one or more members thereof to make the inquiry.

Submission of annual reports and periodical returns by stock exchanges to SEBI

These matters are regulated under rule 17 & 17Arespectively.

Every recognised stock exchange shall (before the 31st day of January in each year or within such extended
time as SEBI may, from time to time, allow), furnish to SEBI annually with a report about its activities during the
(proceeding calendar year), which shall inter alia contain detailed information about the following matters:

(@) changes in rules and bye-laws, if any;

(b) changes in the composition of the goveming body;

(c) any new sub-committees set up and changes in the composition of existing ones;
402 EP-CM&SL

(d) admissions, re-admissions, deaths or resignations of members;

(e] disciplinary action against members;

(f) arbitration of disputes (nature and number) between members and non-members;

(g) defaults;

(h) action taken to combat any emergency in trade;

(i) securities listed and de-listed; and

(j) securities brought on or removed from the forward list.

Every recognised stock exchange shall within one month of the date of the holding of its annual general meeting,
furnish to SEBI with a copy of its audited balance sheet and profit and loss account for its preceding financial
year.
Rule 17A necessiated that every recognised stock exchange shall furnish to SEBI periodical returns relating
to—

(i) the official rates for the securities enlisted thereon;

(i) the number of shares delivered through the clearing house;

(iii) the making-up prices;

(iv) the clearing house programmes;

(v) the number of securities listed and de-listed during the previous three months;

(vi) number of securities brought on or removed from the forward list during the previous three months; and

(vii) any other matter as may be specified by the SEBI.

REQUIREMENTS OF LISTING OF SECURITIES WITH RECOGNISED STOCK EXCHANGES

ule 19 provides
for the complete procedure in this regard. A public company as defined under the Companies Act, 2013, desirous
of getting its securities listed on a recognised stock exchange, shall apply for the purpose to the stock exchange
and forward along with its application the following documents and particulars:
(a) Memorandum and articles of association and, in the case ofa debenture issue, a copy of the trust deed.
(b) Copies of all prospectuses or statements in lieu of prospectuses issued by the company at any fime.
(c) Copies of offers for sale and circulars or advertisements offering any securities for subscription or sale
during the last five years.

(d) Copies of balance sheets and audited accounts for the last five years, or i the case of new companies,
for such shorter period for which accounts have been made up.

(e) A statement showing —

(i) dividends
and cash bonuses, if any, paid during the last ten years (or such shorter period as the
company has been in existence, whether as a private or public company),

(i) dividends
o interest in arrears, ff any.
(f) Certified copies of agreements or other documents relating to arrangements with or between —
Lesson 16 » Regulatory Framework Governing Stock Exchanges 403

(h) Certified copy of every letter, report, balance sheet, valuation contract, court order or other document,
part of which is reproduced or referred to in any prospectus, offer for sale, circular or advertisement
offering securities for subscription or sale, during the last five years.

(i) A statement containing particulars of the dates of, and parties to all material contracts, agreements
(including agreements for technical advice and collaboration), concessions and similar other documents
(except those entered into in the ordinary course of business carried on or intended to be carried on by
the company) together with a brief description of the terms, subject-matter and general nature of the
documents.

(i) A brief history of the company since its incorporation giving details of its activities including any
reorganization, reconstruction or amalgamation, changes in its capital structure (authorised, issued and
subscribed) and debenture borrowings, if any.

(k) Particulars of shares and debentures issued (i) for consideration other than cash, whether in whole or
part, (i) at a premium or discount, or (iii) in pursuance of an option.

() Astatement containing partculars of any commission, brokerage, discount or other specialterms including
an option for the issue of any kind of the securities granted to any person.
(m) Certified copies of -

along with particulars as to the number of shares or debentures held by and the address of each such
holder.

() Particulars of shares or debentures for which permission to deal is applied for;

However, a recognised stock exchange may either generally by its bye-laws or in any particular case call for
such further particulars or documents as it deems proper.

Rule 19(2)
Sub-rule 2 of Rule 19 provides that apart from complying with such other terms and conditions as may be laid
down by a recognised stock exchange, an applicant company shall satisfy the stock exchange that;
404 EP-CM&SL

Rule 19(2)(a)
(a) Its articles of association provide for the following among others —

@ that the company shall use a common form of transfer;

(i) that the fully paid shares will be free from all lien, while in the case of partly laid shares, the company’s
lien, if any, will be restricted to moneys called or payable at a fixed time in respect of such shares;

(i) that any amount paid-up in advance of calls on any share may carry interest but shall not entitle the
holder of the share to participate in respect thereof, in a dividend subsequently declared;

(iv) there will be no forfeiture of unclaimed dividends before the claim becomes barred by law;

) that option or right to call of shares shall not be given to any person except with the sanction of the
company in general meeting;

However, a recognised stock exchange may provisionally admit to dealings the securities of a company
which undertakes to amend its articles of association at its next general meeting so as to fulfill the
foregoing requirements and agrees to act in the meantime strictly in accordance with the provisions of
this clause.

Rule 19(2)(b)
(b) The minimum offer and allotment to public in terms of an offer document shall be-

@ at least twenty five per cent of each class or kind of equity shares or debenture convertible into
equity shares issued by the company, if the post issue capital of the company calculated at offer
price is less than or equal to one thousand six hundred crore rupees;

(i) at least such percentage of each class or kind of equity shares or debentures convertible into equity
shares issued by the company equivalent to the value of four hundred crore rupees, if the post issue
capital of the company calculated at offer price is more than one thousand six hundred crore rupees
but less than or equal to four thousand crore rupees;

(i) at least ten per cent of each class or kind of equity shares or debentures convertible into equity
shares issued by the company, if the post issue capital of the company calculated at offer price is
above four thousand crore rupees.

However, the company referred to in sub-clause (ii) or sub-clause (iii), shall increase its public shareholding to
at least twenty five per cent within a period of three years from the date of listing of the securities, in the manner
specified by the Securities and Exchange Board of India.

Further this clause shall not apply to a company whose draft offer document is pending with SEBI before the
commencement of the Securities Contracts (Regulation) Third Amendment Rules, 2014, if it satisfies the conditions
prescribed in clause (b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1956 as existed
prior to the date of such commencement.

Conditions precedent to submission of application for listing by stock exchange

Sub-rule (3) of Rule 19 deals with the conditions required to be fulfilled by a company precedent to listing
company applying for listing shall, as conditions precedent, undertake inter alia —

(a) (i) thatletters of allotment will be issued simultaneously and that, in the event of its being impossible
to issue letters of regret at the same time, a notice to that effect will be inserted in the press so that
it will appear on the morning after the letters of allotment have been posted.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 405

(i) that letters of right will be issued simultaneously,

(iii) that letters of allotment, acceptance or rights will be serially numbered, printed on good quality
paper and, examined and signed by a responsible officer of the company and that whenever possible,
they will contain the distinctive numbers of the securities to which they relate.

(iv) thatletters of allotment and renounceable letters of right will contain a proviso for splitting and that,
when so required by the exchange, the form of renunciation will be printed on the back of or
attached to the letters of allotment and letters of right.

(v) thatletters of allotment and letters of right will state how the next payment of interest or dividend on
the securities will be calculated;

(b to issue, when so required, receipts for all securities deposited with it whether for registration, sub-
division, exchange or for other purposes; and not to charge any fees for registration of transfers, for
sub-division and consolidation of certificates and for sub-division of letters of allotment, renounceable
letters of right, and split consolidation, renewal and transfer receipts into denominations of the market
unit of trading;

(bb) to issue, when so required, consolidation and renewal certificates in denominations of the market unit of
trading, to split certificates, letters of allotment, letters of right, and transfer, renewal, consolidation and
split receipts into smaller units, to split call notices, issue duplicates thereof and not require any discharge
on call receipts and to accept the discharge of members of stock exchange on split, consolidation and
renewal receipts as good and sufficient without insisting on the discharge of the registered holders;

(c when documents are lodged for sub-division or consolidation (or renewal) through the clearing house of
the exchange;

(i) to accept the discharge of an official of the stock exchange clearing house on the company's split
receipts and (consolidation receipts and renewal receipts) as good and sufficient discharge without
insisting on the discharge of the registered holders; and

(i) to verify when the company is unable to issue certificates or split receipt or (consolidation receipts
or renewal receipts) immediately on lodgement whether the discharge of the registered holders, on
the documents lodged for sub-division or consolidation (or renewal) and their signatures on the
relative transfers are in order;

( on production of the necessary documents by shareholders or by members of the exchange, to make

ontransfers an endorsement to the effect thatthe power of attorney or probate or letters of administration
or death certificate or certificate of the Controller of Estate Duty or similar other document has been duly
exhibited to and registered by the company;

(e] to issue certificates in respect of shares or debentures lodged for transfer within a period of one month
of the date of lodgement of transfer and to issue balance certificates within the same period where the
transfer is accompanied by a larger certificate;

( to advise the stock exchange of the date of the board meeting at which the declaration or recommendation
of a dividend (or the issue or right or bonus share) will be considered;

(9 torecommend or declare all dividends and/or cash bonuses at least five days before the commencement
of the closure of its transfer books or the record date fixed for the purpose and so advise the stock
exchange in writing of all dividends and/or cash bonuses recommended or declared immediately after
a meeting of the board of the company has been held to finalise the same;
406 EP-CM&SL

(h) to notify the stock exchange of any material change in the general character or nature of the company’s
business;

(i) to notify the stock exchange of any change —

(i) in the company’s directorate by death, resignation, removal or otherwise,

(ii) of managing director, managing agent or secretaries and treasurers,

(iii) of auditors appointed to audit the books and accounts of the company;

1 to forward to the stock exchange copies of statutory and annual reports and audited accounts as soon
as issued, including directors’ reports;

(k to forward to the stock exchange as soon as they are issued, copies of all other notices and circulars
sent to the shareholders including proceedings of ordinary and extraordinary general meetings of the
company and to file with the stock exchange certified copies of resolutions of the company as soon as
such resolutions become effective;

(I to notify the stock exchange prior to intimating the shareholders, of any new issue of securities whether
by way of right, privilege, bonus or otherwise and the manner in which it is proposed to offer or allot the
same;
(m to notify the stock exchange in the event of re-issue of any forfeited securities or the issue of securities
held in reserve for future issue;

(n to notify the stock exchange of any other alteration of capital including calls;

(o] to close the transfer books only for the purpose of declaration of dividend or issue of right or bonus
shares or for such other purposes as the stock exchange may agree and to give notice to the stock
exchange as many days in advance as the exchange may from time to time reasonably prescribe,
stating the dates of closure of its transfer books (or, when the transfer books are not to be closed, the
date fixed for taking a record of its shareholders or debenture holders) and specifying the purpose or
purposes for which the transfer books are to be closed (or the record is to be taken) and in the case of
a right or bonus issue to so close the transfer books or fix a record date only after the sanctions of the
competent authority subject to which the issue is proposed to be made have been duly obtained, unless
the exchange agrees otherwise;

(P to forward to the stock exchange an annual return immediately after each annual general meeting of at
least ten principal holders of each class of security of the company along with particulars as to the
number of shares or debentures held by, and address of, each such holder;

[C] to grant to shareholders the right of renunciation in all cases of issue of rights, privileges and benefits
and to allow them reasonable time not being less than four weeks within which to record, exercise, or
renounce such rights, privileges and benefits, and to issue, where necessary, coupons or fractional
certificates or provide for the payment of the equivalent of the value of the fractional right in cash unless
the company in general meeting or the stock exchange agrees otherwise;

(r) to promptly notify the stock exchange—

(i) of any action which will result in the redemption, cancellation or retirement in whole or in part of any
securities listed on the exchange,

(i) of the intention to make a drawing of such securities, intimating at the same time the date of the
drawing and the period of the closing of the transfer books (or the date of the striking of the balance)
for the drawing;
Lesson 16 » Regulatory Framework Governing Stock Exchanges 407

(iii) of the amount of securities outstanding after any drawing has been made;

(s) to intimate the stock exchange any other information necessary to enable the shareholders to appraise
the position of the company and to avoid the establishment of a false market in the shares of the
company;
(t) thatin the event of the application for listing being granted, such listing shall be subject to the rules and
bye-laws of the exchange in force from time to time and that the company will comply within areasonable
time, with such further listing requirements as may be promulgated by the exchange as a general
condition for new listings.

Application for listing of new securities

An application for listing shall be necessary in respect of the following:

(a) all new issues of any class or kind of securities of a company to be offered to the public;

(b) all further issues of any class or kind of securities of a company if such class or kind of securities of the
company are already listed on a recognised stock exchange. [Rule 19(4)]

Suspension or withdrawal of admission to dealings in securities on stock exchange

Arecognised stock exchange may suspend or withdraw admission to dealings in the securities of a company
or body corporate either for a breach of or non-compliance with, any of the conditions of admission to dealings
or for any other reason, to be recorded in writing, which in the opinion of the stock exchange justifies such
action;

However, no such action shall be taken by a stock exchange without affording to the company or body corporate
concerned a reasonable opportunity by a notice in writing, stating the reasons, to show cause against the
proposed action;

Further that where a recognised stock exchange has withdrawn admission to dealings in any security, or where
suspension of admission to dealings has continued for a period exceeding three months, the company or body
corporate concerned may prefer an appeal to the Securities Appellate Tribunal constituted under section 15K of
the SEBI Act, 1992 and the procedure laid down under the Securities Contracts (Regulation) (Appeal to Securities
Appellate Tribunal) Rules, 2000 shall apply to such appeal. The Securities Appellate Tribunal may, after giving
the stock exchange an opportunity of being heard, vary or set aside the decision of the stock exchange and its
orders shall be carried out by the stock exchange.

A recognised stock exchange may, either at its own discretion or shall in accordance with the orders of the
Securities Appellate Tribunal restore or re-admit to dealings any securities suspended or withdrawn from the
list.
All requirements with respect to listing prescribed by these rules shall, so far as they may be, also apply to a
public sector company.

SEBI may, at its own discretion or on the recommendation of a recognised stock exchange, waive or relax the
strict enforcement of any or all of the requirements with respect to listing prescribed by these rules. [Rule
19(5)]
CONTI S LISTING REQUIREMENT
Rule 19A (1) stipulates that every listed company other than public sector company shall maintain public
shareholding of at least 25%.

However, any listed company which has public shareholding below 25%, shall increase its public shareholding
408 EP-CM&SL

to at least twenty five per cent, within a period of four years from the date of commencement of amendment to
the said rules in 2014, in the manner specified by SEBI.

Explanation : For the purposes of this sub-rule, a company whose securities has been listed pursuant to an offer
and allotment made to public in terms of sub-clause (ii) of clause (b) of sub-rule (2) of rule 19, shall maintain
minimum 25% public shareholding from the date on which the public shareholding in the company reaches the
level of 25% in terms of said sub-clause.
Sub-rule (2) provides that where the public shareholding in a listed company falls below 25 % at any time, such
company shall bring the public shareholding to 25% within a maximum period of twelve months from the date of
such fall in the manner specified by SEBI.

Where the public shareholding in a listed company falls below 25% in consequence to SCRR Amendment
Rules, 2015, such company shall increase its shareholding to atleast 25%, in the manner specified by SEBI
within a period of three years, as the case may be, from the date of notification of:

(a) the Depository Receipts Scheme, 2014, in cases where the public shareholding falls below 25% as a
result of such Scheme;

(b) SEBI (Share Based Employee Benefits) Regulations, 2014, in cases where the public shareholding
falls below 25%, as a result of such regulations.

DELISTING OF SECURITIES
Rule 21 deals with delisting of Securities. A recognized stock exchange may, without prejudice to any other
action that may be taken under the Act or under any other law for the time being in force, delist any securities
listed thereon on any of the following grounds in accordance with the regulations made by SEBI, namely:—

(a) the company has incurred losses during the preceding three consecutive years and it has negative
networth;

(b) trading in the securities of the company has remained suspended for a period of more than six months;

(c) the securities of the company have remained infrequently traded during the preceding three years;

(d) the company or any of its promoters or any of its director has been convicted for failure to comply with
any of the provisions of the Act or SEBI Act, 1992 or the Depositories Act, 1996 or rules, regulations,
agreements made thereunder, as the case may be and awarded a penalty of not less than rupees one
crore or imprisonment of not less than three years;

(e the addresses of the company or any of its promoter or any of its directors, are not known or false
addresses have been furnished or the company has changed its registered office in contravention of the
provisions of the Companies Act, 2013, or;

( shareholding of the company held by the public has come below the minimum level applicable to the
company as per the listing agreement under the Act and the company has failed to raise public holding
to the required level within the time specified by the recognized stock exchange.

However, no securities shall be delisted unless the company concerned has been given a reasonable opportunity
of being heard.

(2) If the securities is delisted under clause (1),

(a) the company, promoter and director of the company shall be jointly and severally liable to purchase the
outstanding securities from those holders who wish to sell them at a fair price determined in accordance
with regulations made by SEBI, under the Act; and

(b) the said securities shall be delisted from all recognized stock exchanges.
Lesson 16 » Regulatory Framework Governing Stock Exchanges 409

(3) A recognized stock exchange may, on the request of the company, delist any securities listed thereon in
accordance with the regulations made under the Act by SEBI, subject to the following conditions, namely :

(@) the securities of the company have been listed for a minimum period of three years on the recognized
stock exchange;

(b) the delisting of such securities has been approved by the two-third of public shareholders; and

(c) the company, promoter and/or the director of the company purchase the outstanding securities from
those holders who wish to sell them at a price determined in accordance with regulations made by SEBI
under the Act.
However, the condition at (c) may be dispensed with by SEBI if the securities remain listed at least on the
National Stock Exchange of India Limited or the Bombay Stock Exchange Limited.

LESSON ROUND UP
The Securities Contracts (Regulation) Act, 1956 was enacted by Parliament to prevent undesirable
transactions in securities by regulating the business of dealing therein, and by providing for certain
other matters connected therewith.
Section 2 of this Act contains definitions of various terms used in the Act.
Section 17A of the Act provides for public issue and listing of securities.

The Act prescribes various penalties against persons who might be found guilty of offences under the
Act.

Section 21 of the Act provides that where securities are listed on the application of any person in any
recognised stock exchange, such person shall comply with the conditions of the listing agreement with
that stock exchange.

Section 31 provides that without prejudice to the provisions contained in Section 30 of SEBI Act, 1992,
SEBI may, by notification in the Official Gazette, make regulations consistent with the provisions of this
Act and the rules made thereunder to carry out the purposes of this Act.

With an Intent to regulate recognition, ownership, and governance in stock exchange and cleaning
corporations, SEBI on June 20, 2012 issued the Securities Contracts (Regulation) (Stock Exchanges
and Clear Corporations) Regulations, 2012.

The Government promulgated the Securities Contracts (Regulation) Rules, 1957 for carrying into effect
the object of the SCRA Act, 1956.

Rule 19 dealt with the requirement

with respectto the listing of securities on a recognised stock exchange.
Rule 19A provides the detailed provision regarding continuous listing agreement.

GLOSSARY
Demutualization Process from “mutually owned” association to a company “owned by shareholders”.
In other words, transformation of the legal structure from a mutual from to a business
corporation form and privatisation of the corporations so constituted is referred to
as demutualization.
Stock Exchange Anybody of individuals, whether incorporated or not, constituted for the purpose of
assisting, regulating controlling the business of buying, selling or dealing in
securities.
Appointed date It means the date which SEBI may, by notification in the Official Gazette, appoint
410 EP-CM&SL

and different appointed dates may be appointed for different recognized stock
exchanges.

Admission to The process of granting permission to the securities of a company to be listed in a

Dealing Stock Exchange and to provide trading facilities for the securities in the market.

SELF TEST QUESTIONS

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. State the provisions relating to Corporatization and Demutualization of Stock Exchanges?
2. Briefly discuss the powers of stock exchange under the SCRA Act, 1956.
3. What is the remedy available to accompany if a stock exchange refuse to list its securities under
SCRAAct, 1956 ?

4. Briefly explain the provision relating to continuous listing requirement under SCRR, 1957.

5. State the grounds on which a stock exchanges can delist the securities of a company under the
SCRR, 1957.

6. What are the provisions relating to lising of securities with recognised stock exchanges?