MODULE 4

STOCK EXCHANGE AND INVESTOR PROTECTION

SECURITIES CONTRACTS (REGULATION) ACT, 1956

RECOGNISED STOCK EXCHANGES

Section 2(j) “stock exchange” means— (a) any body of individuals, whether incorporated or not,
constituted before corporatisation and demutualisation under sections 4A and 4B, or (b) a body
corporate incorporated under the Companies Act, 1956 (1 of 1956) whether under a scheme of
corporatisation and demutualisation or otherwise, for the purpose of assisting, regulating or
controlling the business of buying, selling or dealing in securities.

Recognised Stock Exchange: A recognized stock exchange is a trading venue that has been
officially approved and regulated by the Indian government. This recognition is granted under
the Securities Contracts (Regulation) Act, 1956 (SCRA), and is crucial for the exchange to
operate legally and provide a trading platform for various securities.

Section 3: Application for Recognition of Stock Exchanges

1. Application Process:

Section 3(1): A stock exchange seeking recognition must apply to the Central Government. The
application needs to be made in a prescribed manner.

2. Details to Include:

Section 3(2): The application must contain specific details and be accompanied by:

Bye-Laws: A copy of the bye-laws governing the regulation and control of contracts on the
exchange.
Constitution Rules: A copy of the rules related to the constitution of the stock exchange,
specifically:

(a) Governing Body: Details about the governing body’s constitution, powers, and business
management.

(b) Office Bearers: Powers and duties of the office bearers.

(c) Membership Rules: Procedures for admitting various classes of members, including
qualifications, exclusion, suspension, expulsion, and readmission.

(d) Partnership Registration: Procedures for registering partnerships as members and

appointing representatives and clerks.

Section 4: Grant of Recognition to Stock Exchanges

1. Conditions for Granting Recognition:

Section 4(1): The Central Government will grant recognition if:

(a) Compliance: The stock exchange’s rules and bye-laws conform to prescribed conditions that
ensure fair dealing and investor protection.

(b) Willingness to Comply: The stock exchange agrees to comply with additional conditions
that may be imposed by the Central Government. These conditions are based on the stock
exchange’s standing, area of service, and the nature of securities dealt with.

(c) Public Interest: Granting recognition is deemed to be in the interest of trade and public
interest.

2. Conditions Imposed:

Section 4(2): Conditions that may be prescribed include:

(i) Membership Qualifications: Requirements for membership.

(ii) Contract Management: Procedures for entering into and enforcing contracts between
members.

(iii) Government Representation: Representation of the Central Government on the exchange

(up to three persons).

(iv) Audit: Maintenance of member accounts and their audit by chartered accountants when
required by the Central Government.

3. Publication of Recognition:

Section 4(3): Recognition granted to a stock exchange must be published in the Gazette of India
and the Official Gazette of the relevant State. Recognition becomes effective from the date of
publication in the Gazette of India.

4. Refusal of Recognition:

Section 4(4): If recognition is refused, the stock exchange must be given an opportunity to be
heard. The reasons for refusal must be communicated in writing.

5. Amendments to Rules:

Section 4(5): Any amendments to the rules of a recognized stock exchange concerning matters
specified in Section 3(2) must be approved by the Central Government.

Section 5 : Withdrawal of Recognition for Stock Exchanges

1. General Withdrawal Process

1. Grounds for Withdrawal:

The Central Government may decide to withdraw recognition from a stock exchange if it
believes that doing so is in the interest of trade or the public.

2. Notice and Hearing:

-The Central Government must serve a written notice to the governing body of the stock
exchange. This notice will explain why the government is considering withdrawing recognition.

-The governing body will be given an opportunity to respond and be heard regarding the
proposed withdrawal.

3. Formal Withdrawal:

If, after considering the governing body’s response, the Central Government decides to proceed,
it will withdraw recognition by publishing a notification in the Official Gazette.

4. Impact on Contracts:

-The withdrawal of recognition does not affect the validity of any contracts made before the
withdrawal notification.

-The Central Government may make provisions for the performance of outstanding contracts in
the withdrawal notification or through subsequent notifications.

2. Withdrawal Due to Non-Compliance

1. Failure to Corporatize or Demutualize:

If a recognized stock exchange does not corporatize or demutualize as required, or if it fails to

submit a required scheme within the specified time, or if the Securities and Exchange Board of
India (SEBI) rejects the submitted scheme:

-The recognition of the stock exchange will be withdrawn automatically.

-The Central Government will publish a notification in the Official Gazette to formalize this
withdrawal.

2. Impact on Contracts:

-Similar to the general withdrawal process, this automatic withdrawal does not affect contracts
made before the notification date.
-SEBI may, after consulting with the stock exchange, make necessary provisions for the
performance of outstanding contracts in the order rejecting the scheme.

POWER OF GOVERNMENT

Section 6: Power of Central Government to call for periodical returns or direct inquiries to
be made

1. Periodical Returns:

Recognized stock exchanges must regularly submit returns about their activities to the Securities
and Exchange Board of India (SEBI) as required.

2. Document Maintenance:

Stock exchanges and their members must keep financial records and documents for up to five
years. These records must be available for SEBI to inspect at any reasonable time.

3. Information Requests and Inquiries:

SEBI can:

-Request written information or explanations from a stock exchange or its members.

-Appoint individuals to investigate the exchange's or members' affairs and report back to SEBI.

4. Cooperation During Inquiry:

During an inquiry, all relevant personnel of the stock exchange, including directors, managers,
and members, must cooperate and provide necessary information.

Section 8: Power of Central Government to direct rules to be made or to make rules

1. Issuing Directions:
The Central Government can direct stock exchanges to make or amend their rules. This direction
comes after consulting with the stock exchanges and must be followed within two months.

2. Non-Compliance:

If a stock exchange does not comply with the direction, the Central Government can make or
amend the rules themselves, either as initially proposed or with agreed modifications.

3. Publication and Effect:

New or amended rules must be published in the Gazette of India and the relevant State
Gazette(s). Once published, these rules have the same effect as if they were made by the stock
exchanges themselves, regardless of other laws.

Section 11: Power of Central Government to supersede governing body of a recognised

stock exchange

1. Supersession Procedure:

-The Central Government can decide to remove the governing body of a recognized stock
exchange. They will issue a notice explaining their reasons and allow the governing body to
respond.

-If the decision is made, it is announced in the Official Gazette, and the Central Government will
appoint new individuals to handle the governing body’s duties.

2. Consequences of Supersession:

End of Tenure: The existing governing body members will cease to hold office from the
notification date.

New Appointments: The appointed individuals will take over all governing body
responsibilities and manage the exchange's property needed for its operation.

3. Duration and Reconstitution:

Office Duration: The appointed individuals will serve for the period specified in the
notification. This period can be changed by further notifications.

Reconstitution: The Central Government can require the stock exchange to re-constitute its
governing body before the end of the appointed period. Once re-constituted, the governing body
will take over all properties and responsibilities from the appointed individuals.

Section 12: Power to suspend business of recognised stock exchanges

Power to Suspend Stock Exchange Business:

The Central Government can suspend a recognized stock exchange's business for up to seven
days if an emergency arises. This suspension can be extended with a notification, but the stock
exchange must be given a chance to be heard if the extension exceeds the initial period.

Section 12 A: Power to Issue Directions

The Securities and Exchange Board of India (SEBI) can issue directions to protect investors and
ensure the proper management of stock exchanges. This can be done if SEBI finds it necessary
after conducting an inquiry, particularly if the business is being conducted in a way that harms
investors or the securities market.

LISTING OF SECURITIES

Listing refers to the approval of allowing certain financial assets, like stocks or bonds, to be
bought and sold on an officially recognised stock market. These assets can belong to various
entities, such as public companies, government bodies, financial institutions, or local
governments.
The primary reasons for listing are:
● Providing Liquidity: It makes it easier for people to buy and sell these assets, ensuring
that they can quickly convert their investments into cash when needed.
● Encouraging Savings: Making these assets available for trading, encourages people to
invest their money, which, in turn, supports economic growth.
● Protecting Investors: Listing requirements ensure that companies provide all necessary
information, safeguarding the interests of investors by promoting transparency.
When a company wants to list its assets on a stock exchange, it must submit an application to the
exchange before releasing its prospectus (a document detailing the investment opportunity) or
before conducting an “Offer for Sale” if it’s selling its assets directly.
On the other hand, delisting means permanently removing a company’s assets from a stock
exchange. This means those assets won’t be traded on that particular exchange anymore.

Securities Contract (Regulation) Rules 1957: Section 19 of this act outlines the requirements
and documents needed for listing securities on a recognised stock exchange, which include:
➢ The company’s Memorandum of Association and Articles of Association, and in the case
of debentures, a copy of the trust deed.
➢ Copies of all prospectuses or similar documents issued by the company.
➢ Copies of offers for sale and advertisements for securities issued in the past five years.
➢ Copies of balance sheets and audited accounts for the last five years (or a shorter period
for new companies).
➢ A statement showing dividends and cash bonuses paid during the last ten years (or a
shorter period for newer companies), and any outstanding dividends or interest.
➢ Certified copies of agreements with vendors, promoters, underwriters, brokers, and other
relevant parties.
➢ Certified copies of agreements with managing agents, secretaries, treasurers, selling
agents, and company officers.
➢ Certified copies of any documents referred to in prospectuses or advertisements for
securities issued in the past five years.
➢ Details of important contracts, agreements, concessions, and similar documents.
➢ A brief history of the company, including changes in its capital structure and debenture
borrowings.
➢ Details of shares and debentures issued for non-cash consideration, at a premium or
discount, or pursuant to an option.
➢ Information about commissions, brokerage, discounts, and special terms granted to any
person.
➢ Copies of consent letters from the Controller of Capital Issues.
➢ Particulars of forfeited shares.
➢ A list of the top ten shareholders for each class of securities, along with their holdings.
➢ Details of shares or debentures for which permission to trade is requested.

Companies Act: A company that wants to list its securities on a stock exchange must first send a
formal letter of application to all the stock exchanges where it intends to have its securities listed.
This should be done before the company submits its prospectus to the Registrar of Companies.

SEBI Guidelines: When a company offers securities to the public, it must complete the
allotment of these securities within 30 days from the date when the subscription list closes. After
this, it needs to approach the designated stock exchange for approval of the allocation method.
Additionally, the issuer company must finish all the necessary paperwork to enable trading on all
the stock exchanges where its securities are listed within 7 working days after finalising the
allocation method.

-Companies that make public or rights issues must deposit 1% of the issue amount with the
designated stock exchange before determining the issue price.

Stock Exchange Guidelines: Each stock exchange has its own specific guidelines for companies
seeking to list on it. These guidelines may include requirements for the minimum size of the
offering and the market value of the company.
Before being allowed to list on the exchange, a company must enter into a listing agreement.
Under this agreement, the company agrees to provide facilities for the quick transfer,
registration, sub-division, and consolidation of securities.

It also commits to notifying shareholders of the closure of transfer books and record dates,
sending six copies of complete annual reports, balance sheets, and profit and loss accounts,
reporting shareholding patterns and financial results quarterly, and promptly informing the
exchange of events that could significantly affect the company’s financial performance and stock
price. The company also agrees to comply with corporate governance conditions.

Companies are also required to pay a listing fee to the exchange every financial year as
determined by the exchange.

Companies that do not meet these requirements may face disciplinary action, including the
possibility of having their securities suspended or delisted. If the exchange refuses to permit a
company to list its securities, the company cannot proceed with the allocation of shares.
However, the company has the option to file an appeal with SEBI under Section 22 of the
Securities Contracts (Regulation) Act, 1956.

If a company has been delisted by a stock exchange and wishes to relist on the same exchange, it
must initiate a new public offering and adhere to the exchange’s existing guidelines.

DELISTING OF SECURITIES
Delisting refers to the process of removing a company’s securities from a stock exchange. When
a company wishes to list its securities on an exchange, it needs to submit an application to the
exchange in the prescribed format before issuing a prospectus for securities or before conducting
an “Offer for Sale” through that method. Delisting means the company’s securities are
permanently taken off the stock market where they were initially registered, and they can no
longer be traded there.

The process of delisting involves several factors, including:

Reasons for Delisting: A company may decide to delist its securities voluntarily or may be
compelled to do so if it fails to meet certain requirements outlined in the listing agreement with
the stock exchange.

Voluntary Delisting
In voluntary delisting, the company chooses to remove its securities from the stock exchange
voluntarily. This means that the company’s equity shares will no longer be available for trading
on any authorised stock exchange.
Shareholders who own these shares should be given the opportunity to sell them since they are
no longer listed. To initiate voluntary delisting, the company typically seeks approval from its
shareholders. This approval is usually obtained through a majority vote of shareholders, often a
2:1 majority, using a postal ballot.

Compulsory Delisting
In compulsory delisting, the stock exchange removes a company’s securities because the
company has failed to meet the requirements set out in the listing agreement. The exchange can
do this based on specified justifications outlined in regulations created under Section 21A of the
Securities Contracts (Regulation) Act of 1956.
To carry out delisting, a company typically follows these steps:
● Board of Directors Meeting: The company’s Board of Directors calls a meeting after
issuing a notice, usually in writing, to all directors of the company.
● Resolution for Delisting: During the meeting, the board passed a resolution proposing
the delisting of the company’s shares.
● General Meeting: The company then calls a General Meeting to seek approval from its
members through a special resolution. The date, time, place, and agenda for the meeting
are specified in advance. This agenda can be included in the Annual General Meeting if
applicable.

Delisting by a Stock Exchange

Delisting by a stock exchange involves several important aspects and notifications:
Notice of Delisting: When a company’s equity shares are delisted by a stock exchange, the
company is required to publish a notice in a newspaper where the stock exchange is located. This
notice informs shareholders and the public about the delisting and the circumstances leading to
it.
Reasons for Delisting: Delisting typically occurs due to noncompliance with the Listing
Agreement for a minimum period of six months. This noncompliance can result from factors
such as failure to maintain the minimum trading level of shares on the exchange, issues related to
the track record of promoters and directors, incorrect share pricing, or unfair market practices.
Responsibility of Promoters: When a company’s securities are delisted under these
circumstances, the company’s promoters are usually responsible for compensating the company’s
security holders and paying them the fair value of the securities they hold. Shareholders may not
have an exit option, and trading in the securities may not be allowed for a minimum period of
one year after delisting.
Exit Opportunity: In some cases, stock exchanges allow for the delisting of companies without
providing an exit opportunity if the company’s assets are still listed on a stock exchange with
countrywide trading terminals.

DEMUTUALIZATION AND ITS IMPACT

Demutualization of a stock exchange refers to the process by which a member-owned,

non-profit organization (like a traditional stock exchange) transforms into a profit-oriented,
shareholder-owned corporate entity. The primary goal of this transformation is to separate the
ownership, management, and trading rights of the exchange, which previously were concentrated
among the members (brokers). This helps to improve governance, transparency, and efficiency in
the operation of stock exchanges.

Key Elements of Demutualization:

1. Separation of Ownership and Trading Rights:

-In a mutualized stock exchange, members (typically brokers) both own the exchange and have
exclusive rights to trade on it. This can lead to conflicts of interest, with members prioritizing
their own interests over the exchange's broader function.

-Demutualization separates these roles. Ownership is transferred to shareholders, and trading

rights are granted based on set rules rather than ownership.

2. Corporate Structure:

A demutualized exchange becomes a for-profit entity. It adopts a corporate governance structure,

including a board of directors, and operates like any other company listed on the stock exchange.
It can raise capital through public offerings or by attracting strategic investors.

3. Regulatory Oversight:

A demutualized exchange is subject to stricter regulation, including financial disclosures, audits,

and governance norms, which helps in improving transparency and investor confidence.

Demutualization in India:

In India, the process of stock exchange demutualization began in the early 2000s. The primary
reasons were to improve transparency, reduce conflicts of interest, and align Indian exchanges
with global standards.

The Securities and Exchange Board of India (SEBI) issued guidelines to ensure that
exchanges transition from member-owned entities to professionally managed, for-profit
corporations.

● Impacts of Demutualization on the Indian Economy:

1. Increased Transparency and Governance:

➢ Demutualization brought transparency in the functioning of stock exchanges. As these
exchanges now had to adhere to corporate governance standards, they were subject to
stricter regulatory supervision.
➢ The conflicts of interest that previously existed, where broker-members controlled both
trading and exchange management, were reduced. This increased investor confidence and
led to greater participation in the markets.

2. Attraction of Capital:

➢ As corporate entities, demutualized exchanges could raise capital through equity markets.
This allowed them to invest in infrastructure, technology, and new products.
➢ For instance, BSE and NSE both attracted investments from global institutions, further
strengthening their financial position and market offerings.

3. Development of Financial Markets:

➢ A more transparent and professionally managed stock exchange system contributed to the
deepening of India’s financial markets. With better governance, more companies were
willing to list on the exchanges, and investors, both domestic and international, gained
confidence in India’s capital markets.
➢ The introduction of modern trading systems and products (like derivatives, commodity
trading, and ETFs) helped diversify the market and provided more options for investors.

4. Financial Inclusion and Retail Participation:

➢ The increased transparency and better regulatory oversight have encouraged greater retail
investor participation in Indian stock markets. With lower barriers to entry and more trust
in the system, Indian exchanges have witnessed a rise in individual investors and trading
activity.
➢ This financial inclusion has had a broader positive impact on the Indian economy by
encouraging savings, investments, and the growth of domestic capital.
● Impact of Demutualization on Regional Stock Exchange

The demutualization of stock exchanges in India, while beneficial for major exchanges like the
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), had a significant impact
on regional stock exchanges (RSEs), leading to both positive and negative consequences. Most
of these smaller, regional exchanges struggled to adapt to the new environment of increased
competition, technological demands, and stricter regulatory standards. Below are the key impacts
of demutualization on RSEs in India:

1. Decline in Relevance and Market Share:

➢ Increased Competition from National Exchanges: After demutualization, larger

exchanges like NSE and BSE significantly modernized their trading platforms, adopted
advanced technology, and offered a wider range of products, including derivatives and
automated trading. In contrast, regional stock exchanges lacked the capital and resources
to compete with these innovations.
➢ Migration of Trading Activity: As a result, trading volumes on regional exchanges
rapidly decreased. Most traders and investors shifted their activities to NSE and BSE,
which offered better technology, liquidity, and transparency. This migration caused RSEs
to lose their relevance, as most trading activity was concentrated in the national
exchanges.
➢ Limited Local Listings: Historically, RSEs catered primarily to small, local businesses.
However, post-demutualization, these businesses preferred to list on national exchanges
due to better visibility, liquidity, and access to a larger pool of investors. This further
reduced the market share of regional exchanges.

2. Challenges in Meeting Technological and Regulatory Demands:

➢ Need for Modern Infrastructure: Demutualization necessitated significant investment

in technology, infrastructure, and compliance systems. However, most regional
exchanges lacked the financial capacity to upgrade their trading platforms to the level
required to compete with BSE and NSE.
➢ Compliance with Regulatory Standards: SEBI’s guidelines post-demutualization
required all stock exchanges to adhere to stringent corporate governance, transparency,
and disclosure norms. RSEs struggled to meet these standards, given their limited
resources and outdated systems.

3. Closure and Mergers:

➢ SEBI’s Deregistration of Non-Performing Exchanges: Many RSEs could not meet

SEBI’s regulatory requirements or attract enough trading activity to sustain their
operations. In response, SEBI deregistered several non-operational regional
exchanges. For instance, the Madras Stock Exchange, Delhi Stock Exchange, and
Ahmedabad Stock Exchange were among the RSEs that ceased operations or were
delisted due to low volumes and non-compliance with SEBI’s norms.
➢ Mergers with National Exchanges: To survive, some regional stock exchanges explored
mergers or alliances with larger exchanges. In some cases, RSEs entered into
arrangements with NSE or BSE to facilitate trading through their platforms while
reducing operational costs. However, these mergers were often seen as a last resort, as
many RSEs continued to lose their independence and identity in the process.

4. Impact on Local Businesses and Investors:

➢ Reduced Access for Small and Medium Enterprises (SMEs): Historically, RSEs
provided a platform for small and medium enterprises (SMEs) to list locally and access
capital markets at relatively lower costs. Post-demutualization, the closure or reduced
operations of RSEs made it difficult for these smaller firms to raise funds. Although NSE
and BSE later launched SME platforms, the initial gap created by the decline of RSEs
was challenging for regional businesses.
➢ Local Investor Disengagement: Many local investors, particularly in smaller towns and
cities, had long-standing relationships with regional exchanges. The decline or closure of
RSEs reduced access to capital markets for these investors, as national exchanges were
primarily concentrated in major metropolitan areas, creating barriers for those unfamiliar
with modern, tech-driven trading platforms.

5. Emergence of SME Platforms:

● In response to the need for SME funding, NSE and BSE launched dedicated SME
platforms that allow small and medium enterprises to list and raise capital in a
cost-effective and regulated manner. These platforms partly filled the gap left by the
decline of RSEs, offering an alternative for small businesses to access the equity markets
without the need for a fully operational regional exchange.

MINIMUM PUBLIC SHAREHOLDING

MPS or minimum public shareholding, is a regulatory norm that all listed companies in India
need to comply with. The MPS rule states that a prescribed percentage of the total outstanding
shares should be made available to the general public, thereby restricting promoters to a
maximum limit beyond which they cannot own shares in their own company. Currently, in India,
the Securities Contract Regulation Rule (SCRR) regulates the minimum public shareholding; it
prescribes that all listed companies should have a minimum of 25% of the total outstanding
shares available to the public. Certain Public Sector Undertakings (PSUs) owned by central and
state governments are exempted from this rule and they can hold a higher percentage based on
the situation from time to time. In such cases, the minimum public shareholding is prescribed to
be 10%, and every attempt is being made for it to be standardised to 25%.

The Securities Contract Regulation Act (SCRA), enacted by the Indian Parliament in 1956,
serves as a crucial law regulating the Indian capital markets. Its primary objective is to control
securities trading contracts and the functioning of stock exchanges in India to prevent
undesirable transactions and maintain market integrity.

● Key provisions of the SCRA:

Definition of contracts: The SCRA defines what constitutes a “contract” in the context of
securities trading. It encompasses transactions involving the buying, selling, or dealing in
securities, including stocks, bonds, debentures, and other financial instruments. This definition
provides clarity and uniformity in understanding what activities fall under the purview of the
law.
Recognition of stock exchanges: The SCRA empowers the Central Government of India to
recognise stock exchanges in the country. It establishes a formal process for stock exchanges to
obtain recognition and operate legally. Recognised stock exchanges must comply with the
provisions of the SCRA and adhere to the regulations set forth by the government.
Regulation of trading activities: The SCRA regulates various aspects of trading activities on
recognised stock exchanges. It outlines the types of contracts permitted, such as spot contracts,
forward contracts, and options contracts. It also specifies the conditions under which these
contracts can be entered into and executed, ensuring fairness and transparency in trading
practices.
Listing of securities: The SCRA governs the listing of securities on recognised stock exchanges.
Companies seeking to list their securities must meet certain criteria and requirements as
prescribed by the law. This process helps ensure that only credible and financially sound
companies can access the capital markets, providing investors with confidence in the listed
securities.
Investor protection: The SCRA aims to protect the interests of investors by prohibiting
fraudulent and manipulative practices in the securities market. It empowers regulatory authorities
to investigate and take action against individuals or entities engaged in such activities,
safeguarding the rights of investors and upholding market integrity.
Jurisdiction of the Central Government: The SCRA grants the Central Government of India
jurisdiction over various matters related to stock exchange recognition, types of contracts
permitted, and the securities listed on exchanges. This centralised authority allows for consistent
regulation and policy implementation, ensuring a level playing field for all participants in the
securities market.
The SCRA has played a significant role in shaping the Indian capital markets by providing a
robust regulatory framework for securities trading and stock exchange operations. It has
contributed to the growth and development of the Indian capital markets, attracting domestic and
foreign investments and fostering economic prosperity.

Additionally, SEBI (Securities and Exchange Board of India) has the power to regulate and
continuously supervise the exchanges and the functioning of the participants associated with
securities contract trading. SCRA plays an important role in the minimum public shareholding
regulation with a set of rules framed by the SCRR.

● Securities Contract Regulation Rule (SCRR)

The SCRA legislation provides a broad legal framework that helps regulate the recognised stock
exchanges and the securities listed on them. SCRR are detailed rules formulated under the act
that further detail the specific regulations that actually help implement the provisions in the
SCRA. In a sense, SCRR helps operationalize the SCR Act. To simplify this further, we can look
at a realistic example: SCRA makes provisions for penalties against those that violate the act
and/or provisions stated in SCRA; to this effect, SCRR will define rules that clearly indicate the
quantum of penalty for that specific violation. In a similar manner SCRR will quantify the
penalties where required for each of the provisions and will clearly specify the enforcement
mechanism to deal with the violation or non-compliance.

● Advantages of Minimum Public Shareholding (MPS)

Free float, another term for minimum public shareholding, means the total number of shares
freely available for the public to acquire and participate in the market. Making available a large
free float is the primary goal of MPS.

➢ Liquidity
A larger free float enables a larger number of shareholders, which increases liquidity to begin
with. Since the distribution is very large, it prevents the concentration of shares in the hands of a
particular group and/or the promoter group. It enables keeping a check on such groups and
reducing their dominance, thereby positively impacting fair price discovery.

➢ Corporate governance
Corporate governance improves because a higher number of non-promoter shareholders reduces
the dominance of promoters, enabling public shareholders to participate and influence corporate
decisions, which enables a better focus on minority shareholder interests and aligns with their
objectives.

➢ Other benefits
The free float is created by rules prescribed in SCRR under the authority of SCRA. This free
float is responsible not only for liquidity, corporate governance, and price discovery, but also
prevents price manipulation, helps maintain market integrity, and creates a level playing field for
promoters and non-promoters in wealth generation.

CONTRACTS

● Trading

Trading, in the context of the Securities Contracts (Regulation) Act, 1956 (SCRA), refers to
the buying and selling of securities in the stock market. The Act provides a regulatory framework
for the control and regulation of securities transactions and ensures fair dealings in securities.
Trading can occur in different forms, such as in the spot market, futures market, or options
market. The SCRA aims to protect investors, prevent fraud, and promote transparency in
securities trading.

● Spot Delivery Contract

A Spot Delivery Contract is a fundamental concept in the context of securities trading,

particularly under the Securities Contracts (Regulation) Act, 1956 (SCRA). It refers to a
contract for the sale or purchase of securities where the settlement is carried out on the same day
or within the next working day. These contracts ensure prompt settlement and delivery of
securities and payment, reducing the risk of default or delay in the transaction.

➢ Definition under SCRA

The term Spot Delivery Contract is defined under Section 2(i) of the Securities Contracts
(Regulation) Act, 1956 as follows:

"A contract which provides for the actual delivery of securities and the payment of a price
either on the same day as the date of the contract or on the next day."

This means that in a spot delivery contract:

-The transfer of securities (physical or electronic) from the seller to the buyer, and

- The payment of the agreed-upon price by the buyer to the seller, both must occur on the same
day or the next working day after the contract is agreed upon.

➢ Features

Immediate Settlement: The primary feature of a spot delivery contract is the immediate
settlement of both securities and payment. The settlement must be completed on the same day or
within the next working day. This immediacy reduces the credit and counterparty risk for both
parties involved in the transaction.

Transfer of Ownership: In spot delivery, the ownership of the securities is transferred right
away (or within one business day) from the seller to the buyer, and the buyer must pay the full
price upon receipt of the securities.

No Speculative Holding: Since the contract requires immediate delivery and payment, it
prevents speculative holding of securities by buyers or sellers. The transaction is final and does
not allow deferring settlement or taking on leverage (like futures contracts).

➢ Delivery and Payment Modes

- In the case of physical shares, the delivery would typically involve the exchange of share
certificates.
- With the dematerialization of securities, delivery now often happens through the transfer of
securities between Demat accounts, using electronic systems like those of depositories (e.g.,
NSDL or CDSL).

- Payment is usually made through the banking system or through designated settlement systems
facilitated by the stock exchanges.

➢ Purpose and Importance

The concept of spot delivery contracts plays an important role in ensuring a prompt and efficient
settlement system in the stock market. Some key purposes and benefits include:

Risk Mitigation: Immediate settlement reduces the risk of non-performance by either party. The
transaction is completed within a very short time frame, minimizing market risk, which can arise
due to price fluctuations over time.

Prevention of Speculation: As spot delivery contracts require actual settlement within a day or
two, they do not allow room for speculative transactions. This ensures that buyers and sellers in
spot markets deal in real securities and not on mere price movements without ownership.

Market Liquidity: By requiring immediate delivery, spot delivery contracts promote liquidity in
the market. Buyers who need the securities for a genuine purpose can purchase them promptly,
and sellers who need immediate payment can receive it without delay.

➢ Legal and Regulatory Framework

Under the SCRA, a spot delivery contract is the only type of transaction that can be carried out
in physical form outside recognized stock exchanges. All other contracts for securities trading
(like futures and options) must be conducted through recognized stock exchanges, under
regulated clearing and settlement systems. The SCRA allows only spot delivery contracts to be
executed directly between parties because of their simplicity and immediate settlement.
Prohibition of Forward Contracts: Spot delivery contracts are considered non-speculative and
thus allowed under the SCRA. On the other hand, forward contracts, which involve delivery and
payment on a date beyond the immediate next day, are not allowed in off-market dealings
without stock exchange regulations. This prevents speculative trading and ensures only genuine
market transactions take place outside the exchange framework.

● Badla contract

The Badla contract was a system of financing and carrying forward trades that existed in the
Indian stock markets before being banned in 2001. Badla, meaning "something in return" in
Hindi, referred to the deferral or postponement of a settlement, allowing investors to carry
forward their positions to the next settlement cycle by paying a financing charge. This system
played a significant role in the Indian stock market before the introduction of modern derivative
products like futures and options.

Here's a detailed explanation of the Badla contract system, including how it worked, its
advantages and disadvantages, why it was banned, and its impact on the Indian stock market.

➢ Meaning

A Badla contract refers to a mechanism where stock traders could carry forward their positions
(either buy or sell) to the next trading period instead of settling the contract immediately. The
system allowed traders to delay the delivery of securities or the payment of funds by paying a
fee, known as the Badla charge. In essence, it was a carry-forward mechanism that allowed
investors to avoid settlement while keeping their positions open for future profit opportunities.

➢ Features

Carry Forward Mechanism: Instead of settling the transaction on the scheduled date, a trader
could defer the settlement to a future date by paying or receiving a charge.

Interest Payment (Badla Charge): To carry forward the position, the trader would either pay or
receive a Badla charge, which was effectively an interest charge for postponing the settlement.
Leverage: The system provided a way for investors to take on larger positions without paying
the full value of the stocks. This was essentially leveraging the trade by using borrowed funds.

No Immediate Settlement: Unlike spot delivery contracts, which involve immediate delivery of
securities and payment, Badla contracts allowed positions to be carried forward without the
requirement for immediate settlement.

➢ Badla Financier:

-A Badla financier was a third party or market participant who provided funding for these
carry-forward positions. The financier would lend money to buyers or lend shares to sellers in
exchange for the Badla charge.

-This created a market for Badla financing, where financiers earned a return on their investment
by charging interest to traders wishing to carry forward their positions.

Settlement Cycle:

-The settlement cycle (typically 15 days) determined when trades had to be settled on the stock
exchange. If a trader wanted to carry forward a position beyond the current cycle, they would
engage in the Badla arrangement.

-Every settlement period, the position could be rolled over, allowing traders to hold on to their
positions for extended periods without actual delivery or payment of securities.

Types of Badla Contracts

There were two primary forms of Badla contracts:

Vyaj Badla (Financing of Purchases): This allowed a buyer of securities to defer payment by
borrowing funds from a financier in return for a Badla charge (interest).

Undha Badla (Financing of Short Sales): This allowed a seller of securities to defer delivery
by borrowing shares from a financier in exchange for a Badla charge.

➢ Ban on Badla System

The Badla system was banned in 1993 but was reintroduced in 1996 due to pressure from
market participants who found it essential for market liquidity. However, it was permanently
banned by the Securities and Exchange Board of India (SEBI) in 2001 after the Ketan
Parekh stock market scam exposed the system's vulnerabilities and risks.

Key Reasons for the Ban:

Excessive Speculation: The system encouraged traders to hold speculative positions without the
intent of actual settlement, making the market prone to speculation and manipulation.

Market Instability: The high leverage allowed by Badla contracts contributed to market
instability and volatility, leading to potential financial crises.

Lack of Transparency: Badla contracts operated in a relatively opaque manner, leading to

unfair practices and manipulation by large market participants, creating imbalances in the
market.

Systemic Risk: The large amount of leverage in the system made it vulnerable to a systemic
collapse in case of adverse market conditions, as defaults could cascade throughout the market.

● Futures Contract

A Futures Contract is a standardized legal agreement to buy or sell an asset (such as stocks,
commodities, indices, or currencies) at a predetermined price on a specified date in the future.
Unlike traditional spot market transactions, where delivery and payment occur immediately, a
futures contract allows both buyers and sellers to lock in a price for future delivery or receipt of
the underlying asset. Futures contracts are traded on organized exchanges and are regulated to
ensure transparency and minimize counterparty risk.

Futures contracts are used primarily for two purposes: hedging (reducing risk) and speculation
(taking on risk for potential profits). Futures contracts have been a key financial instrument in the
markets, especially for managing risks in volatile markets like commodities, equities, and
currencies.
➢ Definition of a Futures Contract

A Futures Contract is a forward agreement between two parties, where one party agrees to buy
and the other agrees to sell a specified quantity of an asset at a fixed price on a future date.
However, unlike forward contracts (which are private agreements), futures contracts are traded
on regulated exchanges and are standardized in terms of quantity, quality, and settlement dates.

➢ Features

a) Standardization

Standardized Contract: Futures contracts are standardized by exchanges in terms of the asset
quantity, quality, and delivery dates. For example, a stock futures contract might represent 100
shares of a specific company, or a commodity futures contract might specify the quality and
quantity of a commodity like oil or wheat.

Exchange-Traded: Unlike forward contracts, which are customized and traded over-the-counter
(OTC), futures contracts are traded on organized exchanges (e.g., NSE, BSE, CME) and are
standardized to facilitate liquidity and ease of trading.

b) Margin and Leverage

Margin Requirements: To enter a futures contract, both the buyer and the seller are required to
deposit a fraction of the contract’s total value, called the initial margin. This ensures that both
parties can fulfill their obligations at the settlement date. Margin requirements are enforced by
clearinghouses to minimize default risk.

Leverage: Futures contracts allow traders to control large positions with a relatively small
amount of capital. The margin required is only a percentage of the full value of the contract,
creating leverage. For example, if the margin requirement is 10%, a trader needs to deposit
₹50,000 to control a contract worth ₹500,000.
c) Mark-to-Market (Daily Settlement)

Mark-to-Market (MTM): Futures contracts are marked-to-market daily. This means that any
profits or losses are settled on a daily basis. If the value of the contract moves in favor of the
trader, profits are credited to the trader’s account. Conversely, if the market moves against the
trader, losses are debited from the account. This daily settlement ensures that any unrealized
gains or losses are reflected and reduces the risk of default.

d) Settlement

Physical Delivery or Cash Settlement: Futures contracts can be settled in two ways:

1. Physical Delivery: The underlying asset (stocks, commodities, etc.) is physically

delivered to the buyer, and payment is made.
2. Cash Settlement: Many futures contracts, especially for financial instruments
(like stock indices or currencies), are settled in cash, where the difference between
the contract price and the actual market price at the time of settlement is
exchanged. There is no physical delivery of the underlying asset.

Expiration Date: Each futures contract has a specific expiration date, which is the date by which
the contract must be settled, either by delivery or cash settlement. The contract ceases to exist
after this date.

➢ Uses of Futures Contracts

a) Hedging

Hedging involves using futures contracts to protect against the risk of price fluctuations in an
underlying asset. Businesses, producers, and investors often use futures to manage price risks.

b) Speculation
Speculators use futures contracts to profit from price movements in the underlying asset without
having to own it. Speculators take on the risk of the asset’s price moving in the direction they
anticipate.

c) Arbitrage

Arbitrage involves taking advantage of price differences between markets. Arbitrageurs use
futures contracts to exploit differences between the futures price and the spot price of the
underlying asset.

➢ Regulation of Futures Contracts

The Securities Contracts (Regulation) Act, 1956 (SCRA) governs futures trading in India,
ensuring that only recognized stock exchanges can offer futures contracts. This legal framework
helps maintain transparency, prevent fraud, and reduce systemic risk.

Additionally, clearinghouses such as the National Securities Clearing Corporation Limited

(NSCCL) in India ensure the proper settlement of futures contracts by guaranteeing trades and
managing margins.

● Option

An Option is a financial derivative contract that gives the holder the right, but not the obligation,
to buy or sell an underlying asset (such as stocks, commodities, or indices) at a predetermined
price (strike price) before or on a specific date (expiration date). Options are widely used for
hedging, speculation, and income generation and provide investors with flexibility to manage
risk and leverage market positions without directly owning the underlying asset.

There are two types of options: Call options and Put options. Call options give the holder the
right to buy the underlying asset, while put options give the holder the right to sell the underlying
asset.
➢ Definition of Options

An Option is a contract between two parties in which one party (the option holder) has the right
to buy or sell an asset at a fixed price within a specified time period. The other party (the option
writer) has the obligation to fulfill the contract if the holder decides to exercise the option.

The key difference between an option and a futures contract is that the option holder has the
right, but not the obligation, to exercise the option, whereas in futures, both parties are obligated
to fulfill the terms of the contract.

➢ Types of Options

a) Call Options

A Call Option gives the buyer the right, but not the obligation, to buy the underlying asset at a
predetermined price (strike price) on or before a specific date (expiration date).

Buyer of Call: Pays a premium to acquire the right to buy the underlying asset if they expect its
price to rise.

Seller of Call (Writer): Receives the premium and is obligated to sell the asset if the buyer
exercises the option.

b) Put Options

A Put Option gives the buyer the right, but not the obligation, to sell the underlying asset at a
predetermined price (strike price) on or before a specific date (expiration date).

Buyer of Put: Pays a premium to acquire the right to sell the underlying asset if they expect its
price to fall.

Seller of Put (Writer): Receives the premium and is obligated to buy the asset if the buyer
exercises the option.
➢ Features

a) Underlying Asset

The underlying asset in an option contract can be stocks, commodities, indices, currencies,
bonds, or other financial instruments. The value of the option depends on the price movements of
the underlying asset.

b) Strike Price (Exercise Price)

The Strike Price is the predetermined price at which the option holder can buy (in the case of a
call) or sell (in the case of a put) the underlying asset. This price is agreed upon at the time the
option contract is created.

REGULATIONS RELATED TO INVESTOR PROTECTION UNDER COMPANIES

ACT,2013
The Companies Act, 2013 is enacted with the main aim to assure maximum protection to every
section of investors irrespective of their classes. The Companies Act, 2013 has been embedded
with several new provisions in regards to the protection of investor’s interest. Some of the
provisions to protect investor’s interest under the Companies Act, 2013 are discussed hereunder.

Acceptance of Deposits: The acceptance of deposit from the general public is not permitted
under the Act, and violation of any of the provision is a punishable offense. Section 73 of the Act
provides that no company shall accept or review deposit under this Act from the public except in
a manner recognized under Chapter V of the Act and Companies (Acceptance of Deposit) Rule
2014.

Misstatement in Prospectus: Tregulationshe prospectus is a written statement issued by the

company to the general public containing brief information regarding companies profile and their
investment proposals. Section 34 of the Act deals with the criminal liability for miss statement in
the prospectus issued by a company. The prospectus issued, circulated or distributed, include any
statement, which is untrue or misleading in form or context to induce people to make an
investment, shall be liable for action u/S 447.

Fraudulently Inducing Person to Invest Money: Section 36 of the Act deals with the
punishment of the person who intentionally or recklessly induces the investor to make the
investment through any agreement for the purpose or the pretended purpose of which to secure a
profit. This kind of deliberate concealment of fact shall be liable for punishment u/s 447.

Non-Payment Of Dividend: Declaration of the dividend is usually one of the items of agenda of
every AGM. The dividend is nothing but profits earned by the company and divided among
shareholders in proportion to the amount paid-up shares held by them, i.e., return on the
investment made by shareholders. The Section 125 of the Act provides for the establishment of
investors education and protection fund by the central government. This fund is credited with the
unpaid/unclaimed amount of application money/matured money or mature deposits. Such
accumulations of the fund are to be utilized for promotion of investor’s awareness and protection
of investor interest. Section 123 of the Act state that the dividend should be credited in investors
account within in five days after the declaration.

Right to Demand Financial Statements: Section 136 of the Act provides for the right of a
member to obtain copies of Balance-Sheet and Auditors Reports. In the case of default
complying with this requirement, the company shall be liable for a penalty of twenty-five rupees
and the authorized officer who is in default shall be liable for a penalty of five thousand rupees.
Besides, this investor has the option to proceed against the company or its authorities in a court
of law under the guidelines determined under Section 436 of the Act.

EDUCATION AND PROTECTION FUND

Meaning of Investor Education and Protection Fund (IEPF)

The Investor Education and Protection Fund (IEPF) is a fund established by the Government of
India to promote investor awareness and protect the interests of investors. The fund was created
under the provisions of the Companies Act 1956, and later under the Companies Act 2013. As
per section 125(1) of the Companies Act 2013, the Central Government shall establish a Fund to
be called the Investor Education and Protection Fund.

➢ Features of Investor Education and Protection Fund (IEPF)

1. Unclaimed Dividends and Shares: The primary source of funds for IEPF is the unclaimed
dividends and shares of companies. When dividends declared by companies are not claimed by
shareholders or when shares are left unclaimed, the amounts are transferred to the IEPF.

2. Investor Education: The fund is used to finance initiatives aimed at educating investors about
financial markets, investment opportunities, and the importance of making informed investment
decisions.

3. Refund to Investors: In cases where the rightful owners of unclaimed dividends or shares
come forward, they can claim their money or securities from the IEPF.

4. Protection of Investor Interests: The IEPF plays a role in safeguarding the interests of
investors by ensuring that unclaimed funds are used for their benefit and by promoting
transparency and accountability in the financial system.

5. Rules and Regulations: The rules and regulations governing the IEPF are specified by the
Ministry of Corporate Affairs in India. These rules outline the process for transferring unclaimed
amounts to the fund and the procedures for claiming refunds.

➢ Administration of IEPF

The oversight of the IEPF rests in the hands of the IEPF Authority, led by a chairperson and a
chief executive officer, along with a maximum of seven other members appointed by the Central
Government. Charged with administering the IEPF funds, the Authority diligently maintains
distinct accounts and pertinent records, following consultations with the Comptroller and
Auditor-General of India. These funds embody the accumulated amounts ascribed to the IEPF in
accordance with the stipulations of the Act.

CLASS ACTION SUIT

Introduction
The introduction of class action suits is one of the major changes introduced by the Companies
Act, 2013. The major objective behind the provision of class action suits is to safeguard the
interests of the minority shareholders. So, class action suits are expected to play an important
role to address numerous prejudicial and abusive conduct committed by the Board of Directors
and other managerial personnel as it has been statutory recognized under the Companies Act,
2013.

Meaning

-A class action suit is a lawsuit where a group of people representing a common interest may
approach the Tribunal to sue or be sued.

-It is a procedural instrument that enables one or more plaintiffs to file and prosecute litigation
on behalf of a larger group or class having common rights and grievances.

➢ Who are entitled to file class action suits?

1) Members:
a) In case of a company having share capital, member or members:

● not less than 100 members of the company or

● not less than 10% of the total number of its members, whichever is less or
● any member or members singly or jointly holding not less than 10% of the issued
share capital of the company.
Provided that the applicants have paid all calls and other sums due on their shares.
b) In case of a company not having a share capital, member or members:

● not less than 1/5th of the total number of its members.

2) Depositors:

● The number of depositors shall not be less than 100 or

● not less than 10% of the total number of its depositors, whichever is less or

● any depositor or depositors singly or jointly holding not less than 10% of the total
value of outstanding deposits of the company.

➢ Who may be sued through class action suits?

A class action suit may be filed against the following authorities:

● A company or its directors for any fraudulent, unlawful or wrongful act or omission;
● an auditor including audit firm of a company for any improper or misleading
statement of particulars made in the audit report or for any unlawful or fraudulent
conduct.

● an expert or advisor or consultant for an incorrect or misleading statement made to the

company.

➢ Which reliefs may be claimed through class action suits?

Any member or depositor on behalf of such members or depositors may file a class action suit
before the National Company Law Tribunal (NCLT) to:
A) restrain the company from committing an act which is beyond the powers of the articles or
memorandum of association of the company;
B) restrain the company from committing breach of any provision of company’s memorandum or
articles;
C) to declare a resolution as void for altering the memorandum or articles of the company or
passed by suppression of the material facts or obtained by mis-statement to the members or
depositors;
D) to restrain the company and its directors from acting on such resolutions;
E) restrain the company from committing any acts which is contrary to the provisions of the Act
or any other law for the time being in force;
F) restrain the company from taking action contrary to any resolution passed by its members;
G) claim damages or compensation on demand any other suitable action against :
i) the company or its directors for any fraudulent, wrongful or unlawful act;
ii) an auditor including audit firm of a company for any improper or misleading statement of
particulars made in the audit report or for any unlawful or fraudulent conduct.
iii) an expert or advisor or consultant for an incorrect or misleading statement made to the
company.