SEBI

Laws Governing Stock Market in India

Given the importance of stock markets for maintaining the stability of any economy, it is very important that such markets remain free from any loopholes giving way to unfair trade practices and proliferation of uncertainty among the investors regarding the security of investments. For building and maintaining the confidence of the investors in the economy, there is definitely a need for a robust regulatory framework built to protect the investor’s confidence and their investments from any probable unfair and manipulative trade practices which not only tampers with the investors’ confidence but also harms the overall future of country’s economy.  In this article we shall study different laws governing stock market in India.

What is a Stock Market?

A stock market is a platform which connects both the buyers and sellers to trade in the financial securities of the publicly held companies. It is also a platform for the issuance of financial securities to the public for example thorough IPOs. This trading is done through a recognised platform known as stock exchange. A stock market’s boundary is not restricted to a stock exchange. A country may have a number of recognised stock exchanges. A stock market comprises of all these exchanges that exist in a country to be collectively called as the stock market of a country. For example BSE, NSE, MCX etc. are stock exchanges recognised in India and collectively represent the Stock market of India.

Regulations and Laws governing Stock Market in India

Securities Contract (Regulation) Act, 1956

The regulatory bedrock of all the transactions taking place in securities in the stock markets is Securities Contract (Regulation) Act, 1956 read with Securities Contract (Regulation) Rules, 1957. The Securities Contract (Regulation) Act, 1956 or SC(R)A was introduced with the objective of preventing undesirable speculation in the securities being traded in the stock market. This is ensured by regulating the stock exchanges and transactions taking place both inside and also outside the market through licensed brokers.

The scope of the act extends to curb unwarranted transactions taking place in the securities market by exercising both direct and indirect control over the stock exchanges with their continued supervision, restricting the framework of the contracts in securities and prescribing conditions related to the listing and delisting of securities on the stock exchanges.

Some of the important SC(R)A laws governing stock market in India are listed below:

Recognition of Stock Exchanges

Sec.3: It is mandated by the act that trading of securities can be done only on recognised platforms. Therefore, for an entity to carry on the activities of a stock exchange must submit an application to the SEBI to be recognised as a stock exchange along with the relevant scheme, bye laws etc.

Sec. 4 Recognition of Stock Exchanges by the SEBI: Once the Central government is satisfied with the scheme of activities presented by the stock exchange and the relevant bye laws of the proposed stock exchange are in conformity with the standards prescribed by the statute, then the Central government decides to give recognition to the entity for running the operations as a stock exchange in India.

 Sec. 5: If the Central government realises that the operations of the recognised stock exchange are not in conformity with the existing prescribed conditions and prove to be not in the public interest and trade, then the central government has the power to withdraw the recognition granted to the stock exchange and halt its future operations.

Supervision of Stock Exchanges

Sec. 6: The act prescribes the procedure for keeping supervision over the activities of the Stock Exchange by mandating the stock exchange to file the periodical returns to SEBI regarding its affairs. For this, the stock exchange needs to maintain books of accounts for a period not exceeding five years for the purpose of inspection.

Sec.7: The stock exchange is mandated to furnish annual reports to SEBI regarding prescribed rules relating to restriction of voting rights.

Sec. 8: the Central Government has the power to direct a stock exchange to make or amend rules if it thinks they are violative of trade or public interest.

Sec. 10: The power rests with SEBI to make or amend by-laws of the stock exchanges if it feels it is necessary and expedient to do so.

S.11 The power to supersede the governing body of the stock exchange also rests with the Central Government if the government finds reasons that are in the interest of the public.

Sec. 12: The Central Government also has the power to suspend the business of the stock exchange in cases of emergency.

Sec. 23-24: Talk about the penalties that may be imposed on the stock exchanges in cases of failure to perform functions such as furnishing of information, redressal of investors’ grievances, annual returns etc.

Listing (sec. 21) and Delisting (21A) of Securities:

The company has to fulfil the all the prescribed conditions of the stock exchange before it wishes to list its securities on the platform. Failure to perform such obligations may result in stock exchange denying the company to list its shares on the exchange platform. Listing of shares must also be read with SEBI (LODR) Regulations, 2015.

Similarly, the stock exchange has the power to delist the securities of a publicly traded company on account of reasons prescribed by the statute. The remedy for the company lies at the Securities Appellate Tribunal (SAT).

Securities and Exchange Board of India Act, 1992

Securities and Exchange Board of India Act, 1992 mandates for establishment of Securities and Exchange Board of India with the objective of promoting the development of securities market, regulating the activities in the security market and entrusted with task to protect the interests of the investors in the securities market.

SEBI is the regulatory body that is responsible for regulating the securities and commodity market of India. The SEBI has the power to regulate the conduct of the companies from the issuance of securities to behaviour and conduct of intermediaries like investors, brokers, sub-brokers etc. in securities market.

SEBI has been mandated for the following roles:

1. Registration and Regulating the conduct of stock exchanges, intermediaries like brokers, sub-brokers, merchant bankers, CRAs, custodians etc.
2. Prevention of unwarranted and unfair practices in securities and other markets such as price manipulation, insider trading etc.
3. Promoting investor awareness and education schemes and redressal of their grievances.
4. Inspection, audit and enquiries of the offences prohibited under the act.
5. To penalise and punish in case of violation of any act, rules, regulations etc.

SEBI has the responsibility of regulating and shaping an overall fair and competitive market.

Depositories Act, 1996

Depositories are those entities that have been mandated by the Depositories Act, 1996^[1] to hold the securities of shareholder in electronic and fungible form for the free transferability of shares. The shares are held in the electronic form with the help of depository participants who can either be banks, brokers, financial institutions etc. Depository Act provides the procedure for the establishment of a Depository.

The reason for establishing a depository is to promote free transferability of shares so that stamp duty is not required to be paid on every instance of share transfer. This free transferability of shares becomes possible when the shares are kept with the depository in dematerialized form. When they are kept in dematerialized form, the shares do not have specific number and they can be easily transferred since the security certificates dematerialized form do not have certificate number.

Only two depositories exist in India. These are Central Depository Services (India) Limited (CSDL) and National Securities Depository Limited (NSDL).

The depositories are the registered owners whereas the shareholders are the beneficial owners. The shareholders will get all the benefits and liabilities attached to the shares including the right to vote and as beneficial owners.

Companies Act, 2013

The Companies Act, 2013 is the basic legislation that deals with the issuance, transfer and allotment of securities and other financial instruments. The act also prescribes a detailed procedure regarding the issuing of securities thorough multiple channels like rights issue, private placement, bonus issues etc.

The company act also provides the details of how the management of company, disclosure of share capital, dividends, payment of interest etc.

Other legislations

The other laws governing stock market in India that are important are Prevention of Money Laundering Act, Takeover Code, LODR Regulations, ICDR Regulations among other laws having effective application over regulation of Indian stock market.

Conclusion

After a series of stock market frauds committed in the period of nineties there was a desperate need for the government to develop a regulatory framework which could protect the investors’ confidence in the Indian stock market. For this a slew of laws governing stock market in India came into being and still continue to evolve to prevent a situation that existed in the stock market similar to that of nineties. And the results have been quite satisfactory where not only the investor confidence has been built but herculean efforts been undertaken were made to develop financial awareness among the investors. Although, no legislation is foolproof to contain financial frauds, the key lies in constantly evolving the structure that is competent to tackle any eventuality. And Indian stock market regulatory framework has been able to keep pace with the present times challenges.

Read our article:Why do two stock exchanges exist in India?