Securities Contracts (Regulation) Act, 1956
Scope
The Securities Contracts (Regulation) Act, 1956 is the parent statute for recognised stock exchanges, contracts in securities and derivatives. The exam tests definitions, the recognition regime, when contracts are legal, and the relationship with SEBI.
Core rules
- SCRA defines securities widely: shares, stocks, bonds, debentures, debenture stock, derivatives, units of collective investment schemes, security receipts and other notified instruments.
- A stock exchange must be recognised by SEBI under SCRA; recognition can be granted, renewed, withdrawn or suspended. Trading in securities in notified areas must generally be through a recognised exchange, subject to exemptions such as spot delivery contracts.
- Derivatives are legal only when traded on a recognised stock exchange and cleared by a recognised clearing corporation, in accordance with conditions notified by SEBI. This is why private OTC derivative contracts in securities are not freely enforceable.
- SCRA empowers SEBI to make rules/bye-laws, regulate listing, prohibit undesirable contracts, inspect exchanges and impose penalties. It also preserves remedies for illegal contracts.
Worked example
Two companies privately agree that one will pay the other the difference between the market price of a listed share and ₹1,000 after three months. This is a derivative contract in a security. It is not a spot delivery contract and is not traded on a recognised exchange or cleared by a clearing corporation. It therefore does not get the statutory validation for exchange-traded derivatives and is not enforceable as a lawful securities derivative. If the same exposure were taken through exchange-traded futures, SCRA’s derivative provisions would apply.
Traps
SCRA is not the SEBI Act: SCRA regulates exchanges and contracts; the SEBI Act creates SEBI’s powers. Do not confuse a spot delivery contract with every off-market transfer. Do not assume a derivative is valid merely because the parties are sophisticated. Do not overlook that “securities” is a statutory definition, not ordinary commercial usage.