Study Notes

SCRA
Descriptive Question Notes
SCRA – Descriptive Question Notes

Question no. 1. What are the objects of the Securities Contracts (Regulation) Act, 1956?

 To provide for the regulation of stock exchanges.

 To provide for the regulation of transactions in securities.
 To prevent undesirable speculation in securities.
 To regulate the buying and selling of securities outside the limits of stock exchanges.
 To provide for ancillary matters like promoting a healthy stock market.

Question no. 2. Write a short note on Spot Delivery Contract?

Spot delivery contract means a contract which provides for:

 Actual delivery of securities and the payment of a price either on the same day or on the
next day.
 Transfer of the securities by the depository from the account of one beneficial owner to
another beneficial owner.

Be prepared with all Delivery Contracts – Spot Delivery Contract, Ready Delivery Contracts,
Specific Delivery Contracts, Transferable and Non-transferable specific delivery contracts

Suggestive Questions-

 Q. What do you understand by Ready Delivery Contracts?

 Q. Different types of delivery contracts

Question no. 3. Write a short note on Derivatives.

A derivative is a financial instrument/security with a value that is reliant upon or derived from, an
underlying asset or group of assets—a benchmark.

A derivative includes:

 A security derived from a debt instrument, share, loan whether secured or unsecured,
risk instrument or contract for differences or any other form of security and
 A contract that derives its value from the prices or index of prices of underlying
securities.

A derivative is a financial contract that derives its value from the performance of another entity
such as an asset, index, or interest rate, called the “underlying asset”.

Derivatives include a variety of financial contracts, including futures, forwards, swaps,

options. [Be prepared with the types of derivatives]

Also, know about commodity derivatives – 4 types

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SCRA – Descriptive Question Notes

 Agriculture commodities
 Base metals
 Precious metals
 Natural resources

Suggestive Questions-

 Q. “Derivatives are contracts which derive their value from the value of one or
more of other assets.” Comment.
 Q. What are the types of Derivatives?
 Q. Differentiate between options and futures
 Q. What are commodity derivatives

Question no. 4. State the powers of SEBI to amend the bye-laws of a recognized stock
exchange.

Power of SEBI to make or amend bye-laws of recognized stock exchanges if given under
Section 10 of SCRA.

SEBI is empowered to make or amend bye-laws of recognized stock exchanges on request

from the stock exchange or on its own motion, after consultation with the governing body of
the stock exchange.

The bye-laws or amended by-laws shall be published in the Gazette of India and also in the
Official Gazette of the State in which the principal office of the recognized stock exchange is
situated.The bye-laws or amendments become effective as if made or amended by the stock
exchange itself.

If the governing body objects to any bye-laws made or amended by SEBI, it should apply to
SEBI within 2 months of publication of the bye-laws in Gazette. SEBI will give the opportunity of
hearing and then may revise the bye-laws.

The revised by-laws will be published in Official Gazette.

The bye-laws or amendments become effective only after publication in Official Gazette.

Question no. 5. What is meant by the demutualization of stock exchanges? Explain the
purpose of demutualization?

Historically, most of the stock exchanges, except NSE & OTCEI were formed as ‘mutual
organization’ formed by trading members for their common benefit. The disadvantage of such
an organization is that they primarily work for the interests of members and those of investors.
The office bearers will have access to inside information, which can be misused by them. There

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SCRA – Descriptive Question Notes

is no transparency and no professional approach. Moreover, they cannot raise large funds for
modernization or up-gradation by offering equity shares to others.

In view of the above shortcomings of ‘mutual stock exchanges’, a policy decision was taken by
the Government of India for the corporatization of the stock exchange.

SEBI had formed a Group on Corporatisation and Demutualization of Stock Exchanges under
the Chairmanship of Justice M H Kania, former Chief Justice of India, for advising SEBI on
corporatization and demutualization of exchanges and to recommend the steps that need to be
taken to implement the same. The Group submitted its Report to SEBI on August 28, 2002.

Corporatization means the stock exchange should be organized as a company.

Thus, the process of converting ‘mutual stock exchanges’ into a company form of organization
is known as ‘Demutualization of Stock Exchanges’.

Corporatization [Section 2(aa)]: Corporatisation means the succession of a recognized stock

exchange, being a body of individuals or a society registered under the Societies Registration
Act, 1860, by another stock exchange, being a company incorporated for the purpose of
assisting, regulating or controlling the business of buying, selling or dealing in securities carried
on by such individuals or society.

Demutualization [Section 2(ab)]: Demutualisation means the segregation of ownership and

management from the trading rights of the members of a recognized stock exchange in
accordance with a scheme approved by the SEBI.

Corporatization and demutualization of stock exchanges is mandatory as per Section 4A:

Every stock exchange shall be corporatized and demutualized before the appointed date.

Procedure for corporatization and demutualization [Section 4B]:

Submission of the scheme: All recognized stock exchanges shall submit a scheme for
corporatization and demutualization for its approval within the time specified by the SEBI.
However, stock exchanges, which had already been corporatized and demutualized, shall not
be required to submit the scheme.

Approval of scheme: On receipt of the scheme, the SEBI may approve the scheme with or
without modification.

Publication of scheme: The scheme so approved shall be published immediately by the SEBI
in the Official Gazette and in two daily newspapers circulating in India.

Imposition of restriction: While approving the scheme, SEBI may make an order restricting:

 Voting rights of shareholders who are also stock brokers.

 Rights of shareholders to appoint representatives on the governing board of the stock
exchange.

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SCRA – Descriptive Question Notes

Rejection of scheme: Where the SEBI is satisfied that it would not be in the interest of the
trade and also in the public interest to approve the scheme, it may, by an order, reject the
scheme. Such order of rejection shall be published by it in the Official Gazette.

However, the SEBI shall give a reasonable opportunity of being heard before | passing an order
rejecting the scheme.

Effects of publication: On the publication of the scheme in the Official Gazette it shall have full
effect.

Compliance: Every recognized stock exchange shall ensure that at least 51 % of its 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.

Suggestive Questions-

 Q. What do you understand by Corporatisation?

 Q. What is the difference between corporatisation and demutualisation?
 Q. What is the procedure of corporatisation and demutualisation of stock exchange?
 Q. Why was demutualization and corporatisation of stock exchange done?

Question no. 6. The recognized stock exchange has powers to make rules for restricting
voting rights. Comment.

Power of recognized stock exchange to make rules restricting voting rights, etc. is given under
Section 7A: Normally, voting rights are proportional to the shareholding of a member. However,
in the case of recognized rules can provide the following matters:

 The restriction of voting rights to members only in respect of any matter placed before
the stock exchange at any meeting.
 The regulation of voting rights in respect of any matter placed before the stock exchange
at any meeting so that each member may be entitled to have one vote only.
 The restriction on the right of a member to appoint another person as his proxy to attend
and vote at a meeting.
 Such incidental, consequential, and supplementary matters may be necessary to give
effect to any of the matters specified in clauses (a) to (c).

Rules can be amended only with the approval of the Central Government. In approving the
rules, the Central Government may make modifications therein as it thinks fit. On publication of
amended rules as approved by the Central Government the rules shall be deemed to have been
validly made.

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SCRA – Descriptive Question Notes

Question no. 7. Bangalore Stock Exchange wants to establish an additional trading floor.
Explain briefly the meaning and procedure for establishing an additional trading floor.

The provisions related to additional trading floor is given under Section 13A: A stock exchange
may establish an additional trading floor with the prior approval of the SEBI in accordance with
the terms and conditions stipulated by the SEBI.

Additional trading floor means a trading ring or trading facility offered by a recognized stock
exchange outside its area of operation to enable the investors to buy and sell securities through
such trading floor.

Earlier, the trading in the stock exchange was with the physical presence of brokers on the
trading floor of a stock exchange.

Now, all stock exchanges have screen-based trading. Further, the brokers can have terminals at
any place in India and hence the concept of ‘trading floor’ no more exists.

Question no. 8. Explain provisions of the Securities Contracts (Regulation) Act, 1956
relating to the listing of securities. Can the stock exchange refuse to list? What are the
powers of the Securities Appellate Tribunal (SAT) in this regard?

Conditions for listing [Section 21]: Where securities are listed on the application of any person in
any recognized stock exchange, such person shall comply with the conditions of the listing
agreement with that stock exchange.

Delisting of Securities [Section 21A] :A recognised stock exchange may delist the 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

A listed company or an aggrieved investor may file an appeal before the Securities Appellate
Tribunal against the decision of the recognised stock exchange delisting the securities within
fifteen days from the date of the decision of the recognised stock exchange delisting the
securities

Right of appeal to SAT against refusal to list securities of public companies [Section
22A]:

Where a recognized stock exchange refuses to list the securities of any public company, it shall
furnish the reasons for such refusal.

The time period for filing an appeal is 15 days from the date of refusal. However, SAT may
extend such period not exceeding 1 month on sufficient cause being shown.

Every appeal to SAT shall be in the prescribed form along with the prescribed fee.

SAT may vary or set aside the decision of the stock exchange.

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SCRA – Descriptive Question Notes

If an application is not disposed of by the stock exchange within the specified time, on appeal,
SAT may grant or refuse the permission.

The appeal should be decided by the SAT expeditiously and possibly within 6 months.

SAT shall send a copy of every order made by it to the SEBI and parties to the appeal.

Procedure and powers of SAT [Section 22B]: The SAT is not bound by the procedure laid
down by the Code of Civil Procedure, 1908 but shall be guided by the principles of natural
justice.

SAT has powers of Civil Court in respect of:

 Summoning and enforcing the attendance of any person and examining him on oath.
 Requiring the discovery and production of documents.
 Receiving evidence on affidavits.
 Issuing commissions for the examination of witnesses or documents.
 Reviewing its decisions.
 Dismissing an application for default or deciding it ex parte.
 Setting aside any order of dismissal of any application for default or any order passed by
it ex parte.
 Any other matter which may be prescribed.

Every proceeding before SAT shall be deemed to be a judicial proceeding within the meaning of
the Indian Penal Code, 1860, and the SAT shall be deemed to be a Civil Court.

Right to legal representation [Section 22C]: The appellant may either appear in person or
authorize one or more CA or CS or CMA or legal practitioners or any of its officers to present his
or its case before the SAT.

Limitation [Section 22D]: Provisions of the Limitation Act, 1963 shall apply to an appeal made
to SAT.

Civil court not to have jurisdiction [Section 22E]: Civil court shall not have jurisdiction to
entertain any suit or proceeding in respect of any matter which SAT is empowered to determine.

Appeal to Supreme Court [Section 22F]: Any person aggrieved by any decision or order of
the SAT may file an appeal to the Supreme Court within 60 days from the date of
communication of the decision or order of the SAT on any question of law arising out of such
order. The Supreme Court may extend the period by 60 days on sufficient cause being shown.

Suggestive Questions-

 Q. Explain the provisions related to delisting of securities under SCRA

 Q. What are the remedies available to a person whose securities are refused to be listed
on stock exchange?
 Q. What is the procedure of corporatisation and demutualisation of stock exchange?
 Q. Why was demutualization and corporatisation of stock exchange done?
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SCRA – Descriptive Question Notes

Similar Topic Question- You are the Company Secretary of Vision Ltd., whose shares
were listed on the Delhi Stock Exchange. The stock exchange delists the shares of the
company. Give your suggestions to the company regarding the remedy available keeping
in view the provisions of the Securities Contracts (Regulation) Act, 1956

Delisting of securities [Section 21 A]: A recognized stock exchange may delist the securities of
the company on any of the ground or grounds prescribed under the Act.

The recognized stock exchange shall record reasons for delisting the securities of the company
and shall give a reasonable opportunity of being heard to the company.

Appeal: A listed company or an aggrieved investor may file an appeal before the SAT within 15
days from the date of delisting of securities. However, on sufficient cause being shown, SAT
may extend the period further by 1 month.

The provisions of sections 22B to 22E shall apply to such appeal.

Question no. 9. Write a short note on clearing corporation.

Clearing Corporation is mentioned under Section 8A of SCRA.

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, for the purpose of

 the periodical settlement of contracts and differences thereunder;

 the delivery of, and payment for, securities;
 any other matter incidental to, or connected with, such transfer.

Clearing Corporation shall make bye-laws and submit to SEBI for approval

Question no. 10. Can the member of stock exchange act as principal? (Section 15)

Members may not act as principals in certain circumstances [Section 15]:

A broker can act on a principal basis with other members of the stock exchange. However, a
member of the stock exchange shall not enter into any contract in respect of securities, as a
principal with any person other than a member of the recognized stock exchange. He can do so
only if he has secured the consent or authority of such person. He should disclose in the note,
memorandum, or agreement of sale or purchase that he is acting as a principal. If the consent
or authority of such other person was not obtained in writing, the member shall secure written
confirmation within 3 days from the date of the contract.

However, such written consent of such person is not necessary for a closing outstanding
contract entered into by such person in accordance with the bye-laws, if the member discloses

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SCRA – Descriptive Question Notes

in the note, memorandum, or agreement of sale or purchase in respect of such closing out that
he is acting as a principal.

Question no. 11. What is the procedure for withdrawal of recognition granted to stock
exchange?

Withdrawal of recognition [Section 5]: The Central Government may withdraw recognition
granted to a stock exchange in the public interest.

The Central Government may serve on the governing body of the stock exchange a written
notice that it is considering the withdrawal of the recognition for the reasons stated in the notice.

After giving an opportunity to be heard to the governing body, the Central Government may
withdraw the recognition by notification in the Official Gazette.

Such withdrawal shall not affect the validity of any contract entered into or made before the date
of the notification.

The Central Government may, after consultation with the stock exchange, make provisions for
the due performance of any contracts outstanding on that date by issuing a notification.

Question no. 12. Explain the power of SEBI to issue directions under SCRA?

Power to issue directions [Section 12A]: SEBI is empowered to issue direction for the following
reasons:

 In the interest of investors, or orderly development of securities market.

 To prevent the affairs of any recognized stock exchange or clearing corporation which
are being conducted in a manner detrimental to the interests of investors or the
securities market.
 To secure the proper management of any stock exchange or clearing corporation or
agency or another person.

Such directions can be issue to:

 Any stock exchange or clearing corporation or agency or class of persons associated

with the securities market.
 Any company whose securities are listed or proposed to be listed.

As per the Explanation given in the section, it is declared that power to issue directions shall
include and always be deemed to have been included the power to direct any person, who
made a profit or averted loss by indulging in any transaction or activity in contravention of the
provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to
the wrongful gain made or loss averted by such contravention.

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SCRA – Descriptive Question Notes

So, accordingly, the directions can be given to an individual who had made some profit in any
transaction in contravention of any provisions of the Securities Contracts (Regulation) Act, 1956.

Question no.13. XYZ, a recognized stock exchange fails to comply with certain directions
issued by the Securities and Exchange Board of India, and the adjudicating officer
initiated proceedings for the purpose of imposing a penalty. The stock exchange seeks
your advice on whether it is possible to go for settlement of the proceedings. Advise
explaining the relevant provisions of the Securities Contracts (Regulation) Act, 1956?

Settlement of administrative and civil proceedings [Section 23JA]:

1. Filing of application to the SEBI: Any person against whom any of the following procedures
have been initiated or may be initiated may hie an application in writing to the SEBI proposing
for settlement of the proceedings initiated or to be initiated for the alleged defaults.

2. SEBI may consider the matter for the settlement: The 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 the
SEBI in accordance with the regulations made under the SEBI Act, 1992.

3. Procedure to be followed as prescribed under the SEBI Act: For the purposes of settlement,
the procedure as specified by the SEBI under the SEBI Act, 1992 shall apply.

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

5. Settlement Amounts: All settlement amounts, excluding the disgorgement amount and legal
costs, realized under the Act shall be credited to the Consolidated Fund of India.

Question no.14. Mr. Patel has transferred his shares of a listed company registered in his
name to Mr. Mehta. Mr. Mehta has failed to get the shares registered in his name before
the company declared and paid the dividend on the shares.

Examine with reference to the provisions of the Securities Contracts (Regulation) Act,
1956, whether Mr. Patel is entitled to retain the dividend even though he has transferred
the shares before the declaration of the dividend.

Section 27(1) of the Securities Contracts (Regulation) Act, 1956 provides that the holder of
security can legally receive and retain any dividend declared by the company even if he has
transferred the security for valuable consideration. However, the transferor of security cannot
receive a dividend if the transfer deed with all other documents are lodged with the company
within 15 days of the date on which the dividend became due.

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SCRA – Descriptive Question Notes

Further according to Section 27(2)(a), a company can 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 view of the above Mr, Patel is entitled to retain the dividend received by him if the transferee
Mr. Mehta has not lodged the transfer deed with the company within 15 days of the date on
which the dividend became due.

However, section 27(1) will not affect the right of the transferee to enforce his rights if any
against the transferor or any other person if the company refuses to register, the transfer of
security in the name of the transferee.

The questions on topics like SAT, Special Courts, Powers of Board to enquire and
inspect, Power to adjudicate, settlement of proceedings etc, is also there in SEBI Act and
are covered in those notes.

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