EVOLUTION OF SECURITIES AND INVESTMENT LAWS IN INDIA

This article is written by Anshul Parashar of 7^th semester of Banasthali Vidyapith University.

Abstract

The health of a country’s securities market is critical to its economy. The better a country’s securities market is developed, the greater its possibilities of growth in GDP and development. The security market is a marketplace for the purchase and sale of securities including stocks, bonds, and different financial instruments. The security market is critical to the economy because it allows people, businesses, and governments to gather funds by providing securities and permits investors to invest in a variety of financial products. The security market needs to be regulated to ensure its smooth functioning and to protect the interest of investors.

Keywords: security market, GDP, economy, financial instruments, investors, marketplace.

Introduction

Investment securities are tradable securities similar to financial assets such as shares or fixed income instruments. These are obtained with the intention of holding them for investment purposes. Equity securities often relate to stocks that may be purchased in the company, but debt securities, also known as income securities and referring to bonds in general, are exactly what they sound like: debt investments.

Securities are classified into:

Debt securities encompass banknotes, bonds, and debentures. Equity securities encompass stocks and derivatives consist of forwards, future options and swaps.

Tracing from the back Dates

By the last decade of the 18th century, the trade of loan securities (of the East Indian Company) had begun in India. In 1850, the Companies Act passed, introducing limited liability for companies and increasing trading volumes. In 1861, the American Civil War broke and consequently the American cotton export to Europe was cut off. This raised cotton demand in India, raising cotton prices and exports.

People who held stocks were astonished when the civil war ended because they couldn’t find purchasers for their securities. On December 3, 1887, the brokers created the Native Share & Stock Brokers Association to establish a formal market. Ahmadabad Share & Stock Brokers Association was founded in 1894.

When it comes to eastern India, the costs of jute, tea, and coal skyrocketed from 1870 to 1890, and there were several disputes and disagreements between traders. This prepared the way for the establishment of the Calcutta Stock Exchange Association on June 15, 1908.

The SECURITIES CONTRACT (REGULATION) ACT, 1956 followed soon after. Later, in 1995, stocks Contracts (Regulation) was revised to abolish the ban on options in stocks, and derivatives trading began on both the BSE and NSE exchanges in June 2000. The trading phase has also improved, from T+5 in December 2001 to T+3 in April 2002 and finally to T+2 in April 2003.

• The following are a few of the reasons that the security market should be regulated:

• Investor protection,
• Market integrity,
• Investment encouragement,
• Capital formation promotion, and
• Competition enhancement.

Current Status

Post-independence Era and Market Reforms – The stock market had a steady rise in stock market catastrophes during the 1990s. The manipulation of markets on secondary markets was one part of these crises.

Harshad Mehta – The first “stock market scam” in India covered both the GOI bond and equities markets. Then MS Shoes in 1994.  1995: Sesa Goa – Another event of market crisis for the BSE was the price manipulation of Sesa Goa shares. Physical certificates were not delivered on time in 1995. 1997: CRB. C.R. Bhansali established the CRB group, which consisted of a conglomerate of financial and non-finance enterprises.  BPL, Videocon, and Sterlite, 1998- this is a market manipulation episode involving Harshad Mehta, the broker who constructed the 1992 stock market bubble.  Ketan Parekh in 2001. This was sparked by a drop in the pricing of IT equities around the world.

The aforementioned occurrences had an adverse impact on the market, namely (i) price efficiency and (ii) intermediation among individuals investing in shares and corporations funding projects by issuing shares, which were remedied by government reform measures.

The BSE dominated trade volume in the post-independence era. However, the lack of transparency and untrustworthy clearing and settlement mechanisms, among other macro factors, reinforced the demand for a financial sector regulator, and the SEBI was established as a non-statutory agency in 1988. It later became a statutory body in 1992.

Details of Stock Exchanges[1]

• List of Stock Exchanges (Arranged in alphabetical order)

Sr. No.	Name of the Recognized Stock Exchange	Address	Recognition Valid Upto	Segments Permitted
1	BSE Ltd.	P J Tower, Dalal Street, Mumbai 400001   Website: http://www.bseindia.com	PERMANENT	a. Equity b. Equity Derivatives c. Currency Derivatives (including Interest Rate Derivatives) d. Commodity Derivatives e. Debt
2	Calcutta Stock Exchange Ltd.	7, Lyons Range, Dalhousie, Kolkata-700001, West Bengal Website: http://www.cse-india.com/	PERMANENT	–
3	Metropolitan Stock Exchange of India Ltd.	205A, 2nd Floor, Piramal Agastya Corporate Park, Sunder Bung Lane, Kamani Junction, LBS Road, Kurla (West) Mumbai – 400070 Website: http://www.msei.in/index.aspx	Sep 15, 2023	a. Equity b. Equity Derivatives c. Currency Derivatives (including Interest Rate Futures) d. Debt
4	Multi Commodity Exchange of India Ltd.	Exchange Square, Suren Road, Chakala, Andheri (E), Mumbai 400093 Website: https://www.mcxindia.com/	PERMANENT	a. Commodity Derivatives
5	National Commodity & Derivatives Exchange Ltd.	Akruti Corporate Park,1st Floor, Near G.E. Garden, L.B.S. Marg, Kanjurmarg (West), Mumbai 400078 Website: http://www.ncdex.com/	PERMANENT	a. Commodity Derivatives
6	Indian Commodity Exchange Limited	Reliable Tech Park, 403-A, B-wing, 4th Floor, Thane-Belapur, Road, Airoli (E), Navi Mumbai – 400708	PERMANENT	–
7	National Stock Exchange of India Ltd.	Exchange Plaza, C-1, Block G, Bandra Kurla Complex, Bandra (East) Mumbai 400051   Website: https://www.nseindia.com	PERMANENT	a. Equity b. Equity Derivatives c. Currency Derivatives (including Interest Rate Derivatives) d. Commodity Derivatives e. Debt

• List of stock exchanges which have been granted exit: –

Sr. No	Name of Stock Exchange	Date of Exit
1	The Hyderabad Securities and Enterprises Ltd (erstwhile Hyderabad Stock Exchange)	January 25, 2013
2	Coimbatore Stock Exchange Ltd	April 3, 2013
3	Saurashtra Kutch Stock Exchange Ltd	April 5, 2013
4	Mangalore Stock Exchange	March 3, 2014
5	Inter-Connected Stock Exchange of India Ltd	December 08, 2014
6	Cochin Stock Exchange Ltd	December 23, 2014
7	Bangalore Stock Exchange Ltd	December 26, 2014
8	Ludhiana Stock exchange Ltd	December 30, 2014
9	Gauhati Stock Exchange Ltd	January 27, 2015
10	Bhubaneswar Stock Exchange Ltd	February 09, 2015
11	Jaipur Stock Exchange Ltd	March 23, 2015
12	OTC Exchange of India	March 31, 2015
13	Pune Stock Exchange Ltd	April 13, 2015
14	Madras Stock Exchange Ltd	May 14, 2015
15	Uttar Pradesh Stock Exchange Ltd	June 09, 2015
16	Madhya Pradesh Stock Exchange Ltd	June 09, 2015
17	Vadodara Stock Exchange Ltd	November 09, 2015
18	Delhi Stock Exchange Ltd	January 23, 2017
19	Ahmedabad Stock Exchange Ltd	April 02, 2018
20	Magadh Stock Exchange	May 08, 2019
21	Ace Derivatives and Commodity Exchange Limited, Ahmedabad	December 31, 2018
22	Hapur Commodity Exchange Limited	June 29, 2018
23	Universal Commodity Exchange Limited (UCX)	March 16, 2018
24	Rajkot Commodity Exchange limited	January 09, 2018
25	The Spice and Oilseeds Exchange Limited, Sangli	April 12, 2017
26	Cotton Association of India (CAI)	December 29, 2016
27	Bombay Commodity Exchange Limited (BCEL)	October 28, 2016
28	India Pepper and Spice Trade Association, Kochi (IPSTA)	January 10, 2018

NOTE: The details have been last updated on August 03, 2022.

Laws governing Security Markets

The key laws and rules that govern the Indian securities market are as follows: 

• Securities and Exchange Board of India (SEBI) Act: The SEBI Act is the main component of legislation that governs India’s stock exchange. It empowers SEBI as the main supervisor of the stock market and gives it the authority to enact laws and rules for investor protection and the orderly operation of the securities market. Its headquarters are in Mumbai, and the organization is overseen by the Ministry of Finance, Central Government. The SEBI Act was enacted to address the issue of many regulatory organizations. Multiple regulatory structures have overlapping functions, which may cause market participants to become confused. As a result, the establishment of SEBI allowed for the establishment of a single, highly visible, and autonomous organization supported by legislation. The primary goal of the SEBI Act is to protect the interests of investors in securities, as well as to encourage the development and regulation of the securities market. It also tries to make resource mobilization and allocation more efficient through the securities markets.[2]

• The Securities Contracts Regulation Act (SCRA): The Securities and Exchange Commission of India (SEC) is a federal statute that controls securities trading in India. It governs securities contracts, notably the prohibition on insider trading, as well as exchanges for stocks and brokers.

• The Company Act: oversees the formation, operation, and management of corporations in India. It regulates company securities offerings, including the necessity for corporations to disclose relevant details for investors and file financial statements with the MCA.[3]

• Depositories Act: The Depositories Act defines and governs the depository system in India as well as depository participants, who act as a middleman between investors and the depository.  The depository system is designed to give Indians a secure and effective means to store and exchange assets.[4]

• Prevention of Money Laundering Act: Money laundering and the financing of terrorism are governed under the PMLA, a federal law in India.  Companies engaged in securities transactions, like brokers and depository participants, are required by the PMLA to adhere to anti-money laundering rules and alert authorities to any questionable activities.

• The Government Securities Act, 2006:  is a piece of legislation passed by the Indian Parliament that intends to strengthen the government securities market and the Reserve Bank of India’s administration of government securities.

• The RBI Act: Another important Act is the RBI Act of 1934, which supervises and regulates India’s entire financial system. Although the RBI Act does not directly manage or supervise capital markets in India, it does govern some of the market participants. In the 1990s, there were certain unethical practices in non-banking financial corporations. These NBFCs were investing in the capital markets via their surplus and assets. The RBI has taken disciplinary measures against such errant NBFCs for a variety of defaults and violations of RBI Act requirements. Such negative steps included the ban of taking deposits and the initiation of criminal procedures against such defaulters.

The stock markets in India are regulated by acts such as the Securities Contract (Regulation) Act, the SEBI Act, and the Depositories Act, which are overseen by the Union Government’s Department of Company Affairs. As a result, all acts are for the seamless functioning of the marketplace, but complete oversight over all business activity is exercised by the Central Government. Along with these laws, SEBI has also published a number of rules and regulations that are applicable for the Indian stocks market, including prohibitions on trading on the inside, market manipulation, and material information disclosure by companies.

SEBI, the MCA, and the Ministry of Finance are the primary regulatory authorities in India that supervise the securities industry. SEBI is in charge of overseeing the securities market, which includes the issue of securities by corporations and the buying and selling of shares on stock exchanges. The MCA is in charge of company incorporation and regulation in India, including the issue of securities by firms. The Ministry of Finance is in charge of entire financial sector regulation in India, including the stock market.

Managing the security market is critical for ensuring market integrity, protecting investors’ interests, boosting capital formation, and creating competition. The particular regulations and legislation that applied to the security market differ by country, but the basic regulatory objectives are often similar. It is critical to understand and comply with these rules and laws in order to be a strong player in India’s securities market.

Conclusion

The governing bodies in Indian financial markets have played an important role in the development of the Indian capital markets. Initially, India’s capital markets were completely unregulated. Because the general people were less drawn to the capital market, the requirement to guide these specific company sectors was not felt as strongly. During the actual period of improvement in India’s capital markets, the then-British Government did not pay satisfactory thought to capital market control. However, soon after independence, the Capital Issues (Control) Act came into effect as the first attempt to direct Indian capital markets.

The RBI was nationalized and renamed the Central Bank of India in 1949 to regulate the financial sector in India. Because there wasn’t no other independent entity in charge of directing the financial sector, it was expected that the RBI would play an important role in the financial sector. The RBI’s policy steps to govern and regulate the financial sector and economy have immediate and indirect effects on the functioning of Indian stock exchanges. Furthermore, the Companies Act [since abolished by the Companies Act, 2013] was enacted in 1956, and notable commercial banks were nationalized in 1969. The passage of the Companies Act was an important milestone since it contains regulations pertaining to the creation and liquidation of organizations.

 Recently, some more Acts, such as the Depositories Act, have been sanctioned, while some prior demonstrations, such as the Capital Issues (Control) Act, have been repealed. This evolution was brought forth in response to new developments, notably following globalization. Regardless, amid all of these advancements, SEBI has emerged as a significant regulatory authority in the development of India’s financial markets.

With India climbing the economic ladder, increased investment in the securities market, securities laws, and an influx of international institutional and portfolio investment are unavoidable. The current battling regimes have undoubtedly proven insufficient on occasion, but it is important to remember that the crash and frauds in the securities market are a worldwide issue, and even the most evolved legal systems have caught fire now and again. No one piece of law can guarantee a scam-free security market; thus the emphasis should be on building mechanisms to catch defaulters before they conduct so-called white-collar crime. SEBI’s recent endeavor to strengthen the vigil system is an example of such an undertaking. The transformation of SEBI from a paper tiger to a market regulator over the last two decades has enhanced India’s security law environment.

---

[1] Details of stock exchanges, SEBI, available at https://www.sebi.gov.in/stock-exchanges.html, last seen on 03/06/2023

[2] Securities and Exchange Board of India, Indian regulatory body, available at: http://www.sebi.gov.in/about-sebi.html last seen on 03/06/23

[3] Dr. N. V. Paranjape, Company Law 2013 2 (Central Law Agency, Allahabad, 7th edn., 2016)

[4] An Insight into the Depositories Act, 1996, India, available at: http://www.rna-cs.com/an-insight-into-the-depositories-act-1996/ last seen on 03/06/23