This Article is written by Aditi Saxena, an Intern under Legal Vidhiya
Abstract:
The stock market is a fascinating world that has captured the imagination of people for centuries. But what exactly is a stock, and how does the stock market work?
At its most basic level, a stock represents ownership in a company. When a company needs to raise money, it can do so by selling shares of its ownership to the public. Investors who buy these shares become part owners of the company and are entitled to a portion of its profits. Stocks are emblematic of the fragmented ownership of a company in the records[1]. A stock market is primarily linked with facilitating the buying and selling of stocks and other forms of securities.
In this research paper, I would bring to the fore the basic nuance of the Securities Contracts regulation act, of 1956. The paper aims to provide a comprehensive analysis of the Securities Contracts Regulation Act, 1956 (SCRA)[2] and its regulatory framework governing securities in India. The paper discusses the historical background of the SCRA and its importance in India, as well as the role of the regulatory authority responsible for enforcing the provisions of the act.
The paper also critically examines the challenges and criticisms faced by the SCRA, such as outdated provisions, slow legal proceedings, inadequate enforcement, complexity, and lack of protection for small investors. Moreover, the paper highlights the impact of the COVID-19 pandemic on the securities market in India and its implications for the SCRA.
In conclusion, the paper proposes reforms to address the challenges faced by the SCRA, such as updating the provisions to reflect the current market realities, enhancing the enforcement of the provisions, simplifying the provisions for ease of compliance, and providing more protection for small investors.
Keywords:
Securities Contracts Regulation Act, of 1956, Stock market, Securities, SEBI, RBI, Regulatory Framework, Enforcement Mechanisms
Introduction:
The Securities Contracts Regulation Act, 1956 (SCRA) is a landmark legislation in India that has had a significant impact on the securities market in the country. Enacted more than six decades ago, the SCRA has undergone several amendments over the years and remains one of the primary legal frameworks governing securities trading in India.
The SCRA defines securities as a broad range of financial instruments, including shares, bonds, debentures, and derivatives. It regulates the issuance, trading, and settlement of securities, with the aim of ensuring transparency, fairness, and investor protection in the securities market. The act also empowers the Securities and Exchange Board of India (SEBI)[3], the primary regulator of the securities market in India, to oversee and enforce the provisions of the act.
The impact of the SCRA on the securities market in India has been significant. It has facilitated the growth of the securities market, making it more transparent, accessible, and secure for investors. The act has established a framework for listing securities on recognized stock exchanges, ensuring that only genuine and credible companies are able to access the capital market. It has also established regulations for the conduct of trading in securities and for the settlement of securities transactions, ensuring that investors are able to trade in securities in a fair and efficient manner.
Furthermore, the SCRA has established various mechanisms for investor protection, including regulations on disclosure, transparency, and fair trading practices. This has helped to promote investor confidence in the securities market and has encouraged more retail participation in the market.
However, the SCRA has also faced criticism and challenges over the years. Some stakeholders have argued that the act is too restrictive, limiting the growth and development of the securities market. Others have criticized the act for not going far enough in protecting investors, particularly retail investors, from fraudulent practices.
Overall, the SCRA remains a critical piece of legislation for the securities market in India. Its impact on the market has been significant, and it continues to play an important role in regulating securities trading and promoting investor protection in the country.
What are Securities, Government securities and a stock market?
Securities refer to tradable financial instruments that hold some type of monetary value. These instruments can be issued by companies, governments, or other organizations, and are sold on various financial markets. Securities can take many forms, including stocks, bonds, options, futures, and other derivative contracts.
Securities typically represent an ownership interest in an asset or a debt owed by an organization. For example, stocks represent ownership in a corporation, while bonds represent a debt owed by a corporation or government entity. Securities can be traded on stock exchanges, bond markets, or other financial markets, and their value is determined by market forces such as supply and demand, as well as underlying asset values and other economic factors.
The regulation of securities is typically overseen by government agencies, the Securities and Exchange Board of India (SEBI) in India. These regulatory bodies are responsible for enforcing rules and regulations to protect investors, maintain fair and transparent markets, and prevent fraud and manipulation.
Government securities, also known as G-secs, are one of the most significant types of securities regulated under the Securities Contracts Regulation Act, of 1956 (SCRA). As the name suggests, these securities are issued by the Indian government to borrow money from the market. The funds raised through the issuance of government securities are used to finance various development programs and initiatives of the government. Investing in government securities is also an important way for individuals and institutions to contribute to the development of the country. By investing in these securities, investors are essentially lending money to the government, which can be used to finance various development projects, infrastructure initiatives, and social welfare programs.
Overall, government securities are an essential component of the securities market in India.
A stock market is a public marketplace that enables the trading of stocks of publicly held companies. It provides a platform for investors to buy and sell financial instruments, such as stocks. These stocks represent fractional ownership in a registered company, making the stock market the place where one can purchase or sell ownership of such assets.
The stock market has a dual purpose, the first of which is to help companies raise capital. By issuing stocks to the public, companies can acquire the funds needed for expansion and development, without incurring debt. This makes it a more desirable way of obtaining capital than borrowing.
History and Evolution of the SCRA,1956
The Securities Contracts Regulation Act, 1956 (SCRA) is a key piece of legislation that governs securities trading in India. The act was enacted on December 29, 1956[4], and has undergone several amendments over the years to keep pace with the changing dynamics of the securities market in the country.
The origins of the SCRA can be traced back to the aftermath of the Second World War when there was a need to establish a framework for the regulation of securities trading in India. Prior to the enactment of the SCRA, securities trading in India was largely unregulated, with no formal regulatory framework in place to oversee the conduct of trading and protect investors.
The SCRA was enacted with the aim of regulating securities trading in India and promoting transparency, fairness, and investor protection in the securities market. The act defined securities as a broad range of financial instruments, including shares, bonds, debentures, and derivatives. It established regulations for the issuance, trading, and settlement of securities and empowered the Securities and Exchange Board of India (SEBI) to oversee and enforce the provisions of the act.
Over the years, the SCRA has undergone several amendments to address various challenges and developments in the securities market. One of the most significant amendments to the act was the introduction of electronic trading in securities in 1995[5]. This amendment enabled the trading of securities through electronic platforms, making securities trading more efficient and accessible for investors.
Another significant amendment to the SCRA was the introduction of the concept of insider trading in 2002. This amendment made it illegal for insiders, such as company directors and key management personnel, to trade in securities on the basis of privileged information that is not available to the general public.
The SCRA was further amended in 2013[6] to strengthen investor protection and promote greater transparency in securities trading. The amendment introduced provisions for stricter disclosure requirements for listed companies and increased penalties for violations of the act. It also established a framework for the settlement of securities transactions, ensuring that investors are able to trade in securities in a fair and efficient manner.
In addition to these amendments, the SCRA has also been supplemented by several other regulations and guidelines issued by SEBI over the years. These regulations cover a broad range of areas, including disclosure requirements, trading norms, investor protection, and market infrastructure.
Today, the SCRA and the various regulations issued by SEBI under its purview provide a comprehensive framework for the regulation of securities trading in India. The act has facilitated the growth of the securities market in the country, making it more accessible, transparent, and secure for investors.
However, the securities market in India continues to face several challenges, including the need for greater depth and liquidity, as well as the need to address concerns around investor protection and corporate governance. The SCRA and other regulations will continue to evolve over time to address these challenges and to ensure the long-term growth and sustainability of the securities market in India.
Critical Analysis of The Securities Contracts Regulation Act, 1956 (SCRA)
The Securities Contracts Regulation Act, 1956 (SCRA) is a comprehensive legislation that regulates the securities market in India. However, like any other law, the SCRA has faced criticism and challenges over the years. In this section, we will analyze some of the criticisms and challenges faced by the SCRA.
One of the main criticisms of the SCRA is that it is outdated and does not address the current realities of the securities market in India. The act was enacted more than 60 years ago and has not undergone significant revisions since then. The securities market has evolved significantly since the enactment of the SCRA, and there is a need for the law to be updated to reflect the current market realities.
For example, the SCRA does not address emerging trends in the securities market, such as algorithmic trading, high-frequency trading, and blockchain-based securities. The absence of specific provisions to regulate these new trends poses a significant challenge for the SEBI, which is responsible for regulating the securities market in India.
Another challenge faced by the SCRA is the slow pace of legal proceedings. The act provides legal remedies for investors who have suffered losses due to fraud or malpractice in the securities market. However, the legal proceedings can take years to conclude, which can be frustrating for investors seeking redress.
Moreover, the SCRA has been criticized for the lack of enforcement of its provisions. The SEBI has the power to enforce the provisions of the act, but the enforcement has been inconsistent and inadequate. The lack of enforcement has led to a culture of non-compliance, which undermines the credibility of the securities market and erodes investor confidence.
The SCRA has also been criticized for the complexity of its provisions, which can be challenging for market participants to understand and comply with. The act has several provisions and regulations that are often difficult to interpret, leading to confusion and uncertainty in the market. This can discourage investors from participating in the market and limit the growth and development of the securities market in India.
Another criticism of the SCRA is that it does not adequately protect the interests of small investors. The act provides for the regulation of the securities market, but it does not offer sufficient protection to small investors who may lack the knowledge and expertise to navigate the complex securities market. This can lead to small investors being exploited by unscrupulous market participants and suffering significant losses.
Additionally, the SCRA has been criticized for being too focused on the regulation of the securities market and not enough on promoting the growth and development of the market. The act establishes regulations for the issuance, trading, and settlement of securities, but it does not provide sufficient incentives for companies to issue securities or for investors to participate in the market.
Furthermore, the SCRA has faced challenges in the implementation of its provisions due to the lack of coordination between different regulatory authorities. The securities market is regulated by several different authorities, including the SEBI, the Reserve Bank of India[7] (RBI), and the Ministry of Corporate Affairs (MCA)[8]. The lack of coordination between these authorities can lead to conflicts of jurisdiction and delay in decision-making, which can have a detrimental impact on the securities market.
In recent years, the SCRA has faced new challenges due to the COVID-19 pandemic, which has disrupted the securities market in India. The pandemic has led to significant market volatility and has made it challenging for investors to assess the risk and value of securities. The SEBI has introduced several measures to mitigate the impact of the pandemic on the securities market, but the long-term effects of the pandemic on the market remain unclear.
To address the challenges and criticisms of the SCRA, several reforms have been proposed in recent years. In 2019, the SEBI proposed a new Securities Contracts (Regulation) (Amendment) Bill[9], which aims to update and strengthen the existing regulatory framework for securities in India. The proposed amendments to the Securities Contracts Regulation Act (SCRA) of 1956 include several key changes that aim to enhance investor protection, promote market transparency and integrity, and strengthen the regulatory oversight of the securities market. The proposed amendments also aim to strengthen the enforcement powers of the SEBI, including the ability to impose stricter penalties and fines for securities fraud and market manipulation. The amendments also propose the establishment of a new Securities Appellate Tribunal to handle appeals against SEBI orders and decisions.
Other proposed changes include new requirements for stock exchanges to implement advanced surveillance and monitoring systems to detect and prevent market abuse and new disclosure obligations for listed companies and market intermediaries.
Overall, the proposed amendments to the SCRA represent a significant update to India’s securities regulatory framework, aimed at enhancing investor confidence, promoting market integrity, and improving the overall functioning of the securities market.
Conclusion
The Indian stocks and security market is a kernel of the growth and development prospects of our country. The Indian investors as well as foreign investors have the right to a fair transaction process in the buying and selling of the estocks. The Indian equity system ought to change as per the contemporary 21st-century challenges. In conclusion, the Securities Contracts Regulation Act of 1956 has been instrumental in regulating the securities market in India for over six decades. The Act has played a vital role in the development of the Indian securities market, providing a robust framework for the issuance, trading, and settlement of securities. The SCRA has also undergone several amendments over the years to keep pace with the changing market dynamics and evolving regulatory requirements.
While the SCRA has been effective in regulating the securities market, there are several challenges and criticisms that need to be addressed. The Act has been criticized for its outdated provisions, lack of enforcement powers, and inadequate investor protection measures. Additionally, the rise of new financial instruments and market practices has exposed certain gaps in the existing regulatory framework, which need to be addressed to ensure market integrity and investor confidence.
Overall, the SCRA remains a critical piece of legislation in the regulation of the securities market in India, and its continued evolution and modernization are essential to ensure the continued growth and development of the Indian securities market. The success of the SCRA in regulating the securities market will depend on the effective implementation of its provisions, robust enforcement mechanisms, and continuous adaptation to the changing market[10] dynamics and regulatory requirements.
[1]Stocks: What They Are, Main Types, How They Differ From Bondshttps://www.investopedia.com/terms/s/stock.asp
[2] SCRA (Security contract regulation Act)https://www.brainkart.com/article/SCRA-(Security-contract-regulation-Act)_6154/
[3]Securities and Exchange Board of India https://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_India
[4] Securities Contracts (Regulation) Act, 1956https://en.wikipedia.org/wiki/Securities_Contracts_(Regulation)_Act,_1956
[5] Amendments to SCRA and SEBI Act (under Finance Act 2019) notifiedhttps://www.amsshardul.com/insight/amendments-to-scra-and-sebi-act-under-finance-act-2019-notified/
[6] Enforceability of Put Options under SCRA – Bombay HC’s latest judgment finally clears the air!Enforceability of Put Options under SCRA – Bombay HC’s latest judgment finally clears the air! – Lexology
[7]How is the stock market regulated in India
[8] Companies Act, 2013https://www.mca.gov.in/content/mca/global/en/acts-rules/companies-act/companies-act-2013.html
[9] AMENDMENTS TO SECURITIES CONTRACTS (REGULATION) ACT, 1956 BY FINANCE BILL, 2018 https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=7868
[10] Significance Of SCRA,1956 In Raising Investment https://blog.ipleaders.in/significance-scra1956-raising-investment/
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