CHAPTER – 4 

CHAPTER  4

LEGAL FRAMEWORK
The responsibility for regulating the securities market is shared by...

1. Department of Economic Affairs (DEA)

2. Department of Company Affairs (DCA)

Department of Company Affairs (DCA)

3. Reserve Bank of India (RBI)

4. Securities and Exchange Board of India (SEBI)

5
5. S
Securities Appellate Tribunal (SAT)
ii A ll T ib l (SAT)
 Legal Framework deals with legislative and regulatory provisions 
relevant from the viewpoint of a trading member.
p g

1. Securities Contracts (Regulation) Act, 1956, which provides for 
regulation of transactions in securities through control over stock 
l f h h l k
exchanges

2
2. SEBI Act, 1992
SEBI A t 1992 which establishes SEBI to protect investors and develop 
hi h t bli h SEBI t t ti t dd l
and regulate securities market

3
3. Depositories Act, 1996
Depositories Act 1996 which provides for electronic maintenance and 
which provides for electronic maintenance and
transfer of ownership of dematerialised securities

4
4. Companies Act, 1956,
Companies Act 1956 which sets out the code of conduct for the 
which sets out the code of conduct for the
corporate sector in relation to issue, allotment and transfer of 
securities, and disclosures to be made in public issues
 Securities Contracts (Regulation) Act, 1956
( g ) ,

• The Securities Contracts ((Regulation)

g ) Act,, 1956 [SC(R)A]
[ ( ) ] was
enacted to prevent undesirable transactions in securities by
regulating the business of dealing there in and by providing for
certain other matters connected therewith.
therewith This is the principal
Act, which governs the trading of securities in India.

The SC(R) Act deals with-

• Stock exchanges, through a process of recognition and continued
supervision,
p ,
• Contracts in securities,
• Listing of securities on stock exchanges.
 Recognition of stock exchanges
• SEBI is empowered to grant recognition and prescribe conditions to 
any stock exchange

• SEBI is authorised to call for periodical returns from the recognised 
p g
Stock Exchanges and make enquiries in relation to their affairs.

• Recognised
Recognised Stock Exchanges are allowed to make bylaws for the 
Stock Exchanges are allowed to make bylaws for the
regulation and control of contracts but subject to the previous 
approval of SEBI

• The Central Government and SEBI have the power to supersede the 
governing body of any recognised stock exchange 
 Contracts in Securities

• Organized trading activity in securities takes place on a recognised 
stock exchange 

• If a transaction in securities has to be validly entered into, such a 
transaction has to be either between the members of a recognised 
stock exchange or through a member of a Stock Exchange.
 Listing of Securities

• Where securities are listed on the application

pp of anyy person
p in anyy
recognised stock exchange, such person shall comply with the
conditions of the listing agreement with that stock exchange (Section
21).
)

• Where a recognised stock exchange acting in pursuance of any power

given
i tto it by
b its
it bye-laws,
b l refuses
f to
t list
li t the
th securities
iti off any company,
the company shall be entitled to be furnished with reasons for such
refusal and the company may appeal to Securities Appellate Tribunal
(SAT) against
i such h refusal.
f l
 Contracts between members of recognised stock exchange

Every member of a recognised stock exchange shall maintain and preserve the 
following books of account and documents for a period

Five years
• Register of transactions (Sauda book).
• Clients' ledger.
• General ledger
General ledger.
• Journals.
• Cash book.
• Bank pass‐book.
• Documents register showing full particulars of shares and securities received and 
delivered.
Two years
• Members' contract books showing details of all contracts entered into by him with 
other members of the same exchange or counter‐foils or duplicates of memos of 
confirmation issued to such other members.
• Counter‐foils or duplicates of contract notes issued to clients.
• Written consent of clients in respect of contracts entered into as principals. (Rule 15)
Wi f li i f di i i l (R l 15)
 Securities and Exchange Board of India Act, 1992

• SEBI has statutory powers for:

– Protecting the interests of investors in securities,

– Promoting the development of the securities market, and

– Regulating the securities market.

Its regulatory jurisdiction extends over

Its regulatory jurisdiction extends over 
– Companies listed or intending to get listed on Stock Exchanges in the issuance of 
securities and transfer of Securities, 

– All intermediaries and persons associated with securities market. 
 Constitution of SEBI

SEBI (Securities & Exchange Board of India) consists of the following

members
b :-

‰ A Chairman

‰ Two members from amongst the officials of the Ministries of the Central
Government dealingg with Finance and administration of Companies
p Act,,
1956

‰ One member from amongst the officials of the Reserve Bank of India;

‰ Five other members of whom at least three shall be whole time members
to be appointed by the Central Government.
Government
 SEBI (Stock Brokers & Sub‐Brokers) Rules, 1992

Capital Adequacy Ratio (CAR) Norms for Brokers

Each stockbroker is subject to capital adequacy requirements consisting of two 
components:
(1) Base minimum capital, and
(2) Additional or optional capital related to volume of business
(2) Additional or optional capital related to volume of business.

Registration of Stock Broker

SEBI takes into account for considering the grant of a certificate whether the 
stock broker:
– is eligible to be admitted as a member of a stock exchange,
– has the necessary infrastructure like adequate office space, equipment and man 
h th i f t t lik d t ffi i t d
power to effectively discharge his activities,
– has any past experience in the business of buying, selling or dealing in securities,
– is subjected to disciplinary proceedings under the rules, regulations and byelaws of 
a stock exchange with respect to his business as a stock‐broker involving either 
t k h ith t t hi b i t kb k i l i ith
himself or any of his partners, directors or employees, and
– is a fit and proper person.
 Code of conduct
The stock‐broker holding a certificate at all times abides by the Code of Conduct 
I. General
– Exercise of Due Skill and Care
– Manipulation
– Malpractices
– Compliance with Statutory Requirements 
– Integrity

II. Duty to the investor
y
– Execution of Orders 
– Issue of Contract Note 
– Breach of Trust: 
– Business and Commission
Business and Commission 
– Business of Defaulting Clients
– Fairness to Clients  
– Investment Advice 
– Investment Advice in publicly accessible media 
– Competence of Stock Broker
 SEBI (Insider Trading) Regulations, 1992
Insider trading is prohibited and is considered an offence vide SEBI (Insider 
Trading) Regulations, 1992. The definitions of some of the important terms are 
given below :
given below :

‘Dealing in securities’ means an act of buying, selling or agreeing to buy, sell or 
d li
deal in any securities by any person either as principal or agent.
iti b ith i i l t

‘Insider’ means any person who is or was connected with the company or is 
deemed to have been connected with the company and who is reasonably 
expected to have access, connection to unpublished price sensitive 
information in respect of securities of a company or who has received or has 
h d
had access to such unpublished price sensitive information.
t h bli h d i iti i f ti

“Price sensitive information" means any information which relates directly or 
indirectly to a company and which if published is likely to materially affect the 
price of securities of that company. 
 Prohibition on dealing, communicating or counseling

No insider shall–
Either on his own behalf or on behalf of any other person, deal in securities of 
a company listed on any stock exchange when in possession of any
li t d t k h h i i f
unpublished price sensitive information;
– Communicate, 
– Counsel or 
– Procure, 
– Directly or 
Directly or
– Indirectly, 
any unpublished price sensitive information to any person, who, while in 
possession of such unpublished price sensitive information shall not deal in
possession of such unpublished price sensitive information shall not deal in 
securities; Provided that nothing contained above shall be applicable to any 
communication required in the ordinary course of business or profession or 
employment or under any law.
employment or under any law.
 Policy on disclosures and internal procedure for prevention of 
insider trading

Initial Disclosure:

• Any person who holds more than 5% shares or voting rights in any listed 
company shall disclose to the company, the number of shares or voting 
rights held by such person on becoming such holder within 4 working
rights held by such person, on becoming such holder, within 4 working 
days of:‐
– The receipt of intimation of allotment of shares; or
– The acquisition of shares or voting rights, as the case may be.

• Any person who is a director or officer of a listed company, shall disclose 
to the company, the total number of shares or voting rights held and 
g g g g , g
change in shareholding or voting rights, if there has been a change in such 
holdings from the last disclosure made under sub‐regulation 
SEBI (Prohibition of Fraudulent & Unfair trade practices related 
to securities markets) Regulations, 1995 

‰ Prohibition against Market Manipulation
P hibiti i t M k t M i l ti

‰ Prohibition of misleading statements to induce sale or 
purchase of securities
h f ii

‰ Prohibition on unfair trade practice relating to securities 
(Regulation 6)
 The Depositories Act, 1996
ƒ Agreement between depository and participant
ƒ Services of depository
p y
ƒ Surrender of certificate of security
ƒ Registration of transfer of securities with depository
ƒ O i
Options to receive
i securityi certificate
ifi or hold
h ld securities
i i with ih
depository
ƒ Securities in depositories
p to be in fungible
g form
ƒ Rights of depository & beneficial owner
ƒ Pledge & Hypothecation of securities held in a depository
ƒ F i hi off information
Furnishing i f i & records d by
b depository
d i andd issuer
i
ƒ Option to opt out in respect of any security
ƒ p
Depository y to indemnifyy loss in certain cases
ƒ Securities not liable to stamp duty
 The Companies Act, 1956
Private company means a company which has a minimum paid‐up capital of one 
lakh rupees or such higher paid‐up as may be prescribed and by its articles

– Restricts the right to transfer its shares, if any;
– Limits the number of its members to fifty;
– Prohibits any invitation to the public to subscribe for any shares in or Debentures of the 
company;
– Prohibits any invitation or acceptance of deposits from persons other than its members, 
directors or their relatives

P bli
Public company means a company which
hi h

– Is not a private company;
– Has a minimum paid‐up capital of five lakh rupees
p p p p or such higher paid‐up capital, as may be 
g p p p y
prescribed;
– Is a private company which is a subsidiary of a company which is not a private company.
– The minimum number of persons required to form a public company is seven and the 
minimum number of persons required to form a private company is two.
 Buy‐back of securities (Section 77A)
b k f i i (S i )
A company may purchase its own shares or other 
A h it h th
specified securities out of 

‰Free reserves; or
‰The securities premium account; or
‰The securities premium account; or
‰The proceeds of any shares of other specified securities.
 Conditions to be satisfied for buy‐back

‰ The buy‐back must be authorised by its articles;
‰ A special resolution shall be passed in general meeting of the company 
authorizing buy‐back;
‰ The buy‐back shall be equal to or less than 25% of the total paid‐up capital 
and free reserves of the company
‰ The ratio of debt owed by the company is not more than twice the capital 
The ratio of debt owed by the company is not more than twice the capital
and its free reserves after such buy‐back
‰ All the shares or other specified securities for buy‐back are fully paid‐up;
‰ The buy‐back of listed securities is in accordance with SEBI Regulations;
‰ The buy‐back of un‐listed securities is in accordance with guidelines 
prescribed by Central Government.;

Every buy‐back shall be completed within twelve months
Every buy back shall be completed within twelve months from the date of 
from the date of
passing the special resolution or a resolution passed by the Board.
Annual Return (Sections 159 & 160)
‰ Every Company shall within sixty days from the day on which the Annual 
General Meeting is held, prepare and file Annual Return with Registrar of 
Companies

Annual General Meeting (Section 166)
‰ The
The annual general meeting should be held on the earliest of the three 
annual general meeting should be held on the earliest of the three
relevant dates as prescribed under section 166 together with section 210:
ƒ 15 months from the previous annual general meeting;
ƒ Last day of the calendar year.
Last day of the calendar year
ƒ 6 months from the close of the financial year,

‰ A
A general meeting of a company may be called by giving at least twenty‐one 
general meeting of a company may be called by giving at least twenty one
days ’notice in writing.
 Dividend (Section 205)

Dividend shall be declared or paid by a company for any financial year

‰ Out of the profits of the company for that year arrived at after providing for   
p p y y p g
depreciation in accordance with the provisions of section 205 (2) of the Act, or

‰ Out of the profits of the company for any previous financial year or years arrived at 
after providing for depreciation in accordance with those provisions and remaining 
p g p p g
undistributed, or

‰ Out of both above or

‰ Out of moneys provided by the Central Government or a State Government for the 
payment of dividend in pursuance of a guarantee given by that Government.

The amount of dividend shall be deposited in a separate bank account within five days
Th t f di id d h ll b d it d i t b k t ithi fi d
from the date of declaration of dividend. The dividend shall be paid within thirty 
days from the date of its declaration.
 Investor Education and Protection Fund (Section 205C)
The fund shall be credited with:
‰ Amounts in the unpaid dividend accounts of companies,
‰ Application moneys received by companies for allotment of any securities 
and due for refund,
‰ Matured deposits with companies,
‰ Matured debentures with companies,
‰ The interest accrued on the amounts referred to above (a to d),
Th i t t d th t f dt b ( t d)

Grants and donations given to the Fund by the Central Government, State 
Governments, companies or any other institutions for the purposes of the
Governments, companies or any other institutions for the purposes of the 
Fund; and 
The interest or other income received out of the investments made from the 
Fund: Provided that no such amounts referred to in clauses (a) to (d) shall 
form part of the Fund unless such amounts have remained unclaimed and
form part of the Fund unless such amounts have remained unclaimed and 
unpaid for a period of seven years from the date they became due for 
payment. 

The Investor Education and Protection Fund shall be utilised for promotion of 
awareness amongst the investors and for the protection of the interests of 
investors in accordance with such rules as may be prescribed.
Th nk you
Thank