Contracts and Options in Securities
Section 13. Contracts in notified areas illegal in certain circumstances.
The Central Government must be satisfied and should the feel the need that they need to regulate.
This satisfaction is based on the nature or volume of securities transactions in a State, States, or area.
The Government may then issue a notification in the Official Gazette.
The notification declares that this section will apply to that area.
After the notification: It applies to all contracts entered into after the date of notification.
A contract will be illegal if:
It is not between members of a recognised stock exchange.
It is not made through or with such members.
Example:
Suppose the Central Government is satisfied that there is a high volume of securities trading in Delhi.
It issues a notification in the Official Gazette saying this section will apply to Delhi.
From that date onwards:
All share transactions in Delhi must happen through members of a recognised stock exchange.
(lMembers include brokers of National Stock Exchange of India or Bombay Stock Exchange).
Now imagine:
A sells shares directly to B in a private deal (not through any stock exchange or broker).
Since this is not through a recognised stock exchange or its member , this contract will be illegal.
Any contract entered into between:
Members of two or more recognised stock exchanges in such State or States or area, should comply to these conditions:
(a).
Such contracts are allowed, if they follow terms and conditions fixed by the respective stock exchanges.
These terms and conditions must have prior approval of Securities and Exchange Board of India.
(b).
Contracts between members of different stock exchanges may require prior permission.
This requirement applies only if the stock exchanges have stipulated it.
Such stipulation must have prior approval of Securities and Exchange Board of India.
Stipulation simply means a condition or requirement that must be followed.
It is a rule or condition set in advance.
It tells you what must be done or complied with.
Section 13A. Additional Trading Floor
A stock exchange may set up an additional trading floor.
In order to do that , it must take prior approval from Securities and Exchange Board of India.
The approval must be taken before establishing the trading floor.
The stock exchange must follow the terms and conditions set by SEBI.
Explanation :
An "additional trading floor" is defined for the purposes of this section"
An “additional trading floor” means a trading ring or trading facility.
It is set up by a recognised stock exchange.
It is located outside the stock exchange’s normal area of operation.
It allows investors to buy and sell securities through that facility.
All trading there is governed by the regulatory framework of that stock exchange.
Section 14. Contracts in notified areas to be void in certain circumstances.
14(1).
A State or area is first notified under section 13.
In that area, contracts in securities are regulated.
If any contract is entered into in that area: It must follow the bye-laws of the stock exchange.
These bye-laws are specified under section 9(3)(a).
If a contract is made in contravention (violation) of those bye-laws then the contract shall be void (i.e., legally invalid).
(i).
The above rule applies to a member of a recognised stock exchange.
If a member has entered into a contract in contravention of bye-laws then the rights of such member are affected.
(ii)
The above rule also applies to any other person (non-member).
The person has knowingly participated in the transaction.
The transaction involves contravention of bye-laws.
The rights of such person are affected.
14(2).
Under circumstances, a person is not a member of a recognised stock exchange then:
The rule under 14(1) will not affect the rights of such person.
Such person can:
Enforce the contract, or
Recover any sum under or related to the contract.
This is allowed only if the person had no knowledge that the transaction violated bye-laws.
The bye-laws referred to are those under section 9(3)(a).
Section 15. Members may not act as principals in certain circumstances
A member of a recognised stock exchange cannot enter into a contract as a principal with a non-member.
This restriction applies to contracts in securities.
Exception: The member can do so only if he has obtained the consent or authority of that person.
Additional requirement: The member must disclose in the note, memorandum, or agreement of sale or purchase that he is acting as a principal.
Example:
A stock broker (member of a recognised stock exchange) deals with a client (non-member).
Normally: The broker acts as an agent (just executes the trade for the client).
The situation here: The broker wants to act as a principal (buy/sell from his own account to the client).
This is allowed only if:
The broker takes the client’s consent, and
The broker clearly mentions in the contract note that he is acting as a principal.
If the broker does not do this: The transaction will be in violation of the law.
If the member takes consent or authority orally (not in writing),
Then he must obtain written confirmation of that consent.
This written confirmation must be obtained within three days from the date of the contract.
Example:
The broker (member) wants to act as a principal while dealing with the client (non-member).
The broker takes the client’s consent orally (e.g., over a phone call).
The contract is entered into on Day 1.
Since the consent was not in writing: The broker must get written confirmation from the client.
This written confirmation must be obtained within 3 days from Day 1.
If the broker fails to get written confirmation within 3 days:
He will be in violation of the requirement.
This applies to closing out an outstanding contract.
No written consent or authority is required from the person in such cases.
Condition: The original contract must have been entered into in accordance with the bye-laws.
Additional requirement: The member must disclose in the note, memorandum, or agreement that he is acting as a principal.
The client had already entered into a valid contract through the broker (as per bye-laws).
Later, the broker wants to close out (square off) that contract.
While closing out: The broker acts as a principal (deals on his own account).
In this case: The broker does NOT need fresh written consent from the client.
But condition: The broker must clearly disclose in the contract note that he is acting as a principal.
Section 16. Power to prohibit contracts in certain cases
16(1).
The Central Government must form an opinion that action is necessary.
This opinion must be to prevent undesirable speculation in specified securities.
It must relate to a particular State or area.
The Government may then issue a notification in the Official Gazette.
The notification specifies:
The State or area, and
The securities to which it applies.
After the notification: No person in that area can enter into contracts for those securities.
Exception: Contracts can be entered into only with the permission of the Central Government.
Further condition: Even with permission, contracts must follow the extent and manner specified in the notification.
16(2).
This applies to contracts entered into after the date of the notification.
The notification is issued under 16(1).
If any contract is made in contravention of 16(1) then: Such contract shall be illegal
Section 17. Licensing of dealers in securities in certain areas.
17(1).
The following rule applies subject to 17(3) and other provisions of the Act.
The rule states that:
No person can carry on the business of dealing in securities.
This restriction applies whether the person acts for himself or on behalf of someone else.
The rule applies only in areas where section 13 is not in force.
That said , the Central Government can notify such areas in the Official Gazette and make this section applicable there
Once notified, no person can operate in those areas without proper authority.
The required authority is essentially a licence granted by the Securities and Exchange Board of India
Explanation:
So , if you want to deal in securities, you cannot do it freely in every area.
The restriction applies even if you are trading for yourself or acting for someone else.
It applies to areas where section 13 is not already in force
The Central Government can extend this rule to such areas by issuing a notification.
Once the government notifies an area, the restriction becomes active there.
After that, you cannot carry on securities business in that area without permission.
The permission is in the form of a licence from Securities and Exchange Board of India.
So , if you operate without this licence, you are violating the law.
17(2).
The Central Government cannot issue a notification under 17(1) freely.
Before issuing it, the Government must first examine how securities trading is happening in that State or area.
It must form an opinion based on that assessment.
The Government must be satisfied that regulation is needed
The reason for regulation should be either in the interest of trade, or in the public interest
Only if such satisfaction exists, the Government can decide to regulate the area.
The method of regulation in such cases will be through a licensing system.
17(3).
The restrictions under 17(1) apply to dealings in securities.
These restrictions do not apply to actions done by a member of a recognised stock exchange.
These restrictions also do not apply to actions done on behalf of such a member.
Section 17A. Public issue and listing of securities referred to in sub-clause (ie) of clause (h) of section 2.
17A(1).
The following provision is in addition to and does not override other laws in force.
With respect to securities referred to in 2(h)(ie):
Such securities cannot be offered to the public unless certain conditions are met.
They also cannot be listed on a recognised stock exchange unless those conditions are met.
The issuer must fulfil the eligibility criteria specified.
The issuer must also comply with other requirements.
These criteria and requirements are prescribed through regulations.
The regulations are made by the Securities and Exchange Board of India (SEBI).
17A(2).
The following rule applies to every issuer covered under Section 2(h)Ie):
The issuer must be intending to offer such certificates or instruments to the public.
Before issuing the offer document, the issuer must take action.
The issuer must apply to one or more recognised stock exchanges.
The purpose of the application is to seek permission for listing.
The listing permission must be for those certificates or instruments proposed to be offered.
If applying to multiple exchanges, permission must be obtained from each such stock exchange.
17A(3).
If the issuer has applied for listing permission under 17A(2) and:
If the stock exchange does not grant permission or refuses permission (even by any one exchange), consequences follow.
The issuer must immediately repay all money received from applicants under the offer document.
If the issuer fails to repay within 8 days from the date it becomes liable:
The issuer and every director or trustee in default become liable.
They are jointly and severally liable to repay the money.
They must also pay interest at 15% per annum.
Interest applies from the expiry of the 8th day until repayment.
Explanation(ITA):
The 8-day period is calculated in the following manner:
While counting the 8 days, any intervening public holiday under the Negotiable Instruments Act, 1881 is ignored.
So, holidays in between are not counted in the 8 days.
After excluding such holidays, you determine the actual 8th day.
If this calculated 8th day itself falls on a public holiday , It is shifted to the next working day.
Therefore, the deadline becomes the first day after the holiday which is not a holiday.
17A(4).
With respect to securities covered under Section 2(h)(ie):
The issuer in this case is a special purpose distinct entity (SPDE).
All provisions of the Act relating to listing of securities of a public company will apply.
These provisions apply with necessary modifications (mutatis mutandis).
This means the same listing rules are followed, but adapted to suit the SPDE structure.
Therefore, the SPDE must comply with listing requirements similar to a public company, unless specifically modified.
Understanding Special Purpose Distinct Entity:
An SPDE is a separate legal entity created for a specific and limited purpose.
It is mainly established for securitisation or structured finance transactions.
It holds specific assets such as loans, receivables, or other financial instruments.
It issues securities that are backed by these underlying assets.
It remains legally distinct from the originator that transfers the assets.
An SPDE designed to be bankruptcy-remote, so its assets are protected from the originator’s liabilities.
It does not carry on general business activities and only performs its defined function.
It acts as the issuer of securities covered under Section 2(h)(ie).
It complies with listing and disclosure requirements similar to those applicable to a public company, subject to necessary modifications.
Example:
A bank creates an SPDE for the purpose of securitisation.
The bank transfers a pool of home loans to the SPDE.
The SPDE becomes the legal owner of these loans.
The SPDE issues securities to investors that are backed by the loan repayments.
Investors purchase these securities from the SPDE.
The borrowers continue to repay their loans as usual.
The SPDE collects the repayments from the borrowers.
The SPDE distributes the collected amounts to the investors as returns.
This structure allows the bank to receive immediate funds while transferring the risk to the SPDE.
Section 18. Exclusion of spot delivery contracts from sections 13, 14, 15 and 17.
18(1).
Sections 13, 14, 15 and 17 do not apply to spot delivery contracts.
So, spot delivery contracts are exempt from the restrictions/provisions contained in those sections.
18(2).
The Central Government can override the rule in 18(1).
The Central Government can take action if it considers it necessary:
In the interest of trade, or
In the public interest.
It can decide to regulate and control spot delivery contracts as well.
This power applies to any State or area, whether section 13 applies there or not.
The Government must issue a notification in the Official Gazette.
Through the notification, it can declare that section 17 will apply to spot delivery contracts.
This can be done:
For all spot delivery contracts, or
Only for specific securities mentioned in the notification.
The Government can also specify:
The manner in which section 17 will apply, and
The extent to which it will apply.
Section 18A. Contracts in derivative.
Over-riding all other laws in force:
Derivative contracts will be considered legal and valid only if conditions are satisfied.
The key conditions are:
(a).
The contract must be traded on a recognised stock exchange.
Therefore, exchange-traded derivatives are legally enforceable.
(b).
Additional conditions for valid derivative contracts:
The contract must be settled through the clearing house of the recognised stock exchange.
Settlement must also be done in accordance with the rules and bye-laws of that stock exchange.
(c).
Alternatively, contracts can still be valid if:
They are between parties specified by the Central Government, and
On terms specified by the Central Government.
Such specification is made through a notification in the Official Gazette.
So, validity depends on:
Proper exchange trading,
Proper clearing and settlement, or
Government-approved parties and terms.
Section 19. Stock exchanges other than recognised stock exchanges prohibited.
19(1).
No person can organise or help organise a stock exchange that is not recognised.
No person can become a member of such an unrecognised stock exchange.
This restriction applies when the purpose is to: Assist in, enter into, or perform contracts in securities.
Exception: Such activities are allowed only with permission of the Central Government.
So, dealing in securities through unrecognised exchanges is prohibited unless approved by the Government.
19(2).
The section does not apply automatically everywhere.
The Central Government decides when it will apply.
It can bring the section into force for a specific State or area.
This is done through a notification in the Official Gazette.
The section becomes effective from the date specified in that notification.
Section 20. Prohibition of options in securities. [Omitted].
Section 21. Conditions for listing.
When securities are listed on a recognised stock exchange:
The listing must be done on the application of a person (issuer or applicant).
That person becomes responsible after listing.
He must comply with all conditions of the listing agreement.
The obligations arise towards that specific stock exchange.
So, once listed, the applicant is bound by the listing agreement requirements.
Section 21A. Delisting of securities.
21A(1).
A recognised stock exchange has the power to delist securities.
Delisting can be done from any recognised stock exchange.
The exchange must record the reasons for delisting.
Delisting can only be done on grounds prescribed under the Act.
So, delisting is not arbitrary , it must be reasoned, and based on prescribed legal grounds.
This is a safeguard (proviso) against delisting.
A company’s securities cannot be delisted without following due process.
The company must be given a reasonable opportunity of being heard.
This means the company can:
Present its case,
Give explanations, and
Defend against delisting.
So, delisting must follow principles of natural justice (fair hearing).
21A(2).
When a recognised stock exchange delists securities:
Two categories of persons can appeal:
The listed company, or
An aggrieved investor.
The appeal must be filed before the Securities Appellate Tribunal (SAT).
Time limit: Appeal must be filed within 15 days from the date of the delisting decision.
The procedure and provisions of sections 22B to 22E will apply.
These provisions apply as far as possible (mutatis mutandis) to such appeals.
This is a relaxation of the 15-day time limit for appeal.
If the company fails to file within 15 days, it can still file later.
Condition: The company must show “sufficient cause” for the delay.
If SAT is satisfied, it can allow a delayed appeal.
However, the extension is limited to: maximum 1 additional month beyond the original 15 days.
So, delay is condonable, but only within a capped period.
Section 22. Right of appeal to Securities Appellate Tribunal against refusal of stock exchange to list securities of public companies.
If a recognised stock exchange refuses to list securities then:
The refusal must be under its bye-laws.
This refusal can be with respect to a public company, or a collective investment scheme.
The company/scheme has a right to know the reasons for refusal.
After receiving the reasons, it gets further rights.
(a).Within 15 days from the date the reasons are given:
The company/scheme can take action (i.e., proceed with appeal/next step as provided in law).
The company/scheme can take action if the Stock Exchange:
Refuses listing, or
Fails/omits to decide the application within the specified time (under section 73(1) of the Companies Act, 1956).
The “specified time” = the time limit within which the stock exchange must dispose of the listing application.
(b). Time limit to appeal:
Within 15 days from the expiry of the specified time, or
Within an extended period (max 1 month) allowed by the Central Government (if sufficient cause is shown).
The company/scheme can appeal to the Central Government against refusal, or omission/failure.
On appeal, the Central Government must give the stock exchange an opportunity of being heard.
After hearing, the Central Government can:
(i). Vary or set aside the decision of the stock exchange, or
(ii). If no decision was taken, itself grant or refuse permission.
If the Central Government: sets aside the decision, or grants permission , then:
The stock exchange must comply with (act according to) the Government’s order.
Restricting the right to appeals against refusal, omission, or failure of the stock exchange.
After the commencement of the Securities Laws (Second Amendment) Act, 1999:
No appeal can be filed under this section.
So, the earlier right to appeal to the Central Government has been discontinued from that date.
So, appeals under this section are no longer allowed after 1999 amendment.
Section 22A. Right of appeal against refusal of stock exchanges to list securities of public companies.
22A(1).
When a recognised stock exchange refuses to list securities of a company:
The refusal must be based on powers under its bye-laws.
The company has a right to be given reasons for such refusal.
After receiving the reasons, the company gets further rights.
(a). Within 15 days from the date the reasons are furnished:
The company can file an appeal (as provided under the section).
The company can file an appeal if the stock exchange
Refuses listing, or
Fails/omits to decide the application within the specified time (under section 73(1A) of the Companies Act, 1956).
“Specified time” = time limit within which the stock exchange must dispose of the listing application.
(b). Right to appeal: The company can appeal to the Securities Appellate Tribunal (SAT).
Time limit for appeal:
Within 15 days from expiry of the specified time, or
Within a further period (max 1 month) if SAT allows (on sufficient cause).
The appeal can be against refusal, or omission/failure to decide.
Before passing any order: SAT must give the stock exchange an opportunity of being heard.
Powers of SAT:
(i). Vary or set aside the decision
SAT can modify the stock exchange’s decision, or
Completely cancel (set aside) the refusal.
(ii). In case of delay/non-decision by stock exchange
SAT itself can grant permission, or refuse permission.
If SAT sets aside the decision or grants permission, then:
The stock exchange is bound to follow (act in conformity with) SAT’s order.
22A(2).
With respect to appeals filed under 22A(1).
Every appeal must follow a prescribed format:
The format is as specified by rules/regulations.
The appeal must also be accompanied by a prescribed fee.
So, filing an appeal requires proper form, and payment of required fee.
22A(3).
After passing an order, SAT must send a copy of the order.
Copies must be sent to the Board (SEBI), and the parties to the appeal.
So, all concerned parties are officially informed of the decision.
22A(4).
With respect to appeals filed before the Securities Appellate Tribunal (SAT) under 22A(1):
SAT must handle the appeal as quickly as possible.
It should make efforts to dispose of the appeal finally.
The target time for disposal is within 6 months.
This 6-month period is counted from the date of receipt of the appeal.
Section 22B. Procedure and powers of Securities Appellate Tribunal.
22B(1).
SAT is not bound by the Code of Civil Procedure, 1908.
Instead, it follows principles of natural justice (fair hearing, no bias, etc.).
Its functioning is still subject to provisions of the Act and rules.
SAT has the power to regulate its own procedure.
This includes deciding:
How proceedings will be conducted, and
Where (places) it will hold sittings.
So, SAT has procedural flexibility with a focus on fairness.
22B(2).
For performing its functions, SAT has powers similar to a civil court under the Code of Civil Procedure, 1908.
These powers apply while dealing with matters like a court trying a suit.
Specifically, SAT can:
(a). Summon any person, enforce attendance, and examine them on oath.
(b). Require discovery and production of documents.
(c). Receive evidence on affidavits.
(d). Issue commissions for examination of witnesses or documents.
(e). Review its own decisions.
(f). Dismiss an application for default or decide it ex parte (in absence of a party).
(g). Set aside:
Dismissal orders for default, or
Ex parte orders passed earlier.
(h). Exercise powers on any other prescribed matters.
So, SAT functions with quasi-judicial powers similar to a civil court for effective adjudication.
22B(3).
Every proceeding before SAT is treated as a judicial proceeding.
This is for the purposes of:
Section 193 of IPC - Punishment for false evidence (perjury),
Section 228 of IPC - Punishment for intentional insult/interruption to a public servant during proceedings,
Section 196 of IPC - Offences relating to use of false evidence.
Therefore:
Giving false evidence before SAT is punishable, and
Misconduct during proceedings is also punishable.
SAT is also deemed to be a civil court for certain purposes.
This applies under:
Section 195 of the Code of Criminal Procedure, 1973, and
Chapter XXVI of CrPC (relating to offences affecting administration of justice).
So, SAT has the status of a civil court for initiating certain criminal proceedings (like perjury, contempt-related offences).
Section 22C. Right to legal representation.
The appellant has a choice of representation for the purpose of appeals before SAT.
The appellant may appear in person.
Alternatively, the appellant may authorise representatives to present the case.
Permitted representatives include:
Chartered accountants.
Company secretaries.
Cost accountants.
Legal practitioners (lawyers).
Officers of the appellant.
So, representation before SAT is flexible and not limited only to lawyers.
Explanation: (ITA):
The following persons can represent an appellant before the Securities Appellate Tribunal (SAT).
(a). Chartered accountant
Must be a chartered accountant as per the Chartered Accountants Act, 1949.
Must also have a valid certificate of practice.
(b). Company secretary
Must be a company secretary as per the Company Secretaries Act, 1980.
Must also have a valid certificate of practice.
(c). Cost accountant
Must be a cost accountant as per the Cost and Works Accountants Act, 1959.
Must also have a valid certificate of practice.
(d). Legal practitioner
Includes an advocate, vakil, or attorney of a High Court.
Also includes a pleader in practice.
So, only qualified professionals with valid practice certificates (where required) can represent parties before SAT.
Section 22D. Limitation.
The Limitation Act, 1963 will apply to such appeals before the SAT.
It applies “as far as may be”, meaning:
Not exactly the same in all respects,
But applied with necessary modifications.
So, rules relating to:
Time limits,
Delay condonation,
Computation of limitation,
will generally apply to SAT appeals.
So , Limitation principles govern appeals before SAT.
Section 22E. Civil court not to have jurisdiction.
No civil court can entertain any suit or proceeding on matters that the Securities Appellate Tribunal (SAT) is empowered to decide.
So, matters within SAT’s domain are exclusively handled by SAT.
Further, no court or authority can grant an injunction in such matters.
This applies to actions already taken, or proposed to be taken under the Act.
So, courts cannot interfere or stop proceedings/actions under this Act.
Section 22F. Appeal to Supreme Court.Any person aggrieved by an order of the Securities Appellate Tribunal (SAT) has the right to appeal further with the Supreme Court of India,
The Time Limit for such appeal to be filed is within 60 days.
This period of 60 days is counted from the date of communication of SAT’s order to the person.
The scope of appeal Only on a question of law and not on factual issues.
So, appeal to Supreme Court is time-bound, and restricted to legal questions only.
