Definitions & Recognized Stock Exchanges
Section 2. Definitions
(a). Contract
A contract is a legally binding agreement.
It includes contracts for purchase and sale of securities.
It covers both direct and indirect agreements connected with securities transactions
(aa). Corporatisation
Corporatisation means succession of a recognised stock exchange.
The original stock exchange is a body of individuals, or a society registered under the Societies Registration Act, 1860.
It is replaced by another stock exchange.
The new stock exchange is a company (corporate entity).
The company is incorporated for the purpose of:
Assisting the business of securities.
Regulating the business of securities.
Controlling the business of securities.
The business involved is:
Buying securities
Selling securities
Dealing in securities
This business was originally carried on by the individuals or society (old stock exchange).
Example:
The transformation of the Bombay Stock Exchange.
Before corporatisation:
It was a mutual organisation.
Owned and managed by brokers (members).
Functioned like a body of individuals / association.
After corporatisation:
It became a company (BSE Ltd.).
Ownership and management were separated.
Introduced professional management and governance.
(ab). Demutualisation
Demutualisation means the segregation (separation) of different functions within a recognised stock exchange.
It involves the separation of ownership from the trading rights of members.
It also involves the separation of management from the trading rights of members.
This concept applies specifically to the members of a recognised stock exchange.
The process of demutualisation is carried out in accordance with a scheme approved by the Securities and Exchange Board of India.
As a result, ownership, management, and trading rights are no longer vested in the same persons.
(ac). Derivative
Derivative includes:
(A).
A derivative means a security that is derived from another underlying instrument.
It may be derived from a debt instrument.
It may be derived from a share.
It may be derived from a loan, whether secured or unsecured.
It may be derived from a risk instrument.
It may be derived from a contract for differences.
It may also be derived from any other form of security.
(B).
A derivative means a contract.
Such a contract derives its value from underlying securities.
The value may be based on the price of underlying securities.
The value may also be based on an index of prices of underlying securities.
So, the contract’s value depends on fluctuations in the prices or index of the underlying securities.
(C).
Commodity Derivatives.
(D).
Derivatives also include such other instruments declared by the Central Government to be derivatives.
Understanding important terms
Derivative
A derivative is a financial security.
Its value is derived from an underlying asset or instrument.
It does not have independent value of its own.
Its value changes based on the value of the underlying.
Security
A security is a tradable financial instrument.
It represents ownership, debt, or financial rights.
It includes instruments like shares, bonds, and derivatives.
Underlying Instrument
An underlying instrument is the base asset.
It is the asset from which a derivative derives its value.
It may include shares, commodities, or financial instruments.
Debt Instrument
A debt instrument is a financial instrument representing borrowing.
It creates an obligation to repay money.
It includes instruments like bonds and debentures.
Share
A share represents a unit of ownership in a company.
It gives the holder rights in profits and assets.
It may also carry voting rights.
Loan (Secured / Unsecured)
A loan is a sum of money borrowed with an obligation to repay.
A secured loan is backed by collateral.
An unsecured loan is not backed by collateral.
Risk Instrument
A risk instrument is a financial instrument exposed to uncertainty.
Its value depends on market risks or fluctuations.
It is often used for hedging or speculation.
Contract for Differences (CFD)
A CFD is a financial contract between two parties.
It involves payment of the difference in price of an asset.
There is no actual transfer of the underlying asset.
Underlying Securities
Underlying securities are the securities on which a derivative is based.
Their value determines the value of the derivative.
Price of Securities
The price of securities is the market value at which they are traded.
It is determined by demand and supply in the market.
Index of Prices
An index of prices is a measure of the value of a group of securities.
It reflects the overall performance of the market or sector.
Value (of a Derivative)
The value of a derivative is the price of the derivative contract.
It depends on the value of the underlying asset or index.
Commodity Derivatives
Commodity derivatives are derivative contracts based on commodities.
Their value is derived from physical goods like gold, oil, or crops.
They are used for hedging price risk or speculation.
(b). Government Security
A Government security means a security created and issued by the Government.
It may be issued by the Central Government or a State Government.
It may be issued before or after the commencement of the Act.
It is issued for the purpose of raising a public loan.
It must be in one of the forms specified under Section 2(2) of the Public Debt Act, 1944.
Thus, it represents a debt obligation of the Government towards investors.
(bb). Goods
Goods mean every kind of movable property.
It includes all types of movable items.
It excludes actionable claims , money & securities.
(bc). Commodity Derivative
(i).
Commodity Derivative refers to a contract for delivery of goods.
These goods must be specified (notified) by the Central Government through the Official Gazett
The contract must NOT be a ready delivery contract:
A Ready to Delivery and payment do not happen immediately or within a short time.
Instead, it is typically for future delivery (forward/futures type contracts).
(ii).
Commodity Derivative also refers to a contract for differences (CFD).
This means that there is no actual delivery of goods happens.
The Parties settle only the price difference (profit/loss).
The value of the contract is derived from:
Prices or price indices of underlying Goods , Activities , Services , Rights , Interests & Events.
These underlying items must be notified by the Central Government and done in consultation with SEBI (the Board)
It does NOT include securities mentioned in sub-clauses (A) and (B) of clause (ac).
(c). Member
Member means a member of a recognised stock exchange.
(ca). Non-transferable Specific Delivery Contract
It is a specific delivery contract so It involves actual delivery of goods
The rights and liabilities under the contract cannot be transferred to another person
This non-transferability applies to the contract itself, and any related documents of title, such as:
Delivery order , Railway receipt.
Bill of lading , Warehouse receipt.
Any other similar document.
So, neither the benefits (rights) nor the obligations (liabilities) can be passed on to someone else.
(d). Option in Securities
It is a contract for purchase or sale of a right. (not the securities themselves directly)
The right may be:
A right to buy securities (Call option)
A right to sell securities (Put option)
A right to both buy and sell securities
The action (buy/sell) is to take place in the future and not immediately.
It includes includes a teji, a mandi, a teji mandi, a galli.
It specifically relates to securities (like shares, bonds, etc.)
Understanding Teji , Mandi , Teji Mandi , Galli
Teji (Bullish Position)
This position is when there is an expectation that prices will rise.
You take a position to benefit from price increase.
This is equivalent to a Call-type behavior.
So you make profit if price goes up.
Mandi (Bearish Position)
The position is when there is an expectation that prices will fall.
Thereafter , you take a position to benefit from price decrease.
This is Equivalent to a Put-type behavior.
So , you make Profit if price goes down.
Teji Mandi (Combined Position)
This is a Combination of Teji + Mandi positions
This is used to hedge risk or speculate both sides
It usually involves buying and selling rights together
The Strategy depends on price movement in either direction
Galli
A speculative option arrangement (traditional market term).
It involves informal or flexible option-like contracts.
It is often used in local/old trading practices.
(da). Pooled Investment Vehicle
A Pooled Investment vehicle is a fund established in India.
The fund may be formed as a trust, or in any other form.
It includes funds such as:
Mutual fund
Alternative Investment Fund (AIF)
Collective Investment Scheme (CIS)
Business trust (as defined under the Income-tax Act, 1961)
It must be registered with the Securities and Exchange Board of India (SEBI)
It also includes any other fund meeting similar conditions.
The fund must raise or collect money from investors and Invest such money
The investment must be in accordance with SEBI regulations.
(e). Prescribed
Prescribed means prescribed by rules made under this Act
(ea). Ready Delivery Contract
A ready delivery contract is a contract that provides for the delivery of goods and payment of the price.
The delivery of goods and payment must take place either immediately or within a period not exceeding eleven days from the date of the contract.
The maximum period of eleven days is strictly fixed and cannot be exceeded.
The period of the contract cannot be extended under any circumstances, including by mutual consent of the parties.
The contract is subject to such conditions as may be specified by the Central Government.
These conditions are notified through the Official Gazette.
The conditions may vary depending on the nature or type of goods involved.
Provided that where any such contract is performed either wholly or in part:
(I).
It refers to the realisation of a sum of money representing the difference between rates.
The difference may be between the contract rate and the settlement rate.
The difference may also be between the contract rate and the clearing rate.
Alternatively, it may be between the contract rate and the rate of any offsetting contract.
In such cases, no actual delivery takes place, and only the price difference is settled in money.
(II).
It includes situations where the contract is settled by any other means whatsoever.
Such settlement results in no actual delivery of the goods covered by the contract.
It also results in no payment of the full price of the goods.
In such cases, the requirement of actual tendering of goods or full payment is dispensed with.
Therefore, such a contract shall not be regarded as a ready delivery contract.
Example:
(I).
A enters into a contract to buy shares at ₹100 per share (contract rate).
On the settlement date, the market/settlement price becomes ₹110 per share.
Instead of taking actual delivery of shares, the parties decide to settle the difference in money.
The difference = ₹110 − ₹100 = ₹10 per share.
The seller pays ₹10 per share to the buyer (or vice versa depending on position).
The difference may be calculated between:
Contract rate and settlement rate.
Contract rate and clearing rate.
Contract rate and rate of an offsetting contract.
(II).
A agrees to buy 100 bags of wheat at ₹2,000 per bag from B.
On the settlement date, the market price becomes ₹2,200 per bag.
Instead of delivering the wheat, both parties agree to settle the contract in another way.
They calculate the difference = ₹2,200 − ₹2,000 = ₹200 per bag.
B pays A ₹200 × 100 = ₹20,000, and the contract is closed.
No actual delivery of wheat takes place.
Full price of goods is not paid (only difference is paid).
Hence, this is not a ready delivery contract.
Contract Rate
It is the price agreed at the time of entering into the contract.
It represents the original obligation of the parties.
All future calculations (profit/loss) are based on this rate.
It remains fixed unless the contract is modified.
Settlement Rate
It is the price prevailing on the settlement date.
It is used to determine the final gain or loss between parties.
It is usually based on the closing market price on that day.
The difference between contract rate and settlement rate is paid in cash (if no delivery).
Clearing Rate
It is the price fixed by the clearing house or clearing corporation of the stock exchange.
It is used for official settlement of trades and obligations.
It may be calculated based on average price, closing price, or prescribed method.
Rate of an Off-setting Contract
It is the price in a reverse transaction entered to cancel the original contract.
It arises when a party enters into an opposite trade (buy vs sell).
It helps in closing the position without actual delivery.
The difference between the original contract rate and this rate determines profit or loss.
(f). Recognised Stock Exchange
A recognised stock exchange is a stock exchange that has been officially recognised.
The recognition must be granted by the Central Government.
Such recognition is given under section 4 of the relevant Act.
The recognition must be valid and in force at the present time.
(g). Rules
The term rules refers to the rules relating to the constitution and management of a stock exchange.
These rules govern how the stock exchange is structured and administered.
In the case of a stock exchange that is an incorporated association, the term “rules” has an extended meaning.
It includes the memorandum of association of the stock exchange.
It also includes the articles of association of the stock exchange.
(ga). Scheme
A scheme refers to a scheme for corporatisation or demutualisation of a recognised stock exchange.
Such a scheme may provide for the following:
(i).
It may provide for the issue of shares for lawful consideration.
The grant of trading rights in lieu of membership cards of members of a recognised stock exchange.
(ii).
It may provide for restrictions on voting rights.
(iii).
It may provide for the transfer of property, business, assets, rights, liabilities, and recognitions of the recognised stock exchange.
It may also include the transfer of contracts and legal proceedings.
This transfer can be in the name of the recognised stock exchange, a trustee, or otherwise.
The transfer can be done along with any permissions given to or by the recognised stock exchange.
(iv).
It may provide for the transfer of employees of a recognised stock exchange to another recognised stock exchange.
(v).
It may include any other matter required for or connected with the corporatisation or demutualisation of the recognised stock exchange.
(gb). Securities Appellate Tribunal
The Securities Appellate Tribunal is a tribunal established under the law.
It is specifically established under Section 15K(1).
The establishment is under the Securities and Exchange Board of India Act, 1992.
It is a statutory body created for the purposes provided under that Act.
(h). Securities
The term Securities includes various types of financial instruments.
It includes the following:
(i).
It includes shares, scrips, stocks, bonds.
It also includes debentures, debenture stock, or other marketable securities of a similar nature.
Provided that the above marketable securities are issued by any incorporated company, pooled investment vehicle, or other body corporate.
(ia).
It includes derivatives.
(ib).
It includes units or any other instruments issued to investors under a collective investment scheme.
(ic).
It includes security receipts as defined under clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
(id).
It includes units or any other instruments issued to investors under any mutual fund scheme.
Explanation: (ITA)
In order to not cause doubts or any confusion:
The explanation clarifies that certain instruments are not included within the meaning of “securities”.
It declares that unit linked insurance policies (ULIPs) or similar instruments are excluded.
It also excludes any instrument that provides a combined benefit of life risk and investment.
Such instruments must be issued by an insurer as defined under section 2(9) of the Insurance Act, 1938.
Further, the term “securities” includes the following:
(ida).
It includes units or any other instruments issued by any pooled investment vehicle.
(ie).
Any certificate or instrument (by whatever name called) that is issued to an investor.
It is issued by an issuer that is a special purpose distinct entity (SPV).
The entity holds debt or receivables, including mortgage debt.
Such debt or receivables are assigned to that entity.
The instrument acknowledges the investor’s beneficial interest in that debt or receivable.
This includes beneficial interest in mortgage debt, where applicable.
(ii).
It includes Government securities.
(iia).
It includes any other instruments declared by the Central Government to be securities.
(iii).
It includes rights or interests in securities.
(ha). Specific delivery contract
A specific delivery contract is a type of commodity derivative.
It provides for the actual delivery of goods.
The goods must be of specific qualities or types.
The delivery is to take place during a specified future period.
The price is either fixed in the contract or to be fixed in the manner agreed in the contract.
The contract must clearly mention the name of the buyer and the seller.
(i). Spot Delivery Contract
Spot Delivery Contract is essentially a contract which actually provides for:
(a).
These contracts provide for actual delivery of securities.
There must be payment of the price for those securities.
Delivery and payment must happen on the same day as the contract, or on the next day after the contract.
If parties are in different towns/localities the following times are excluded:
Time taken for dispatch of securities is excluded.
Time taken for remittance of money (e.g., through post) is excluded.
So, only the effective time period (excluding transit time) is counted.
(b).
These contracts also provide for transfer of securities by a depository.
The transfer takes place from the account of one beneficial owner.
The transfer is made to the account of another beneficial owner.
This applies when the securities are held and dealt with through a depository.
(j). Stock Exchange
Stock exchange means:
(a).
It essentially can be any group of individuals acting together.
The group may be either incorporated (legally registered) or unincorporated.
The group must have been formed before corporatisation and demutualisation.
The corporatisation and demutualisation mentioned are those under Sections 4A and 4B of the Securities Contracts (Regulation) Act, 1956.
It includes bodies that existed before stock exchanges were converted into companies.
(b).
It also means a body corporate that is incorporated under the Companies Act, 1956.
The body corporate may be formed under a scheme of corporatisation and demutualisation or otherwise.
The manner in which it is formed does not affect its inclusion.
Its purpose must be to assist, regulate, or control activities.
These activities relate to the business of buying, selling, or dealing in securities.
(k). Transferable Specific Delivery Contract
It is a specific delivery contract and involves actual delivery of goods.
It is not a non-transferable specific delivery contract.
It can be transferred from one person to another.
Transferability is subject to conditions.
These conditions are specified by the Central Government and are notified through the Official Gazette.
