Definitions
Section 2. Definitions
The meanings given in the Act generally apply to the whole Act.
If a meaning does not suit a particular section, then the word should be understood according to that context.
2(a). Contract
A contract is a legally binding agreement.
This contract must be for or connected with securities.
It includes agreements for the purchase (buying) of securities.
It includes agreements for the sale (selling) of securities.
2(aa). Corporatisation
A recognised stock exchange was originally run as a body of individuals or a registered society.
This body or society is registered under the Societies Registration Act, 1860.
Corporatisation means this body or society is replaced or succeeded by another new entity.
The new entity is a stock exchange incorporated as a company.
This company is formed specifically to assist, regulate, or control the business of the stock exchange.
The business involved includes buying, selling, or dealing in securities.
2(ab). Demutualisation
Ownership and management of the stock exchange are separated from trading rights.
Members who own or manage the exchange do not automatically have trading rights.
This separation is called demutualisation and happens according to a specific scheme.
The scheme must be approved by Securities and Exchange Board of India (SEBI).
2(ac). Derivative
Derivative includes:
(A).
A security that gets its value from another underlying financial instrument.
The underlying instrument can be a debt instrument (like bonds or debentures).
It can also be based on a share or equity instrument.
The underlying asset may be a loan, whether it is secured or unsecured.
It may be linked to a risk instrument, where value depends on market risk.
It can arise from a contract for differences (CFD), where profits or losses depend on price movements.
It also covers any other type of security from which value is derived.
(B).
A contract whose value is not fixed on its own.
Its value depends on the price of underlying securities (like shares or bonds).
It can also depend on an index of prices (such as a stock market index).
If the prices of the underlying securities or the index go up or down, the value of the contract also changes.
(C).
Commodity Derivatives.
Commodity derivatives are financial contracts linked to a commodity.
Their value depends on the price of an underlying commodity.
The commodity can be agricultural (like wheat, cotton), metal (gold, silver), or energy products (crude oil, natural gas).
(D).
The Central Government has the power to identify and specify instruments.
If the Central Government formally declares an instrument to be a derivative, then that instrument will legally be treated as a derivative.
2(b). Government Security
A Government security is a security created and issued by the Government.
It may be issued before or after the commencement of this Act.
It can be issued by the Central Government or a State Government.
The purpose of issuing it is to raise money from the public (public loan).
The security must be in one of the forms specified under Section 2(2) of the Public Debt Act, 1944.
2(ba).
Such a clause does not exist. The sequential numbering skips (ba).
Please do not get confused.
2(bb). Goods
Goods include every type of movable property.
Movable property means things that can be moved from one place to another.
Goods do not include:
Actionable claims. (Debts or claims for money).
Money itself.
Securities (Shares or Debentures).
2(bc).
Commodity Derivative means:
(i).
The contract is for the delivery of goods and not for immediate payment and delivery.
These goods must be specifically notified by the Central Government.
The notification is issued through the Official Gazette.
The contract does not involve immediate delivery of goods or immediate payment as it is not a ready delivery contract.
(ii).
The contract for differences where there is no actual delivery of goods or assets.
The value of the contract depends on price changes.
These price changes relate to: Goods, or activities, or services, or rights, interests, or events.
The prices or price indices must be officially notified by the Central Government.
The Central Government issues such notification after consulting the Board.
The definition excludes certain securities already covered under sub-clauses (A) and (B) of clause (ac).
2(c). Member
It means a member who is a member of a Stock Exchange.
2(ca). Non-Transferable Specific Delivery Contract
Specific delivery contract, means the goods must actually be delivered.
The contract’s rights and liabilities cannot be transferred to another person.
Any documents related to the delivery of goods are also non-transferable, including:
Delivery orders.
Railway receipts.
Bills of lading.
Warehouse receipts.
Any other documents of title.
Only the original parties to the contract can claim delivery or bear responsibility.
Therefore, the contract cannot be assigned, sold, or passed on to someone else.
2(d). Option in Securities
Option in Securities is essentially a contract and is not an immediate purchase or sale of securities.
The contract gives a right, and not an obligation to buy, or to sell, or to both buy and sell securities.
This right can be exercised at a future date, not immediately.
The contract relates specifically to securities.
It includes different types of option arrangements such as:
Teji.
Mandi.
Teji mandi.
Galli.
Put option.
Call option.
Put and call option in securities.
All these forms are legally treated as options in securities.
2(da). Pooled-Investment Vehicle
Pooled-Investment Vehicle is a fund established in India.
The fund may be set up as a trust or in any other legal form.
It includes the following types of funds:
Mutual funds.
Alternative investment funds.
Collective investment schemes.
Business trusts as defined under the Income-tax Act, 1961.
The fund must be registered with the Securities and Exchange Board of India (SEBI).
Such a fund raises or collects money from investors.
The collected money is pooled together and invested as a single fund.
Investments are made according to regulations framed by SEBI.
2(e). Prescribed
Prescribed means prescribed by the rules under this Act.
So only rules framed under this Act can be used to prescribe procedures, conditions, or requirements.
2(ea). Ready-Delivery Contract
Ready-Delivery Contract is a contract for the delivery of goods.
The contract also requires payment of the price for those goods.
Delivery and payment must take place immediately, or within a short fixed period after the contract date.
This period cannot exceed eleven days from the date of the contract.
The Central Government may specify conditions for such contracts.
These conditions are issued through a notification in the Official Gazette.
The delivery period cannot be extended, even if both parties agree.
Provided that if such a contract is carried out, either completely or even partly:
I.
Instead of delivering goods or assets, the contract is completed by paying or receiving money.
The amount settled is only the difference in price, not the full contract value.
This difference is calculated between:
The contract rate, and the settlement rate.
The contract rate and the clearing rate.
The contract rate and the rate of an offsetting (opposite) contract.
The contract is completed by paying or receiving this difference.
No actual delivery of goods or assets takes place.
Example:
A and B enter into a contract to buy and sell wheat at ₹2,500 per quintal.
On the settlement date, the market/settlement rate of wheat is ₹2,600 per quintal.
Instead of delivering wheat, they settle the contract in money.
The difference in price is ₹2,600 − ₹2,500 = ₹100 per quintal.
B pays ₹100 per quintal to A.
The contract is treated as performed to that extent, even though no wheat is delivered.
II.
The contract may be completed by any method other than actual delivery or full payment.
Because of this method, the parties do not actually deliver the goods.
The parties also do not pay the full price of the goods.
If either actual delivery or full payment is dispensed with, the contract loses its character as a ready delivery contract.
Therefore, such a contract shall not be treated as a ready delivery contract.
Example:
A and B enter into a contract for sale of 100 bags of rice at ₹1,000 per bag.
Instead of delivering the rice, they adjust the contract by mutual settlement.
A agrees to cancel the delivery if B pays only a small agreed amount.
No rice is actually delivered, and the full price of ₹1,00,000 is not paid.
Because the contract is settled by some other method, not by delivery or full payment,
The contract is NOT treated as a ready delivery contract.
2(f). Recognised Stock Exchange
It is a stock exchange operating in India.
This stock exchange must have official approval.
This approval is given by the Central Government.
The recognition is granted under section 4 of the Act.
Only stock exchanges with such recognition are treated as recognised stock exchanges.
2(g). Rules
The term rules generally refers to regulations about the constitution and management of a stock exchange.
These rules govern how the stock exchange is formed, organised, and run.
If the stock exchange is an incorporated association, then the meaning of rules is broader.
In such cases rules also include the Memorandum of Association, and the Articles of Association.
Therefore, these documents are treated as part of the rules of the stock exchange.
2(ga). Scheme
Scheme means a scheme for corporatisation or demutualisation of a recognised stock exchange.
This scheme may provide for:
(i). The issue of shares by a recognised stock exchange.
The shares are issued for a lawful consideration , so for a legally valid value or payment.
Members who earlier held membership cards are affected.
Instead of membership cards, members are given trading rights.
The trading rights are provided in exchange for or in place of the membership cards.
This process converts membership cards into shares and trading rights.
(ii). The Restriction on Voting Rights
Restrictions may control how much voting power a person can exercise.
The purpose is to prevent excessive control by any single person or group.
Voting rights can be regulated, capped, or conditional.
(iii). Transfer of Property of a Recognised Stock Exchange
This includes transfer of its business operations.
It also includes transfer of assets and rights.
The liabilities and obligations of the recognised stock exchange are also transferred.
All official recognitions and approvals connected with the stock exchange are included.
Contracts entered into by the recognised stock exchange are transferred.
Legal proceedings, whether filed by the stock exchange, or against the stock exchange, continue after the transfer..
Such legal proceedings may continue in any of the following ways:
In the name of the recognised stock exchange.
In the name of a trustee.
In any other lawful manner.
Any permissions or approvals given to, or granted by, the recognised stock exchange are also transferred.
(iv). Transfer of Employees
The transfer is part of an approved or lawful process.
Employees continue their service under the new recognised stock exchange.
The transfer applies only between recognised stock exchanges.
(v). Any other matter connected with corporatisation or demutualisation
The scheme can also provide for any additional issue or subject not specifically listed earlier.
The matter must be necessary for the purpose of corporatisation or demutualisation.
It also includes matters connected or related to corporatisation or demutualisation.
The provision applies epending on the situation, whether it is corporatisation or demutualisation.
2(gb). Securities Appellate Tribunal
The Securities Appellate Tribunal (SAT) is a special appellate body.
The SAT is established under the law
The establishment is done under section 15K(1) of the Securities and Exchange Board of India Act, 1992.
The Tribunal hears appeals related to securities laws.
It provides a legal forum for challenging SEBI’s orders.
2(h). Securities
The term Securities includes:
(i).
Shares of a company.
It also covers scrips and stocks.
Bonds are included.
Debentures and debenture stock are included.
It covers any other marketable securities of a similar nature.
These securities must belong to:
An incorporated company.
A pooled investment vehicle.
Any other body corporate.
(ia).
Derivative.
(ib).
Securities includes units issued to investors.
It also covers any other investment instrument.
These units or instruments are issued by a collective investment scheme.
They are issued to investors who participate in the scheme.
Such units or instruments represent the investor’s interest in the scheme.
(ic).
Securities also include security receipt.
The meaning of security receipt is not explained here directly.
Instead, its meaning is taken from another law.
Section 2(zg) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 defines Security receipt:
A security receipt is a receipt or similar security.
It is issued by an Asset Reconstruction Company (ARC).
The receipt is issued to a qualified buyer.
It is issued under a securitisation scheme.
The receipt shows that the holder has purchased or acquired a share.
This share is an undivided right, title, or interest.
The interest relates to a financial asset.
The financial asset is the one involved in securitisation.
(id).
Securities also include units issued to investors.
It also includes any similar instrument.
These units or instruments are issued under a mutual fund scheme.
They represent the investment made by investors in the mutual fund.
Explanation:
In order to remove any kind of doubts:
Securities do NOT include unit-linked insurance policies (ULIPs).
It also excludes: scrips, or any other instrument or unit, by whatever name called.
These excluded instruments that provide both life insurance risk cover, and investment benefits.
Such instruments are issued by an insurer.
The insurer must be one referred to under the Insurance Act, 1938.
(ida).
Securities includes units issued to investors.
It also covers any other similar investment instrument.
These units or instruments are issued by a pooled investment vehicle.
They represent the investor’s interest in the pooled fund.
Investors’ money is collected and invested together through such vehicles
(ie).
Securities includes a certificate or instrument, regardless of the name given to it.
This certificate or instrument is issued to an investor.
It is issued by separate legal entity for a special purpose.
This entity holds debt or receivables.
The debt or receivable may include mortgage debt.
Such debt or receivable is assigned to the special purpose entity.
The instrument confirms or acknowledges the investor’s beneficial interest.
This beneficial interest is in the debt or receivable held by the entity, including mortgage debt.
Alternative Explanation for (ie).
An investor is given a paper or document (whatever it is called).
This document is issued by a separate company created only for this purpose.
That company owns loans or money to be received.
These loans can include home loans (mortgage loans).
The loans are transferred to this special company.
The document tells the investor that he has a share or interest in those loans.
This means the investor can benefit from the money earned from those loans.
(ii).
Securities include Government Securities.
Government securities are investment instruments issued by the Government.
They are issued by the Central Government, or a State Government.
The purpose of issuing them is to raise money (public loan) for government needs.
When you buy a government security, you are lending money to the Government.
In return, the Government promises to pay interest, and to repay the money after a fixed period.
These securities are considered very safe, because they are backed by the Government.
(iia).
Such other instruments as may be declared by the Central Government to be securities.
The Central Government has the power to declare any instruments as securites.
(iii).
Securities also include the rights related to securities.
These rights may include legal or contractual rights.
It also includes interests connected with securities.
Such rights or interests may arise from: ownership, or holding, or entitlement linked to securities.
2(ha). Specific Delivery Contract
Specific Delivery Contract refers to a commodity derivative contract.
The contract provides for actual delivery of goods, not just cash settlement.
The goods to be delivered should be of a specific quality or type.
Delivery is to take place during a specified future period.
The price is fixed in the contract, or to be fixed later in a manner agreed by both parties.
The contract clearly mentions the name of the buyer.
The contract also clearly mentions the name of the seller.
2(i). Spot-Delivery Contract
Spot delivery contract is a contract where:
(a).
The contract requires actual delivery of securities.
The buyer must also pay the price for those securities.
Delivery and payment must take place on the same day as the contract, or on the next day after the contract.
If the buyer and seller live in the same town or locality, the time limit applies strictly.
If the buyer and seller do not live in the same town or locality then:
The time taken to send the securities by post or The time taken to send the payment by post is not counted while calculating the allowed period.
(b).
A spot delivery contract usually deals with securities that are held in electronic (demat) form.
The securities are dealt with through a depository.
The contract is completed by electronic transfer of securities.
The depository transfers the securities:
From the account of one beneficial owner to the account of another beneficial owner.
This transfer happens immediately or within the permitted short time, as required for spot delivery.
No physical certificates are involved in the transfer.
2(j). Stock Exchange
(a).
Stock Exchange refers to a group or association of individuals.
The group may be incorporated (registered as a legal entity) or unincorporated.
The group must have been formed before corporatisation and demutualisation.
The corporatisation and demutualisation are those carried out under sections 4A and 4B.
(b).
Stock Exchange can also refer to a body corporate which is a legally recognised company.
The body corporate is incorporated under the Companies Act, 1956.
The incorporation may happen under a scheme of corporatisation and demutualisation.
It can also happen in any other lawful manner.
The legal status as a company exists regardless of the method of incorporation.
Stock exchanges which exists as either a group or association of individuals or as a body corporate exist to support the securities market.
They help in the buying and selling of securities.
They also facilitate dealing and trading in securities.
Stock exchanges regulate market activities.
They control and monitor securities transactions to ensure fairness and order.
2(k). Transferable Specific Delivery Contract
It is a type specific delivery contract where actual delivery of goods is required.
The contract can be transferred from one person to another.
The transfer of the contract is allowed only under certain conditions.
These conditions are laid down by the Central Government.
The conditions are issued through a notification in the Official Gazette.
Section 2A. Interpretation of certain words and expressions.
Some words and expressions are used in this Act.
These words may not be defined within this Act itself.
If a word is defined in the Companies Act, 1956, that meaning will apply here.
If a word is defined in the Securities and Exchange Board of India Act, 1992, that meaning will apply here.
If a word is defined in the Depositories Act, 1996, that meaning will apply here.
The word will carry the same meaning as given in the relevant Act.
This avoids confusion or different interpretations of the same word.
Other Important Definitions
Shares
A share means ownership in a company.
When you buy shares, you become a part-owner of the company.
Shareholders may earn dividends and benefit if the company grows.
Shares can usually be bought and sold on a stock exchange.
Scrips
A scrip is a document or record showing ownership of shares or securities.
Earlier, scrips were physical certificates.
Today, the word is commonly used to refer to a particular share or security.
Stocks
Stocks refer to securities representing ownership in a company.
The word is often used generally for shares.
Stocks may represent fully paid ownership.
In modern usage, stocks and shares are often used interchangeably.
Instrument
An instrument is a legal or financial document.
It shows rights, obligations, or ownership.
Shares, bonds, debentures, and units are all financial instruments.
It is used as a broad term in law and finance.
Unit
A unit represents a portion of an investment scheme.
Units are commonly issued by mutual funds or pooled investment vehicles.
When you buy a unit, you own a share in the pooled investment.
The value of a unit changes based on market performance.
Teji
Teji means expectation of price rise.
It is related to a bullish market view.
A person taking a teji position expects to profit from rising prices.
It is an old trading term used in Indian markets.
Mandi
Mandi means expectation of price fall.
It is related to a bearish market view.
A person taking a mandi position expects to profit from falling prices.
It is also an old trading term used in securities markets.
Put Option
A put option gives the right to sell an asset.
The selling happens at a fixed price decided in advance.
The right can be used on or before a future date.
A person buys a put option when they expect prices to fall.
The buyer is not forced to sell and it is only a right.
Call Option
A call option gives the right to buy an asset (like shares or securities).
The buying happens at a fixed price decided in advance.
The right can be used on or before a future date.
A person buys a call option when they expect prices to rise.
The buyer is not forced to buy; it is only a right.
