This article covers the overall view of the securities in the Indian securities market. There are a lot of internal as well as external factors that affect the stock market. The government makes regulations, establishes regulatory authorities and releases new notifications to secure the balance in the securities market, protect the investor’s interest and ensure overall growth of the market. To understand the securities laws in India, one needs to have the basic idea or knowledge about what securities are, its evolution, the various types of securities which are dealt in the market and the enactment of various legislations which regulate and govern the securities market in India.
A ‘security’ in simple words in a “negotiable instrument”, with some type of monetary value. The term ‘security’ is used in various forms of financial instruments, it has been defined by various jurists, scholars and economists. A ‘security’ is a certificate which can be traded and has monetary value, the investment securities are tradable securities like financial assets and these securities are purchased for investment. Equity securities are generally stocks, to be purchased in the company and on the other hand, debt securities are bonds, they are basically investments in debt. The market players have two perspectives for the applicability of the important principles:
- To govern their investments i.e. KYC requirements and invertor’s protection or grievance redressal.
- To get the public money from the market through a public offer or by issuing debt securities or via intermediaries etc.
Securities are arrangeable economic apparatuses which are allotted by a company or the government that gives the ownership rights, debt rights, rights to purchase, right to sell or trade an option to the contributor. The legal definition of securities is defined under the Securities Contract and regulation Act, 1956 (SCRA):
- “shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
- units or any other instrument issued by any collective investment scheme to the investors in such schemes;
- security receipt;
- units or any other such instrument issued to the investors under any mutual fund scheme;
- Government securities;
- such other instruments as may be declared by the Central Government to be securities; and
- rights or interest in securities;”
Evolution of Securities
In the 18th century, in India, the trading of securities of the East Indian Company began. Around the period, The Companies Act was enacted which introduced limited liability of the company. The demand for cotton in India was rising because American cotton supply to Europe was cut-off during the civil war, which eventually started new ventures and raised a lot of capital for the industry.
After the civil war, people were finding it difficult to get buyers for their securities which created a formal market. To fulfil such demands, the brokers made an association which led to the formation of a stock exchange which was known as the “Native share and stock association”. Later, Ahmedabad Share & Stock Brokers Association came into existence which was the reason behind booming prices of the raw materials in eastern India but as the market was expanding, there were numerous disputes between the traders. To end such disputes and make the market’s functioning more peaceful, the Calcutta Stock Exchange Association was formed in 1908.
The need for a legislation to regulate the securities market was felt and the government of India appointed the ministry of finance, the Reserve Bank of India and the government of Bombay to make recommendations and submit a report on the legislation. Later, the proposed bill was taken into consideration and then it was passed. The Securities Contract Regulation Act was enacted in 1956 for the purpose of regulating the securities market which included the stock exchanges, buyers, sellers, brokers, intermediaries etc. The Act was amended in 1995 and the prohibition was lifted on Bombay Stock Exchange and the National Stock Exchange to trade the securities options and derivatives in securities.
In 1988, Securities Exchange Board of India was established as a non-statutory body to safeguard the interests of the investors and to increase the development in the securities market. In 1995, the Securities law (Amendment) Act came into force and gave the Securities Exchange Board of India statutory power. This allowed SEBI to exercise regulatory as well as statutory powers, to stop any wrong practices and also enforce accountability of any unfair practice. At present, the operations at stock exchanges are electronic which makes stock markets paperless, fast and accessible. The trading facilities can be accessed on phone via the Internet. Therefore, with new products and services, a tremendous amount of growth in the securities market can be seen.
Types of Securities
Securities are broadly in three primary categories:
- Equity securities- stocks
- Debt securities- bonds and banknotes
- Derivatives- options and futures (convertible bond)
- Debt Securities
When business is growing, the company has to borrow capital from various sources or means. On the one hand, the company can borrow it from the bank where the principle amount has to be returned timely with assured interest. On the other hand, they can borrow money through capital markets by issuing debt security i.e. bonds which are debt instruments. The person to whom the bond is issued, lends the money (the amount borrowed) to that business or company which the company has to return with interest. There is a fixed maturity date and a renewal date, these terms and conditions are defined in the bond. Also, these debt securities are instruments which are tradable i.e. it can be bought and sold between parties. Some examples of debt securities are government bond, certificate of deposit, corporate bond, preferred stock etc.
- Equity Securities
Equity securities are represented as the financial assets of the corporation. These securities are issued by the company to get either private investors or the company is publicly listed to freely trade on a stock exchange or over-the counter markets. The entity buying the stocks becomes the additional owner of the company. These share owners receive the profits of the company either as dividends or they use it for growth of the business which further leads to subsequent increase in the value of those shares in the stock market. The one thing that is different about equity securities is the ownership, the person or entity who owns a company’s equity share, they represent ownership.
- Derivative Securities
In simple words, derivative securities are convertible bonds, the value of these bonds depend upon the value of other assets. Derivative securities are traded on exchanges like other financial instruments, instead of directly owning the share of stocks or commodities etc, one owns the right to trade those other financial securities on the pre-agreed terms. The value of these securities depends upon the value of its underlying assets.
For e.g. there are financial derivatives in the securities market, their underlying assets are Stocks, Indexes, currency, commodities etc. As the value of these assets changes in the market, the value of their financial derivatives changes accordingly. There are mainly four types of derivatives in the securities market i.e.
The Legislative Regulations
To govern the securities market, the legislative and regulatory authorities enact various regulations. Between the year 1992-2003, there were a total of nine legislations including the new enactments i.e. Securities Exchange Board of India Act in 1992 and the Depositories Act in 1996 that were added. The stock market is mainly regulated by the Central Government and it is further regulated by the Securities Contracts Regulation Act, 1956 and the Securities Exchange Board of India Act, 1992. Later, the need for other legislations developed and that’s when the legislations like Income Tax Act, companies Act etc. were amended to match with the changes made in the securities laws in India. The capital market in India is monitored by the Ministry of Finance, Securities Exchange Board of India and the Reserve Bank of India.
- Securities Contracts (Regulation) Act, 1956
The Securities Contracts (Regulation) Act was introduced or enacted for the purpose of regulating the trade dealings in the securities market and to regulate various businesses which deal with securities issued by a body corporate and the government. The stock market is regulated by the central government and it is further regulated by this Act and Securities Exchange Board of India. This Act was introduced or enacted for regulating the trading in securities market, to regulate business of dealings of securities and other businesses as prescribed by the central government.
- Development of the securities market
- Recognition and supervision of stock exchanges
- To conduct inquiries
- Supersede governing body as it is a law-making body
Provision of the Act-
- Empower the central government to regulate the securities market
- Promote the dealings orderly by keeping in check of any fraud or unfair dealings
- Prevent any sudden fluctuation in the market
- Protect the investors
- Securities & Exchange Board of India (SEBI) Act,1992
The securities and exchange board of India focuses and regulates listed companies, brokers, sub-brokers, investors etc. It is a regulatory authority which was established in 1992 under the Securities and Exchange Board of India Act, 1992 i.e. SEBI. SEBI was controlled by the Central Government and became the main authority to regulate the stock exchanges, this means that the whole securities market was handled by Securities and Exchange Board of India. Later, the government decided to provide statutory powers to this authority because of the increasing participation of the public in the capital market, this helped in dealing with matters related to the capital market in an effective manner and in redressal of the grievances of the investors. Various committees have been formed by SEBI to handle the primary as well as secondary market. The Company can raise capital via different modes i.e. by issue of securities to the public or by issuing bonus etc. and for that the Act prescribes proper procedures as well as the required conditions.
- Depositories Act, 1996
Depositories Act, 1996 was enacted with the purpose of providing a more prominent legal structure or a legal framework for the depositories. The object of this act was to record the ownership specifics or information in a book-entry arrangement. As a result of the Depositories Act, there were amendments introduced in various legislations, e.g. Companies Act,1956; SEBI Act,1992 and Income Tax Act etc. Depositories were responsible for dematerialization of shares.
Features of this Act-
- The business starts after the certification, it also requires participation and both the Depository and participant must have an agreement to avail depository service.
- Issuer surrenders the certificate and the depository becomes the beneficial owner and the transfer of shares is registered with the depository.
- Liability to indemnify loss to Beneficial Owner.
- SEBI can put enquiry over securities held in Depositories and can also give directions.
Advantages of Depositories–
- Less risk of loss
- Easier to keep
- Quick and easy transfer
- Companies Act, 2013
The main statutes which deal with securities under Indian Company law are Section 24 and Section 458 of the Companies Act,2013. These statutes regulate the issue of securities, the transfer of securities, allotment of securities as well as deals with various parts of the company’s management. The Act specifies the standard which is to be disclosed for the public issue of the capital. SEBI looks after certain aspects of the companies Act related to the listing of the companies, issuing or transferring of shares, unpaid dividend, forwards dealings or insider trading etc.
As far as Securities laws in India are concerned, they are there so the public could pitch in the market and in order to do that, the trust of the investors is the important factor. There was a dire need for proper regulation of the stock exchanges in India and these laws as mentioned above paved the way for better functioning structured capital markets in the country. Securities laws entails the public companies for the disclosure of the capital issued to the public whereas the Corporate laws are there to regulate the internal factors of a company. Such disclosure is made in the investor’s interest which gives them a fair valuation and that’s why securities law is both uniform as well as mandatory. A regulatory oriented space that supports the secondary market disclosure and all the disclosures by listed companies is scrutinised by regulatory bodies and makes sure that the disclosure of all material information is listed by the entity.
Any questions? Leave a comment.
Link to some of my articles (published on other websites):