A stock exchange is that organization consisting of various people which was created to achieve the objective of the controlling, assisting or regulating the dealing, purchasing or selling the securities in the market. Such a body may or may not get incorporated. Further, SEBI and SCRA are required to provide recognition to such a body so that it can fulfil various essentials such as by-laws, constitution, having a governing body, procedure for application, filing of periodicals, rules and regulations to list a few.
STOCK EXCHANGE BOARD OF INDIA
Securities and Exchange Board of India is delegated with the duty to ensure that the securities market is functioning in an orderly manner. Along with this, it also has the responsibility to ensure the developing pace of the securities market and safeguard the interests of various other people who are willing to invest their money in the securities market.
Securities and Exchange Board of India Act, 1992 is used to grant validity to SEBI. The main aim of the Act is to make the market safe and reliable for trading in the securities. Most of the functions performed by SEBI are done by virtue of the authority that has been granted by Securities Contract Regulation Rules, 1956 and the Securities Contract Regulation Act, 1956. The main motto behind the introduction of SCRA is to regulate the securities that are traded on the exchanges as well as the exchanges used to deal in the securities.
The securities market is used to get the funds mobilised from small investors and further, getting them channelized for the purpose of fulfilling various other needs for the development of the market per se. Parliament came forward with the legislation known as Securities Contract Regulation Act, 1956 so that business of trading in securities can be regulated and all the undesirable transactions while trading in the securities can be done away with.
RECOGNITION OF STOCK EXCHANGE
According to sec 3, as provided in the Securities Contract Regulation Act, 1956, there are certain requirements for getting a stock exchange recognized. It has to comply with the procedure laid down such as making an applicat5ion to the central government according to the format as prescribed. After the central government receives an application from the stock exchanges to get recognized, inquiry can be conducted by the government along with the other conditions as laid down by the Act.
The government has to announce the recognition of stock exchange with the help of getting this news published in the Official Gazette. If the application is to be rejected, the chance should be provided to the applicant to represent his/ her matter and henceforth, complying with the Principles of Natural Justice. There can be no amendment in any matter relating to the securities exchange without getting the opinion of the central government with respect to that particular matter.
APPLICATION OF RECOGNITION OF STOCK EXCHANGE
For getting any stock exchange recognised, an application as per the prescribed mode has to be made to the central government. Such applications with the subject head of recognition of stock exchange should be attached with a copy consisting of all the bye-laws, which were drafted to regulate and control the contracts entered by it along with a copy of other rules which speaks about the constitution of the exchange in general but limited to the following in particular:
- Duties and powers of those who are in possession of some office of the stock exchange
- Constitution of the body that will be used to govern the stock exchange
- Powers vested with the management of the exchange and the procedure which is to be followed while getting a business transacted
- Procedure for getting the various class of people admitted into the stock exchange as well as their membership, qualifications, expulsion, suspension, readmission and exclusion of members there into or therefrom
- The manner through which the partnerships are getting registered as the members of the stock exchange majorly in those matters where the laws lay down for the membership, appointment of authorised clerks, representatives and their nomination
FEES FOR APPLICATION
Whenever there is an application for getting the stock exchange recognized, it has to be accompanied with some fees.[1] The amount as required by such fee is Rs five hundred and it is to be done in the SBI or treasury or RBI.[2]
GRANT OF RECOGNITION TO STOCK EXCHANGE
According to section 4(1) of Securities Contract Regulation Act, 1956, after the receipt of the said application, the central government may conduct an inquiry in connection with the application and upon the receipt of further information, it might find the requirement of the following:
- That the by-laws as well as the rules, which were drafted for the stock exchange, are in line with those conditions that are prescribed for simultaneously fulfilling the objective of safeguarding the investors and ensuring fair dealing.
- That the stock exchange is ready to work according to any other constraint put by the government, which can be done only when the body that governs the stock exchange is consulted. Further, after considering the area that the stock exchange will serve, nature and type of the securities that will be dealt by the stock exchange, its standing and any other parameter depending upon the requirement that can get imposed for fulfilling the objects as stated by this Act
- That by providing any stock exchange with the status of ‘recognised stock exchange’, the purpose of interests of the general public, as well as that of the trade, is fulfilled. It may also provide the stock exchanges with recognition after fulfilling all the conditions that are attached to it.
The conditions that are prescribed by the central government by virtue of clause (a) of subsection (1) for making the stock exchanges as the recognised one may lead to the inclusion of various other conditions. Some of them are as follows:
- Qualification required for getting the membership of the stock exchange
- The mode through which the contracts will be entered into and gets enforced between the members of the stock exchange
- The central government can represent itself in any stock exchange by stating some individuals that must not exceed three and who will be nominated by the central government
- The audit of the exchange and their account is required to be maintained by an individual, who is a chartered accountant by profession. The audit is conducted on the discretion of the government.
WITHDRAWAL OF RECOGNITION
If the central government finds that the withdrawal of recognition granted to any stock exchange as per the provisions of this Act will serve the interests of public or trade in a better way, then a written notice will be served by the central government to the body that governs the management of the stock exchange. The reason for withdrawal has to be stated in the notice and an opportunity has to be provided to the governing body to make a representation of its case and henceforth, it is a mandate for the central government to follow the rules laid down by the principles of natural justice.
The central government has to make an official and public announcement of the withdrawal of the recognised status by publishing it as a notification in the official gazette of India. The authority to withdraw the status of ‘recognised’ from any stock exchange is granted to the central government by virtue of sec 5 of the Securities Contract Regulation Act, 1956.
POWERS PROVIDED TO STOCK EXCHANGES
- Power to make direct enquiries and to call for returns
By virtue of sec 6 of the Securities Contract Regulation Act, 1956, it is a mandate for every stock exchange to keep the books of accounts preserved for a minimum period of five years. This mandate can be subjected to various inspections conducted by SEBI.
All the stock exchanges with the recognition of central government are required to furnish the periodical returns that relate to its affairs to SEBI. It has been vested with the power to make a call for any explanation or any other information in relation to the stock exchanges as per the necessity.
Further, an enquiry relating to the affairs of the stock exchange and its members can be conducted by people, who are appointed by SEBI and they have to make a report for the same that has to be submitted to SEBI.
- Establishment of the trading floor
As per the various terms and conditions that are prescribed by SEBI, any stock exchange can get the additional trading floor established only after getting the prior approval of SEBI.
- The power vested with stock exchanges to draft bye-laws for the purposes of regulations and management
The stock exchanges are granted with the power of making bye-laws so that their management can function in a proper way. These bye-laws will also help in getting the contracts regulated and controlled. This power is vested with it by virtue of sec 9 of the Securities Contract Regulation Act, 1956.
PENALTIES AND PROCEDURES
A list containing various acts is prescribed under sec 23 of the securities contract regulation act. Any individual, who ends up doing such acts, is liable to some penalty that gets fixed by adjudicating officer or a fine up to a maximum limit of twenty-five crore rupees or imprisonment with a maximum period of 10 years. Some of the penalties are as follows:
- when an individual fails to enter into agreements with the client
If a person, who was entrusted with the duty of entering into agreements with clients by virtue of any bye-law or this act, defaults on the same, he/ she is liable for some amount of penalty for such a default.
- Failure to furnish returns, information etc
There is a class of individuals that are required to provide any document, information, report or returns to any recognised stock exchange as well as to maintain the books of accounts. If they failed to comply with this provision, they become liable for the penalty under the Act.
- Failure to redress the grievances of investors
There is a duty vested upon stockbrokers to redress all the grievances that are brought by its members within the stipulated time. If there is any default with respect to this duty, a penalty will be imposed on the stock exchange for the same.
- Segregate the money or securities of clients
Any stockbroker with the status of the ‘registered stockbroker’ has to bear with the consequences if there is any failure on its part to get the money or securities of one or more than one clients segregated. Further, it is barred to use the money collected by virtue of the trading in securities for personal use.
- Failure to get the provisions of delisting conditions and listing conditions complied
All the companies have to comply with all the regulations passed by SEBI and other laws of the land. In case, any stock exchange fails to comply with the same has to be penalized.
- Failure of acts for which there is no distinct penalty under the SCRA
If an individual ends up doing some act which is not in line with any direction or regulation passed by SEBI, the bye-laws or regulations or rules of any of the recognised stock exchanges or any of the sections of this Act, he becomes liable for the imposition of penalty with a minimum amount of 1 lakh rupees while a maximum of 1 crore rupees.
SEBI is required to appoint an officer, who is possessing the officer not below the rank of division- chief of SEBI. Such an officer will be serving the role of adjudicating officer for conducting an inquiry in the manner as prescribed by the Act. The inquiry will get commenced only when the reasonable opportunity to make the representation of the case is provided.
SAT or Securities Appellate Tribunal is the authority to provide relief against the appeal of any person who is aggrieved by any order passed by SEBI or decision of adjudicating officer or any of the recognised stock exchanges. SAT is required to get the matter disposed of within the period of six months.
[1] Rule 3 of Securities Contract Regulation Rules, 1956
[2] Rule 4 (1) of Securities Contract Regulation Rules, 1956
