Regulation of Contracts and Options in Securities

Regulation of Contracts and Options in Securities | Overview

• Contracts in Notified Areas Illegal in Certain Circumstances
• Additional Trading Floor
• Contracts in Notified Areas Held to Be Void in Some Circumstances
• Members May Not Act as Principals in Certain Circumstances
• Powers of Central Government OT Prohibit Contracts in Certain Cases
• Licensing of Dealers in Securities in Certain Cases
• Contracts in Derivative
• Stock Exchange Other Than Recognised Stock Exchange Prohibited

A contract that related to or for the sale or purchase of securities is termed as ‘contract’ according to the Sec 2(a) of the Securities Contract (Regulation) Act, 1956. On the other hand, a contract which entitles a person to sell or buy or deal in securities provides a person with the rights to sell and buy, and also contains a mandi, a teji, a Galli, a teji mandi, a call, a put or a call and put insecurities. Such a contract is known as ‘option on securities’ as per the sec 2(d) of the Securities Contract (Regulation) Act, 1956.

CONTRACTS IN NOTIFIED AREAS ILLEGAL IN CERTAIN CIRCUMSTANCES

When the volume or nature of the transactions in securities in either of the states in India or any part of India as it may deem necessary is as per the satisfaction of the Central Government or SEBI, it has the power to make sec 13 of SCRA applicable in such parts or states of India. This application has to be done by passing a notification in the Official Gazette of India.

If any of these states or a state or such parts that are notified in the Gazette are not permitted to enter into a contract with any member unless these members belong to any of the recognized stock exchanges. The contract entered by them with any other member will be considered illegal.

The contract entered into by these notified states or areas with the members of one or more than one recognized stock exchanges established in such states or areas are also subject to some terms and conditions. These conditions are as follows:

1. These contracts will be regulated by those terms and conditions as specified by the stock exchanges in these notified states or areas. They get the power to issue these conditions only after getting the prior approval from the Securities and Exchange Board of India;
2. There is a requirement of prior approval from the concerned stock exchange which, in turn, is required to take prior approval from SEBI.

These conditions prescribing the procedure for entering into contracts by these states or areas that got notified in the Official Gazette are provided in sec 13 of Securities Contract (Regulation) Act, 1956.

ADDITIONAL TRADING FLOOR

Any recognized stock exchange provides the facility to trade in the form of a trading ring outside the area of operation of that exchange. This extra facility is provided to make the investors capable to sell, buy or deal in securities with the help of this trading floor according to the regulatory framework of that exchange. Such an additional facility provided to trade in securities is known as an additional trading floor.

If the stock exchange takes prior recognition of SEBI according to those terms and conditions that are laid down by the said Board, the stock exchange has the power to establish an additional trading floor.

CONTRACTS IN NOTIFIED AREAS HELD TO BE VOID IN SOME CIRCUMSTANCES

If any of these states or areas that got notified in the gazette enters into any contract, which is not in consonance with any of the bye-laws stipulated for these purposes will be held to be void. The extent of these void contracts is as follows:

1. With respect to the rights of any of the members of the recognized stock exchanges if they had entered into any contract that is not in line with the any of the guidelines, bye-laws, regulations and so on;
2. With respect to the rights of that particular individual who has participated in the securities market or traded in the securities. While participating in the market, he/ she had full knowledge that these securities are violating the regulations or bye-laws or any other condition as prescribed by the stock exchange or Board.

However, the scope of these void contracts does not extend to cover the right of any other person, who is not a member of these notified stock exchanges, for the recovery of any sum under or for the enforcement of any such contract or with regards to such contracts. If such a person does not have any knowledge in relation to the transactions that are not in consonance with any of the bye-laws, then he will not fall under the domain covered by the void contracts.[1]

MEMBERS MAY NOT ACT AS PRINCIPALS IN CERTAIN CIRCUMSTANCES

A member of any of the recognized stock exchanges is not permitted to enter into any contract in relation to any securities in the form of a principal with any other person, who is not a member of any recognized stock exchange.

However, if any member of the recognized stock exchanges wants to enter into contract in the form of a principal with some person other than the member of any recognized stock exchange, then he has to take the prior approval of such other person and then, he is also required to disclose it in the agreement, memorandum or note for purchase or sale that he is entering into the agreement as a principal. He/ she is also required to secure the consent of another party in writing and within a period of thirty days from the date on which the contract is entered into.

Further according to sec 15 of Securities Contract (Regulation) Act, 1956, there is no requirement of any authority or consent in writing of such other person for closing out any of the outstanding contracts that have been entered into by such other person is not in contravention with any of the bye-laws. This provision is applicable only if the member has already disclosed that he is acting as a principal with respect to such closing out in the agreement, memorandum or note of purchase or sale.

POWERS OF CENTRAL GOVERNMENT OT PROHIBIT CONTRACTS IN CERTAIN CASES

These powers are also exercised by SEBI and RBI. These authorities may prohibit the public of the notified areas or states from entering into any contract for purchase or sale or dealing into any kind of securities only if these authorities are of the opinion that there is no necessity to do away with the undesirable speculations in the securities in any of the notified states or areas.

For this prohibition, the authorities are required to pass a notification in the official gazette. If any contract is entered into after the date of notification issued by the RBI or SEBI shall be deemed to be illegal if it is not in consonance with the above-mentioned guidelines. However, if any person wants to enter into a contract that is not in line with the guidelines, he/ she has to take the approval of the central government.

LICENSING OF DEALERS IN SECURITIES IN CERTAIN CASES

It is barred for any person to carry on the trade to deal in securities either on his own behalf or on behalf of any other person under Sec 17 of securities Contract (Regulation) Act, 1956 is applied on those areas which have not been notified under sec 13 of Securities Contract (Regulation) Act, 1956. However, if any person is willing to trade in the securities, he/ she is required to take the permission of SEBI for the same.

Any notification for the above mentioned will be issued as per the satisfaction of the central government. The conditions that are imposed relating to the trade in the securities will not be applicable to the tasks undertaken by or on behalf of a member of any of the recognized stock exchanges.

CONTRACTS IN DERIVATIVE

The contracts in derivative will be held valid as well as legal only in the context of certain events. Some of the events that are provided by the sec 18A of Securities Contract (Regulation) Act, 1956are as follows:

1. If a contract is entered into for the purpose of trade on any recognized stock exchange
2. If a contract has been settled on the clearinghouse of any of the recognized stock exchanges
3. If the contract is entered between those parties and on those terms that are notified under the official gazette and those which are in line with the bye-laws and the rules of such stock exchanges.

STOCK EXCHANGE OTHER THAN RECOGNISED STOCK EXCHANGE PROHIBITED

Without the prior consent of the central government, it is not permissible for any person to organize or extend his assistance for organizing any event with the motive of performing any contract, assisting in or entering into any kind of securities.

This can be done only by those people who are the members of any recognized stock exchange as per sec 19 of Securities Contract (Regulation) Act, 1956. This provision will be in effect only in those areas or those states that are notified by the central government with the help of the official gazette.

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[1] Sec 14 of Securities Contract (Regulation) Act, 1956

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