before heading towards the securities market and securities laws in India, let’s understand what actually securities are. Securities are nothing but a financial asset which can be traded. Securities are considered as those financial instruments which possess some value in terms of money or some monetary value. These financial assets are generally used for the purpose of raising capital in the public as well as in the private markets. These securities are generally issued by the companies or business organizations or any corporation units and in case of a public undertaking, issued either by the state government or central government. There are various types of securities: Equity securities, Debt securities and Derivatives. The market where the deal of securities is done is known as Securities markets.
The securities market is a marketplace where the buying or selling of securities takes place. Securities market is a place where the trading of financial instruments like stocks and bonds, obligations and claims takes place between the traders. Securities market is divided into two levels i.e. primary market and secondary market. In simple terms, primary markets are those where the securities are issued at first i.e. by the issuing company whether a private company or a public company or primary markets are those platforms or places where the new securities are created while the secondary market is a marketplace where the dealing of financial instruments or securities or stock is done in between the traders but there is no interference of the issuing company in this deal or trade, here the trade is done between the investors who are already owning the shares. There are various functions of securities market which are summarized as:
- The securities markets have been a place where the small investors may channelize their savings which helps them participating in economic growth.
- The very important function of securities market to note here is providing liquidity to financial instruments or securities.
- It enables the investors to allocate their capital. It brings the traders i.e. issuers of securities and the investors at one place.
- It enables in price discovery of any securities.
The securities markets are generally considered as the barometers which help in determining the economic health of any country. The main regulators of the securities market are the Ministry of Corporate Affairs, the Department of Economic Affairs, the Reserve Bank of India, and the Securities and Exchange Board of India.
Legislations Which Govern the Securities Markets in India:
Securities and Exchange Board of India Act, 1992
This Act provides for the establishment of an organization named SEBI which extensively controls the securities market. This organization is empowered to enquire about any audit or to conduct any inspection regarding any concerned offences under this Act. By virtue of this Act, SEBI possesses autonomy regarding regulating the securities market. If we look back, the Act named Capital Issues (Control) Act, 1947 was governing the affairs regarding securities market which as of now being dealt with under the SEBI Act, 1992. Section 4 of the Act of 1992, deals with the establishment of SEBI board, and its extensive powers are dealt under Chapter IV of the Act of 1992.
Section 11 of the Act imposes a duty to protect the interests of investors. It also provides for the rules in regard to penalties along with providing for the judicial authority of SEBI. It gives authority not only to observe the guidelines but also to enforce them along with regulating the capital markets. It performs certain functions which protective in nature that are i) keeping a check on price manipulation. ii) Prohibiting the unfair trade practices iii) also it bans insider trading along with promoting fair and reasonable code to be conducted in the securities market.
Thus, this Act of 1992 provides provisions for the appointment of the SEBI board and provides certain powers, functions and duties for the SEBI board along with keeping a proper check on the activities of the securities market along with safeguarding the rights of investors.
The Securities Contracts (Regulation) Act, 1956
The Securities Contracts (Regulation) Act, 1956 is also very important legislation as it provides for provisions regarding the stock market in India. This Act was enacted by the Parliament with the aim of preventing undesirable transactions, by way of either regulating the business or by dealing therein or by way of providing for some matters which are related, in stocks or securities.
The term “securities” has been defined under Section 2(h) of the Securities Contract (Regulation) Act, 1956. Section 17A of this Act deals with the public issue along with the listing of securities. This Act also provided various penalties for those who commit any offence defined in this Act.
This Act grants recognition to stock exchanges by virtue of Section 3 and Section 4. There are provisions which deal with the control of the central government over the stock exchanges. Thus, this Act provides for the provision of corporatization and demutualization of stocks along with the control of government over the stocks which are recognized. With keeping an eye over the functions of stock exchanges, it becomes a platform for dealing in securities.
The Depositories Act, 1996
If we look back, this Act was an ordinance in its initial stages but then enacted in 1996 with the goal of providing an appropriate legal framework for the regulation of depositories. It also aims to ensure free, speedy, accurate transferability of securities. This Act provides for the transfer of securities electronically i.e. the ownership transfer from one person to another person in an electronic manner by book. This Act envisages for the establishment of depositories such as National Securities Depository Limited and CDSL in order to provide the depository services electronically without even making the securities to move from one person to another. Thus, this Act provides protection to the interests of investors and also keeps checks on all the irregularities occurring at a time in the capital market.
Companies Act, 2013
Company has been defined under section 2(20) of the companies Act, 2013. The Company Law of India has taken its root from English Company Law. Under Section 2(20) of the Companies Act, 2013, a company which is or has incorporated under the Company Act, 2013 or any existing or any previous company law. If we look into the history of the company legislation, we would observe that the company legislation of India closely follows the company legislation of England. The Companies Act 1857 was following the England company legislation of 1856 in which various amendments have taken place in the company legislation of India in the year like 1914, 1915, 1920, 1926, 1930, 1932 and 1936 also. Then after the independence, a committee was set up by the government of India and on the recommendation of that committee, the Companies Act 1956 was passed which was amended several times; some of those amendments took place in the years 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969,1974, 1977, 1985, 1988 and 1991. The major amendment took place in the year 2013 in which the changes made were:
- Companies like One Person Company were recognized.
- Provisions related to woman directorship have also taken place.
- Provisions regarding corporate social responsibility
- Provisions regarding Independent Directors.
- And other various changes were made like the provisions of raising money from the public was made little stringent etc.
The main goals of this legislation are i) to create a flexible and simple formation for the purpose of establishing and maintaining the companies. ii) This Act provides for some strict rules against any fraud or unfair trade practices. iii) It encourages more fair and transparent standards to the governance of the companies, iv) It also provides for certain easy and new procedures for creating better understands towards businesses along with providing the interests of the companies and the shareholders as well.
This Act of 2013 is consists of 29 Chapters and 7 Schedules which include 470 Sections. This Act provides for the prohibition of auditors from doing non-auditing services. The duties of the director have been extensively defined by this Act. The concepts like One Person Company and independent directors have been discussed. This Act has also provided for the electronic mode for the purpose of certain functions like financial statements, inspection of some documents in e-form etc. It has also simplified the procedure of fast track mergers and permits for cross-border mergers. This Act provides for the establishment of the National Company Law Tribunal and also provides for liabilities on directors and officers. Thus, the company legislation of 2013 has given a good shot in providing the company laws more contemporary in India, also the company has been considered as an artificial person with perpetual existence under this Act.
Relationship between company legislation and securities laws in India
Large scale businesses have largely emerged after the Industrial revolution. Businesses like Reliance, Bajaj, Infosys, Hindustan Unilever etc. have grown to an extent that requires a big investment which involves risk. So in order to prevent the malpractices that could happen in such business, there are various laws enacted by the parliament like the Companies Act, 2013 which initially was the Companies Act, 1956. The securities markets are kept on checks by the regulating body named SEBI which has established under SEBI Act, 1992.
Section 55A in the Companies Act 1956 was inserted with the intention to empower the regulating body SEBI for the purpose of preventive action. Another point in regard to their relation between company laws and the securities laws in India can be taken as both the legislations i.e. Company legislation and the Securities legislations provides penalty for defaults or any offence as defined or specified under the Acts. Both of these legislations prevent all types of unfair trade practices. Any person may go for statutory cause of action under the Companies Act, 2013 and on the other hand, enforcement actions are also initiated by the regulatory body SEBI whenever any securities litigation arises.
The securities legislation are to provide protection to the interests of the investors and also empowered with the authority of investigating or enquiring matters regarding market manipulation, insider trading. The main relationship between both of these legislations is that the securities are issued by the companies or business organization under the provisions given under the Companies Act, 2013 and the trading or dealing of any such securities are dealt under securities market either the primary market or the secondary market which is regulated by the organization called SEBI that has been established under Securities and Exchange Board of India Act, 1992.
It is to be noted while constructing a relationship that whether the securities are being traded in the primary market or secondary market, the markets are regulated by SEBI as per the provisions given under SEBI Act, 1992. Both of these legislations provide for the penalties to prevent any fraudulent activities or any trade being unfair. Companies Act, 2013 safeguards the interests of shareholders, and on the other hand, the SEBI Act, 1992 safeguards the interests of investors. Shareholder is a person who is holding some share in some business organization or company whereas an investor is a person who is interested in taking an ownership interest in any company or business organization.
Securities markets being the window of an economy reflect the health of any economy or economic condition of any nation. These markets are highly sensitive to the risk which are tried to curb by the securities laws in India while the company laws are providing the more contemporary procedure to deal in their business organization. It can also be said that securities laws and company legislations go hand in hand for safeguarding the businesses and the interests of investors.
This article has been written by Deepshikha Gautam, B.A. LL.B student at Banasthali Vidyapeeth.