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Definition of Stock Exchange

A stock exchange is defined under Section 2 (3) of the Securities Contracts (Regulation) Act 1956, “as any body of individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.”

Regulating the intermediaries

SEBI (Intermediaries) Regulations, 2008 (Regulations) came into effect on May 26, 2008. The purpose of these regulations was to provide a comprehensive regulation over all intermediaries on aspects such as registrations, code of conduct etc. Based on these regulations, SEBI can conduct inspections of registered intermediaries. These regulations empower a “Designated Member” who is also a whole time member on the board of SEBI. This Designated Member can initiate the investigations and appoint a “Designate Authority” who will conduct the investigation. SEBI (Intermediaries) (Amendment) Regulations, 2017 have introduced the role of an Executive Director in the pre-investigation process. Now a Designated Member is only authorized to approve the initiation of proceedings against a defaulter with regard to the certificate of registration.

Regulating the Stock Exchange

SEBI Act, 1992 empowers SEBI to inspect stock exchanges. SEBI has been inspecting the stock exchanges once every year since 1995-96. It reviews the market operations, organizational structure and administrative control of each of the stock exchange. The purpose of these inspections are:

  • If the exchange provides a fair, equitable and growing market to investors
  • If the exchange’s organization, systems, and practices are in accordance with the Securities Contract (Regulation) Act (SC(R) Act), 1956 and rules framed thereunder
  • If the exchange has implemented the directions, guidelines, and instructions as issued by the SEBI
  • If the exchange has complied with the conditions if any, imposed on it at the time of renewal/ grant of its recognition under section 4 of the SC(R) Act, 1956.

Based on the suggestions made in these inspection reports, the exchanges are supposed to send a compliance report to SEBI on a regular basis indicating the progress made by them on the suggestions.

Meaning and Type of securities

Tradable financial instruments are generally referred to as securities eg. shares, bonds etc. The key aspect of a security is it being transferable. Securities can either represent ownership or debt position. Securities belong to both money as well as capital market. The types of securities are below:

  • Shares, scrips, stocks, bonds, debentures, debenture stock, and other marketable securities
  • Derivatives
  • Government Security
  • Units or any other instrument issued by any collective investment scheme to the investors in such schemes
  • Units or any other such instrument issued to the investors under any mutual fund scheme but does not include any unit-linked insurance policy
  • Security receipts issued under SARFAESI Act
  • Securitized debt instruments (collateralized debt obligations etc.)
  • Such other instruments as may be declared by the Central Government to be securities
  • Rights or interest in securities

Securities Contract

The Securities Contracts  (Regulation) Act, 1956 was enacted to prevent undesirable transactions in securities and to regulate the working of stock exchanges. The Act came into force on Feb 20, 1957.

Corporatisation

Corporatisation [Section 2(aa)] means the succession of a recognized stock exchange by another stock exchange. The former should be a body of individuals or a society registered under the Societies Registration Act, 1860 and the latter should be a company incorporated for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities carried on by such individuals or society.

Demutualization and regulation of stock exchange

Demutualisation is the process of transformation of the legal structure of a stock exchange from a mutual form to a business corporation form and after demutualisation, the ownership, the management, and the trading rights at the exchange are isolated from one another. Demutualisation was mandated by the government as a regulatory measure directed at ending the brokers’ control over the exchanges. BSE was demutualized in Aug 2005 getting converted from a not-for-profit mutual entity, i.e., an association of stockbrokers, into a for-profit public limited company.

This process seeks to give majority control of the exchange to investors who don’t have trading rights to allow a better regulation of the exchange. Once listed as a public company, corporate governance standards and ethics will govern the exchange to ensure transparency.

Listing Agreement

Listing Agreement is a document executed between a company and a stock exchange when the former gets listed on the latter. The document’s primary purpose is to ensure that the company follows good corporate governance. The agreement comprises 54 clauses which listed companies have to follow failing which companies have to face disciplinary actions.

Dematerialisation

Dematerialisation is the process to convert a physical certificate into electronic form and credited to the demat account of an investor. Any investor intending to dematerialise its securities needs to have an account with a DP (Depositary Participant).

Rematerialization

Rematerialisation is the process of converting electronic holdings of securities into physical certificate form. Investors need to fill up a Remat Request Form (RRF) and submit it to the DP (Depositary Participant).

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