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Capital Market in India - Role of Stock Exchanges
Securities Contracts (Regulation) Act,1956 (ACT NO.42 OF 1956)
Chapter II deals with procedure for granting recognition of stock exchanges by Central Government (Section 3 & 4).
Withdrawal of Recognition (Section 5)
If the Central Government is of the opinion that the recognition granted to a stock exchange under the provisions of this Act should, in the interest of the trade or in the public interest, be withdrawn, the Central Government may serve on the governing body of the stock exchange a written notice that the Central Government is considering the withdrawal of the recognition for the reasons stated in the notice and after giving an opportunity to the governing body to be heard in the matter, the Central Government may withdraw, by notification in the Official Gazette, the recognition granted to the stock exchange
Power of Central Government to Call for Periodical Returns or
Direct Inquiries to be Made (Section 6)
Every recognised stock exchange shall furnish to the Securities and Exchange Board of India prescribed periodical returns relating to its affairs. SEBI may also call for such other information or explanation relating to the stock exchange as it may require. SEBI can appoint one or more persons to make an inquiry in the prescribed manner in relation to the affairs of any of the members of the stock exchange in relation to the stock exchange and submit a report of the result of such inquiry to the Securities and Exchange Board of India.
Furnishing of Annual Reports (Section 7)
All recognized stock exchanges to furnish an annual report to the Central Government
Powers of the Stock Exchange to Make Rules (Section 7A)
The power to make rules is subject to the approval of the Rules so made by the Central Government and publication of the said rules in the official Gazette. Rules can be made in respect of the following matters:
the restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting; the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only, irrespective of his share of the paid-up equity capital of the stock exchange; the restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting of the stock exchange; and such incidental, consequential and supplementary matters as may be necessary to give effect to any of the matters specified in clauses (a), (b) and (c).
Power of Recognised Stock Exchange to Make Bye-Laws (Section 9)
Any recognised stock exchange may, subject to the previous approval of the Securities and Exchange Board of India, make bye-laws for the regulation and control of contracts.
Such bye-laws may be in respect of the following matters
the opening and closing of markets and the regulation of the hours of trade; a clearing house for the periodical settlement of contracts and differences thereunder, the delivery of and payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house; the submission to the Securities and Exchange Board of India by the clearing house as soon as may be after each periodical settlement of all or any of the following particulars as the Securities and Exchange Board of India may, from time to time require, namely:
the total number of each category of security carried over from one settlement period to another. the total number of each category of security, contracts in respect of which have been squared up during the course of each settlement period. the total number of each category of security actually delivered at each clearing; the publication by the clearing house of all or any of the particulars submitted to the Securities and Exchange Board of India under clause (c) subject to the directions, if any, issued by the Securities and Exchange Board of India in this behalf; the regulation or prohibition of blank transfers; the number and classes of contracts in respect of which settlements shall be made or differences paid through the clearing house; the regulation, or prohibition of badlas or carry-over facilities; the fixing, altering or postponing of days for settlements; the determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities; the terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing; the regulation of the entering into, making, performance, rescission and termination, of contracts, including contracts between members or between a member and his constituent or between a member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members who are not parties to such contracts; the regulation of transacting business including the placing of limitations thereon; the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities; the method and procedure for the settlement of claims or disputes, including settlement by arbitration; the levy and recovery of fees, fines and penalties; the regulation of the course of business between parties to contracts in any capacity; the fixing of a scale of brokerage and other charges; the emergencies in trade which may arise, whether as a result of pool or syndicated operations or cornering or otherwise, and the exercise of powers in such emergencies including the power to fix maximum and minimum prices for securities; the regulation of dealings by members for their own account; the separation of the functions of jobbers and brokers; the limitations on the volume of trade done by any individual member in exceptional circumstances; the obligation of members to supply such information or explanation and to produce such documents relating to the business as the governing body may require.
Power of Securities and Exchange Board of India to Make or Amend Bye-Laws of
Recognised Stock Exchanges (Section 10)
SEBI may, either on a request in writing received by it in this behalf from the governing body of a recognised stock exchange or on its own motion, if it is satisfied after consultation with the governing body of the stock exchange that it is necessary or expedient so to do and after recording its reasons for so doing, make bye-laws, for all or any of the matters specified in section 9 or amend any bye-laws made by such stock exchange under that section.
Power of Central Government to Supercede Governing Body of a
Recognised Stock Exchange (Section 11)
The Act under Section vests the Central Government to supercede governing body of a recognised stock exchange. It provides that where the Central Government is of the opinion that the governing body of any recognised stock exchange should be superceded, then, not withstanding anything contained in any other law for the time being in force, the Central Government may serve on the governing body a written notice that the Central Government is considering the supercession of the governing body for the reasons specified in the notice and after giving an opportunity to the governing body to be heard in the matter, it may, by notification in the Official Gazette declare the governing body of such stock exchange to be superceded, and may appoint any person or persons to exercise and perform all the powers and duties of the governing body, and, and where more persons than one are appointed, may appoint one of such persons to be the chairman and another to be the vice- chairman thereof.
Section 12 of the Act deals with the power of teh Central Government by notification in the Official Gazette, for reasons to be set out therein, direct a recognised stock exchange to suspend such of its business for such period not exceeding seven days and subject to such conditions as may be specified in the notification, and if, in the opinion of the Central Government, the interest of the trade or the public interest requires that the period should be extended may, by like notification extend the said period from time to time. Such power of the Centrql Government to be exercised if in the opinion of the Central Government an emergency has arisen and for the purpose of meeting the emergency the Central Government considers it expedient to do so.
Establishment of Additional Trading Floors (Section 13A)
A stock exchange may establish additional trading floor with the prior approval of the Securities and Exchange Board of India in accordance with the terms and conditions stipulated by the said Board. Such 'additional trading floor' to be a trading ring or trading facility offered by a recognised stock exchange outside its area of operation to enable the investors to buy and sell securities through such trading floor under the regulatory framework of the stock exchange.
Indian Stock exchanges thus operate under strict control and supervision of SEBI/Government, which help to make the stock exchange a pivotal institution in the financial system and able to discharge its following functions.
It performs an 'act of magic' by translating short-term and medium-term investments into long term funds for companies.
Most of the investors are interested in short-term to medium-term investments. The requirements of companies are long-term in nature, as they require equity capital on a more or less permanent basis and debenture capital for 7 to 10 years. Thanks to the negotiability and transferability of securities, through the stock market, it is possible for companies to obtain their long-term requirements from investors with short-term and medium-term horizons. It Ensures a Measure of Safety and Fair Dealing
The rules, bye-laws and regulations of stock exchanges which are approved by the Government, are meant to ensure that a reasonable measure of safety is provided to investors and transactions take place in competitive conditions which are fair to all concerned. It Directs the Flow of capital in the Most Profitable Channels
Companies, which have more profitable investment opportunities, are normally able to raise substantial funds through the stock market, whereas companies, which do not have such opportunities, are normally not able to do so. As a result, the stock market facilitates the direction of the flow of capital in the most profitable channels It induces Companies to Raise their Standard of Performance.
When the equity capital of a company is listed on a stock exchange, the performance of the company is reflected in the market price of the equity stock, which is readily available for public information. In other words, the company's performance is more 'visible' in the eyes of the public. Such a public exposure normally induces companies to raise their standard of performance.
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