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Section 1 – Securities Laws (Amendment) Act,2004

Securities Laws (Amendment) Act,2004

Section 1. Short title and commencement

SECURITIES LAWS (AMENDMENT) ACT,20041

[No. 1 OF 2005]

[January 6,2005]

An Act further to amend the Securities Contracts (Regulation) Act,1956 and the Depositories Act,1996

Be it enacted by Parliament in the Fifty-fifth Year of the Republic of India as follows:-

Prefatory Note-Statement of Objects and Reasons.-Although the Securities Contracts (Regulation) Act,1956 aims to prevent undesirable transactions in securities by regulating the business of dealing therein, the existing mutual organisational structure of stock exchanges (except two exchanges) failed to address the conflict of interests on stock exchanges. The Joint Parliamentary Committee on the stock market scam and matters relating thereto recommended that the process of corporatisation and demutualisation of exchanges should be expedited and underlined the necessity for early implementation of corporatisation and demutualisation of stock exchanges.

2. The Central Government, in its Action Taken Report laid before both Houses of the Parliament, assured that necessary legislative amendments to give effect to the aforesaid recommendation will be made. In view of this, it is proposed to make amendments in the Securities Contracts (Regulation) Act,1956 for structural transformation of stock exchanges from mutual organisational form to a demutualised form.

3. Since demutualisation separates ownership, voting rights and management from the right of access to trading, it is imperative that the representation of brokers in Board of Directors of Stock Exchanges is either not permitted at all or kept to a minimum.

4. In order to expedite corporatisation and demutualisation of exchanges, the Securities Laws (Amendment) Bill,2003 was introduced in the Lok Sabha on the 18th August,2003 to amend the Securities Contracts (Regulation) Act,1956 and the Depositories Act. 1996, inter alia, which provided for the following matters, namely:-

(a) defining the corporatisation and demutualisation;

(b) limiting the organisational form of a stock exchange to a corporate entity;

(c) specifying the procedure for corporatisation and demutualisation (including approval of scheme for corporatisation and demutualisation by the Securities and Exchange Board of India);

(d) specifying the time limit within which the shares shall be disinvested by stockbrokers under the scheme of corporatisation and demutualisation;

(e) restricting the voting rights of brokers as shareholders, and brokers’ participation on governing boards of stock exchanges so as to plug the loopholes inherent in governance of stock exchanges whose organisational form is mutual;

(f) defining units of mutual funds as “securities”, delisting conditions and consequences of violations and transfer of duties and functions of a clearing house to a clearing corporation;

(g) making certain other provisions in the Securities Contracts (Regulation) Act,1956, similar to those contained in the Securities and Exchange Board of India (Amendment) Act,2002, such as, conferring powers upon the Securities and Exchange Board of India to issue directions to stock exchanges and the companies whose securities are listed or proposed to be listed, providing appeal from the orders of the Securities Appellate Tribunal to the Supreme Court, enhancing the penalties specified under the Securities Contracts (Regulation) Act,1956, and adjudication by an adjudicating authority to impose monetary penalties, making provision for compounding of offences and crediting of amount of penalties into the Consolidated Fund of India, etc.

5. After introduction of the Bill, various suggestions were received from the Securities and Exchange Board of India, the Reserve Bank of Indi a and instituti ons connected with the securities market. In view of the suggestions and developments in the securities market subsequent to introduction of the aforesaid Bill, it has been decided to-

(i) omit the earlier provisions in the Securities Laws (Amendment) Bill,2003 relating to-

(A) the definition of “derivatives” which included non-securities based derivatives, such as, those based on rates on indices, in view of the apprehension that the proposed amendment would create further disability to the existing over the counter derivatives;

(B) the spot delivery contracts as the exiting provisions are adequate for regulation of certain category of spot contracts;

(C) non-attachment of investment assets as such provision could be misused to pass off assets of brokers as client assets and thus to frustrate the attachment proceedings;

(D) specific conditions of delisting of securities by stock exchanges and instead provide for delisting in the rules under the Securities Contracts (Regulation) Act,1956 so as to provide flexibility for regulation of delisting;

(ii) incorporate provision in the Securities Contracts (Regulation) Act,1956 to provide for penalties for offences and grant of immunity on the lines of Section 24-B of the Securities and Exchange Board of India Act,1992;

(iii) allow, in certain cases, the members of one stock exchange to enter into contract with members of other stock exchanges subject to such terms and conditions as may be stipulated, with prior approval of Securities and Exchange Board of India, by the respective stock exchanges or after obtaining prior permission from the respective stock exchanges if so stipulated by the stock exchanges with prior approval of Securities and Exchange Board of India;

(iv) make certain amendments in the Depositories Act,1996 such as, enhancement of existing penalties, make provision for monetary penalty for certain contraventions and provide for crediting penalties into the Consolidated Fund of India, grant of immunity in certain cases by the Central Government and filing of appeal from the Securities Appellate Tribunal to the Supreme Court on the lines of provisions contained in the Securities and Exchange Board of India Act,1992, etc.

6. Due to dissolution of the 13th Lok Sabha, the said Bill had lapsed. Since Parliament was not in session and it had become necessary to take immediate action to provide for above matters, an Ordinance called the Securities Laws (Amendment) Ordinance,2004 was promulgated by the President on the 12th October,2004.

7. The Bill seeks to replace the aforesaid Ordinance.

——————–

1. Received the assent of the President on January 6,2005 and published in the Gazette of India, Extra., Part II, Section 1, dated 7th January,2005, pp. l-14, No. 1

(1) This Act may be called the Securities Laws (Amendment) Act,2004.

(2) It shall be deemed to have come into force on the 12th day of October,2004.

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