Securities Contracts Regulations Rules 2021

On 18th June 2021, the Ministry of Finance notified a new set of rules – Securities Contracts (Regulation) (Amendment) Rules, 2021 to amend the Securities Contract (Regulation) Rules 1957.

The Securities Contracts (Regulation) Act, 1956 (SCRA) was enacted to prevent undesirable exchanges in securities and to control the working of stock exchange in India. The Rules aid the compliance of the Act.

The Securities Contracts (Regulation) Rules were first enacted in 1957 and contain provisions that govern the stock exchanges – from applying to be listed on stock exchanges, qualifications for being listed on a stock exchange, renewal, obligations, audits of members listed on stock exchanges, inquiry, investigation, delisting and other compliances. The rules were amended from time to time in keeping pace with the changing economic environment.

In light of the latest amendments, we bring you an insight into all provisions of SCR Rules while highlighting the amendments.  

Rule

Particulars

Key Provisions

2

Definitions

3

Application for recognition of a stock exchange with SEBI

To be made in Form A

4

Fee for application

A sum of Rs. 500 to be deposited in the nearest government treasury or SBI. In cities like Bombay, Calcutta, Madras, Delhi & Kanpur, the fee shall be deposited in the RBI.

5

Documents to be filed along with the application and particulars it should contain

Application to be accompanied by 4 copies of Rules and bye laws of the applicant stock exchange and receipt of the fee paid granted by government treasury or RBI or SBI. 5A SEBI is vested with power to make enquiries and seek further information before granting recognition to a stock exchange.

6

Form of recognition

Granted by SEBI in Form B for a period not less than 1 year and shall be subject to compliance of the SCRA Act and Rules

7

Renewal of recognition

To be made by the stock exchange seeking renewal at least 3 months before expiry of period of recognition by paying a fee of Rs. 200 and subject to Rules 3,5 &6.

8

Qualifications of membership on recognized stock exchange

For seeking admission / recognition on stock exchange:

(1) (2) & (3) Person: should be at least 21 years old; sound mind; not bankrupt or insolvent; not compounded with his / her creditors; not convicted for offence of fraud or dishonesty; not engaged in any other business except of securities / commodity except as broker or agent; for at least 2 years, worked or agreed to work as a partner or authorized assistant or clerk with a member and bargained on the floor of the stock exchange in the name of the member.

(4) (5) & (6) Company / Partnership Firm / LLP

Formed u/2 322 of the Companies Act 2013: Majority of directors are shareholders and also members of that stock exchange; such director – members have ultimate liability in the company; provided on recommendation of SEBI, in relaxation of this rule, the governing body may admit members such as IFCI, IDBI, ICICI, UTI, NABARD, EXIM bank central board of trustees of EPF, pension fund and standalone primary dealers authorized by the RBI.

Formed u/s 12 of the Companies Act 2013:  undertakes to comply with financial requirements laid down by SEBI, directors are not disqualified from being members of stock exchange and not held office as directors on any company which had been a member of the stock exchange; declared defaulter or expelled by the stock exchange. At least 2 directors must have minimum 2 years’ experience in dealing in securities or portfolio managers or as investment consultants.

*Rules (3)&(4) shall so far as they can apply to a firm / LLP.    

(7) any Provident fund represented by its trustees of an exempted establishment under Provident Fund Act 1952 shall also be eligible to be appointed as member of a stock exchange.

(8) ON recommendation of SEBI, the governing body may admit members such as IFCI, IDBI, ICICI, UTI, NABARD, EXIM bank central board of trustees of EPF, pension fund and standalone primary dealers authorized by the RBI  

9

Contracts between members of recognized stock exchanges

All contracts shall be in writing and in accordance with Rules and bye laws of the stock exchange on which they are members.

10

Nominees of SEBI on governing bodies of stock exchanges

SEBI shall nominate a maximum of 3 members on governing bodies of stock exchanges. Such members shall enjoy same status as other members on the governing body.

11

Obligations of governing body to take disciplinary action against member(s) if directed by SEBI

If directed by SEBI, the governing body of the stock exchange is obligated to initiate action against offending members by imposing fine or non- monetary penalty such as expulsion, suspension. The governing body cannot with prior permission of SEBI, revoke or modify the penalty.

12

Audit of accounts of members

If require by SEBI, every member shall get their accounts audited by a Chartered accountant.

13

Withdrawal of recognition

Shall be intimated to member in Form C

14

Books of account and other documents to be maintained and preserved by every recognized stock exchange.

Minutes books of meetings, registers, ledgers, margin deposit books, journals of members, governing body and standing committee shall be preserved for a period of 5 years.

15

Books of account and other documents to be maintained and preserved by every member of a recognised stock exchange.

Every member shall preserve for a period of 5 years registers of transactions, client & general ledgers, cash books, pass books, documents showing full particulars of shares and securities received and delivered. Members contract books, counterfoils etc. shall be preserved for a period of 2 years

16

Manner of inquiry in relation to the affairs of the governing body of a recognised stock exchange or the affairs of any member of the stock exchange in relation to the stock exchange.

Person or persons appointed by SEBI shall be the “inquiring authority” and shall hand over a list of issues to be investigated to the governing body. Opportunity to be herd shall be given to the governing body / member. The majority view on the issue shall be submitted as final report to the SEBI.

17

Submission of annual report

Every recognized stock exchange shall on or before 31st January every year furnish an annual report to SEBI on its activities in the preceding year; Every stock exchange shall within 1 month of holding its AGM furnish to SEBI copies of its financial statements. Periodical returns as stated in the Rule17A have to be submitted as well.

18

Manner of publication of bye-laws for criticism

The bye-laws to be made, amended or revised shall be published for criticism both in the Gazette of India and Official Gazette of the State in which the principal office of the recognised stock exchange is situate.

19

Requirements with respect to the listing of securities on a recognised stock exchange.

(1) Public company(s) desirous of getting its securities listed on a recognised stock exchange shall apply to the stock exchange with the following documents:

  • Memorandum and articles of association; a copy of the trust deed (in case of a debenture issue).
  • Copies of all prospectuses or statements in lieu of prospectuses issued by the company at any time.
  • Copies of offers for sale and circulars or advertisements offering any securities for subscription or sale during the last 5 years.
  • Copies of balance-sheets and audited accounts for the last 5 years, or in the case of new companies, for such shorter period for which accounts have been made up.
  • A statement showing dividends and cash bonuses paid during the last 10 years for private or public company and dividends or interest in arrears, if any.
  • Certified copies of agreements and other documents entered into with vendors and or promoters; underwriters and sub writers; brokers and sub brokers.
  • Certified copies of agreements with managing directors and technical directors, general manager, sales manager or secretary
  • Certified copy of every letter, report, balance-sheet, valuation contract, court order or other document reproduced or referred to in any prospectus, offer for sale, circular or advertisement offering securities for subscription or sale, during the last 5 years.

(i) A statement containing particulars of dates of and parties to all material contracts, agreements (including technical advice and collaboration), concessions and similar other documents (except those entered into in the ordinary course of business together with a brief description of the terms, subject-matter and general nature of the documents.

  • A brief history of the company since its incorporation and activities including any reorganisation, reconstruction or amalgamation, changes in its capital structure and debenture borrowings, if any.
  • Particulars of shares and debentures issued for (i) consideration other than cash, whether in whole or part, (ii) at a premium or discount, or (iii) in pursuance of an option.
  • A statement containing particulars of any commission, brokerage, discount or other special terms including an option for the issue of any kind of the securities granted to any person.
  • Certified copies of (i) acknowledgement card or the receipt of filing offer document    with SEBI; (ii) agreements, if any, with IFCI, ICIC and similar bodies.
  • Particulars of shares forfeited; 
  • A list of 10 highest holders of each class /kind of securities of the company as on the date of application along with particulars as to the number of shares or debentures held by and the address of each such holder.
  • Particulars of shares or debentures for which permission to deal is applied for.

A recognised stock exchange may either generally by its byelaws or in any particular case call for such further particulars or documents as it deems proper. 

(2) Additionally, the applicant company shall satisfy to the stock exchange that:

(a) The Articles of association contain following clauses:

  • Company shall use a common form of transfer;
  • Fully paid shares shall be free from lien, for partly paid shares company’s lien shall be restricted to moneys called or paid;
  • Amount paid up in advance of calls by shareholder may carry interest but not entitled to dividend subsequently declared.
  •  There will no forfeiture of unclaimed dividends before the claims becomes barred by law;
  • Option or right to call of shares shall not be given to any person except with sanction in a general meeting of the company.

A recognised stock exchange may provisionally admit to dealings the securities of a company which undertakes to amend its articles of association at its next general meeting so as to fulfil the foregoing requirements and agrees to act in the meantime strictly in accordance with the provisions of this clause.

(b) The minimum offer and allotment to public in terms of offer document shall be – 

(i) At least 25% of each class or kind of equity shares or debentures convertible into equity shares issued by the company if the post issue capital of the company calculated at offer price is less than or equal to 1,600 Crore rupees.

(ii) At least such percentage of each class or kind of equity shares or debentures convertible into equity shares issued by the company equivalent to the value of 400 crore rupees, if the post issue capital of the company calculated at offer price is more than 1,600 crore rupees but less than or equal to 4,000 crore rupees;

**(iii) At least 10% of each class or kind of equity shares or debentures convertible into equity shares issued by the company, if the post issue capital of the company calculated at offer price is more than 4,000 Crore rupees but less than or equal to Rs. 1 Lakh Crores.

Provided further that such company shall increase its public shareholding to at least 25% within a period of 3 years from the date of listing of the securities, in the manner specified by SEBI.

Provided that this requirement shall not apply to a company whose draft offer document is pending with SEBI before the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, if it satisfies the conditions prescribed in clause (b) of sub-rule 2 of rule 19 of the Securities Contracts (Regulation) Rules, 1956 as existed prior to the date of such commencement.

**(iv) At least such percentage of each class or kind of equity shares or debentures convertible into equity shares issued by the company equivalent to the value of 5,000 crore rupees and at least 5% of each such class or company, if the post issue capital of the company calculated at offer price is above 1 lakh Crore rupees.

 Provided further that such company referred to in clause (iv) shall increase its public shareholding to at least 10% within 2 years and at least 25% within a period of 5 years from the date of listing of the securities, in the manner specified by SEBI.

Provided that this requirement shall not apply to a company whose draft offer document is pending with SEBI before the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, if it satisfies the conditions prescribed in clause (b) of sub-rule 2 of rule 19 of the Securities Contracts (Regulation) Rules, 1956 as existed prior to the date of such commencement.

If the applicant company referred to in Clause 19 2(b) issued equity shares having superior voting rights to its promoters / founders seeks listing of its ordinary shares, then it shall mandatorily list its equity shares having superior voting rights at the same recognized stock exchange along with the ordinary shares being offered to the public.  

(3) As a condition precedent, a company applying for listing shall, undertake that —

(a)
(i) letters of allotment will be issued simultaneously and that, if not possible to issue letters of regret, a notice to that effect  will be inserted in the press so that it will appear on the morning after the letters of allotment have been posted,
(ii) letters of right will be issued simultaneously,
(iii) letters of allotment, acceptance or rights will be serially numbered, printed on good quality paper and examined and signed by a  responsible officer of the company and that whenever possible, they will contain the distinctive numbers of the securities to which they relate,
(iv) letters of allotment and renounceable letters of right will contain a proviso for splitting and the form of renunciation will be printed on the back of or attached to the letters of allotment and letters of right,
(v) letters of allotment and letters of right will state how the next payment of interest or dividend on the securities will be calculated, 

(b)
To issue, when required, receipts for all securities deposited with it whether for registration, sub-division, exchange or for other purposes ; and not to charge any fees for registration of transfers, for sub-division and consolidation of certificates and for sub-division of letters of allotment, renounceable letters of right, and split, consolidation, renewal and transfer receipts into denominations of the market unit of trading; 

(bb) to issue, when so required, consolidation and renewal certificates in denominations of the market unit of trading to split certificates, letters of allotment, letters of right, and transfer, renewal, consolidation and split receipts into smaller units, to split call notices, issue duplicates thereof and not require any discharge on call receipts and to accept the discharge of members of stock exchange on split, consolidation and renewal receipts as good and sufficient without insisting on the discharge of the registered holders;

(c) when documents are lodged for sub-division or consolidation or renewal through the clearing house of the exchange:

(i) to accept the discharge of an official of the stock exchange clearing house on the company’s split receipts and consolidation receipts and renewal receipts as good and sufficient discharge without insisting on the discharge of the registered holders, and

(ii)  When the company is unable to issue certificates or split / consolidation/renewal receipts immediately on lodgement, to verify whether the discharge of the registered holders, on the documents lodged for sub-division/ consolidation/ renewal and their signatures on the relative transfers are in order,

(d) On production of the necessary documents by shareholders or members, to make endorsement on transfers to the effect that power of attorney/ probate/ letters of administration/ death certificate/ certificate of the Controller of Estate Duty or similar other document has been duly exhibited to and registered by the company;

(e) to issue certificates in respect of shares or debentures lodged for transfer within 1 month of the date of lodgement of transfer and to issue balance certificates within 1 month where the transfer is accompanied by a larger certificate;

(f) to advise the stock exchange of the date of the board meeting at which the declaration or recommendation of a dividend or the issue of right or bonus share will be considered;

(g) to recommend/ declare all dividends and cash bonuses at least 5 days before the commencement of the closure of transfer books or the record date fixed for the purpose and advise the stock exchange in writing of all dividends and/or cash bonuses recommended or declared immediately after a meeting of the board of the company has been held to finalise the same;

(h) to notify the stock exchange of any material change in the nature of the company’s business including company’s directorate by death, resignation, removal or otherwise; managing director, managing agent or secretaries and treasurers; of auditors appointed to audit the books and account of the company; (j) to forward to the stock exchange copies of statutory and annual reports and audited accounts as soon as issued, including directors’ report;

(k) to forward to the stock exchange copies of all other notices and circulars and certified true copies of resolutions sent to the shareholders including proceedings of ordinary as soon s such resolutions become effective

(l) to notify the stock exchange (prior to intimating shareholders) of the manner of new issue of securities – whether rights issue, privilege of securities whether by way of right, privilege bonus or otherwise and the manner 

(m) notify the stock exchange of any re-issue of forfeited shares or reserve issue of securities in future

(n) to notify the stock exchange of any other alteration of capital including calls

(o) to close the transfer books only for the purpose of declaration of dividend or issue of right or bonus shares or for such other purposes as the stock exchange may agree and give reasonable notice as required by the stock exchange, stating the dates of closure / record dates after the stock exchange sanctions the same.   

(p) Immediately after each AGM, to forward to the stock exchange, an annual return containing details of at least 10 holders in each class of security along with their full particulars such as number of shares, addresses etc.

(q) to grant to shareholders the right of renunciation in all cases of issue of rights, privileges and benefits and allow them reasonable time not less than 4 weeks to record, exercise, or renounce such rights, privileges and benefits and to issue coupons or fractional certificates or provide for the payment of the equivalent of the value of the fractional right in cash unless the company in general meeting or the stock exchange agrees otherwise;

(r) to promptly notify the stock exchange of any action which will result in the redemption, cancellation or retirement of securities in whole or part; or intention to make a drawing of such securities intimating date, time and manner of doing so; amount of securities outstanding after any drawing so made; 

(s) to intimate / apprise shareholders of the position of the company and avoid establishment of false market in shares of the company; 

(t) intimation that in the event of the application for listing being granted, it shall be subject to the rules and bye-laws of the exchange in force from time to time and that the company shall comply with further listing requirements as may be promulgated by the exchange. 

(4) An application for listing shall be necessary in respect of (a)all new issues of any class or kind of securities of a company to be offered to the public; (b) all further issues of any class or kind of securities, if such class or kind are already listed on a recognized stock exchange.    

(5) A recognised stock exchange may suspend or withdraw admission to dealings in the securities of a company or body corporate either for a breach of or non-compliance of any conditions of admission to stock exchange; such withdrawal or suspension or justification to be recorded in writing; opportunity to be heard to be given to company or body corporate. 

(6) A recognised stock exchange may, either at its own discretion or shall in accordance with the orders of the Securities Appellate Tribunal under sub-rule (5) restore or re-admit to dealings any securities suspended or withdrawn from the list.

(6A) Except as otherwise provided in these Rules or by SEBI in the sub rule (7), all requirements of listing prescribed shall be applicable to a public sector company also. 

(7) SEBI may at its discretion prescribe additional requirements or waive off or relax all or any of the listing requirements. 

(8) Notwithstanding anything contained in this Rule, the minimum offer and allotment requirements under rule 2(b) shall not be applicable to listing of such equity shares having superior voting rights issued to promoters or founders, where the applicant company is seeking listing of its ordinary shares for offering to the public in accordance with rules and regulations of SEBI.

(19 A) Continuous Listing requirement

  • Every listed company other than a public sector company shall maintain public shareholding of at least 25%. Any listed company which has public shareholding less than 25% shall, within a period of 3 years from the date of commencement of SCR Rules 2018 increase its public shareholding to 25% in the manner specified by SEBI.
  • Where the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall in the manner specified by SEBI.
  • Where the public shareholding in a listed company falls below 25% at any time in consequence to Securities Contracts Regulation Amendment Rules 2015, such company shall increase its public shareholding to at least 25% within a period of 3 years form the date of notification of the Depository Receipts Scheme 2014 in cases where the public shareholding falls due to such scheme; SEBI (Share based employee benefits) Regulations 2014 in cases where it falls due to these regulations.
  • Where the public shareholding in a listed company falls below 25% at any time as a result of implementation of resolution plan approved u/s 31 of the IBC 2016, such company shall increase its public shareholding to at least 25% within a period of 3 years form the date of the date of such fall in the manner specified by SEBI.

Provided that the if the public shareholding falls below 10%, it shall be increased to 10% within 12 months from the date of such fall in the manner specified by SEBI.

**Provided that every listed company shall maintain public shareholding of at least 5% as a result of implementation of resolution plan approved u/s 31 of the IBC 2016   

20

Requirements with respect to the listing of units or any other instrument of a Collective Investment Scheme (CIS) on a recognised stock exchange.

(1) to (8) A Collective Investment Management Company (CIMC) which is desirous of getting its any collective investment scheme (CIS) listed on a recognised stock exchange apply to the stock exchange with documents contained under Rule 19(1) (a) to (n) and (o) particulars of units of scheme for which permission to deal is applied for.  Rules 19(2) to 19(8) are also applicable in a similar manner for listing of a CIS on a stock exchange.

21

Delisting of Securities

(1) A recognized stock exchange, may, without prejudice to any other action under the Act or under any other laws for the time being in force, delist any securities listed on a stock exchange on any of the following grounds:

  • company has incurred losses in the preceding 3 consecutive years and has negative net worth;
  • trading in securities of the company has remained suspended for more than 6 months;
  • trading in securities have been infrequent during preceding 3 years;
  • company or any of its promoters / directors have been convicted for failure to comply with provisions of SEBI Act 1992 or Depositories Act 1996 and awarded penalty or not less than 1 crore or imprisonment of 3 years;
  • addresses of the company or any of its promoters / directors are not known or are false or changed in contravention of provisions of Companies Act 1956;
  • shareholding of the company held by public has fallen below minimum levels mentioned in the Listing agreement and the company failed to bring it to the minimum level within the time situated by the stock exchange. 

Provided that no securities shall be delisted without giving the company an opportunity to be heard.

(2) If securities are delisted under Clause (1),

  • Company, promoter, director shall be liable jointly and severally to purchase outstanding securities from those who wish to sell them at a fair price as determined in accordance with SEBI and
  • The said securities shall be delisted from ALL recognized stock exchanges.

(3) On the request of a company, the recognized stock exchange may delist securities in accordance with rules and regulations under SEBI subject to the following conditions –

  • Securities have been listed for a minimum period of 3 years;
  • Such delisting has been approved by 2/3rds of public shareholders;
  • Company, promoter, director shall be liable jointly and severally to purchase outstanding securities from those who wish to sell them at a fair price as determined in accordance with SEBI. This condition may be dispensed with by SEBI if the securities remain listed at least on the National Stock exchange or the Bombay stock exchange.

ANALYSIS

The latest amendments have been made in Rule 19 of the SCR Rules. The essence of the amendments has been that companies with market value or over Rs. 1 lakh crores will now have to offer / sell only 5% of their shares (as against 10% previously) to the public. This is intended to bring more flexibility to such companies in dealing with their shares. However, the amendment also states that such companies will have to increase their shareholding to 10% in 2 years and 25% within 5 years. This amendment ensures that large companies do not misuse their financial strength in malpractices. Similarly public shareholding of a listed company which has fallen due to resolution plan approved under IBC 2016 has to maintain a minimum of 5% public shareholding consequent to implementation of such resolution plan. This amendment is intended to preserve accountability and participation of public through in such large companies. The rationale seems to be two-fold – (i) lesser / manageable compliance procedures with reduced public shareholder (ii) ensure there is enough participation of public in larger companies thereby keeping accountability intact.

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