Recognition of Stock Exchange

RECOGNITION OF STOCK EXCHANGE VIS-À-VIS SECURITIES
CONTRACTS REGULATION ACT OF 1956.
WHAT IS A STOCK EXCHANGE?
A stock exchange can be defined as a body of individuals, whether incorporated or not,
constituted for the purpose of assisting or controlling the business of buying, selling or
dealing in securities1. It refers to a body of persons either incorporated and demutualised
in accordance with Section 4B of the Securities Contracts (Regulation) Act, 1956 2 or a
corporate body incorporated under the Companies Act, 1956, for the purposes of buying,
selling and dealing in securities3.
SECURITIES EXCHANGE BOARD OF INDIA
The Securities Exchange Board of India (SEBI) derives its validity from the Securities
and Exchange Board of India Act, 1992. The primary aim of SEBI is to ensure a smooth
functioning of the securities market by guaranteeing fair trade practices. It works to
warrant the interests of the investors of the market at the hands of those capable of
manipulating the market.
SEBI derives its cogency and authority from the Securities Contracts Regulation Rules,
1956 and the Act. The primary purpose of a stock exchange is to allow for mobilization
of funds from investors to generate capital for the progress of the market itself while
monetarily benefitting the investor as well. SEBI functions in pursuance of the same.
CORPORATISATION AND DEMUTUALISATION
Before a regulatory act was put into place, the stock exchanges across the country were
either an Association of Persons (AOP) or Body of Individuals (BOI). This implied that
the Members, Brokers/Traders, Board of Directors, Governing Body, Decisions Makers
and Owners were all the same people. The same body of persons performed all the above
functions. This gave way to underhand dealings and corporate espionage on part of the
1
Madhubhai Amathalal Gandhi v. The Union of India, 1961 AIR 21.
2
Hereinafter known as the ‘Act’.
3
Securities Contracts Regulation Act, No. 42.
1|Page
brokers since they possessed access to sensitive information by virtue of their positions as
Board of Directors.
Such fraudulent and unethical dealings were put to an end by the Act. Under Section 4A
of the Act, corporatisation and demutualisation of a stock exchange became a mandatory
procedure.
Corporatisation refers to the conversion of a stock exchange from an AOP/BOI to a

corporate entity under the Societies Registration Act, 1860. 4 Demutualisation implies the
segregation of the owners and managers of the stock exchange from the brokers and
traders working it in. It essentially divides the management from the working members.
A Recognised Stock Exchange (RSE) must axiomatically be corporatized and

demutualised (C&D). The SEBI provides for a specified time period within which the
RSE must be corporatized and demutualised else it would lose its recognition. The
procedure for the same is given under Section 4A of the Act and is enumerated below as:
1. The RSE must prepare a scheme for C&D and submit to SEBI.
2. SEBI may conduct an inquiry in the matter and if satisfied may approve the
scheme with or without any modification.
3. If the scheme gets approved and the RSE gets corporatized and demutualised, the
same must be published in the following manner:
 Firstly, in the Central Gazette and the Gazette of the state in which the
RSE is located
 Secondly, in the English and regional newspapers of the concerned state.
4. Failure to successfully corporatize and demutualise would lead to derecognition of
the Stock Exchange. The same must also be published in the manner mentioned
above.
Currently all stock exchanges in the country are corporatized and demutualised. There are
25 recognised stock exchanges in India.
4
Ibid.
2|Page
RECOGNITION OF A STOCK EXCHANGE
After the passage of the Act, private stock exchanges have ceased to exist. Any stock
exchange that wishes to be recognised must necessarily come under the government. The
Act purports that for grant of recognition an application concerning the same must be sent
by the stock exchange to SEBI or the Central Government. Attached to the application in
Form A, must be a copy of the by-laws of the stock exchange and a fee of Rupees 500.
It is also noteworthy that if the by-laws of the stock exchange are made or amended after
grant of recognition, then it must necessarily be published in the Central and State
Gazette and the regional and English newspaper of that state. 5
Apart from these, the Central Government may at its discretion call for additional
information including but not limited to rules regarding:
1. The powers and functions of the governing body.

2. Conditions and qualifications for members of the stock exchange
3. Procedure for registration of Partnerships as members of the organisation.
4. Duties and powers of those holding office in the Stock Exchange
Upon receipt of such an application, the Central Govt. under Section 4 (1) is entitled to
conduct an inquiry into the workings of the Stock Exchange. It may ask the Exchange to
furnish further information to assure the Govt. that:
1. The by-laws of the exchange are in complete conformity with the rules and
regulations prescribed for fair and ethical dealings in interest of the investors.
2. The Exchange is willing to comply with any other limitations or rules which the
Central Govt. may set forth after granting recognition.
3. The granting of such a recognition would be in general interest of the public and
trade.
It is up to the discretion of the Central Government to grant an unconditional approval to

the Stock Exchange if it is satisfied with the documents it receives. If not, it may grant a
conditional approval under clause (a) of subsection 1 of section 4. It may request the
exchange to comply with conditions relating to:
5
V Juia v. S. Dalmia, AIR 1968 Bom 347.
3|Page
1. Maintenance of books of accounts and their audit whenever the Central
Government deems necessary.
2. Qualifications for membership in the stock exchange
3. The modus operandi of the transaction of business in the Exchange.
4. The extent and limit of government representation in the Exchange.
The fulfilment of the abovementioned conditions is merely a pre-requisite and not an

assurance of recognition. Despite all documents being in place, the Central Government
is at the liberty to reject the application.
WITHDRAWAL OF RECOGNITION
If under any circumstances, the Central Government feels that the Stock Exchange is
unable to serve the general public interest anymore, it may withdraw the recognition
status from the said stock exchange in exercise of its powers under Section 5 of the Act.
This may also happen in cases where the stock exchange is found to be in violation of the
rules and regulation laid down or is caught in unethical inside trading.
The Central Government, however, must give an opportunity for a hearing to the stock
exchange to present its case before it withdraws the status. The stock exchange is required
to publish the withdrawal in the Central Gazette and the Gazette of the state were the
stock exchange is located. It must also be published in the newspapers of that state- both
English and regional.
The ‘recognised’ status may also be withdrawn by the Central government in cases where
the status was granted subject to certain conditions and the stock exchange failed to
comply with them. It may also be withdrawn when the stock exchange failed to
corporatize and demutualise after being afforded the recognition.
4|Page
CONCLUSION
The Securities Contracts Regulation Act has achieved its aim of preventing undesirable
transactions in securities by regulating the securities market. The mandate for recognition of a
stock exchange streamlined the otherwise chaotic securities market that existed before the
promulgation of the Act.
The Stock Exchanges were infamous as gambling dens of the brokers. Malpractices and
below-the-table dealings were rampant in the stock market. To pull the plug on such
unethical dealings it was necessary to bring all stock exchanges under the government’s
supervision. An active involvement of the government was ensured by the Act of 1956 and
the stock exchanges were Recognised and Regulated for the same.
5|Page

Recognition of Stock Exchange

Uploaded by

Copyright:

Available Formats

Recognition of Stock Exchange

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Recognition of Stock Exchange

Uploaded by

Copyright:

Available Formats

RECOGNITION OF STOCK EXCHANGE VIS-À-VIS SECURITIES

CONTRACTS REGULATION ACT OF 1956.

WHAT IS A STOCK EXCHANGE?

SECURITIES EXCHANGE BOARD OF INDIA

CORPORATISATION AND DEMUTUALISATION

Corporatisation refers to the conversion of a stock exchange from an AOP/BOI to a

A Recognised Stock Exchange (RSE) must axiomatically be corporatized and

1. The powers and functions of the governing body.

It is up to the discretion of the Central Government to grant an unconditional approval to

The fulfilment of the abovementioned conditions is merely a pre-requisite and not an

You might also like