Constitutional & Statutory Framework

2.1 Constitutional Foundations

Securities regulation in India derives its authority from constitutional provisions. Understanding these foundations is essential for challenging or defending regulatory actions.

Article 19(1)(g) - Right to Practice Any Profession or Trade

The fundamental right to carry on any occupation, trade, or business is guaranteed under Article 19(1)(g). However, this right is subject to reasonable restrictions under Article 19(6).

Reasonable Restrictions under Article 19(6)

The State can impose reasonable restrictions in the interest of:

• General public: Protecting investors and market integrity
• Professional qualifications: Requiring registration of intermediaries
• State monopoly: Controlling who can operate stock exchanges

"The test of reasonableness should be applied to each individual statute impugned, and no abstract standard or general pattern of reasonableness can be laid down as applicable to all cases." State of Madras v. V.G. Row, AIR 1952 SC 196

Article 14 - Right to Equality

SEBI regulations must not be arbitrary or discriminatory. Any classification must satisfy the twin tests of intelligible differentia and rational nexus.

Legislative Competence

Securities regulation falls under the Union List:

• Entry 48: Stock exchanges and futures markets
• Entry 43: Incorporation, regulation, and winding up of corporations (excluding state corporations)
• Entry 44: Incorporation, regulation, and winding up of cooperative societies

2.2 SEBI Act, 1992

The SEBI Act is the principal legislation governing securities market regulation in India. It establishes SEBI, defines its powers, and creates the framework for market regulation.

Structure of the Act

Section 11 - Powers and Functions

Section 11 is the heart of the SEBI Act, setting out SEBI's mandate and specific powers.

Specific Powers under Section 11(2)

1. Regulate business in stock exchanges and any other securities markets
2. Register and regulate working of intermediaries and self-regulatory organizations
3. Register and regulate working of depositories, custodians, FPIs, and credit rating agencies
4. Register and regulate working of venture capital funds and collective investment schemes
5. Prohibit fraudulent and unfair trade practices
6. Prohibit insider trading
7. Regulate substantial acquisition of shares and takeovers
8. Conduct inquiries and audits of exchanges, intermediaries, and self-regulatory organizations

Section 11B - Power to Issue Directions

This section grants SEBI power to issue directions to any person associated with the securities market. It is frequently used for interim and final orders.

Section 11C - Power of Investigation

SEBI can order investigation by investigating authority on reasonable suspicion of violation. This includes power to:

• Summon and examine persons on oath
• Require production of documents
• Conduct search and seizure (under Section 11C(8))

2.3 Securities Contracts (Regulation) Act, 1956

The SCRA is the foundational statute for regulation of securities contracts and stock exchanges. It provides the definition of "securities" which is central to the entire regulatory framework.

Section 2(h) - Definition of Securities

The definition of "securities" in Section 2(h) is expansive and includes:

1. Shares, scrips, stocks, bonds, debentures, debenture stock, or other marketable securities
2. Derivative instruments
3. Units or other instruments issued by collective investment schemes
4. Security receipts
5. Government securities
6. Rights or interest in securities
7. Any instrument declared by Central Government to be securities

Recognition of Stock Exchanges (Section 4)

No person can operate a stock exchange without recognition from SEBI. Key conditions include:

• Rules must provide fair dealing and investor protection
• Adequate facilities for trading and settlement
• Compliance with SEBI guidelines

Listing of Securities (Section 9)

Section 9 empowers SEBI to regulate listing requirements. The detailed requirements are in SEBI (LODR) Regulations, 2015.

Contracts in Derivatives (Section 18A)

Section 18A gives legal validity to derivatives contracts traded on recognized stock exchanges. Without this provision, derivatives would be void as wagering contracts under the Indian Contract Act.

2.4 Companies Act, 2013 Interface

The Companies Act, 2013 interfaces with securities law in multiple areas, particularly regarding public issues, disclosure requirements, and corporate governance.

Key Interface Areas

Section 24 - Power of SEBI regarding Prospectus

SEBI has overriding powers regarding offer documents for listed companies. The Companies Act defers to SEBI regulations in matters of securities market regulation.

Corporate Governance Framework

The corporate governance provisions demonstrate significant overlap:

• Board Composition: Both require independent directors, but SEBI LODR has specific requirements for listed entities
• Audit Committee: Both mandate constitution, but SEBI specifies additional functions
• Related Party Transactions: SEBI LODR has stricter thresholds and approval requirements
• Vigil Mechanism: Both require it, SEBI mandates specific access to audit committee

2.5 Depositories Act, 1996

The Depositories Act established the legal framework for dematerialization of securities and electronic holding, revolutionizing the Indian securities market.

Key Concepts

Section 10 - Rights of Depositories and Beneficial Owners

Key provisions regarding ownership rights:

• Depository is registered owner but not beneficial owner
• Depository has no voting rights except as beneficial owner directs
• Beneficial owner entitled to all rights and benefits
• Transfer through depository is exempt from stamp duty

Impact of Dematerialization