3.1 Definition of "Securities" under SCRA
The definition of "securities" is fundamental to securities law. It determines SEBI's jurisdiction and the applicability of various regulations. An instrument must qualify as a "security" to attract SEBI's regulatory oversight.
Section 2(h) of SCRA - The Complete Definition
Securities include:
- Shares, scrips, stocks, bonds, debentures, debenture stock - Traditional equity and debt instruments
- Other marketable securities of a like nature - Similar tradeable instruments
- Derivative - As defined in Section 2(ac) of SCRA
- Units of a collective investment scheme - Including mutual fund units
- Security receipt - As defined under SARFAESI Act
- Government securities - Central/State government obligations
- Rights or interest in securities - Beneficial interests
- Instruments declared by Central Government - By notification in Official Gazette
The scope of "securities" directly determines SEBI's regulatory reach. If an instrument is NOT a security under SCRA Section 2(h), SEBI generally lacks jurisdiction to regulate it. This is why cryptocurrency regulation debates focus on whether crypto-assets are "securities."
What is NOT a Security
Certain instruments are explicitly excluded or have been held not to be securities:
- Bank fixed deposits: Regulated by RBI, not SEBI
- Insurance policies: Regulated by IRDAI
- Chit funds: Regulated under state legislation
- Real estate investments (directly): Not securities, but REITs are
- Cryptocurrency (currently): No clear classification as security
3.2 Derivatives, Mutual Funds & Collective Investment Schemes
Understanding the legal definitions of derivatives and pooled investment vehicles is essential for advising on structured products and investment schemes.
Derivative - Section 2(ac) of SCRA
Types of Exchange-Traded Derivatives
| Type | Definition | Settlement |
|---|---|---|
| Futures | Obligation to buy/sell at future date at agreed price | Cash or physical |
| Options | Right (not obligation) to buy/sell at agreed price | Cash settled in India |
| Index Futures | Futures on stock index (Nifty, Bank Nifty) | Cash settled |
| Stock Futures | Futures on individual stocks | Cash settled |
| Currency Derivatives | Futures/options on currency pairs | Cash settled |
Mutual Funds
Key Mutual Fund Structures
- Sponsor: Establishes the mutual fund, minimum 40% contribution to AMC
- Trust: Holds assets for benefit of unitholders
- AMC (Asset Management Company): Manages the fund, makes investment decisions
- Custodian: Holds securities of the fund
- Registrar: Maintains investor records
Collective Investment Scheme (CIS)
Unregistered CIS are illegal. SEBI has taken action against numerous plantation schemes, agricultural schemes, and investment schemes that were disguised CIS. The Sahara case prominently involved CIS issues.
3.3 FPIs, FIIs, and AIFs
Foreign portfolio investors and alternative investment funds play significant roles in Indian capital markets. Understanding their regulatory definitions is crucial for advising on cross-border investments.
Foreign Portfolio Investor (FPI)
FPI Categories
| Category | Includes | Characteristics |
|---|---|---|
| Category I | Government/Central Banks, Sovereign Wealth Funds, Pension Funds | Highest level of regulation in home country |
| Category II | Regulated entities like banks, asset managers, insurance companies | Appropriately regulated broad-based funds |
| Category III | All others not in I or II | Endowments, charitable trusts, etc. |
FII vs FPI
The term "FII" (Foreign Institutional Investor) was replaced by "FPI" in 2014 to create a unified regime. The FPI regime merged FIIs, sub-accounts, and Qualified Foreign Investors into a single framework with simplified registration.
Alternative Investment Funds (AIFs)
AIF Categories
| Category | Type | Investment Focus |
|---|---|---|
| Category I | Venture Capital, SME Funds, Social Venture, Infrastructure | Start-ups, early-stage, social enterprises |
| Category II | Private Equity, Debt Funds, Fund of Funds | Residual category with no specific incentives/restrictions |
| Category III | Hedge Funds | Employ leverage, short-selling, complex strategies |
AIF minimum investment is Rs. 1 crore (Rs. 25 lakh for employees/directors). Maximum investors generally 1,000 per scheme. These are for sophisticated investors, not retail.
3.4 Listed vs Unlisted Securities
The distinction between listed and unlisted securities determines which regulatory framework applies and what compliance obligations exist.
Listed Securities
Regulatory Implications of Listing
- Continuous Disclosure: Periodic financial results, material events, shareholding patterns
- Corporate Governance: Board composition, committees, independent directors
- Related Party Transactions: Approval requirements under LODR
- Insider Trading: Trading window closures, pre-clearance requirements
- Takeover Code: Open offer obligations on acquisition
Unlisted Securities
Securities not listed on any exchange. However, unlisted securities are still regulated in certain aspects:
- Private Placement: Section 42 of Companies Act applies
- Transfer: Subject to Companies Act and Articles
- Unlisted NCDs: SEBI (ILDS) Regulations apply to issuance
- Insider Trading: SEBI PIT Regulations apply to unlisted securities of listed companies
| Aspect | Listed Securities | Unlisted Securities |
|---|---|---|
| Trading | On recognized stock exchange | Off-market/private transactions |
| Price Discovery | Transparent market price | Negotiated/valuation-based |
| Disclosure | Extensive continuous disclosure | Limited to Companies Act |
| Liquidity | Generally high | Limited, illiquid |
| Transfer | Through depository, T+1 | Manual/depository, no time limit |
| Regulator | SEBI primarily | MCA primarily, SEBI for certain aspects |
3.5 Book Entry Securities and Dematerialization
Modern securities markets operate on book-entry systems where securities exist as electronic records rather than physical certificates.
Dematerialization
Key Terminology
| Term | Meaning |
|---|---|
| ISIN | International Securities Identification Number - unique 12-character alphanumeric code identifying a security |
| DP ID | Depository Participant Identifier - unique code for each DP |
| Client ID | Unique identifier for investor's demat account with a DP |
| Beneficial Owner | Person in whose name securities are credited in demat account |
| Registered Owner | Depository (NSDL/CDSL) as per company records |
| Rematerialization | Converting electronic holdings back to physical certificates |
Book-Entry Transfer Process
- Trade Execution: Buy/sell order matched on exchange
- Trade Confirmation: Broker confirms trade details to client
- Clearing: Clearing corporation determines obligations
- Settlement: Securities debited/credited to demat accounts (T+1)
- Pay-in/Pay-out: Funds transferred through clearing banks
India moved to T+1 (trade date plus one day) settlement in January 2023, making it one of the fastest settlement cycles globally. This reduces counterparty risk and improves capital efficiency.
Benefits of Book-Entry System
- Elimination of Counterfeiting: No physical certificates to forge
- Faster Settlement: T+1 instead of weeks
- Reduced Paperwork: No transfer deeds, no stamp duty
- Easy Corporate Actions: Dividends, bonuses credited automatically
- Nomination Facility: Easy transmission on death
- Pledging: Electronic pledge for loans
Key Takeaways
- SCRA Section 2(h) definition of securities determines SEBI's regulatory jurisdiction
- Derivatives derive value from underlying assets and are legally valid when exchange-traded
- FPI regime replaced FII in 2014, creating unified foreign investor framework
- AIFs are for sophisticated investors with minimum Rs. 1 crore investment
- Listed securities attract extensive compliance; unlisted have fewer but still significant requirements
- Dematerialization is mandatory; India operates on T+1 settlement