Securities Contracts (Regulation) Act, 1956

The SCR Act was enacted to regulate contracts of sale, purchase, exchange, and other transactions in securities, ensuring market integrity and investor protection.

It defines a securities contract as any agreement for the sale or purchase of a security, a derivative thereof, or an option to buy or sell such securities. The definition deliberately includes both cash and derivative contracts, which is why the Act is the cornerstone for equity‑derivatives regulation.

For the NISM exam, remember that the Act applies to all contracts that are executed on a recognised stock exchange or through a clearing corporation. Any contract outside this framework is deemed illegal and may attract severe penalties.

Section 4 mandates that every securities contract must be executed through a recognised stock exchange or a clearing corporation approved by SEBI. This eliminates over‑the‑counter (OTC) trading in regulated securities.

Section 5 requires every broker, sub‑broker, and clearing member to be registered with the exchange and to maintain a minimum net‑worth as prescribed by SEBI. Failure to register results in the contract being void and the parties liable for penalties.

The Act also empowers SEBI to issue directions, conduct inspections, and enforce compliance. For exam purposes, focus on the registration requirement, net‑worth criteria, and the prohibition of unregistered contracts.

Three major categories are recognised: contracts of sale (spot transactions), options (right but not obligation to buy/sell), and futures (obligation to buy/sell at a future date). Each category must be cleared through a SEBI‑approved clearing corporation.

Spot contracts involve immediate delivery and settlement, while derivatives (options and futures) involve deferred settlement. The Act treats them uniformly for registration and compliance, but the risk‑management requirements differ.

Other specialised contracts, such as swaps and forward contracts, are also covered if they are listed on a recognised exchange. The exam may test your ability to differentiate between listed and unlisted derivatives.

A recognised stock exchange is one that SEBI has authorised under Section 4 of the SCR Act. It must maintain a robust clearing and settlement system, enforce contract‑level compliance, and report daily trading data to SEBI.

Exchanges are also responsible for monitoring member compliance with net‑worth requirements and for imposing disciplinary actions, such as suspension of trading rights, on defaulting members.

For the exam, remember that the exchange acts as the ‘gate‑keeper’ for every securities contract. Any contract executed outside a recognised exchange is automatically illegal under the Act.

Section 11 of the SCR Act empowers SEBI to levy monetary penalties for contraventions such as unregistered contracts, failure to maintain net‑worth, or false statements in prospectuses.

Penalties are calculated on a per‑day basis for continued violations, and the Act allows SEBI to impose imprisonment of up to three years for serious offences.

In the exam, you may be asked to identify the correct penalty provision for a given breach. Focus on the distinction between monetary fines and criminal prosecution.

The 2012 amendment introduced stricter net‑worth norms for clearing members and expanded the definition of "securities contract" to explicitly include electronic contracts executed through algorithmic trading platforms.

In 2020, SEBI mandated real‑time reporting of derivative positions to enhance market surveillance. This amendment reinforced the Act’s relevance to modern high‑frequency trading.

Exam candidates should note the year of amendment and the key change (net‑worth or reporting) as these are frequent multiple‑choice stems.