Securities Contracts Regulation Act (SCRA 1956)

Securities Contracts Regulation Act, 1956 was enacted to prevent undesirable trading practices and to protect investors from fraudulent contracts. The Act defines a “securities contract” as any agreement to buy, sell, or exchange a security at a future date, including futures, options, and forward contracts.

The primary objective of SCRA is to bring all trading of such contracts under a regulated framework, ensuring transparency, reducing systemic risk, and aligning Indian markets with global best practices. It empowers the government and the Securities and Exchange Board of India (SEBI) to oversee exchanges, prescribe eligibility criteria, and enforce disciplinary actions.

For the NISM exam, you will often be asked to recall the definition of a securities contract, the Act’s jurisdiction, and the relationship between SCRA and the SEBI Act. Missing any of these points can lead to loss of marks in the “Regulatory Framework” section.

• SCRA applies to all contracts that are listed on a recognized stock exchange in India.
• Unlisted contracts that fall under the definition are also covered, but enforcement is primarily through exchange regulation.

The Act mandates that every stock exchange dealing in securities contracts must be registered with the central government. Registration requires a minimum net‑worth, a prescribed constitution, and adherence to trading‑hour norms. Once registered, the exchange must maintain a contract‑specification booklet that lists permissible contract types, lot sizes, and settlement procedures.

SCRA also restricts the creation of new contracts unless expressly permitted by the government. This means that advisory firms cannot design bespoke derivatives without prior approval. The Act further empowers SEBI to issue directions to exchanges for the suspension or cancellation of contracts that are deemed manipulative or harmful to market integrity.

Exam‑wise, remember that the Act focuses on three pillars: (1) registration of exchanges, (2) specification of permissible contracts, and (3) enforcement of penalties for violations. Questions often combine these pillars, asking you to match a provision with its purpose.

• Only contracts listed in the exchange’s contract‑specification booklet are legal.
• Any deviation without government approval is a punishable offence.

Under SCRA, a stock exchange must obtain a licence from the central government after satisfying criteria such as a minimum paid‑up capital of ₹100 crore (as per the latest amendment) and a robust risk‑management framework. The exchange is required to submit periodic returns, maintain a clearing house, and ensure that all contracts traded are in compliance with the Act.

SEBI, though created later, works in tandem with SCRA. It monitors exchange operations, conducts inspections, and can direct an exchange to suspend trading in a particular contract if it suspects manipulation. SEBI’s powers to levy fines and impose bans are derived from both the SEBI Act and SCRA.

For the exam, you may be asked to identify which authority grants the licence (the central government) and which body enforces day‑to‑day compliance (SEBI). Remember that the licence is a one‑time requirement, while compliance is continuous.

• Licence issuance → Central Government.
• Ongoing supervision → SEBI.

SCRA explicitly bans certain practices such as trading in contracts not listed in the contract‑specification booklet, creating contracts that are “unfairly advantageous”, and dealing in contracts that are speculative to the point of destabilising the market. Violations attract both monetary fines and imprisonment, with the severity depending on the nature of the offence.

Typical penalties include a fine up to ₹5 crore for individuals and up to ₹25 crore for corporate entities, along with imprisonment for up to three years. In addition, the offending exchange may face suspension of its licence, and the contract itself can be cancelled.

Exam questions often test your knowledge of the maximum fine and imprisonment terms. Be careful not to interchange the limits for individuals and companies; the Act clearly differentiates them.

• Fine for individuals – up to ₹5 crore.
• Fine for companies – up to ₹25 crore.

Investment advisers must ensure that any derivative recommendation complies with the contract specifications laid down by the exchange under SCRA. This includes verifying lot size, expiry dates, and settlement mechanisms before advising a client.

Advisers are also required to maintain records of all client recommendations involving securities contracts for a minimum of five years, as stipulated by SEBI’s compliance guidelines, which are reinforced by SCRA’s emphasis on transparency.

Failure to adhere can result in disciplinary action against the adviser, including fines, suspension of advisory licence, or even criminal prosecution. In the exam, you may encounter case‑based questions where you must identify the correct compliance step for a given advisory scenario.

• Check contract‑specification booklet before recommending futures/options.
• Maintain detailed advisory records for at least five years.