SEEDLING SCHOOL OF LAW AND GOVERNANCE

JAIPUR NATIONAL UNIVERSITY

SECURITIES AND INVESTMENT LAW PROJECT

TOPIC: RECOGNIZED STOCK EXCHANGE- ITS CONSTITUTION, POWERS, DUTIES AND
ROLE IN THE CORPORATE GOVERNANCE

SUBMITTED TO

SUBMITTED BY

MR. MANISH YADAV

ASSISTANT PROF.
SEM.)

OF

KUMARI ABHA
LAW

B.A.L.LB (10 TH

DECLARATION
I declare that the project entitled Recognized stock exchange- Its constitution, powers, duties
and role in the corporate governance is the outcome of my own work conducted under the
supervision of Mr. Manish Yadav at Seedling School of Law And Governance, Jaipur
National University (Jaipur)
I further declare that to the best of my Knowledge the project does not contain any part of any
work, which has been submitted for the award of any degree either in this University or in
any other University / Deemed University without proper citation.
Abha
Dated: 5th April 2013

CERTIFICATE OF THE SUPERVISOR

This is to certify that the research work entitled Recognized stock exchange- Its constitution,
powers, duties and role in the corporate governance is the work done by Abha under my
guidance and supervision for the Partial fulfillment of the requirement of marks
To the best of my Knowledge and belief the dissertation: (i) embodies the work of the
candidate himself; (ii) has been duly completed; and (iii) is up to the standard both in respect
of contents and language for being referred to the examiner.

Mr. Manish Yadav

Assistant Professor of Law
Supervisor

ACKNOWLEDGEMENT
I would like to express profound gratitude to Mr. Manish Yadav, for his invaluable support,
encouragement, supervision and useful suggestions throughout this research work. His moral
support and continuous guidance enabled me to complete my work successfully. His
intellectual thrust and blessings motivated me to work rigorously on this study. In fact this
study could not have seen the light of the day if his contribution had not been available. It
would be no exaggeration to say that it is his unflinching faith and unquestioning support
that has provided the sustenance necessary to see it through to its present shape.
For any work to be successfully completed, a prime requirement is that of leadership and
guidance. I must mention Manish sir was Eveready to give us a helping hand. It was under
his guidance that I have been able to focus on the research questions which otherwise would
have been vague and unsatisfactory. He helped us at every possible stage over this project
and also encouraged us to go into deeper research. I was also helped by my friends who
cooperated with and guided us with the process to proceed and as to how to limit my
research into a short yet precise and comprehensive work Therefore this project, without any
mention of their would have remained, an idea incomplete.

Abha
X Semester
B.A.LLB (Hons.)

TABLE OF CONTENTS
DECLARATION.............................................................................................................................II
CERTIFICATE OF THE SUPERVISOR............................................................................................ III
ACKNOWLEDGEMENT................................................................................................................IV
CHAPTER

I.

I INTRODUCTION..........................................................................................................1

BACKDROP.......................................................................................................................1

II. SCHEME OF STUDY..........................................................................................................2

A.

STATEMENT OF PROBLEM.........................................................................................2

B.

METHODOLOGY........................................................................................................2

III. CHAPTERISATION.............................................................................................................3
CHAPTER II EVOLUTION OF LAW...............................................................................................4
I.

WHAT IS MEANING OF STOCK EXCHANGE........................................................................4

CHAPTER III CONSTITUTION OF RECOGNISED STOCK EXCHANGE..............................................6

I.

OBLIGATION TO SEEK RECOGNITION................................................................................6

II. APPLICATION FOR RECOGNITION OF STOCK EXCHANGES...............................................6

A.

APPLICATION UNDER THE ACT.................................................................................6

III. CONSIDERATION OF GRANT OF RECOGNITION.................................................................7

IV. GRANT OF RECOGNITION TO STOCK EXCHANGES...........................................................9
V. CORPORATISATION AND DEMUTUALISATION OF STOCK EXCHANGES.............................11
A.

PROCEDURE FOR CORPORATISATION AND DEMUTUALISATION...............................11

VI. WITHDRAWAL OF RECOGNITION....................................................................................13

CHAPTER IV POWER OF RECOGNISED STOCK EXCHANGES......................................................14
I.

POWER TO MAKE RULES RESTRICTING VOTING RIGHTS ETC........................................14

II. POWER OF RECOGNISED STOCK EXCHANGES TO MAKE BYE-LAWS.-.............................14

CHAPTER

V DUTIES OF RECOGINSED STOCK EXCHANGE..........................................................17

CHAPTER VI: ROLE OF STOCK EXCHANGE IN CORPORATE GOVERNANCE.............................19

I.

FOLLOWING POINTS SHOW RELEVANCE OF ROLE OF STOCK EXCHANGES IN THE

CORPORATE GOVERNANCE:..................................................................................................19

II. THE EVOLVING ROLE OF EXCHANGES IN RESPECT OF CORPORATE GOVERNANCE.....19

A.

EXCHANGES ACT AS A SOURCE OF CORPORATE GOVERNANCE RELATED

REGULATION......................................................................................................................19

B.

EXCHANGES PLAYED A CENTRAL ROLE IN THE EFFECTIVE IMPLEMENTATION OF

NATIONAL CORPORATE GOVERNANCE CODES...................................................................20

C.

COMPLIANCE REQUIREMENTS................................................................................20

D.

AWARENESS RAISING EFFORTS HAVE ALSO PLAYED A ROLE..................................20

E.

INCREASING COMPETITION AMONG STOCK EXCHANGES.......................................21

CHAPTER VII CONCLUSION......................................................................................................22

CHAPTER VIII BIBLIOGRAPHY.................................................................................................23
STATUTES..............................................................................................................................23
BOOK....................................................................................................................................23
ARTICLE................................................................................................................................23
WEBSITE...............................................................................................................................23

CHAPTER

I.

INTRODUCTION

Backdrop

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the
close of 18th century when the East India Company used to transact loan securities. In the
1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading was broad but the brokers were hardly half dozen during 1840
and 1850. An informal group of 22 stockbrokers began trading under a banyan tree opposite
the Town Hall of Bombay from the mid-1850s, each investing a (then) princely amount of
Rupee 1. This banyan tree still stands in the Horniman Circle Park, Mumbai. In 1860, the
exchange flourished with 60 brokers. In fact the 'Share Mania' in India began with the
American Civil War broke and the cotton supply from the US to Europe stopped. Further the
brokers increased to 250. The informal group of stockbrokers organized themselves as the
The Native Share and Stockbrokers Association which, in 1875, was formally organized as
the Bombay Stock Exchange (BSE). 1
The first legislative mesuare providing fr the regulation of stock exchange was enacted in
1952 the Bombay securities contracts control Act 1925 to regulate and control certain
contract for the purchase and sale of securities in the city of Bombay and elsewhere in the
Bombay presidency. However the impact of Act on the regulation of trading in securities was
rather insignificant, in 1951, a draft bill on stock exchange regulation in India, based on the
report of a committee, was prepared and referred to an expert committee under the
chairmanship of A.D Gorawala. The recommendation of the Gorawala committee (1954)
culminated in the enactment of the securities contracts (regulation) Act (SCRA), 1956, which
has been amended from time to time. 2 In 1956, the Government of India recognized the
Bombay Stock Exchange as the first stock exchange in the country under the Securities
Contracts (Regulation) Act the SCRA provide the broad framework of the present scheme of
stock exchange regulation in India.

1 http://shodhganga.inflibnet.ac.in/, Article on History & Evolution of Stock Exchanges in India

2 MY khan Indian Financial System 5E, The Mc Graw-hill companies

The most decisive period in the history of the BSE took place after 1992. the BSE helped
radicalise the position of the government, which encouraged the creation of the National
Stock Exchange (NSE), which National Stock Exchange incorporated in the year 1992
provides trading in the equity as well as debt market.. NSE started trading on 4 November
1994. Within less than a year, NSE turnover exceeded the BSE. Maximum volumes take
place on NSE and hence enjoy leadership position in the country today. 3
II.

Scheme of Study
A. Statement of Problem

To study and analyze how recognized stock exchange constitue ,and what is the power, duties
and role of recognized stock exchange,
B. Methodology
a) Objectives
The objectives of the study are as follows:
(i) To deal with the provision and present law of the recognized stock exchange.
(ii) To trace the variation in the Act, rule and regulation related recongnised stock
exchane.
(iii)

To analyze how recognized stock exchange is beneficiary to corporate

governance

b) Hypotheses
Due to the undesirable transaction in securities by the business of dealing therein and also
seek buying and selling of securities outside the limit of stock exchange has brought changes
in the perception of approach towards new law.
c) Data Collection
In order to approach the prescribed objectives of study, doctrinal model of research
methodology is proposed, intensive literature review on the subject would be applied and the
issues under study would be examined in a systematic manner. E-resources have majorly
contributed in writing of this dissertation for getting the most relevant and latest information
on the relevant websites which has helped the researcher to explore the subject through

3 www.conventuslaw.com

various dimensions.
chapters.

The broad facets of the study are indicated in terms of proposed

III.

Chapterisation

The present study is divided into seven chapters.

The Chapter I, deals with the introduction in which include backdrop, scheme of study.
The Chapter II deals with the evolution of law in which include definition of stock exchange
and recognized stock exchange.
In chapter III, provide provision and what is essential element for constitution of recognised
stock exchange in the corporate governance.
The chapter IV, deal with provision for power of recognised stock exchange
The chapter V provide the duties of recognised stock exchange.
The chapter VI, deals with role of recognised stock exchange in corporate governance
The chapter VII, deals with the conclusion
The Chapter VIII is Bibliography

CHAPTER II EVOLUTION OF LAW

India has been the foremost leader in introducing norms related to Corporate Governance in
the corporate world. Corporate governance initiatives have been undertaken by the Ministry
of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). The first
formal regulatory framework for listed companies specifically for corporate governance was
established by the SEBI in February 2000, following the recommendations of
Kumarmangalam Birla Committee Report. It was enshrined as Clause 49 of the Listing
Agreement. Further, SEBI is maintaining the standards of corporate governance through other
laws like the Securities Contracts (Regulation) Act, 1956 the SCRA provide the broad
framework of the present scheme of stock exchange regulation in India; Securities and
Exchange Board of India Act, 1992; and Depositories Act, 1996. Stock Exchange provides a
trading platform, where buyers and sellers can meet to transact in securities
I.

What is meaning of stock exchange

Stock Exchanges are an organized marketplace, either corporation or mutual organization,

where members of the organization gather to trade company stocks or other securities. The
members may act either as agents for their customers, or as principals for their own accounts.
Stock exchanges also facilitates for the issue and redemption of securities and other financial
instruments including the payment of income and dividends. The record keeping is central
but trade is linked to such physical place because modern markets are computerized. The
trade on an exchange is only by members and stock broker do have a seat on the exchange.4
Stock exchange means anybody of individuals, whether incorporated or not, constituted
before corporatisation and demutualisation or a body corporate incorporated under the
Companies Act ,whether under scheme of corporatisation or demutualisation or otherwise for
the purpose of assisting /regulating/controlling the business of buying ,selling or dealing in
securities.5

4 www.sebi.gov.in

5 Under section 2(j) of Securities Contracts (Regulation) Act, 1956 [42 Of 1956]

Corporatisation means the succession of a recognised stock exchange, being a body of

individual or a society registered under the societies registration Act 1860 (21 of 1860), by
another stock exchange, being a company incorporated for the purpose of assisting
/regulating/controlling the business of buying ,selling or dealing in securities carried on by
such individual/society.6
Demutualisation means the segregation of ownership and management from the trading right
of the member of a recognised stock exchange approved by the Securities and Exchange
Board of India7
Such scheme means a scheme for corporatisation and demutualisation of a recognised stock
exchange which may provide for :

The issue of share for a lawful consideration and provision of trading right in lieu of

membership cards of the member of a recognised stock Exchange,

The restriction on voting rights,
The transfer of property/business/assets/rights/liabilities/recognition/contracts of the
stock exchange/legal proceeding by or against, the stock exchange, which in the name
of stock exchange or any trustee or otherwise and any permission given to , or by the

stock exchange
Transfer of employees of a recognised stock exchange to another recognised stock

exchange,
Any other matter required for the purpose of, or in connection with, the
corporatisation/demutualisation of the recognised stock exchange.8

recognised stock exchange means a stock exchange which is for the time being recognised
by the Central Government under section 4;9

6 Section 2(aa) ibid

7 Section 2(ab) ibid

8 MY khan Indian Financial System 5E, page No. 4.13

9 Under section 2(f) of Securities Contracts (Regulation) Act, 1956 [42 Of 1956]

CHAPTER III CONSTITUTION

I.

OF RECOGNISED STOCK EXCHANGE

Obligation to seek recognition.

No person shall conduct, organise or assist in organising any stock exchange or clearing
corporation unless he has obtained recognition from the Board in accordance with the Act,
rules and these regulations.
Provided that a stock exchange, which has been recognised under the Act as on the date of
commencement of these regulations, shall be deemed to have been recognised under these
regulations and all the provisions of these regulations as they apply to a recognised stock
exchange shall also apply to such stock exchange.
Provided further that an existing clearing house of a recognised stock exchange or any person
who clears and settles trades of a recognised stock exchange, as on the date of the
commencement of these regulations, may continue to do so for a period of three months from
the date of commencement of these regulations or, if he has made an application under
regulation 4 for recognition, till disposal of such application.
II.

Application for Recognition of Stock Exchanges.

A. Application under the Act

Any stock exchange, which is desirous of being recognised for the purposes of this Act, may
make an application in the prescribed manner to the Central Government. 10 Every application
shall contain such particulars as may be prescribed, and shall be accompanied by a copy of
the bye-laws of the stock exchange for the regulation and control of contracts and also a copy
of the rules relating in general to the constitution of the stock exchange and in particular, to
(a) The governing body of such stock exchange, its constitution and powers of management
and the manner in which its business is to be transacted;
(b) The powers and duties of the office bearers of the stock exchange;
(c) The admission into the stock exchange of various classes of members, the qualifications
for membership, and the exclusion, suspension, expulsion and re-admission of members there
from or there into;
10 Id, Sec 3(1)

(d) The procedure for the registration of partnerships as members of the stock exchange in
cases where the rules provide for such membership; and the nomination and appointment of
authorised representatives and clerks.
Subject to compliance with the provisions of Act, rules and these regulations, an application
for recognition as a stock exchange shall be submitted to the Board in Form A as prescribed
under rule 3 of the rules and an application for recognition as a clearing corporation shall be
submitted to Board in Form A as specified in Schedule I of these regulations. 11
a) Fee for Application.
An applicant seeking recognition as a stock exchange shall pay application fee in terms of
rule 4 of the rules, and an applicant seeking recognition as a clearing corporation shall also
pay application fee as payable by a stock exchange.12
b) Documents and Particulars for Application.
An application for recognition as a stock exchange or a clearing corporation, as the case may
be, shall be accompanied by copies of memorandum of association, articles of association,
bye-laws and other documents as provided in sections 3 and 4 of the Act 13, rule 5 of the
rules14 and these regulations.15
III.
i.

Consideration of grant of Recognition.

The application under regulation 4 shall be governed by the provisions of the Act,
rules and these regulations. An applicant seeking recognition as a stock exchange or
clearing corporation shall comply with the following conditions, namely:

11 Under regulation 4 of Securities Contracts (Regulation) (Stock Exchanges And Clearing Corporations)
Regulations, 2012

12 Under regulation 5, ibid

13 Securities Contracts (Regulation) Act, 1956 [42 Of 1956]

14 Securities Contracts (Regulations) Rules, 1957

15 Under regulation 6. (1) , ibid

The applicant is a company limited by shares;

The applicant is demutualised;
The applicant, its directors and its shareholders who hold or intend to hold shares, are

fit and proper persons as described in regulation 20;

the applicant satisfies requirements relating to ownership and governance structure

specified in these regulations;

The applicant satisfies net worth requirements specified in these regulations;
The applicant satisfies requisite capability including its financial capacity, functional
expertise and infrastructure.

Demutualised means that the ownership and management of the applicant is segregated
from the trading rights or clearing rights, as the case may be, in terms of these regulations.
ii.

An applicant seeking recognition as a stock exchange shall, in addition to conditions

as specified in sub-regulations (1) and (2), comply with the following conditions,
namely:
(a) the applicant has the necessary infrastructure for orderly execution of trades;
(b) the applicant has an online screen-based trading system;
(c) the applicant has an online surveillance capability which monitors positions, prices
and volumes in real time so as to ensure market integrity;
(d) the applicant has adequate infrastructure to list securities for trading on its platform,
wherever applicable;
(e) the applicant has necessary capability to have a nationwide network of trading
members and has adequate facility to admit and regulate its members;
(f) the applicant has made necessary arrangements to establish connectivity with its
trading members and clearing corporation;
(g) the applicant has adequate Investor Protection Fund and Investor Services Fund;
(h) the applicant has adequate investor grievances redressal mechanism and arbitration
mechanism to resolve disputes arising out of trades and its settlement;
(i) the applicant has the facility to disseminate information about trades, quantities and
quotes in real time to at least two information vending networks which are accessible
to investors in the country;
(j) the applicant has adequate systems capacity supported by a business continuity plan
including a disaster recovery site;
(k) the applicant has in its employment, sufficient number of persons having adequate
professional and other relevant experience;
(l) the business feasibility plan has been appraised by a reputed agency having expertise
in securities market; and any other conditions as may be specified by the Board.

iii.

An applicant seeking recognition as a clearing corporation shall, in addition to

conditions as specified in sub-regulations (1) and (2), comply with the following
conditions, namely:
(a) the applicant has necessary infrastructure to ensure timely clearing and settlement of
trades;
(b) the applicant has adequate risk management mechanism;
(c) the applicant has a settlement procedure including netting, novation and guarantee for
settlement of trades in place, which is in accordance with the manner specified by the
Board;
(d) the applicant has the capacity to establish a fund to guarantee settlement of trades;
(e) the applicant has necessary capability to have a wide network of clearing members
and has adequate facility to admit and regulate its members;
(f) the applicant has established connectivity with the depositories, clearing banks, stock
exchange and clearing members;
(g) the applicant has adequate systems capacity for on-line/real time risk management of
trades cleared and settled and is supported by a suitable business continuity plan
including a disaster recovery site;
(h) the applicant has in its employment, sufficient number of persons having adequate
(i)

professional and other relevant experience to the satisfaction of the Board;

the applicant has the necessary arrangements in place for resolving disputes and

redressal of grievances arising out of clearing and settlement of trades;

(j) the applicant has an agreement with a depository and with a recognised stock
exchange in respect of clearing and settlement of the trades;
(k) the business feasibility plan has been appraised by a reputed agency having expertise
in securities market; and
(l) any other conditions as may be specified by the Board.
iv. The Board may, on being satisfied with the capability of the applicant to comply with
the conditions laid down in this regulation, grant an in-principle approval to the
applicant which shall be valid for a period of one year: Provided that the Board may,
upon sufficient cause shown by the applicant, extend the validity of in-principle
approval for a further period not exceeding six months
IV.

Grant of Recognition to Stock Exchanges.

Section 4 lays down that if the Central Government is satisfied (powers are exercisable by
SEBI also) after making such inquiry as may be necessary in this behalf and after obtaining
such further information, if any, as it may require;

(a) that the rules and bye-laws of a stock exchange applying for registration are in conformity
with such conditions as may be prescribed with a view to ensure fair dealing and to protect
investors;
(b) that the stock exchange is willing to comply with any other conditions (including
conditions as to the number of members) which the Central Government, after consultation
with the governing body of the stock exchange and having regard to the area served by the
stock exchange and its standing and the nature of the securities dealt with by it, may impose
for the purpose of carrying out the objects of this Act; and
(c) that it would be in the interest of the trade and also in the public interest to grant
recognition to the stock exchange;
it may grant recognition to the stock exchange subject to the conditions imposed upon it as
aforesaid and in such form as may be prescribed.
The conditions which the Central Government can prescribe for the grant of recognition to
the stock exchanges may include, among other matters, conditions relating to
(i) the qualifications for membership of stock exchanges;
(ii) the manner in which contracts shall be entered into and enforced as between members;
(iii) the representation of the Central Government on each of the stock exchanges by such
number of persons not exceeding three as the Central Government may nominate in this
behalf; and
(iv) the maintenance of accounts of members and their audit by chartered accountants
whenever such audit is required by the Central Government.
Every grant of recognition to a stock exchange under this section shall be published in the
Gazette of India and also in the Official Gazette of the State in which the principal office of
the stock exchange is situated, and such recognition shall have effect as from the date of its
publication in the Gazette of India.
No application for the grant of recognition shall be refused except after giving an
opportunity to the stock exchange concerned to be heard in the matter; and the reasons for
such refusal shall be communicated to the stock exchange in writing.

V.

Corporatisation and demutualisation of stock exchanges.

On and from the appointed date, all recognised stock exchanges (if not corporatized and
demutualised before the appointed date) shall be corporatized and demutualised in
accordance with the provisions contained in section 4B 16
Further SEBI may, if it is satisfied that any recognised stock exchange was prevented by
sufficient cause from being corporatized and demutualised on or after the appointed date,
specify another appointed date in respect of that recognised stock exchange and such
recognised stock exchange may continue as such before such appointed date.
appointed date for the purpose means the date which the Securities and Exchange Board of
India may, by notification in the Official Gazette, appoint and different appointed dates may
be appointed for different recognised stock exchanges.
A. Procedure for corporatisation and demutualisation.
Section 4B provides for procedure for corporatisation and demutualisation.All recognised
stock exchanges referred to in section 4A shall, within such time as may be specified by the
Securities and Exchange Board of India, submit a scheme for corporatisation and
demutualisation for its approval17
the Securities and Exchange Board of India, may, by notification in the Official Gazette,
specify name of the recognised stock exchange, which had already been corporatized and
demutualised, and such stock exchange shall not be required to submit the scheme under this
section.
On receipt of the scheme referred to in sub-section (1), the Securities and Exchange Board of
India may, after making such enquiry as may be necessary in this behalf and obtaining such
further information, if any, as it may require and if it is satisfied that it would be in the
interest of the trade and also in the public interest, approve the scheme with or without
modification.
No scheme under sub-section (2) shall be approved by the Securities and Exchange Board of
India if the issue of shares for a lawful consideration or provision of trading rights in lieu of
membership card of the members of a recognised stock exchange or payment of dividends to
members have been proposed out of any reserves or assets of that stock exchange.
16 Under section 4(A) of Securities Contracts (Regulation) Act, 1956 [42 of 1956].

17 Under section 4(B) of Securities Contracts (Regulation) Act, 1956 [42 of 1956].

Where the scheme so approved shall be published immediately by the Securities and
Exchange Board of India in the Official Gazette, the recognised stock exchange in such two
daily newspapers circulating in India, as may be specified by the Securities and Exchange
Board of India.
upon such publication the scheme shall have effect and be binding on all persons and
authorities including all members, creditors, depositors and employees of the recognised
stock exchange and on all persons having any contract, right, power, obligation or liability
with, against, over, to, or in connection with, the recognised stock exchange or its members.
However the Securities and Exchange Board of India is satisfied that it would not be in the
interest of the trade and also in the public interest to approve the scheme, it may, by an order,
reject the scheme and such order of rejection shall be published by it in the Official Gazette:
the Securities and Exchange Board of India shall give a reasonable opportunity of being
heard to all the persons concerned and the recognised stock exchange concerned before
passing an order rejecting the scheme.
The Securities and Exchange Board of India may, while approving the scheme by an order in
writing, restrict
(i) the voting rights of the shareholders who are also stock brokers of the recognised
stock exchange;
(ii) the right of shareholders or a stock broker of the recognised stock exchange to
appoint the representatives on the governing board of the stock exchange;
(iii)
the maximum number of representatives of the stock brokers of the
recognised stock exchange to be appointed on the governing board of the recognised
stock exchange, which shall not exceed one-fourth of the total strength of the
governing board.
The order made shall be published in the Official Gazette.
Every recognised stock exchange, in respect of which the scheme for corporatisation or
demutualisation has been approved shall either by fresh issue of equity shares to the public or
in any other manner as may be specified by the regulations made by the Securities and
Exchange Board of India, ensure that at least fifty-one per cent of its equity share capital is
held, within twelve months from the date of publication of the order, by the public other than
shareholders having trading rights:
Securities and Exchange Board of India may on sufficient cause being shown to it and in the
public interest, extend the said period by another twelve months.

VI.

Withdrawal of Recognition.

If the Central Government is of opinion that the recognition granted to a stock exchange
under the provisions of this Act should, in the interest of the trade or in the public interest, be
withdrawn, the Central Government may serve on the governing body of the stock exchange
a written notice that the Central Government is considering the withdrawal of the recognition
for the reasons stated in the notice and after giving an opportunity to the governing body to
be heard in the matter, the Central Government may withdraw, by notification in the Official
Gazette, the recognition granted to the stock exchange.18
However such withdrawal shall not affect the validity of any contract entered into or made
before the date of the notification, and the Central Government may, after consultation with
the stock exchange, make such provision as it deems fit in the notification of withdrawal or in
any subsequent notification similarly published for the due performance of any contracts
outstanding on that date.
Where the recognised stock exchange has not been corporatised or demutualised or it fails to
submit the scheme within the specified time there for or the scheme has been rejected by the
Securities and Exchange Board of India the recognition granted to such stock exchange, shall,
notwithstanding anything to the contrary contained in this Act, stand withdrawn and the
Central Government shall publish, by notification in the Official Gazette, such withdrawal of
recognition :
However such withdrawal shall not affect the validity of any contract entered into or made
before the date of the notification, and the Securities and Exchange Board of India may, after
consultation with the stock exchange, make such provisions as it deems fit in the order
rejecting the scheme published in the Official Gazette under sub-section (5) of section 4B.]

18 Under section 5 of Securities Contracts (Regulation) Act, 1956 [42 Of 1956]

CHAPTER IV POWER
I.

OF RECOGNISED STOCK EXCHANGES

Power to make Rules Restricting Voting Rights etc.

A recognised stock exchange may make rules or amend any rules made by it to provide for all
or any of the following matters, namely
(a) the restriction of voting rights to members only in respect of any matter placed before the
stock exchange at any meeting;
(b) the regulation of voting rights in respect of any matter placed before the stock exchange at
any meeting so that each member may be entitled to have one vote only, irrespective of his
share of the paid-up equity capital of the stock exchange;
(c) the restriction on the right of a member to appoint another person as his proxy to attend
and vote at a meeting of the stock exchange; and
(d) such incidental, consequential and supplementary matters as may be necessary to give
effect to any of the matters specified in clauses (a) (b) and (c). No rules of a recognised stock
exchange made or amended in relation to any matter referred to in clause (a) to (d) of subsection (1) shall have effect until they have been approved by the Central Government and
published by that Government in the Official Gazette and, in approving the rules so made or
amended, the Central Government may make such modifications therein as it thinks fit, and
on such publication, the rules as approved by the Central Government shall be deemed to
have been validly made, notwithstanding anything to the contrary contained in the
Companies Act, 1956. The powers have been delegated concurrently to SEBI also in this
regard.19
II.

Power of recognised stock exchanges to make bye-laws.-

Any recognised stock exchange may, subject to the previous approval of SEBI, make byelaws for the regulation and control of contracts. In particular, and without prejudice to the
generality of the foregoing power, such bye-laws may provide for:
a. the opening and closing of markets and the regulation of the hours of trade,

19 Sec 7A, ibid

b.

a clearing house for the periodical settlement of contracts and differences there under,
the delivery of and payment for securities, the passing on of delivery orders and the

regulation and maintenance of such clearing house;

c. submission to SEBI by the clearing house as soon as may be after each periodical
settlement of all or any of the following particulars as SEBI may, from time to time,
require, namely:
(i) the total number of each category of security carried over from one settlement period
to another;
(ii) the total number of each category of security, contracts which have been squared up
(iii)

during the course of each settlement period;

the total number of each category of security actually delivered at each

clearing;
d. publication by the clearing house of all or any of the particulars submitted to SEBI
subject to the directions, if any, issued by SEBI in this behalf;
e. the regulation or prohibition of blank transfers;
f. the number and classes of contracts in respect of which settlements shall be made or
g.
h.
i.

differences paid through the clearing house;

the regulation, or prohibition to badlas or carry-over facilities;
the fixing, altering or postponing of days for settlements;
the determination and declaration of market rates, including the opening, closing,

highest and lowest rates for securities;

j. the terms, conditions and incidents of contracts, including the prescription of margin
requirements, if any, and conditions relating thereto, and the forms of contracts in
writing;
k. the regulation of the entering into making, performance, rescission and termination,
of contracts, including contracts between members or between a member and his
constituent or between a member and a person who is not a member, and the
consequences of default or insolvency on the part of a seller or buyer or intermediary,
the consequences of a breach or omission by a seller or buyer, and the responsibility
of members who are not parties to such contracts;
l. the regulation of taravani business including the placing of limitations thereon;
m. the listing of securities on the stock exchange, the inclusion of any security for the
purpose of dealings and the suspension or withdrawal of any such securities, and the
suspension or prohibition of trading in any specified securities;
n. the method and procedure for the settlement of claims or disputes, including
settlement by arbitration;
o. the levy and recovery of fees, fines and penalties;
p. the regulation of the course of business between parties to contracts in any capacity;
q. the fixing of a scale of brokerage and other charges;
r. the making, comparing, settling and closing of bargains;

s.

the emergencies in trade which may arise, whether as a result of pool or syndicated
operations or concerning or otherwise, and the exercise of powers in such

emergencies including the power to fix maximum and minimum prices for securities;
t. the regulation of dealings by members for their own account;
u. the separation of the functions of jobbers and brokers;
v. the limitations on the volume of trade done by any individual member in exceptional
circumstances;
w. the obligation of members to supply such information or explanation and to produce
such documents relating to the business as the governing body may require. 20

20 section 9, Ibid

CHAPTER

V DUTIES

OF RECOGINSED STOCK EXCHANGE

1) Every recognised stock exchange shall furnish to the Securities and Exchange Board
of India such periodical returns relating to its affairs as may be prescribed.
2) Every recognised stock exchange and every member thereof shall maintain and
preserve for such periods not exceeding five years such books of account, and other
documents as the Central Government, after consultation with the stock exchange
concerned, may prescribe in the interest of the trade or in the public interest, and such
books of account, and other documents shall be subject to inspection at all reasonable
times 21by the Securities and Exchange Board of India.
3) SEBI may, if it is satisfied that it is in the interest of the trade or in the public interest
so to do, may, by order in writing,
a. call upon a recognised stock exchange or any member thereof to furnish in writing
such information or explanation relating to the affairs of the stock exchange or of the
member in relation to the stock exchange as the [Securities and Exchange Board of
India] may require; or
b. appoint one or more persons to make an inquiry in the prescribed manner in relation
to the affairs of the governing body of a stock exchange or the affairs of any of the
members of the stock exchange in relation to the stock exchange and submit a report
of the result of such inquiry to the Securities and Exchange Board of India within
such time as may be specified in the order or, in the case of an inquiry in relation to
the affairs of any of the members of a stock exchange, direct the governing body to
make the inquiry and submit its report to the Securities and Exchange Board of India.
4) Where an inquiry in relation to the affairs of a recognised stock exchange or the
affairs of any of its members in relation to the stock exchange
a. every director, manager, secretary or other officer of such stock exchange;
b. every member of such stock exchange;
c. if the member of the stock exchange is a firm, every partner, manager, secretary or
other officer of the firm; and
d. every other person or body of persons who has had dealings in the course of business
with any of the persons, whether directly or indirectly shall be bound to produce
before the authority making the inquiry all such books of account, and other
documents in his custody or power relating to or having a bearing on the subject21 Sec.6 , ibid

matter of such inquiry and also to furnish the authorities within such time as may be
specified with any such statement or information relating thereto as may be required
of him.
5) Every recognised stock exchange shall furnish the Central Government with a copy of
the annual report, and such annual report shall contain such particulars as may be
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

prescribed.22
changes in rules and bye-laws, if any;
changes in the composition of the governing body;
any new sub-committees set up and changes in the composition of existing ones;
admissions, re-admissions, deaths or resignations of members;
disciplinary action against members;
arbitration of disputes (nature and number) between members and non-members;
defaults;
action taken to combat any emergency in trade;
securities listed and de-listed; and
securities brought on or removed from the forward list.

6) Every recognised stock exchange shall within one month of the date of the holding of
its annual general meeting, furnish to SEBI with a copy of its audited balance sheet
and profit and loss account for its preceding financial year. 23
7) Every recognised stock exchange shall furnish to SEBI periodical returns relating
a.
b.
c.
d.
e.
f.

to,24
the official rates for the securities enlisted thereon;
the number of shares delivered through the clearing house;
the making-up prices;
the clearing house programmes;
the number of securities listed and de-listed during the previous three months;
number of securities brought on or removed from the forward list during the previous

g.

three months; and

any other matter as may be specified by the Securities and Exchange Board of India.

CHAPTER VI: ROLE OF STOCK EXCHANGE IN CORPORATE GOVERNANCE

In the corporate governance area, there are few issues quite as important as the role of stock
exchanges in the governance process.

22 Sec 7 , ibid

23 Rule 17 of Securities Contracts (Regulation) Rules, 1957

24 Rule 17 A, ibid

Effective corporate governance provides for more efficient allocation of resources, as the
return on assets in countries with the highest levels of corporate governance is double that of
the return on assets in countries with the lowest levels of corporate governance. India has
been proactive throughout its past 20 years of economic liberalization in bringing regulations
to help foster effective corporate governance that contributed to its economic growth.
Stock exchanges have shared their regulatory function with capital market supervisory
agencies. In addition to overseeing their own rules, stock exchanges were assigned the role of
monitoring the compliance with legislation and subsidiary securities regulation. Since the
promulgation of the SEBI, stock exchanges have often enlarged their regulatory role to
embrace a wider palette of corporate governance concerns. They have contributed to the
development of corporate governance recommendations and encouraged their application to
listed companies.
I.

Following points show relevance of role of Stock Exchanges

in the Corporate Governance:25
i.
ii.
iii.
iv.
v.
vi.
vii.

II.

Stock exchanges in the region developing rapidly; new exchanges being

establishe
Stock exchanges remain government owned entities
CG codes proliferating, some no longer voluntary
Regulatory or enforcement powers of exchanges limited
Room for strengthening of listing rules
Disclosure of listed companies requires further attention
No evidence of race to the bottom, need to align with industry peers.

The Evolving Role of Exchanges In Respect Of Corporate

Governance
A. Exchanges act as a source of corporate governance related regulation

Exchanges provide complementary rationales for establishing themselves as a source of

corporate governance-related regulations. In essence, by raising transparency and
discouraging illegal or irregular practices, exchanges are act as regulatory authorities. The
regulatory function of exchanges is exercised in the context of an existing legal framework.
Exchanges' ability to introduce and enforce regulations is obviously circumscribed by the

25Corporate Governance in India Evolution and Challenges by Rajesh Chakrabarti, College of Management,
Georgia Tech

authority of the relevant market regulators. To the extent that the relevant laws or securities
regulation already address corporate governance of listed companies,
B. Exchanges played a central role in the effective implementation of national corporate
governance codes
Corporate Governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The corporate governance framework is
there to encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society. One of the first among such endeavours was the CII
Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj.
The committee was formed in 1996 and submitted its code in April 1998. Later SEBI
constituted two committees to look into the issue of corporate governance the first chaired
by Kumar Mangalam Birla that submitted its report in early 2000 and the second by
Narayana Murthy three years later. The SEBI committee recommendations have had the
maximum impact on changing the corporate governance situation in India. The Narayana
Murthy committee worked on further refining the rules. The Exchange has brought about
unparalleled transparency, speed & efficiency, safety and market integrity. It has set up
facilities that serve as a model for the securities industry in terms of systems, practices and
procedures.
C. Compliance requirements
Listed companies have to comply with rules and regulations of concerned stock exchange and
work under the vigilance (i.e. supervision) of stock exchange authorities. Clause 49 of the
listing agreement with stock exchanges provides the code of corporate governance prescribed
by SEBI for listed Indian companies. With the introduction of clause 49, compliance with its
requirements is mandatory for such companies. Exchanges have played a pioneering role in
the development of the Indian securities market.
D. Awareness raising efforts have also played a role
Some exchanges have been actively involved in increasing the awareness around the value of
good corporate governance. For instance, The National Stock Exchange (NSE) a leading
stock exchange covering various cities and towns across the country has established &
organized training sessions and other educational projects in order to increase the awareness

of securities market & good governance practices and the Code of Best Practice for Listed
Companies.26 Such programmes not only serve the general public but also require corporates
to maintain good governance in light of investor awareness. In the same way an equally
important accomplishment of BSE Limited is its nationwide investor awareness campaign "Safe Investing in the Stock Market" under which awareness campaigns and dissemination of
information through print and electronic medium is undertaken across the country. BSE
Limited also actively promotes the securities market awareness campaign of the Securities
and Exchange Board of India.27
E. Increasing Competition among Stock Exchanges
While competition among stock exchanges is not new, it has intensified in recent years in
various areas of exchange activities, including trading, listing and settlement. In addition to
the obvious effects of demutualisation and listing of exchanges, a rapid improvement in
information technology and the creation of innovative financial instruments have also been
among the key factors. In consequence, the traditional view of exchanges as the controllers of
at least some has been severely shaken. Exchanges are increasingly seen as providers of
specific services in competitive markets, which include trading.

26 Official website of National Stock Exchange (http://www.nseindia.com/)

27 The state of corporate governance in India - A Poll by KPMG

CHAPTER VII CONCLUSION

Stock exchanges constitute the primary institution of the secondary market. The Securities
Contracts (Regulation) Act, 1956 was enacted by Parliament to prevent undesirable
transactions in securities by regulating the business of dealing therein, and by providing for
certain other matters connected therewith. Listing of securities with stock exchange is a
matter of great importance for companies and investors, because this provides the liquidity to
the securities in the market. Listing of Securities on Indian Stock Exchanges, thus, is
essentially governed by the provisions in the Companies Act, 1956, the Securities Contracts
(Regulation) Act, 1956, the Securities Contracts (Regulation) Rules, 1957, Rules, bye laws,
regulations of concerned stock exchange, the listing agreement entered into by the issuer and
stock exchange and circulars/guidelines issued by the Central Government and SEBI.
Development of norms and guidelines are an important first step in a serious effort to
improve corporate governance. These have been balanced by greater emphasis on selfregulation, minimization of regulatory approvals and increased and more transparent
disclosures. The bigger challenge in India, however, lies in the proper implementation of
those rules at the ground level. In India at present there are 23 recognised stock exchanges
along with NSE & BSE playing a prominent role in carrying out objectives of SEBI rules,
regulations & guidelines in true letter and spirit.

CHAPTER VIII BIBLIOGRAPHY

Statutes
1) Securities Contracts (Regulation) Rules, 1957
2) Securities Contracts (Regulation) Act, 1956
3) Securities Contracts (Regulation) (Stock Exchanges And Clearing Corporations)
Regulations, 2012
Book
1) MY khan Indian Financial System 5E, page No. 4.13
Article
1) Corporate Governance in India Evolution and Challenges by Rajesh Chakraborty,
College of Management, Georgia Tech
2) The state of corporate governance in India - A Poll by KPMG
3) Article on History & Evolution of Stock Exchanges in India.
Website
1)
2)
3)
4)
5)

www.sebi.gov.in
www.conventuslaw.com
http://shodhganga.inflibnet.ac.in/
Official website of National Stock Exchange (http://www.nseindia.com/)
Official website of Bombay Stock Exchange (http://www.bseindia.com)