Module 2

 J.J. Irani Committee (2005)

The J.J. Irani Committee was constituted by the Government of India in December, 2004 to evaluate the
comments and suggestions received on ‘concept paper’ and provide recommendations to the Government
in making a simplified modern law. The Committee submitted its report to the Government in May 2005,
which is under consideration till date.

The main features of its recommendations pertaining to corporate governance are as follows:
(a) The (new) company law should provide for minimum number of directors necessary for various
classes of companies. There need not be any limit to the maximum numbers of directors in a company.
This should be decided by the companies or by its Articles of Association.

(b) Both the managing director as also the whole time directors should not be appointed for more than
five years at a time.

(c) No age limit may be prescribed in the law. There should be adequate disclosure of age of the directors
in the company’s document. In case of a public company, appointment of directors beyond a prescribed
age (say) seventy years should be subject to a special resolution passed by the shareholders.

(d) A minimum of one-third of the total strength of the board as independent directors should be
adequate, irrespective of whether the chairman is executive or non-executive, independent or not.

(e) The total number of directorships, any one individual may hold, should be limited to a maximum of
fifteen.

(f) Companies should adopt remuneration policies that attract and maintain talented and motivated
directors and employees for enhanced performance

(g) There need not be any limit prescribed to sitting fees payable to non-executive directors including
independent directors. The company with the approval of shareholders may decide on remuneration.

(h) The requirement of the Companies Act, 1956 to hold a board meeting every three months and at least
four meetings in a year should continue. The gap between two board meetings should not exceed four
months.

(i) Majority of the directors of the audit committee should be independent directors if the company is
required to appoint independent directors. The chairman of the committee should be independent. At
least one member of the audit committee should have knowledge of financial management or audit or
accounts.

(j) There should be an obligation on the board of a public listed company to constitute a remuneration
committee, comprising non-executive directors including at least one independent director.

Guidelines made by MCA from time to time

Good corporate governance practices enhance companies’ value and stakeholders’ trust resulting into
robust development of capital market, the economy and also help in the evolution of a vibrant and
constructive shareholders’activism. The Ministry of Corporate Affairs has examined committee reports
as well as suggestions received from various stakeholders on issues related to corporate governance.
Keeping in mind that the subject of corporate governance may go well beyond the Law and that there are
inherent limitations in enforcing many aspects of corporate governance through legislative or regulatory
means, it has been considered necessary that a set of voluntary guidelines called “Corporate Governance
-Voluntary Guidelines 2009”

I. BOARD OF DIRECTORS

A. APPOINTMENT OF DIRECTORS

A.1 Appointments to the Board:-Companies should issue formal letters of appointment to Non-
Executive Directors (NEDs) and Independent Directors - as is done by them while appointing employees
and Executive Directors. The letter should specify:

• The term of the appointment;

• The expectation of the Board from the appointed director; the Board-level committee(s) in which the
director is expected to serve and its tasks;

• The fiduciary duties that come with such an appointment along with accompanying liabilities;

• Provision for Directors and Officers (D&O) insurance, if any,;

• The Code of Business Ethics that the company expects its directors and employees to follow;

• The remuneration, including sitting fees and stock options etc,

ii. Such formal letter should form a part of the disclosure to shareholders at the time of the ratification of
his/her appointment or re-appointment to the Board.
A. 3 Nomination Committee:-The companies may have a Nomination Committee comprising of
majority of Independent Directors, including its Chairman. This Committee should consider:

• proposals for searching, evaluating, and recommending appropriate Independent Directors and Non-
Executive Directors [NEDs], based on an objective and transparent set of guidelines.

 determining processes for evaluating the skill, knowledge, experience and effectiveness of individual
directors as well as the Board as a whole.

B. INDEPENDENT DIRECTORS

B.1 Attributes for Independent Directors:-

 The Board should put in place a policy for specifying positive attributes of Independent Directors
such as integrity, experience and expertise, foresight, managerial qualities and ability to read and
understand financial statements.
 All Independent Directors should provide a detailed Certificate of Independence at the time of their
appointment, and thereafter annually.

B.2 Tenure for Independent Director

i. An Individual may not remain as an Independent Director in a company for more than six years.
ii. A period of three years should elapse before such an individual is inducted in the same company in
any capacity. iii. No individual may be allowed to have more than three tenures as Independent Director
in the manner suggested in 'i' and 'ii' above.
iv. The maximum number of pubic companies in which an individual may serve as an Independent
Director should be restricted to seven.

C. REMUNERATION OF DIRECTORS
C.1 Remuneration
C.1.1 Guiding Principles-Linking Corporate and Individual Performance
i. The companies should ensure that the level and composition of remuneration is reasonable and
sufficient to attract, retain and motivate directors of the quality required to run the company successfully.
ii. Remuneration Policy for the members of the Board and Key Executives should be clearly laid down
and disclosed.
C.1.2 Remuneration of Non-Executive Directors (NEDs):
i. The companies should have the option of giving a fixed contractual remuneration, not linked to profits,
to NEDs. The companies should have the option to:
(a) Pay a fixed contractual remuneration to its NEDs, subject to an appropriate ceiling depending on the
size of the company; or
(b) Pay upto an appropriate percent of the net profits of the company.
C.1.3 Structure of Compensation to NEDs
i. The companies may use the following manner in structuring remunerationto NEDs:
• Fixed component: This should be relatively low, so as to align NEDs to a greater share of variable pay.
These should not be more than one-third of the total remuneration package.
• Variable component: Based on attendance of Board and Committee meetings (at least 75% of all
meetings should be an eligibility pre-condition)
• Additional variable payment(s) for being:
• the Chairman of the Board, especially if he/she is a nonexecutive chairman
• the Chairman of the Audit Committee and/or other committees
• members of Board committees.
ii. If such a structure (or any similar structure) of remuneration is adopted by the Board, it should be
disclosed to the shareholders in the Annual Report of the company.
C.1.4. Remuneration of Independent Directors (IDs)
i. In order to attract, retain and motivate Independent Directors of quality to contribute to the company,
they should be paid adequate sitting fees which may depend upon the twin criteria of Net Worth and
Turnover of companies.
ii. The IDs may not be allowed to be paid stock options or profit based commissions, so that their
independence is not compromised.

C.2 Remuneration Committee

i. Companies should have Remuneration Committee of the Board. This Committee should comprise of at
least three members, majority of whom should be non-executive directors with at least one being an
Independent Director.
ii. This Committee should have responsibility for determining the remuneration for all executive directors
and the executive chairman, including any compensation payments,

II. RESPONSIBILITIES OF THE BOARD

A. Training of Directors
i. The companies should ensure that directors are inducted through a suitable familiarization process
covering, inter-alia, their roles, responsibilities and liabilities.
ii. Besides this, the Board should also adopt suitable methods to enrich the skills of directors from time to
time.
B. Enabling Quality Decision making:-The Board should ensure that there are systems, procedures and
resources available to ensure that every Director is supplied, in a manner, with precise and concise
information in a form and of a quality appropriate to effectively enable/ discharge his duties.
C. Risk Management
i. The Board, its Audit Committee and its executive management should collectively identify the risks
impacting the company's business and document their process of risk identification, risk minimization,
risk optimization as a part of a risk management policy or strategy.
ii. The Board should also affirm and disclose in its report to members that it has put in place critical risk
management framework across the company, which is overseen once every six months by the Board.

III. AUDIT COMMITTEE OF BOARD

 AUDIT COMMITTEES Members

• At-least three members, two-thirds of which shall be IDs
• All the members must be financially literate and one member must be an expert in accounting or related
financial management
• The Chairman of the Audit Committee must be an Independent Director Meeting
• At-least four times a year and not more than four months gaps between meetings

Roles
• Oversight of the company’s financial reporting process and the disclosure of its financial information to
ensure that the financial statement is correct, sufficient and credible.
• Approval of payment to external auditors for any other services rendered by the external auditors.
• Recommending to the Board, the appointment, re-appointment and, if required, the replacement or
removal of the external auditor and the fixation of audit fees.
• Reviewing, with the management, the annual financial statements before submission to the board for
approval • Reviewing, with the management, the quarterly financial statements before submission to the
board for approval
• Reviewing, with the management, external and internal auditors, adequacy of the internal control
systems.
• Reviewing the company’s financial and risk management policies.
B. Audit Committee – Enabling Powers:
i. The Audit Committee should have the power to –
• have independent back office support and other resources from the company;
• have access to information contained in the records of the company; and
• obtain professional advice from external sources.
ii. The Audit Committee should also have the facility of separate discussions with both internal and
external auditors as well as the management.
IV. AUDITORS
A. Appointment of Auditors
i. The Audit Committee of the Board should be the first point of reference regarding the appointment of
auditors. ii. The Audit Committee should have regard to the profile of the audit firm, qualifications and
experience of audit partners, strengths and weaknesses, if any, of the audit firm and other related aspects.
iii. To discharge its duty, the Audit Committee should:
• discuss the annual work programme and the depth and detailing of the audit plan to be undertaken by
the auditor, with the auditor;
• examine and review the documentation and the certificate for proof of independence of the audit firm,
and
• recommend to the Board, with reasons,
B. Certificate of Independence
The Certificate of Independence should certify that the auditor together with its consulting and
specialized services affiliates, subsidiaries and associated companies or network or group entities has
not/have not undertaken any prohibited non-audit assignments for the company and are independent vis-
à-vis the client company.
C. Rotation of Audit Partners and Firms
i. In order to maintain independence of auditors with a view to look at an issue (financial or non-
financial) from a different perspective and to carry out the audit exercise with a fresh outlook, the
company may adopt a policy of rotation of auditors which may be as under:-
• Audit partner - to be rotated once every three years
• Audit firm - to be rotated once every five years.
V SECRETARIAL AUDIT
Since the Board has the overarching responsibility of ensuring transparent, ethical and responsible
governance of the company, it is important that the Board processes and compliance mechanisms of the
company are robust. To ensure this, the companies may get the Secretarial Audit conducted by a
competent professional. The Board should give its comments on the Secretarial Audit in its report to the
shareholders.
VI. INSTITUTION OF MECHANISM FOR WHISTLE BLOWING
 i. The companies should ensure the institution of a mechanism for employees to report concerns
about unethical behaviour, actual or suspected fraud, or violation of the company's code of
conduct or ethics policy.
ii. The companies should also provide for adequate safeguards against victimization of
employees who avail of the mechanism, and also allow direct access to the Chairperson of the
Audit Committee in exceptional
cases
GENERAL MEETING OF SHAREHOLDERS

Management structure for

corporate governance

ACCOUNT
AUDITING

ELECTION & REPORTING &

NOMINATING COMMITTEE

TERMINATION proposal

BOARD OF DIRECTORS

COMPENSATION COMMITTEE

REPORTING & PROPOSAL ELECTION & AUDIT COMMITTEE

TERMINATION

EXECUTIVE OFFICERS
AUDIT

CHIEF EXECUTIVE CHIEF OPERATION CHIEF FINANCIAL

OFFICER OFFICER OFFICER

General meeting of shareholders

The General Meeting of Shareholders is the superlative governing body. The Board of Directors
organized an annual general meeting at minimum once a year and held not prior than two months and not
later than six months afterward the financial year-end.
General Meetings provide shareholders the opportunity to elect on the Company's top significance
matters, with approval of annual financial statements, distribution of profit, declaration and payment of
dividends, the election of the Board of Directors and Review Committee as well as approval of the
Company's Charter.

Board of Directors
The board of directors is nominated by the shareholders, there two types of representatives on the board
of directors.

The first inside directors elected from inside the company. This can be a CEO, CFO, manager or any other
person who works for the company every day. The second outside directors, which are chosen outside and
are measured to be independent of the company. The role of the board is to observe a corporation's
management team, performing as an advocate for stockholders.

Board members divided into three parts:

Chief Executive Officer (CEO)  – The Chief Executive Officer is the top manager who is liable for the
entire corporation and reports directly to the board of directors and chairman. Chief Executive Officer is
liable to implement the decision. The Chief Executive Officer will also be elected as the company's
president.
Chief Operations Officer (COO) – The Chief Operation Officer looks to the problem connected to
marketing, sales, production, and personnel. The Chief Operation Officer is regularly referred to as a
senior vice president. In the hand of the chief operating officer that he look the day to day activities and
report to the chief executive officers.
Chief Financial Officer (CFO) – The Chief Financial Officer is liable for examining and go through
financial data, reporting financial performance, preparing budgets, and monitoring expenditures and
costs. The Chief Financial Officer is mandatory to current this information to the board of directors at
consistent intervals and gives it to shareholders. The chief financial officer also designated as senior vice
president and the daily checks the corporation's financial integrity and health.

Committee
 
Nomination committee – Nomination committee frame nomination policy, and recognize and nominate
the candidates for election by shareholders or fill casual vacancies. Committee review the Board
composition and range at least once annually.
Compensation committee- Group of individuals have been appointed to estimate and fixed the pay rate
for senior-level management. The committee may also be intricate in the choice of other compensation
options such as stocks, bonuses, profit sharing, and additional perks. The compensation committee has
many liabilities relating to the company’s whole compensation structure, policies, and programs. 
AUDIT COMMITTEES
• At-least three members, two-thirds of which shall be IDs
• All the members must be financially literate and one member must be an expert in accounting or related
financial management
• The Chairman of the Audit Committee must be an Independent Director Meeting
• At-least four times a year and not more than four months gaps between meetings
Audit Committee – Enabling Powers:
i. The Audit Committee should have the power to –
• have independent back office support and other resources from the company;
• have access to information contained in the records of the company; and
• obtain professional advice from external sources.

Issues and challenges

Issues

Good governance is an ideal which is difficult to achieve in its totality. For the implementation of a
rigorous corporate governance code, companies and institutions must come together regionally and
internationally to draft corresponding guidelines. One of the main issues, at least in the U.S., is that
plenty of well-intentioned people have brought their ideas and experiences to the policy-making table but
it hasn't resulted in any clear-cut framework.
To give this context, countries such as the U.K. have had powerful codes of conduct since the 1990s – the
position in the U.K. is that every company listed on the London Stock Exchange must comply with the
national corporate governance code or explain why it would not. Noncompliance serves as a massive red
flag to investors. Generally, this code is considered as the benchmark for sound corporate governance in
operations of all sizes.
In the U.S., stock exchanges compete for listings and imposing rigorous corporate governance
responsibilities might lose them business. The Securities and Exchange Commission, the primary
regulator of listed companies, is hot on the issue of transparency and comes down hard on companies that
don't prepare their financial reports properly or disclose information to stakeholders in the appropriate
way. However, it doesn't look beyond the issue of disclosure.
So, for example, a company might defy shareholders' wishes and offer a large cash bonus to an unpopular
and under-performing director. On the face of it, the decision is an example of poor governance as there's
no consensus, inclusion or stakeholder accountability in the decision-making. But the SEC would allow it
as long as the company made full disclosure in its reports. This type of regulation has been likened to a
stop sign – useful to prevent serious accidents, but in no way a substitute for skillful and judicious
driving.
Challenges of Corporate Governance

Conflicts of interest: A conflict of interest occurs when a controlling member of the company has other
financial interests that could influence his decision-making or conflict with the objectives of the
company. For example, a board member of a wind turbine company who owns a significant amount of
stock in an oil company is likely to be conflicted, because she has a financial interest in not representing
the advancement of green energy. Conflicts of interest erode the trust of stakeholders and the public and
potentially open the business up to litigation.
Governance standards: A board can have all the equitable rules and policies it likes but if it can't
propagate those standards throughout the business, what chance does the company have? Resistant
managers can subvert good corporate governance at the operational level, leaving the business exposed to
state or federal law violations and reputational damage with stakeholders. A policy of corporate
governance needs a clear enforcement mechanism, applied consistently, as a check and balance against
the actions of executive staff.
Short-termism: Good corporate governance requires that boards should have the right to manage the
company for the long-term, to create sustainable value. This is problematic for a couple of reasons. First,
the rules governing a listed company's performance tend to prioritize short-term performance for the
benefit of shareholders. Managers face an unrelenting pressure to meet quarterly earnings targets, since
dropping the earnings per share by even a cent or two could hit the company's stock price. Sometimes a
company has to go private to achieve the kind of sustainable innovation that cannot be achieved in the
glare of the public markets.
The second problem is that directors only sit on boards for a brief period and many face re-election every
three years. While this has some benefits – there's an argument that directors cannot be considered
independent after 10 years of service – short tenures could rob the board of long-term oversight and
critical expertise.
Diversity: It's common sense that boards should have an obligation to ensure the proper mix of skills and
perspectives in the boardroom, but few boards take a hard look at their composition and ask whether it
reflects the age, gender, race and stakeholder composition of the company. For example, should workers
be given a place on the board? This is the norm across most of Europe and evidence suggests that worker
participation leads to companies having lower pay inequalities and a greater regard for their workforce.
It's a balancing act, however, as companies may focus on protecting jobs instead of making tough
decisions.
Accountability issues: Under the current model of corporate governance, the board is positioned
squarely between shareholders and management. Authority flows from the shareholders at the top and
accountability flows back the other way. In other words, it's shareholders – not stakeholders generally –
who are most protected by corporate governance and shareholders – not stakeholders – who get to
withhold critical votes unless certain reforms are implemented.

Effectiveness of board
Effective board (background)
 Separation of ownership from active management is the important feature of org
 For that, shareholders elect BOD as per defined policy
 Executive committees are appoint by Board for specific assign task
 Board lay down certain policies for executives and management of the company
Authority of the board According to sec 292 of company Act, board is authorized to
 Make call on the shareholders money unpaid
 Issue debentures
 Borrow loans
 Invest company funds
 Make loans
 Some other sections also explained various authorities e.g. filling the vacant post in board
Effectiveness of the board
 Board is to ensure the corporate governance of the company on the behalf of shareholders
 Prevent insiders from expropriation of the shareholders wealth, avoid frauds and stealing funds
 Corporate governance are not in born, but are the collective efforts of all stakeholders
 Director face complex oversight and accountability, personal risk and liability, after financial crises
Effectiveness of board
1. Own the strategy ( feel sense of ownership of strategy to non-executive. where the non- executive
directors also contribute to develop the strategy)
2. Effective top team (executive should be appoint on their ability)
3. Match reward and performance (avoid favoritism in executives) 4. Ensure financial viability (skills in
directors to make sound financial decision)
5. Match risk with return (assessment of risk)
6. Manage corporate reputation (do, what is right for the company, regardless of outside pressure) 7.
Drive the board for an effective chairman
Barriers in the way of board effectiveness
 In contrast to the effective board habits, Martinelli (2012) defined barriers for EB; ◦ Ineffective
nominating committee
 Should be aware from responsibilities of executives
◦ No plan for rotation
 New blood comes with new ideas
◦ Failure to remove the ineffective members
 Ineffective members blocks performance
◦ Lack of functioning committee structure
◦ No strategic plan
◦ Too small board
◦ And no orientation for new and old members

Transparency and disclosure

Transparency: Transparency “means having nothing to hide” that allows its processes and transactions
observable to outsiders. It also makes necessary disclosures, informs everyone affected about its
decisions. Transparency is a critical component of corporate governance because it ensures that all of
entity’s actions can be checked at any given time by an outside observer. This makes its processes and
transactions verifiable, so if a question does come up about a step, the company can provide a clear
answer

Transparency and Disclosure

Good corporate governance should ensure that timely and accurate disclosure is made regarding all
material matters concerning the corporation, including its financial situation and results. It is in the
interest of each organisation to provide clear, timely and reliable information that is adequately prepared,
and to make relevant information equally accessible to all stakeholders. PwC believes that strong
disclosure promotes transparency in addition to being an important aspect of good governance.

What should be disclosed?

Financial information It is important that the financial and operating results of an organisation are
prepared and disclosed in an easily understood manner. It should also be borne in mind that the
information is used both outside and inside the company. An organisation must fully disclose to the
market all material related to transactions with related parties and indicate whether the transactions were
executed at armslength and on normal market terms. In addition to financial information, organisations
should disclose policies relating to business ethics, the environment and other public policy
commitments, as this information can be important to investors and others in better evaluating the
relationships between companies and the communities in which they operate.

Stakeholder relationships Investors should be informed about the organisational ownership structure,
voting rights, governance structure and policies. Such information should make transparent the
objectives, nature and structure of the organisation. Remuneration policy for members of the Board and
key executives, as well as information about the Board members, should be disclosed. Information should
describe their backgrounds and whether they are regarded as independent by the Board. Information
should be disclosed on key issues relevant to the organisation’s market position and issues related to
corporate citizenship.

Risk An organisation should disclose all important risk factors and its anticipated reaction. That may
include risk specific to the industry or geographical areas in which the organisation operates, financial
market risk, risk related to funding and risk related to environmental liabilities.

Financial reporting PwC stresses that it is in the organisation’s interest to provide accurate and reliable
financial information. It is important to guarantee the quality of such information with an annual audit by
an independent auditor. Effective disclosure increases transparency and accountability, enables
appropriate monitoring to take place and provides basis for secure evaluations. Financial information
might include: y Audited financial statements and footnotes y Independent auditor’s reports y
Management Discussion and Analysis (MD&A)
CORPORATE FRAUDS UNDER COMPANIES ACT, 2013
PUNISHMENT FOR FRAUD (S.447)Any person who is found guilty of fraud shall be punishable with
imprisonment for a term which shall not be less than six (06) months but which may extend to ten (10)
years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but
which may extend to three (03) times the amount involved in the fraud. Where the fraud in question
involves public interest, the term of imprisonment shall not be less than three (03) years.
PUNISHMENT FOR FALSE STATEMENT (S.448) If in any return, report, certificate, financial
statement, prospectus, statement or other document required by, or for the purposes of any of the
provisions of this Act or the rules made thereunder, any person makes a statement —

 which is false in any material particulars, knowing it to be false; or

 which omits any material fact, knowing it to be material

PUNISHMENT FOR FALSE EVIDENCE (SECTION 449) If any person intentionally gives false
evidence –

 upon any examination on oath or solemn affirmation; or

 in any affidavit, deposition or solemn affirmation in or about winding up of any company under
this Act, or otherwise in or about any matter arising under this Act,
 he shall be punishable with imprisonment for a term which shall not be less than three (03) years
but which may extend to seven years (07) and with fine which may extend to ten lakh rupees (Rs.
10 Lacs).

PUNISHMENT WHERE NO SPECIFIC PENALTY OR PUNISHMENT IS PROVIDED

(SECTION 450) If a company or any officer of a company or any other person contravenes any of the
provisions of this Act, or the rules made thereunder and for which no penalty or punishment is provided
elsewhere in the Act, they shall be punishable with fine which may extend to ten thousand rupees (Rs.
10,000) and where the contravention is continuing one, with a further fine which may extend to one
thousand rupees (Rs. 1,000) for every day after the first during which the contravention continues.
PUNISHMENT IN CASE OF REPEATED DEFAULT (SECTION 451) If a company or an officer
of a company commits an offence punishable either with fine or with imprisonment and where the same
offence is committed for the second or subsequent occasions within a period of three (03) years, then,
that company and every officer thereof who is in default shall be punishable with twice the amount of
fine for such offence in addition to any imprisonment provided for that offence. This section is not
applicable to the offence repeated after a period of three (03) years from the commitment of first offence.
OFFENCE OF FRAUD NON-COMPOUNDABLE As the punishment for fraud is both imprisonment
and fine, it is considered a non-compoundable offence. It shows that, the commission of fraud has
become a serious offence in the eyes of law. The Act has provided punishment for fraud under section
447 and about 20 sections of the Act talk about fraud committed by the directors, key managerial
personnel, auditors and/or officers of company. Thus, the new Act goes beyond professional liability for
fraud and extends it to personal liability, if a company contravenes such provisions. Here, the
contravention of the provisions of the Act with an intention to deceive are also considered as fraud; to
name a few acts amounting to fraud:

Module 3

THE SECURITIES CONTRACT (REGULATION) ACT, 1956

Introduction:
The Securities Contracts (Regulation) Act, 1956 “Act” was enacted in order to prevent undesirable
transactions in securities and to regulate the working of stock exchanges in the country. The provision of
the Act came into force with effect from 20th February, 1957 vide Notification No. SRO 528 dated 16th
February, 1957.
Definitions:
Stock exchange [Section 2(j)] any body of individuals, whether incorporated or not, constituted before
corporatisation and demutualisation under sections 4A and 4B, or
a body corporate incorporated under the Companies Act, 1956 whether under a scheme of corporatisation
and demutualisation or otherwise,
for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in
securities.
Recognised Stock Exchange [Section 2(f)] means a stock exchange which is for the time being
recognized by the Central Government under Section 4 of the Act.
Corporatisation [Section 2(aa)] means the succession of a recognised stock exchange, being a body of
individuals 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 or controlling the
business of buying, selling or dealing in securities carried on by such individuals or society.
Demutualisation [Section 2(ab)] means the segregation of ownership and management from the trading
rights of the members of a recognised stock exchange in accordance with a scheme approved by the
Securities and Exchange Board of India (SEBI). (Pls click here for other definitions of the Act)
The main parts of the Act are as follows and the powers of Central Government with regard to this Act
are exercisable by SEBI:
 Recognised Stock Exchanges
 Penalties
Brief description of important sections of the Act:
(A) Recognised Stock Exchanges
Application for recognition of stock exchanges (Section 3)
3(1): Every stock exchange which desirous of being recognized for the purposes of this Act, may make
an application in the prescribed manner to the Central Government (the powers of Central Government
with regard to this Act are exercisable by SEBI)
3(2) : Every such application shall contain required particulars and 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
Grant of recognition to stock exchanges (Section 4)
4(1): If the Central Government is satisfied, after making such inquiry as may be necessary may grant
recognition to the stock exchange subject to some conditions.
Corporatisation and demutualisation of stock exchanges (Section 4A)
On and from the appointed date, all recognised stock exchanges (if not corporatised and demutualised
0before the appointed date) shall be corporatised and demutualised in accordance with the provisions
contained in section 4B.
Procedure for corporatisation and demutualisation (Section 4B)
4B(1): All recognised stock exchanges referred to in section 4A shall, within such time as may be
specified by the SEBI, submit a scheme for corporatisation and demutualisation for its approval
4B(2): On receipt of the scheme, the SEBI after making such enquiry as may be necessary and if it is
satisfied that it may approve the scheme with or without modification.
Note: “appointed date” means the date which the SEBI may, by notification in the Official Gazette,
appoint and different appointed dates may be appointed for different recognised stock exchanges.
Power of Central Government to call for periodical returns or direct inquiries to be made
(Section6)
Every recognised stock exchange shall furnish to SEBI periodical returns relating to its affairs as may be
prescribed. Every recognised stock exchange and every member thereof shall preserve such books of
accounts and other documents for period of not exceeding five years.
Annual reports to be furnished to Central Government by stock exchanges (Section 7)
Every recognised stock exchange shall furnish the Central Government a copy of the annual report.
Power of recognised stock exchanges to make bye-laws (Section 9)
9(1) Any recognised stock exchange may, subject to the previous approval of the SEBI, make bye-laws
for the regulation and control of contracts. (Pls click here for such bye-laws)
Power of SEBI to make or amend bye-laws of recognised stock exchanges (Section 10)
10(1) The SEBI may either on a request from the governing body of a recognised stock exchange or on
its own motion make bye-laws for all or any of the matters specified in section 9 or amend any bye-laws
made by such stock exchange under that section.
Power to suspend business of recognised stock exchanges (Section 12)
The Central Government is empowered to suspend the business of recognised stock exchange on an
emergency situation by giving notification in the Official Gazette stating the reasons therein, for a period
of not exceeding seven days and subject to such conditions as may be specified in the notification.
However, in the interest of the trade or the public the said period can be extended from time to
time, provided that no such period of suspension can be extended, unless the governing body of the
recognised stock exchange has been given an opportunity of being heard in the matter.

Conditions for listing (Section 21)

Where securities are listed on the application of any person in any recognised stock exchange, such
person shall comply with the conditions of the listing agreement with that stock exchange.
Delisting of securities (Section 21A)
21A(1): A recognised stock exchange may delist the securities, after recording the reasons therefor, on
any of the ground or grounds as may be prescribed under this Act, provided that the securities of a
company shall not be delisted unless the company concerned has been given a reasonable opportunity of
being heard.
21A(2): A listed company or an aggrieved investor may file an appeal before the Securities Appellate
Tribunal (SAT) against the decision of the recognised stock exchange within fifteen days from the date of
the decision of the recognised stock exchange, provided that SAT may, if it is satisfied that the company
was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within
a further period not exceeding one month.
Section 22 - Right of appeal against refusal of stock exchanges to list securities of public companies
Where a recognised stock exchange refuses to list the securities of any public company or collective
investment scheme, the company or scheme may appeal to the Central Government against such refusal,
omission or failure, as the case may be:
within fifteen days from the date on which the reasons for such refusal are furnished to it, or where the
stock exchange has omitted or failed to dispose of, within the time specified in sub-section (1) of section
73 of the Companies Act, 1956 (1 of 1956) (hereafter in this section referred to as the “specified time”),
the application for permission for the shares or debentures to be dealt with on the stock exchange, within
fifteen days from the date of expiry of the specified time or within such further period, not exceeding one
month, as the Central Government may, on sufficient cause being shown, allow.
Section 22A - Right of appeal to Securities Appellate Tribunal against refusal of stock exchange to
list securities of public companies
Where a recognised stock exchange refuses to list the securities of any public company or collective
investment scheme, the company or scheme may appeal to the SAT against such refusal, omission or
failure, as the case may be:
within fifteen days from the date on which the reasons for such refusal are furnished to it, or where the
stock exchange has omitted or failed to dispose of, within the time specified in sub-section (1A) of
section 73 of the Companies Act, 1956 (1 of 1956), (hereafter in this section referred to as the “specified
time”), the application for permission for the shares or debentures to be dealt with on the stock exchange,
within fifteen days from the date of expiry of the specified time or within such further period, not
exceeding one month, as the Securities Appellate Tribunal may, on sufficient cause being shown, allow.
Section 22D – Limitation The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may
be, apply to an appeal made to a Securities Appellate Tribunal

Conclusion

The SCRA is an enactment to provide for direct and indirect control of all aspects of securities trading,
running of stock exchanges and to prevent undesirable transactions in securities. The SCRA,1956, among
other provisions, making provision as to recognition of the stock exchanges by the Government,
providing for their corporatisation and demutualisation, ensuring adequate government control over the
functions and affairs of the stock exchanges in the interest of investors, has contributed to a healthy,
disciplined and beneficial platform for the dealings in security. Due to such provisions contained in the
Act, there has been a raising in investment.

Corporate crime
PUNISHMENT FOR FRAUD (S.447)

Any person who is found guilty of fraud shall be punishable with imprisonment for a term which shall
not be less than six (06) months but which may extend to ten (10) years and shall also be liable to fine
which shall not be less than the amount involved in the fraud, but which may extend to three (03) times
the amount involved in the fraud. Where the fraud in question involves public interest, the term of
imprisonment shall not be less than three (03) years.

PUNISHMENT FOR FALSE STATEMENT (S.448)

If in any return, report, certificate, financial statement, prospectus, statement or other document required
by, or for the purposes of any of the provisions of this Act or the rules made thereunder, any person
makes a statement —

 which is false in any material particulars, knowing it to be false; or

 which omits any material fact, knowing it to be material
PUNISHMENT FOR FALSE EVIDENCE (SECTION 449)

If any person intentionally gives false evidence –

 upon any examination on oath or solemn affirmation; or

 in any affidavit, deposition or solemn affirmation in or about winding up of any company under
this Act, or otherwise in or about any matter arising under this Act,
 he shall be punishable with imprisonment for a term which shall not be less than three (03) years
but which may extend to seven years (07) and with fine which may extend to ten lakh rupees (Rs.
10 Lacs).

PUNISHMENT WHERE NO SPECIFIC PENALTY OR PUNISHMENT IS PROVIDED (SECTION

450)

If a company or any officer of a company or any other person contravenes any of the provisions of this
Act, or the rules made thereunder and for which no penalty or punishment is provided elsewhere in the
Act, they shall be punishable with fine which may extend to ten thousand rupees (Rs. 10,000) and where
the contravention is continuing one, with a further fine which may extend to one thousand rupees (Rs.
1,000) for every day after the first during which the contravention continues.

PUNISHMENT IN CASE OF REPEATED DEFAULT (SECTION 451)

If a company or an officer of a company commits an offence punishable either with fine or with
imprisonment and where the same offence is committed for the second or subsequent occasions within a
period of three (03) years, then, that company and every officer thereof who is in default shall be
punishable with twice the amount of fine for such offence in addition to any imprisonment provided for
that offence. This section is not applicable to the offence repeated after a period of three (03) years from
the commitment of first offence.