Concept of marketability of securities from Company Law perspective.
Objective and purposes of the Securities Contracts (Regulation) Act, 1956,
specifically its applicability to private companies, listed public companies and
unlisted public companies.
• The Object and purpose of the SCRA is that it regulates stock exchanges and the trading
of securities.
• An Act to prevent undesirable transactions in securities by regulating the business of
dealing therein, by providing for certain other matters connected therewith.
• SCRA has laid down several definitions in Section 2 and some of them bear fundamental
importance to understand the basic structure of the Act. Certain definitions like ‘contract’;
‘Securities’ ‘Stock exchange’ is of wide importance
• The Act provides a mechanism for recognition of stock exchanges. No stock exchange
will be recognised until permitted by the SEBI
• The Act also makes provisions for Corporatisation and Demutualisation of stock
exchanges.
• The Securities Contract Regulation Act, 1956 has further conferred powers on every stock
exchange to formulate bye-laws for the purpose of efficient functioning of its business.
• This Act deals with various types of contracts in the security market and circumstances
where such dealings will be declared void or valid.
• The restrictions under the SCRA and notifications issued there under are not intended to
be applicable to all companies. Their applicability is to be tested against the touchstone of
the marketability of securities issued by a company.
• The definition of “securities” in the SCRA assumes most importance. The expression is
inclusively defined to contain “shares, scrips, stocks, bonds, debentures, debenture stock
or other marketable securities of a like nature in or of any incorporated company or other
body corporate”.
• The key factor is the marketability of the securities, which depends on the nature of the
company that has issued them.
• SCRA and the notifications are inapplicable to private companies because their securities
are not marketable in nature. By definition, transfers in securities of private companies are
restricted.
Shares of Private Limited Company:
• In Norman J. Hamilton & Anr. v. Umedhbhai S. Patel
o Definition of securities mean all securities which are marketable in nature
o Provision of SCRA should be accorded only to securities which can be marketed
i.e. securities with high degree of liquidity
o Shares of Private Limited company are not Securities under SCRA as they are not
freely transferable and hence not marketable
Shares of Public Company
• In Norman J. Hamilton & Anr. v. Umedhbhai S. Patel
o Marketable – means high degree of liquidity
o Listed or Unlisted – is not the criteria
• In Naresh K. Agarwal & Co. v. CanBank Financial Services Ltd.
o Securities Contract Regulation Act does not distinguish between listed and unlisted
securities
