Stock exchange

Two investors could in theory find each other and swap shares privately. Almost nobody does.

They use a stock exchange instead. The exchange does not buy or sell anything itself. It runs the place where buying and selling happen, it sets the rules for who may trade there, and it holds its members to those rules.

The workbook's definition is deliberately wide. A stock exchange means a body of individuals or a body incorporated under the Companies Act to assist, regulate, or control the business of buying, selling, or dealing in securities.

Notice the three verbs. An exchange assists trade, regulates trade and controls trade. It is a rule-maker, not just a venue.

It is also one of the market infrastructure institutions — the plumbing of the market, alongside depositories and clearing corporations. Chapter 1 places it in the secondary market, where shares already issued change hands.

One more word matters: recognised. Nearly every duty in the law attaches to a recognised stock exchange, and recognition is granted under the Securities Contracts (Regulation) Act, 1956.

The definition and where it sits. Chapter 1, section 1.2, lists stock exchanges among the Financial Markets Infrastructure Institutions (MIIs) and calls them an important constituent of the secondary market of the Capital Market. The same section defines a clearing corporation as the entity established to clear and settle trades dealt with or traded on a recognised stock exchange — a definition that includes a clearing house and a limited purpose clearing corporation — and a Social Stock Exchange as a separate segment of a recognised stock exchange having nationwide trading terminals.

What the SCRA does to it (Chapter 2, section 2.5.2). The Securities Contracts (Regulation) Act, 1956 is legislation designed to prevent undesirable transactions in securities by regulating the business of securities dealing and trading. It reaches stock exchanges through seven listed aspects:

1. granting recognition to stock exchanges;
2. corporatization and demutualization of stock exchanges;
3. the Central Government's power to call for periodical returns from stock exchanges;
4. SEBI's power to make or amend the bye-laws of recognized stock exchanges;
5. the power of the Central Government, exercisable by SEBI also, to supersede the governing body of a recognized stock exchange;
6. the power to suspend the business of recognized stock exchanges;
7. the power to prohibit undesirable speculation.

Chapter 5 adds the framing: the Act gives the Central Government regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) the listing of securities on stock exchanges.

What membership costs in paperwork. These are the numbers that get examined.

Bye-laws and contracts between members. Each exchange frames its own bye-laws. Rule 9 requires all contracts entered into between members of a recognized stock exchange to be confirmed in writing and enforced in accordance with the rules and bye-laws of that exchange. Rule 12 requires a member to get accounts audited by a chartered accountant whenever SEBI requires it. Under section 15, a member may not contract as a principal with a non-member without that person's consent and disclosure on the contract note — and for a stock broker the written consent must arrive within 3 days of the contract.

Why recognition matters for derivatives. Section 18A makes contracts in derivatives legal and valid only if they are (a) traded on a recognized stock exchange and (b) settled on the clearing house of that exchange, in accordance with its rules and bye-laws.

The penalty side. Under section 23A, failure to furnish information, documents, books, returns or reports to the recognized stock exchange or to SEBI within the time set by the listing agreement, the exchange's bye-laws or the Act — or failure to maintain books of account or records as required by them — carries a penalty of not less than Rs 1 lakh, extending to Rs 1 lakh for each day the failure continues, subject to a maximum of Rs 1 crore for each such failure.

Illustrative firm and dates; every rule and figure below is the workbook's.

Vindhya Broking Pvt Ltd applies for admission as a member of a recognised stock exchange.

Who may be admitted (Rule 8).

A third partner had been refused admission by the exchange on 10 February 2024. He may not be considered again until 10 February 2025, because Rule 8 bars anyone previously refused admission unless one year has elapsed since the rejection.

What the firm must keep, and for how long.

Sauda book, clients ledger, general ledger,
journals, cashbook, bank pass-book,
documents register                         -> 5 years  (Rule 15(1))

Contract books, contract note counterfoils,
clients written consent for principal deals -> 2 years  (Rule 15(2))

Books prescribed under SCRA s. 6(2)         -> up to 8 years

What it costs to get this wrong. On 5 May 2025 the exchange calls for a client-wise ledger extract. Vindhya does not send it for 60 days. Section 23A applies:

Minimum penalty          = Rs 1,00,000
Per-day, 60 days         = 60 x Rs 1,00,000 = Rs 60,00,000
Statutory maximum        = Rs 1,00,00,000

Sixty days of silence is already Rs 60 lakh of exposure on a single failure, and a further 40 days would reach the Rs 1 crore ceiling.

And a trade that never had a chance. A client asks Vindhya to write an index option off-market, to be settled privately between the two of them at expiry. Section 18A makes a derivative contract legal and valid only if it is traded on a recognised stock exchange and settled on that exchange's clearing house under its rules and bye-laws. Off the exchange there is no valid contract to enforce — which is the whole reason the word "recognised" keeps appearing.

Chapter 1 (Introduction to the Financial System), section 1.2, gives the definition and places stock exchanges among the market infrastructure institutions. Chapter 2, section 2.5.2, lists the SCRA's seven aspects, and 2.5.3 lists what the SCRR covers. Chapter 5 is the detailed treatment: sections 6(2) to 6(4) on returns and inquiries, section 15 on principal contracts, sections 23 to 26 on penalties, and Rules 8, 9, 12 and 15 of the SCRR.

The phrase "recognised stock exchange" is the hinge. Almost every Chapter 5 question turns on it, because the Act's duties attach to a recognised exchange rather than to a market in general. Chapter 5's own review questions ask how long contract note counterfoils must be preserved (2 years) and which Act prescribes the manner of dealing in derivative contracts (the SCRA). Expect the definition itself, the Rule 8 eligibility list, the three retention periods — 8 years, 5 years, 2 years — and the section 23A penalty scale.

One drafting slip in the workbook to ignore: the Chapter 5 title and its first section heading both print the Act as the "Securities Contracts (Regulation) Act, 2018", while the chapter text, the syllabus and Chapter 2 all say 1956. Answer 1956.

• "Recognised" is not decoration. The obligations, the penalties and the section 18A validity rule all attach to a recognised stock exchange. An option that drops the word is usually the wrong one.
• A stock exchange is not a clearing corporation. The exchange runs the trading; the clearing corporation is established to clear and settle what was traded on it, and by definition includes a clearing house and a limited purpose clearing corporation.
• A Social Stock Exchange is a separate segment of a recognised stock exchange, not a separate exchange.
• Three retention periods sit in the same chapter: 8 years, 5 years and 2 years. Eight years is the outer limit the Central Government may prescribe under SCRA section 6(2); five years is Rule 15(1); two years is Rule 15(2). The two-year list is the shorter one — contract books, contract note counterfoils and clients' written consents.
• The definition reads "body of individuals or a body incorporated under the Companies Act". An unincorporated body of individuals still fits it, which is exactly why corporatization and demutualization needed a statutory power of their own.
• The exchange frames its bye-laws; SEBI makes or amends them. Both statements are in the workbook, and bye-laws are not uniform across exchanges.
• Superseding the governing body and suspending the business are two separate powers in the section 2.5.2 list. Both sit with the Central Government and are exercisable by SEBI also.
• Rule 8 is a list of disqualifications, not qualifications. It says who is not eligible — under 21, not an Indian citizen, adjudged bankrupt, convicted of fraud or dishonesty, expelled or declared a defaulter by any other exchange — and the governing body may relax the citizenship condition with SEBI's prior approval and may waive the experience conditions for an otherwise qualified applicant.
• Do not confuse it with the tax sense of exchange, which is a mutual swap of one asset for another where neither is money. Same word, different paper, different meaning.