Prohibition of Contracts in Certain Cases

Topic 6 — SCRA Sections 13 to 17: Prohibited, Void & Illegal Contracts | SEBI Law Officer Notes

Sections 13 to 17 contain the SCRA's core prohibitions — the provisions that distinguish a legally valid securities transaction from an unlawful or void one. These sections are the most enforcement-relevant part of the SCRA and are regularly tested in SEBI Law Officer, Judiciary and Company Secretary examinations. The central principle: not all contracts in securities between consenting parties are valid — the SCRA imposes structural requirements (primarily the exchange requirement) failing which contracts are void.

1. Section 13 — The Prohibition Rule

Section 13: Notwithstanding anything in any other law, no person shall, save with the permission of the Central Government [SEBI], enter into any contract for the sale or purchase of securities other than such spot delivery contracts or contracts for cash or hand delivery or special delivery or any contract in derivatives — (a) where the securities are listed on a recognised stock exchange and such contract is made otherwise than between members of a recognised stock exchange, or in violation of listing conditions; (b) where the securities are not listed on any recognised stock exchange and such contract is entered into with reference to or in anticipation of the issue of such securities.

Section 13 has TWO components:

<w:r><w:rPr><w:b/><w:bCs/><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">The prohibition rule: </w:t></w:r><w:r><w:rPr><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">No person may contract in listed securities outside a recognised stock exchange (except the carved-out categories).</w:t></w:r>
<w:r><w:rPr><w:b/><w:bCs/><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">The unlisted securities prohibition: </w:t></w:r><w:r><w:rPr><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">Contracts 'with reference to or in anticipation of' the issue of unlisted securities are prohibited — targeting grey market activity.</w:t></w:r>

Category	Treatment under Section 13
Spot delivery contracts in listed securities, off-exchange	EXEMPT — valid even outside exchange
Cash/hand/special delivery contracts	EXEMPT — permitted outside exchange
Exchange-traded derivatives	EXEMPT — Section 18A governs separately
Non-spot contracts in listed securities between non-members	PROHIBITED — void under Section 16
Contracts in anticipation of unlisted security issues	PROHIBITED — grey market transactions

2. The Five Exceptions to Section 13's Prohibition

Exceptions — Contracts VALID Despite Being Outside Exchange

<w:r><w:rPr><w:b/><w:bCs/><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">1. Spot delivery contracts [S.2(i)]: </w:t></w:r><w:r><w:rPr><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">Same day/next day actual delivery. The most important exception.</w:t></w:r>
<w:r><w:rPr><w:b/><w:bCs/><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">2. Contracts for cash delivery: </w:t></w:r><w:r><w:rPr><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">Payment and delivery on the same settlement day.</w:t></w:r>
<w:r><w:rPr><w:b/><w:bCs/><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">3. Contracts for hand delivery: </w:t></w:r><w:r><w:rPr><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">Physical delivery of securities at the time of contract.</w:t></w:r>
<w:r><w:rPr><w:b/><w:bCs/><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">4. Special delivery contracts: </w:t></w:r><w:r><w:rPr><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">As permitted by the rules of a recognised exchange for specific securities.</w:t></w:r>
<w:r><w:rPr><w:b/><w:bCs/><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">5. Exchange-traded derivatives [S.18A]: </w:t></w:r><w:r><w:rPr><w:color w:val="323E4F"/><w:sz w:val="21"/><w:szCs w:val="21"/></w:rPr><w:t xml:space="preserve">Already on exchange — exception confirms they are outside Section 13's prohibition.</w:t></w:r>

3. Section 14 — Power to Call for Periodical Returns

Section 14: SEBI may, from time to time, call for and receive such information, statistics and reports from recognised stock exchanges as may be prescribed or as may be necessary for the purposes of this Act.

Section 14 is SEBI's information-gathering power. SEBI uses it to: monitor compliance; collect market data for policy-making; identify systemic risks and concentrated positions; receive surveillance data to detect manipulation; and enforce regulatory requirements based on exchange-submitted reports.

4. Section 15 — Power to Temporarily Prohibit Contracts

Section 15: SEBI may, by notification in the Official Gazette, prohibit any recognised stock exchange, for a specified period, from entering into any contract or class of contracts, where satisfied that such prohibition is in the interest of the trade or in the public interest.

Section 15 is an emergency/temporary power. Three requirements: (i) notification in Official Gazette; (ii) for a specified period (cannot be indefinite); (iii) in the interest of trade or public interest. Examples of use:

Temporarily banning naked short-selling in specific securities during market stress.
Suspending F&O contracts on specific securities to prevent manipulation.
Imposing circuit breakers and trading halts during extreme volatility (complemented by SEBI circulars).

5. Section 16 — Prohibition and Void Contracts

Section 16: SEBI may, if satisfied that it is necessary to prevent undesirable speculation in securities in any State or area, by notification, prohibit contracts in securities or any class of securities.

📖 BSE v. Jamnadas Madhavji & Co. AIR 1995 SC 1256

Facts: Contracts for sale/purchase of listed securities were made outside a recognised stock exchange. The question was whether such contracts were void.

Held: The Supreme Court held that non-spot, non-exchange contracts in listed securities are VOID under Section 16 of the SCRA. The prohibition is absolute. No party can enforce such contracts.

Ratio: The prohibition on off-exchange contracts in listed securities (other than spot delivery) is mandatory and absolute. This is the foundational case on void contracts under SCRA — must-know for every exam.

⚠️ Rule of Voidness — Sections 13 & 16 Combined

Contracts violating Section 13 — specifically, non-spot contracts in listed securities outside a recognised stock exchange — are VOID under Section 16. No rights arise. Neither party can sue to enforce. Restitutionary claims under Section 65 ICA may be available (recovery of benefit conferred under a void contract), but the contract itself is unenforceable.

6. Section 17 — Only Exchange-Member Contracts Valid

Section 17: Subject to the provisions of Section 13, any contract for the sale or purchase of securities listed on a recognised stock exchange shall not be valid unless such contract is entered into in a recognised stock exchange through registered brokers.

Section 17 adds a positive requirement on top of Section 13's prohibition: for listed securities, contracts must be: (i) executed on a recognised stock exchange; AND (ii) through registered brokers/members. This prevents investors from bypassing the exchange system and ensures all trades go through regulated intermediaries.

📖 Pyramid Saimira Theatre Ltd. v. SEBI (2010) 100 SCL 247 (SAT)

Facts: A listed company's shares were transferred through a private off-exchange arrangement, bypassing the stock exchange.

Held: SAT held that such off-exchange transfers of listed securities (outside spot delivery) violated Sections 13 and 17 of SCRA. The transfers were void. SEBI had jurisdiction to take action.

Ratio: Even apparently innocent off-exchange transfers of listed shares violate SCRA if they are not spot delivery transactions. All non-spot transfers of listed securities must go through the exchange mechanism.

7. Penalty Provisions under SCRA [Sections 23–23E]

Section	Violation	Penalty
Sec 23(1)	Contravention of any provision of SCRA or Rules	Imprisonment up to 10 years + fine up to ₹25 crore (or both)
Sec 23A	Failure to furnish information/documents to SEBI/exchange	₹1 lakh per day default + up to ₹1 crore
Sec 23B	Failure to maintain books/records	₹1 lakh per day default + up to ₹1 crore
Sec 23C	Failure to enter into listing agreement	₹1 lakh per day default + up to ₹1 crore
Sec 23D	Failure to pay listing fees	₹1 lakh per day default + up to ₹1 crore
Sec 23E	Failure to comply with listing conditions	Up to ₹25 crore

⚠️ Maximum Criminal Penalty under SCRA

Section 23(1) prescribes the most serious criminal penalty under SCRA: IMPRISONMENT UP TO 10 YEARS AND/OR FINE UP TO ₹25 CRORE. This is higher than IPC's general cheating provisions. For the SEBI exam: memorise the quantum of penalties for each section — they are frequently tested as MCQs.

8. Section 26 — Cognizance of Offences (SEBI-Only Prosecution)

Section 26: No court shall take cognizance of any offence punishable under this Act or the Rules except upon a complaint in writing made by a person authorised by the Central Government [SEBI] in this behalf.

Significance of Section 26:

PRIVATE COMPLAINTS for SCRA offences are not maintainable in any court.
Only SEBI-authorised persons can initiate criminal proceedings.
This centralises enforcement in SEBI and prevents abuse of criminal process by private litigants.
Contrast with SEBI Act's own enforcement where SEBI can also use adjudication proceedings for civil penalties.

9. Section 27 — Corporate Liability

Section 27: Where an offence under this Act is committed by a company, every person who at the time of the offence was in charge of, and was responsible to, the company for the conduct of its business, as well as the company, shall be deemed guilty and liable to be proceeded against and punished accordingly.

Section 27 creates dual corporate-individual liability: both the company AND the responsible officers (managing director, director, key managerial personnel) are liable for SCRA offences committed by the company. Defence available: the individual can escape liability by proving the offence was committed without their knowledge or that they exercised all due diligence to prevent it.

10. Model Examination Questions

Q1. What contracts are prohibited under Section 13 of the SCRA? What are the legal consequences?

Section 13 Prohibition and Consequences

Model Answer — Section 13 of SCRA prohibits any person from entering into contracts for listed securities outside a recognised stock exchange, except: spot delivery contracts; cash/hand/special delivery contracts; and exchange-traded derivatives. The prohibition also covers contracts 'in anticipation of' the issue of unlisted securities. Violation renders the contract VOID under Section 16 — no rights arise and no party can enforce it (BSE v. Jamnadas Madhavji, AIR 1995 SC 1256). Criminal consequences: Section 23(1) prescribes up to 10 years imprisonment and ₹25 crore fine. Civil consequences: Section 23A-23E penalties. SEBI enforcement action under Section 11B of SEBI Act. Corporate liability extends to responsible officers under Section 27. Only SEBI-authorised persons can initiate criminal prosecution (Section 26). The five exceptions to Section 13 are critical: spot delivery (most important), cash delivery, hand delivery, special delivery, and exchange-traded derivatives.

🎯 EXAM POINTERS — Topic 6: Prohibition of Contracts

Section 13: Prohibition — listed securities cannot be traded outside exchange (except spot + cash/hand/special + derivatives).
FIVE EXCEPTIONS to Section 13: (1) spot delivery (most important); (2) cash delivery; (3) hand delivery; (4) special delivery; (5) exchange-traded derivatives.
Section 16: Violation of Section 13 = VOID contract. No rights arise. No enforcement possible.
Section 15: SEBI can TEMPORARILY ban specific contracts on exchanges — by notification; specified period; public interest.
Section 17: Listed securities only through registered members on recognised exchange — adds broker requirement.
Section 23(1): HIGHEST criminal penalty — 10 YEARS imprisonment + ₹25 CRORE fine.
Section 26: SEBI-authorised complaint ONLY — no private prosecution of SCRA offences. Private complaints NOT maintainable.
Section 27: DUAL liability — company + responsible officers both liable for company's SCRA offences.
BSE v. Jamnadas Madhavji (1995 SC): off-exchange forward contracts in listed securities = VOID. Foundational case.
Pyramid Saimira Theatre v. SEBI (SAT 2010): off-exchange transfer of listed shares = void under Sections 13 & 17.

← Topic 5: Contracts in Securities — Types & Validity | Next → Topic 7: Powers of SEBI under SCRA

Published on The Legal Bridge — Study Notes for SEBI Law Officer, Judiciary Aspirants, AIBE, CLAT & University Exams