Forum Views - May 2024

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FORUM VIEWS - MAY 2024

he realm of options, futures, swaps and forwards is still a

largely undiscovered landscape fraught with regulatory

Tuncertainties. The Securities Exchange Board of India

(“SEBI”) has itself had to constantly update the relevant

regulations with this changing landscape. Judicial

pronouncements by various courts also aid in clarifying the

hitherto unknown situations involving option, future, swap and

forward contracts.

The above four contracts are types of derivative contracts.

Section 2 (ac) of the Securities Contracts (Regulation) Act,

1956 (“SCRA”) defines “derivatives” to include (A) a security

derived from a debt instrument, share, loan, whether secured

or unsecured, risk instrument or contract for differences or any

other form of security; (B) a contact which derives its value

from the prices, or index of prices, of underlying securities; (C)

commodity derivatives; and (D) such other instruments as

may be declared by the Central Government to be derivatives;

As per Section 2 (d) of the SCRA, “option in securities” is

defined as a contract for the purchase or sale of a right to buy

or sell, or a right to buy and sell, securities in future, and

includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put

and call in securities. Futures contract is a contract to buy or

sell a commodity asset, or security at a predetermined price at

a future date. A forward contract is a customized contract

between two parties to buy or sell an asset at a specified price

on a future date. Though, the definitions of forward and futures

contract sound the same, there is a marked difference

between them. Futures are traded publicly on exchanges

whereas forwards are privately traded. Swaps derivatives are

customizable derivative contracts between two parties to

exchange liabilities or cash flows.

When SCRA was enacted, Section 20(1) (since omitted) had

1. What are option, future, swap and forward contracts?

2. What is the legislative history pertaining to the legal

status of options in India?

provided that, “Notwithstanding anything contained in this Act

or in any other law for the time being in force, all options in

securities entered into after the commencement of this Act

shall be illegal”. Section 16 of the SCRA provided that if the

Central Government is of opinion that it is necessary to prevent

undesirable speculation in specified securities in any State or

area, it may, by notification in the Official Gazette, declare that

no person in the State or area specified in the notification shall,

save with the permission of the Central Government, enter into

any contract for the sale or purchase of any security specified

therein. Further, Sub-section (2) of Section 16 of SCRA

declares that all contracts in contravention of the provisions of

sub section (1) entered into after the date of the notification

issued thereunder shall be illegal. Thereafter, a notification No.

S.O. 2561, dated June 27, 1969, titled ‘Restriction on Enter into

Contract for Sale or Purchase of Securities’ was issued by the

Ministry of Finance, Government of India under section 16 of

the SCRA, which inter alia provided that any contract for sale

or purchase of securities, other than such spot delivery

contract or contract for cash or hand delivery or special

delivery in any securities will be prohibited. Thus, forward

contracts and options were considered illegal.

By virtue of the Securities Laws (Amendment) Act, 1995,

Section 20 of SCRA was omitted, however, the 1969

notification continued to be in force which prohibited forward

contracts other than spot delivery contracts. In February,

2000, Section 18 A was introduced in the SCRA which

provided that notwithstanding anything contained in any other

law for the time being in force, contracts in derivatives shall be

legal and valid if such contracts are traded in a recognised

stock exchange and settled on the clearing house of the

recognised stock exchange in accordance with the rules and

bye laws of such exchange. Definition of the term “derivative”

was introduced and an amendment was made to the definition

of “securities” to include derivative. On 1st March, 2000 by

Notification No. SO184 (E), issued under section 16 of SCRA,

SEBI prohibited the entering of any contract for sale or

WHEN THE ONLY OPTION IS NOT FORWARD!

Zerick Dastur

Founder

ZERICK DASTUR,

ADVOCATES AND SOLICITORS

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