SEBI
Topic2 SCRA Definition Securities Sec2h
Definition of 'Securities' under SCRA 1956 — Section 2(h)
Topic 2 — Exhaustive Guide for SEBI Law Officer & Judiciary Exams
Section 2(h) of the SCRA, 1956 contains the definition of 'securities' — the most important and most-tested provision of the entire Act. The definition determines the scope of SEBI's regulatory jurisdiction: only instruments qualifying as 'securities' attract the SCRA framework and SEBI's powers. An expansive or narrow interpretation of this definition has profound consequences for investor protection, market regulation, and the legality of financial products.
1. Statutory Text — Section 2(h)
Section 2(h) — 'Securities' include: (i) 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; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to investors; (ic) security receipts as defined in SARFAESI Act 2002; (id) units or instruments issued to investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interests in securities. |
⚠️ Critical Point The definition uses the word 'INCLUDE' — making it an INCLUSIVE, NOT EXHAUSTIVE definition. Courts interpret it purposively and broadly in consonance with the regulatory object of investor protection. |
2. Analysis of Each Category
2.1 Clause (i) — Shares, Debentures & Marketable Securities
Instrument | Explanation |
|---|---|
Shares | Equity shares, preference shares — represent ownership/membership in a company. |
Scrips | Any certificate representing shares or portion thereof. |
Stocks | Fully paid-up shares consolidated into larger transferable units. |
Bonds | Debt instruments; typically secured; issued by companies/government entities. |
Debentures | Unsecured (naked) or secured debt instruments; interest-bearing. |
Debenture stock | Consolidated debentures transferable in fractional amounts. |
'Other marketable securities of a like nature' | Ejusdem generis — instruments sharing characteristics of shares/debentures: transferability, marketability, capital investment. |
2.2 Clause (ia) — Derivatives [Added by 2002 Amendment]
Section 2(aa) — 'Derivative' includes: (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 contract which derives its value from the prices, or index of prices, of underlying securities. |
The 2002 Amendment was transformative. By adding derivatives to Section 2(h)(ia) and enacting Section 18A, Parliament: (i) gave legal validity to exchange-traded futures and options; (ii) brought derivatives within SEBI's regulatory jurisdiction; (iii) resolved the historical legal uncertainty that had surrounded the Badla system.
Derivative Type | Underlying / Exchange |
|---|---|
Index Futures | Nifty 50 (NSE), Sensex (BSE) — monthly contracts |
Index Options | Nifty 50, Sensex, Bank Nifty — weekly & monthly expiry |
Stock Futures | Individual F&O-eligible securities — monthly contracts |
Stock Options | Individual securities — European-style monthly options |
Currency Derivatives | USD-INR, EUR-INR, GBP-INR, JPY-INR |
Interest Rate Futures | 91-day T-Bill, 10-year G-Sec futures |
2.3 Clause (ib) — Units of Collective Investment Schemes
A Collective Investment Scheme (CIS) pools investor money for a collective purpose. Units issued by a CIS are 'securities'. This means SEBI has jurisdiction to regulate CIS instruments; any unregistered CIS offering 'units' is offering unregistered securities. The landmark Sahara case turned on this provision.
📖 Sahara India Real Estate Corp. Ltd. v. SEBI (2013) 1 SCC 1 Facts: Sahara raised money from millions of investors through Optionally Fully Convertible Debentures (OFCDs), claiming these were not 'securities' under SCRA and therefore outside SEBI's jurisdiction. Held: The Supreme Court (3-judge bench) held OFCDs are 'securities' within Section 2(h) of SCRA. They are hybrid instruments with characteristics of debentures. Any instrument offered to 50 or more persons is a public offer triggering Securities law compliance. SEBI had full jurisdiction. Ratio: The definition of 'securities' is broad and purposive. Substance prevails over form. Hybrid instruments sharing characteristics of listed categories are covered. This is the most important SCRA case in recent decades — high exam frequency. |
2.4 Clause (ic) — Security Receipts (SARFAESI)
Security Receipts (SRs) are issued by Asset Reconstruction Companies (ARCs) under SARFAESI Act, 2002 in exchange for non-performing financial assets transferred by banks. Their inclusion as 'securities' enables SRs to be listed/traded on stock exchanges, providing exit liquidity for ARC investors and bringing the SR market within SEBI's framework.
2.5 Clause (id) — Mutual Fund Units
Units issued by mutual funds under any scheme are 'securities'. This means: (i) MF units are subject to SEBI's SEBI (Mutual Funds) Regulations, 1996; (ii) closed-end MF schemes must be mandatorily listed on stock exchanges; (iii) MF investors receive the protections of the SCRA framework.
2.6 Clause (ii) — Government Securities
Government Securities — Treasury Bills, dated Government securities (G-Secs), State Development Loans (SDLs) — are 'securities' under SCRA. Primarily regulated by RBI under Government Securities Act, 2006, they remain under SEBI's concurrent jurisdiction for exchange-listed derivatives. An MOU between SEBI and RBI governs the regulatory boundary.
2.7 Clause (iia) — CG-Notified Instruments
The Central Government can declare any instrument a 'security' by notification — a residuary power enabling new financial instruments to be brought within the regulatory framework without statutory amendment.
✅ Instruments Notified as Securities by CG Real Estate Investment Trusts (REITs) — notified as securities. Infrastructure Investment Trusts (InvITs) — notified as securities. Municipal bonds — notified as securities. This power enables the regulatory framework to evolve with financial innovation. |
2.8 Clause (iii) — Rights or Interests in Securities
'Rights or interests in securities' captures beneficial interests, rights under trusts holding securities, and partial interests. This ensures that holding structures — including depository arrangements where the DP holds legal title but the investor holds beneficial interest — are covered.
3. What is NOT a 'Security' under SCRA
Instrument | Reason Not a 'Security' |
|---|---|
Fixed deposits with banks | Banking contract — regulated by RBI under Banking Regulation Act; no secondary market. |
Insurance policies | Contract of insurance — regulated by IRDAI; no exchange tradability. |
National Savings Certificates, PPF | Government savings instruments — non-transferable, non-marketable. |
Chit funds | Regulated under Chit Funds Act, 1982; outside SCRA's framework. |
Agricultural commodities | Regulated under commodities framework; SCRA does not cover spot commodity contracts. |
4. Definition of 'Securities' Across Connected Laws
Law | Section | Key Point |
|---|---|---|
SCRA 1956 | Section 2(h) | Broadest definition — includes derivatives, CIS, MF units, G-Secs, SRs, CG-notified instruments. |
SEBI Act 1992 | Section 2(h) | Cross-references and adopts SCRA Section 2(h) — no independent definition. |
Companies Act 2013 | Section 2(81) | References SCRA — adopts same broad definition; adds hybrid instruments reference. |
Depositories Act 1996 | Section 2(m) | References SCRA — same definition for demat/depository purposes. |
5. Additional Landmark Cases
📖 Naresh Kumar Aggarwal v. Union of India (2013) 1 SCC 336 Facts: Whether units of an unregistered collective investment scheme fell within 'securities' under Section 2(h). Held: The Supreme Court confirmed the inclusive definition must be interpreted broadly and purposively. Instruments with marketability, investment character, and expectation of return are 'securities'. Ratio: The inclusive definition of Section 2(h) is not closed. Any instrument sharing the essential hallmarks of a security — investment, marketability, return — falls within its scope. |
📖 L.K. Advani v. Nirmala Kumari (1975) 2 SCC 262 Facts: Pre-2002 case — whether options in securities (Badla-type transactions) were valid contracts under SCRA. Held: Options in securities outside recognised stock exchanges were illegal and unenforceable under the then Section 20 of SCRA. The SCRA prohibited badla transactions and deferred settlement outside exchange rules. Ratio: Pre-2002: options in securities prohibited outside regulated exchanges. Post-2002: standardised exchange-traded options are fully legal as 'securities' under Section 2(h)(ia) read with Section 18A. |
6. Model Examination Questions & Answers
Q1. Is the definition of 'securities' under SCRA exhaustive or inclusive? What is its scope?
Inclusive Definition — Scope of Section 2(h) Model Answer — Section 2(h) uses the word 'include' — making it an inclusive, non-exhaustive definition. The seven categories enumerated are: (i) shares/debentures/marketable securities; (ia) derivatives; (ib) CIS units; (ic) security receipts; (id) MF units; (ii) G-Secs; (iia) CG-notified instruments; and (iii) rights in securities. Courts must interpret it purposively. In Sahara India v. SEBI (2013), OFCDs — hybrid instruments — were held to be 'securities'. In Naresh Kumar Aggarwal (2013), the Court confirmed the definition covers any instrument with marketability, investment character, and expectation of return. The 2002 Amendment's addition of derivatives was transformative — making exchange-traded futures and options legally valid. |
🎯 EXAM POINTERS — Topic 2: Definition of Securities
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