Financial instruments which are tradable or that can be bought and sold are generally referred to as securities. eg. shares, bonds etc.
Securities can represent either an ownership or debt position or both, or it can mean rights or entitlements. The key aspect is that it should be transferable. For instance, Fixed Deposit with banks is not considered as a security since it cannot be transferred to another person.
In India, the word "securities" is defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (SCRA). The term securities includes the following in India:
- 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
- derivatives which includes
- a contract which derives its value from the prices, or index of prices, of underlying securities;
- 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;
- Repos and Reverse Repos (being incorporated through the Finance Act, 2015)
- Commodity Derivatives (being incorporated through the Finance Act, 2015)
- any instrument which is notified as a derivative by Central Government (being incorporated through the Finance Act, 2015)
- Government security - a security created and issued by the Central Government or a State Government
- units or any other instrument issued by any collective investment scheme to the investors in such schemes
- units or any other such instrument issued to the investors under any mutual fund scheme but does not include any unit linked insurance policy which is a hybrid instrument providing for life risk cover and investments
- security receipts issued under SARFAESI Act
- Securitized debt instruments (collateralized debt obligations etc.)
- such other instruments as may be declared by the Central Government to be securities; and
- Rights or interest in securities
The market for securities is regulated by Securities and Exchange Board of India (SEBI).
From the definition it can be seen that "securities" can belong to both capital market and money market. The key aspect is their marketability. However, certain instruments like mutual fund policies are non-transferable, notwithstanding the fact that some of them can be bought and sold on the exchange platform (a category known as exchange traded funds). The definition of securities is expansive and includes such instruments also.
What is a “marketable security of a like nature” and hence eligible to be included in the definition of Securities under Section 2(h) of the SCRA, is at times clarified through judicial interpretations.
For instance, in the context of determining the scope of the term ‘marketable’ in definition of securities under the SCRA, the Hon’ble Supreme Court in July 2013, in the matter of Bhagwati Developers Pvt. Ltd. v. Peerless General Finance and Investment Company Ltd. and Anr had stated as follows-
“19. As is evident from the dictionary meaning set out above, the expression "marketable" has been equated with the word saleable. In other words, whatever is capable of being bought and sold in a market is marketable. The size of the market is of no consequence. In other words, the number of persons willing to purchase such shares would not be decisive. One cannot lose sight of the fact that there may not be any purchaser even for the listed shares. In such a case can it be said that even listed shares are not marketable? In our opinion what is required is free transferability. Subject to certain limited statutory restrictions, the shareholders possess the right to transfer their shares, when and to whom they desire. It is this right which satisfies the requirement of free transferability. However, when the statute prohibits or limits transfer of shares to a specified category of people with onerous conditions or restrictions, right of shareholders to transfer or the free transferability is jeopardized and in that case those share with these limitations cannot be said to be marketable”(emphasis supplied)
This means that the same instrument say a "share" can be treated as a security or not depending on various other factors. For instance, shares issued by private companies would not be treated as "securities" in India. This is because a statute - Companies Act, 2013 - provides that private companies can restricts the right to transfer its shares.
Further, Hon’ble Supreme Court (SC) in its judgment dated 31 August 2012 in the matter of Sahara Vs SEBI (Civil appeal No. 9813 and 9833 of 2011) held that
- A combination of debt instrument and equity instrument and therefore a hybrid security would also qualify as “security” if it is marketable and even if it is not specifically mentioned in the list of instruments as "securities" in SCRA
- SEBI has the power to regulate unlisted companies if they are issuing securities
- Any entity which issues instruments which are marketable securities, would become a “person associated with the securities market” and hence amenable to SEBI jurisdiction.