Can Stock Exchange Regulations lead to a loss in business? – A Hypothesis


By Palak Arora from Amity Law School, Noida


Corporate Governance – The Literal Meaning

Corporate Governance systems can be distinguished into two types. Inner ones (set up by the company itself) and outside ones (connected to the various markets in which the company might be available). This investigation centers on the former one. They incorporate, from one perspective, proprietorship structure (level of focus and huge investor personality) and, on the other, the top managerial staff and its working in relationship with specific attributes (size, piece, and so forth).

Stock Exchange is a body of people who provide a place or platform where people can buy or sell the securities of different companies. It provides a new market.

What are the regulations that the Stock Exchange maintains?

Stock Exchange was originally given the responsibility of monitoring the compliances with legislations and securities regulations. Later, when OECD Principles of Corporate Governance enforced, Stock Exchange expanded their roles and responsibilities and contributed majorly towards the development of Corporate Governance. The prominent functions of the Stock Exchange are:

1. Stock Exchange provides the new market for securities. The securities can be listed and then traded at the exchanges.

2. It increases the goodwill of the company.

3. They provide a ready market for the purchase and sale of securities. Not only the new companies but the existing companies also need to issue shares at the time of expansion

4 They provide liquidity to securities. This gives confidence to investors.

5. The corporate sector can get information regarding trends if investment, investors, choice and priorities, etc., from stock exchanges on a regular basis.2 It acts as a medium for capital formation in the country.

While the shares are listed on an exchange, companies are required to follow certain guidelines. This is in order to protect the interests of shareholders. The management of the company is also regulated in a similar way.

By-Laws of Regulations by Stock Exchange

The Stock Exchange Market in India is regulated by the National Stock Exchange. The Regulations are laid down within the regulatory framework. There is a Disciplinary Jurisdiction of NSE. The relevant authority may expel, suspend any trading membership rights if they are found guilty of contravention, violation, non-compliance, disobedience, disregard of any Bye-

Laws, Rules, and Regulations given by National Stock Exchange or SEBI (Securities and Exchange Board of India). They hold absolute discretion.

The violation is for misconduct, non-business like conduct, and unprofessional conduct.

It can include fraud, violation of provisions and statutes, improper conduct, breach of rules, failure to comply with resolutions, false returns, and failure to pay dues, vexatious complaints, market manipulation, and rigging and so on.

To deal with such conduct NSE has ways through penalties, Suspension, and Expulsion. The remedies of penalties are acceptable but suspensions and expulsion can lead to wider loss than expected.

When suspension and Expulsion are the remedies opted by NSE?

The suspension can be two ways. Firstly, a temporary suspension and secondly a permanent suspension.

Suspension occurs when there are:

Prejudicial Business – When any business in a manner is prejudicial and disturbs the equilibrium of the market, this demoralizes the prices and they don’t reflect fair values.

Unwarrantable Business

Unsatisfactory Financial Condition

Expulsion, on the other hand, takes place when any trading member is not able to provide the margin deposit 3and/or Capital Adequacy requirements. These requirements may vary and are mentioned in the Bye-Laws, Rules, and Regulations provided by the relevant authority.

The consequences of Suspension include Suspension of Membership rights, Rights of Creditors unimpaired, the fulfillment of contracts, further business prohibited and no further transactions. Now in the lieu of this account, the Indian Economy is just at the menial stage of constant development. It is yet not stagnant or saturated in any manner. If we take this purview into our perspective then the crucial questions arise. Do these regulations lead to a business loss?

Vigorous Regulations – Threat to the Business and Economy

There are historical examples and illustrations in India where vigorous enforcement may put exchanges at a competitive disadvantage. This results in a loss of competitiveness in the Indian Capital markets. Herein, the stock rates decrease as the investments get affected by any delisting of shares or securities.

There are softer options always available for non-compliance. NSE can always levy penalties. With the exception of jurisdictions where governance recommendations are mandatory de-listing as a result of governance breaches, stricto-sensu is extremely rare.

There are evidential anecdotes where it can be seen widely that punitive measures to curb the violation can lead to further loss to the economy in any way. This actually also gives the gun in the hands of the issuers who may also practice unfair regulations.


With an appropriate case, we can understand the consequential criteria of these regulations. Just a few days back CCD got suspended to trade further. This deflated the stock prices and further, the business of the company got effected.

Another case where Karvy Brokers got suspended to do business because they could not manage to pay the margins. These cases re exemplary examples of business loss due to the actions of NSE

This can lead to the conclusion of our hypothesis that maybe the strict regulations by NSE are not healthy for business.


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