LAW5409 Securities Law — Unit 1: Introduction to Securities Law

Unit 1: Introduction to Securities Law

1.1 Meaning of Securities

A security = the tradable financial instrument evidencing a claim or an interest: the ownership stake (the share), the debt claim (the bond/debenture), or the derivative’s contract. The functional test (Howey’s investment-contract idea, by name only — “the investment of money in a common enterprise with profits from others’ efforts”): anything sold as a passive profit-promise is presumptively a security and enters the regulation’s net. Nepal’s statutory frame: the Securities Act 2063’s definition-family (the shares, stocks, bonds, debentures, mutual-fund units, and the prescribed instruments — by name, the Act’s schedule-faces).

1.2 Types of Securities: Stocks, Bonds, Derivatives, and Others

1. Stocks (equity): the ordinary shares (the voting-and-residual claim — Company Law’s world, LAW5404, this semester), the preference shares (the dividend-and-liquidation priority without the vote), the bonus-and-rights issues (the capital’s own faces), the IPO/FPO (the public’s entry door).
2. Bonds (debt): the government securities (the treasury bills-and-bonds — NRB’s auctions), the corporate debentures (the secured-and-unsecured, the convertible faces), the municipal-and-institutional bonds.
3. Derivatives: the forwards, futures, options, swaps — the value derived from an underlying (the hedging-and-speculation pair — Nepal’s derivative era: the commodity-era experiments and the SEBON’s structured-products gates).
4. Others: the mutual-fund units (Unit 9), the depository receipts, the securitised instruments (Unit 2.9), and the quasi-securities’ borderline cases (the cooperative shares, the “schemes” of the Unity Life type — Unit 9’s lesson).

1.3 Need for Securities and their Regulation

Why securities exist: the capital’s marriage — the saver’s surplus to the entrepreneur’s deficit; the enterprise’s fractional ownership; the state’s borrowing without the tax’s politics. Why regulation (the exam’s fourfold case):

1. Information asymmetry — the issuer knows, the investor doesn’t: the disclosure regime’s whole rationale (Unit 4).
2. The fraud-and-manipulation temptation — the market’s money attracts its predators (Units 5–6).
3. The systemic stakes — the market’s crash as the economy’s fall (the 1929-and-2008 lessons, U1.4-and-U10.5).
4. The investor-protection-and-confidence — the ordinary saver’s trust as the market’s oxygen: no confidence, no capital.

1.4 Genesis of Securities Law

The genealogy (by name): the bubble-era statutes (the South Sea Bubble’s aftermath), the US Blue Sky laws (the states’ early-1900s anti-fraud statutes), and the great settlement: the 1929 crash → the Securities Act 1933 (the issuance’s disclosure regime) and the Securities Exchange Act 1934 (the markets’ regulation and the SEC’s creation) — disclosure-as-philosophy replacing the caveat emptor. The UK’s lineage: the prevention-of-fraud acts to the FSA/FCA eras; the common law’s own faces (the misrepresentation-and-fiduciary actions) — and the modern codification’s global spread (India’s SEBI era; the EU’s prospectus-and-MiFID regimes).

1.5 Development of Securities Law and Regulation in Nepal

The ladder (the exam’s dates): (i) the Securities Marketing Center (2033 B.S./1976) — the state’s first broker; (ii) the Securities Exchange Act 2040 (1983) — the first statute and the Securities Exchange Board; (iii) NEPSE’s establishment (2050 B.S./1993–94) — the floor’s opening (1994) with the open-outcry era; (iv) SEBON’s reconstitution (2052 B.S./1995) — the regulator’s separation from the exchange’s operations; (v) the market’s growth-and-crises (the 2063-era’s broker scandals; the 2010s’ bull-and-bear cycles); (vi) the Securities Act 2063 (2006) — the modern regime (the Board’s full powers, the disclosure-insider-fraud prohibitions, the mutual-fund-and-intermediary regimes); (vii) the infrastructure era: CDSC (2067 B.S./2010 — the central depository-and-settlement), the online TMS trading (2018–19), demutualization (the 2019–2021 implementation); and (viii) the current frontier: the second-exchange-and-commodity-exchange approvals, the FPO/rights waves, the retail boom (the demat accounts’ millions), and the corporate-bond market’s adolescence.

Model Questions

1. Define securities with their types. Why are they regulated? (10)
2. Trace the genesis of securities law from the Blue Sky laws to the SEC. (10)
3. Describe the development of securities law and regulation in Nepal. (15)
4. Short notes: (a) Investment contract; (b) Debenture; (c) SEBON’s reconstitution; (d) Demutualization. (4×5)

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📚 Get the complete notes: Download the full Securities Law PDF (all units) — Law Info Nepal Original Notes Series.