Report of Expert Committee on Fees *

Contract notes, margins, timely settelement *

Dealing in odd lots shares *

Order under Sec 8 of the SC[R] Act, 1956 *

Financial requirements and norms for corporate brokers *

Progress report persuant to inspection *

Market makers *

Submission of Annual Report and Accounts *

INB to be on C/N & transfer deed *

Capital Adequacy Norms For Brokers *

Common irregularities observed in brokers books *

Insider Trading Norms for Exchange Employees *

Regulation Of Transactions Between Clients And Brokers *

Regulation of transaction between clients and members *

Know your client *

Implementation of BMC *

Election Of President/Vice Presidents *

Registration of Sub Brokers *

 

SMD/SED/1430/93

January 7, 1993

To, The President/Executive Director/Secretary

Bombay/Ahmedabad/Calcutta/Delhi

Hyderabad/Madhya Pradesh/Bangalore

Cochin/Uttar Pradesh/Pune/Ludhiana/

Gauhati/Mangalore/Magadh/Jaipur/

Saurashtra-Kutch/Vadodara/

Coimbatore/Bhubaneshwar

 

Dear Sir,

Report of Expert Committee on Fees

This has reference to our letter Ref.No.11969 dated November 30, 1992 regarding payment of fees by member brokers of the Stock Exchanges. During the meeting of Stock Exchange Presidents with the Chairman, SEBI, certain questions were raised requiring clarifications on the calculation of turn-over for the purpose of payment of fees under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The Chairman, SEBI had, thereafter, appointed an expert committee to go into the various aspects on turn-over. The expert Committee has since submitted its report, a copy of which is enclosed. The recommendations of the Expert Committee have been accepted by SEBI and also by the Government of India.

 

I am directed to inform you that all the Stock Brokers in your Exchange may be asked to calculate the fees payable by them on the basis indicated by the Expert Committee and pay the fees in addition to payment already made, if any for the year 1992-93 to SEBI before February 15, 1993. The Brokers would have to give the break-up of turn-over indicating the basis of calculation. To the extent that such turn-over forms part of the transactions reported to the Stock Exchange, the turn-over would have to be verified by the Stock Exchanges. The member broker would be responsible for reporting the correct turn-over for transactions not reported to the Stock Exchange. I draw your attention to the provisions of Rule 4 & Regulation 10 of the SEBI (Stock Brokers and Sub-Brokers) Rules & Regulations, 1992, under which a broker is liable to be penalised for non-payment of registration fees.

 

 

Yours sincerely,

sd/-

 

C.B. BHAVE

 

Encl : As above.

 

REPORT OF THE EXPERT COMMITTEE APPOINTED FOR

INTERPRETATION OF TURNOVER

 

  1. INTRODUCTION

  1. Chairman Securities and Exchange Board of India (SEBI) appointed a Committee to look into the question of interpretation of turnover in the context of the fees payable by the brokers under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992. The composition of the Committee was as follows:-

 

  1. Shri R.S. Bhatt Chairman

  2. Shri N. J. Jhaveri Member

  3. Shri M.R. Mayya Member

  4. Shri C.B.Bhave Member-Secretary

 

  1. The terms of reference of the Committee were as follows:

 

  1. to examine and recommend the various types of transactions, which may reasonably be taken into account to determine the turnover of stock brokers for purposes of levy of registration fees in accordance with Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992; and

     

  2. any other related matter.

 

  1. The Committee held five meetings on December 8,11,14,15 and 17, 1992. The Committee carefully considered the questions raised by the various Stock Exchanges, and the replies given by the Stock Exchanges to SEBI explaining the practices followed on the stock exchanges and the practices followed by the brokers. The Committee also studied the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992 framed under the Securities and Exchange Board of India Act, 1992. The Committee met brokers from the Bombay Stock Exchange dealing in Government securities, badla financiers, jobbers and brokers doing client business predominantly to ascertain their views on the different aspects of the issues involved (list of brokers at Annexure I).

 

II TURNOVER

 

  1. The terms of reference of the committee require it to go into the various components of turnover. However, questions regarding reasonableness of turnover based registration fee were raised and therefore the committee would like to deal with these questions first.

     

  2. The Webster’s New Twentieth Century (p.1973) dictionary meaning of the word "Turnover" relevant to the matter referred to the Committee is "the amount of business done during the given period of time in terms of money used in buying and selling". The term "Turnover" has been defined to mean "the aggregate of the sale and purchase prices of securities received and receivable by the stock broker either on his own account as well as on account of his clients in respect of sale and purchase or dealing in securities during any financial year" in the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. The committee found that the definition given in the regulations is consistent with the meaning of the word as normally understood.

     

  3. It has been represented to SEBI that since brokers carry out business on behalf of their clients most of the time, the brokerage earned by them should be regarded as their turnover and not the purchase and sale price of the securities bought and sold. The committee considered this matter in depth and found it unacceptable for two reasons. First, the definition in the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992 is quite clear and does not admit of the interpretation that the brokerage alone would constitute turnover. Even in common parlance the total volume that is the price paid or received for securities purchased or sold would constitute turnover and the brokerage together with the differential in the prices, if any, would constitute income or revenues from which profits would be derived ultimately. Secondly, it has also been represented that for income tax purposes brokerage is deemed to be the turnover and hence even for the purposes of fees payable to SEBI the same interpretation should apply. Each authority is required to interpret terms as per the enactment(s) being administered by that authority. Therefore, the Committee did not go into the question of what exact interpretation is given by the income-tax authorities.

     

  4. The committee noted the fact that fees have been levied and collected by the Securities and Exchange Commission in the United States of America since 1935 on the basis of the total price of securities and not brokerage alone. The turnover based fees are charged every year and are being collected from 1935 on a perennial basis whereas, under SEBI Regulations fees would be payable by any broker for a period of initial five years only and thereafter a nominal sum of Rs. one thousand per annum is payable by each broker.

 

III INCIDENCE OF FEES

 

  1. The committee considered whether the incidence of fees was so high as to give it the character of an unreasonable levy. The incidence of fees would have to be seen in the context of the income that would be derived by a broker from a certain turnover. Among the various activities that could be undertaken by a broker, the important ones are listed below:

 

    1. trading on behalf of clients in equities and debt instruments;

    2. jobbing;

    3. badla financing

    4. taking position in different scrips as a principal;

    5. underwriting;

    6. business in Government securities; and

    7. other services such as inter-corporate deposits and deposit mobilisation.

 

  1. The committee was disadvantaged by the fact that no reliable precise data are available with regard to the income from the above activities and the turnover generated thereon. The committee has figures of turnover in the Bombay Stock Exchange, however, the break-up of the turnover related to different categories enumerated above is not available from all over the country. The committees had therefore, to rely on empirical methods. For example, while brokerage scales are fixed by stock exchanges and brokers are required to pass on the price paid by a broker on the floor of the exchange to the client , frequent complaints are received from investors that these norms are not followed. Reliable data are not available as to the magnitude of the difference between the price paid by a broker and the price charged to a client. Maximum brokerage chargeable is 2.5 percent. No data on actual brokerage is available because a trading practice has evolved over the years that contract notes are issued showing a consolidated amount payable and receivable and brokerage is not indicated separately. The badla financing rates vary between 20 to 50 percent per annum. Jobbing differences vary widely across scrips, there are no ceilings on such differences. Functions like underwriting, collection of deposits, etc will not result in trading turnover but would contribute to income. However, taking into account different factors the committee has, therefore, assumed that even at a conservative estimate gross income of one percent on the turnover (as defined in the Regulations and as mentioned above) would not be an unfair assumption.

     

  2. The committee has worked out examples to illustrate the extent of incidence of registration fees payable by brokers with a turnover of Rs.1 crore, Rs. 10 crores and Rs. 100 crores. The table below illustrates the figures.

 

S.No.

Turnover

(Rs.crores)

Income

(Rs.)

Registration Fees

(Rs.)

1.

1

1,00.,000

5,000

2.

10

10,00,000

14,000

3.

100

100,00,000

1,04,000

 

The fees would be an expense and hence tax deductible. Moreover, the fees are to be paid for a period of five years only. Taking these factors into consideration and even if fifty percent of gross income is assumed to contribute to expenses at lower levels of turnover, the committee finds that the incidence of registration fees is not in any way unreasonable. If the turnover increases, the expenses would not rise in the same proportion and the proportion of fees may get reduced further.

 

3.4 The committee was, therefore, of the opinion that the concept of `turnover’ based fees was not new. It was also fair and equitable in the sense that brokers with larger business paid proportionately higher fees and the incidence of fees was just.

 

IV CONSTITUTENTS OF TURNOVER

 

4.1 Representations have been received by the Securities and Exchange Board of India regarding certain types of transactions where ‘turnover’ as defined may lead to unfair levy of fees. The views of the committee on these are listed below. No clarification regarding turnover relating to purchase and sale which results in delivery in the same settlement has been sought. Since the committee considers the inclusion of such turnover and calculation of registration fees thereon reasonable this aspect of turnover is not discussed below.

 

  1. Jobbing :

 

  1. A question has been raised whether "jobbing" would form part of the term "turnover" or not. The reasons given for exclusion or for special treatment of jobbing transactions are summarised below:

 

    1. Jobbing by its very nature is not undertaken on behalf of a client. The jobber takes a position in the scrip himself with each transaction and tries to liquidate his position at the end of the day.

       

    2. No brokerage is earned by the broker when he performs the jobbing function.

       

    3. On account of the nature of his function a jobber’s turnover is double because he must have a sale for every purchase and a purchase for every sale.

       

    4. A broker may lose money in jobbing just as he may earn on account of the jobbing difference.

 

  1. While it is true that a jobber may earn no brokerage during jobbing, it is also a fact that there are no ceilings on jobbing differences. Moreover, in India there is no compulsion for a jobber to make market continuously nor is it necessary for any broker to act as a jobber. It is entirely on the basis of market forces and of his own volition that a broker may choose to make market in any scrip. The committee, therefore, was of the opinion that unless the losses in the jobbing function were adequately covered by larger profits to establish a proper risk reward relationship, brokers would not undertake jobbing function. The committee was also told that no authentic data on the profits or losses made in the jobbing function in relation to turnover was available.

     

  2. The committee also considered the fact that by its very nature jobbing turnover would result in double counting because as represented to the committee every sale by a jobber must be offset by him by a purchase and vice-versa. However, it is found that the jobbing transactions are not separately identified by the stock exchanges or the brokers in their reporting system. Thus unless some criterion is laid down it will not be possible for any entity to properly define the transactions that could be labelled as jobbing transactions. The committee recommends that all transactions which are squared off on the same day and which have not been undertaken by the broker on behalf of clients should be classified as jobbing transactions. For the purpose of calculating turnover only the sale side of these transactions should be taken into account. Considering the risk involved in jobbing the committee further recommends that scale of fees may be adopted as one two hundredth of one percent of the jobbing turnover calculated in the above manner.

 

 

  1. Carryover - Renewal Or Badla Transactions :

 

  1. Another question relates to inclusion of transactions which are in the nature of renewal (badla or carry over in ‘A’ scrips and renewal in ‘B’ scrips) into the next settlement period. When the two parties to a transactions are not in a position to meet their commitments in the same settlement or are desirous of carrying their transaction into the next settlement, they achieve this in two different ways. They would enter into offsetting transactions (a buying broker entering a sale and a selling broker entering a purchase) for the current settlement and new transaction for the next settlement so that their liability to deliver that security and the right to receive that security would be identical and in effect no securities may change hands even though net payment of money may be involved because the offsetting transaction is not entered at the same rate as the original transaction. This method is employed because it is not legally permissible to carry over contracts to the next settlement except in specified shares.

     

  2. In the case of specified shares the method of "badla" is employed. In this case a badla financier steps into the shoes of a buyer. This is achieved by the badla financier buying the securities from the original buyer in the current settlement and selling them back in the subsequent settlement. The original buyer does not thus either receive or deliver securities in the current settlement because he is entitled to receive and deliver identical number of securities. He would however have to make payment or may receive payment because the transaction with the badla financier may not be at the same rate as with the original seller. The badla financier would receive delivery of the securities from the original seller. The original seller in turn who would receive payment from the badla financier instead of the original buyer. For the next settlement the badla financier becomes the seller of identical number of securities and the original buyer becomes the buyer again.

     

  3. The committee also noted the point made by some of the brokers who met the committee that renewal of transactions has to be carried out many times on account of the fact that the companies take unduly long in transferring the shares. This results in delay on the part of the seller to deliver the securities. It is true that it is not correct on the part of the sellers to sell the shares after having sent them for transfer and before receiving them back from the company. The committee is, however, seriously concerned by the delays reported on the part of the companies and would urge SEBI and the stock exchanges to take such steps as necessary to ensure that shares are transferred in the ordinary course of the business that takes place within the stipulated time.

     

  4. The reasons put forth for a different treatment of renewal, badla or carry-over transactions in the calculation of turnover are as follows:

 

    1. Carry over or badla transactions are merely devices used by brokers to postpone their liabilities to a subsequent settlement. They inflate the turnover figures but in reality they are not fresh transactions. If a transaction is carried forward say for ten settlements, the turnover will go up twenty times even though it represents just one transaction which is being fulfilled at a later date.

       

    2. No brokerage is earned for renewal whereas for carry forward or badla a small carry forward charge is levied.

 

  1. The committee noted that the performance of contracts in "B" scrips was expected to result in delivery in the same settlement period. A market practice has, however developed on account of which extension beyond one settlement is obtained. Since the net delivery position was being worked out at the end of the settlement, the extension did not always take place among the original parties to the contract and thus technically this was treated to be a new transaction. The Stock Exchange do not and cannot keep track of the original contract renewed from time to time. The position is identical for ‘A’ scrips except that extension is allowed upto a period of 90 days. Again since no record is available with reference to the original transaction it is not possible for exchange authorities to determine the period for which transactions on an average are indeed carried forward.

     

  2. The Committee is, therefore, unable to examine even empirically as to how many times a transaction is indeed carried forward. The committee, however, appreciated the fact that the modality for carrying forward a transaction is such that a transaction is entered in the current settlement for offsetting the effect of the transaction which is sought to be carried forward and a reverse transaction is entered for the next settlement. Thus two entries are necessitated. The committee appreciated the fact that the turnover figure would thus double the volume. The committee therefore recommends that such transactions may only be counted once in each settlement, the reverse transaction being ignored for the purpose of calculating the turnover. The committee was informed that on some stock exchanges like the Bombay Stock Exchange renewal in the ‘B’ scrips is effected without making the offsetting entry in the earlier settlement. In such cases the entire turnover would be taken into account including renewal transactions for subsequent settlements.

     

  3. It was argued before the committee that even though badla charges are on an annualised basis, the turnover would get added on a fortnightly basis. Even if this be true since no transactions can be carried forward beyond a period of 90 days, the maximum registration fees leviable on one particular badla transaction would not exceed 12 paise per Hundred Rupees. Considering the badla charges, the committee noted that even this amount of 12 paise is relatively smaller in proportion to turnover.

 

4.4 Underwriting and collection of deposits

 

The committee also considered the question of including the underwriting collection of deposits and inter corporate deposits, in the turnover figures of brokers, It was decided that such business should not be included in the turnover because the definition given in the Securities and Exchange Board of India (Stock-Brokers and Sub-Brokers) Rules and Regulations, 1992 does not envisage such inclusion and many other entities in the same nature of business are not required to pay fees of similar nature.

 

  1. Trades put through on other exchanges

 

The committee considered the question raised by some exchanges regarding the orders placed by brokers of those exchanges on brokers of other stock exchanges for sale or purchase of securities. The issue raised was whether such turnover would be included in the turnover of broker or not. The Committee appreciated that in such transactions involving two brokers of different stock exchanges there would be two different situations. In the first, the broker from one exchange may merely be buying or selling securities through the broker of another exchange because on his own exchange the market for that security does not exist. In such a case he would be working like a sub-broker of the main broker who would be putting this transaction through his own exchange. The Committee was of the opinion that such a transaction needs to be included in the turnover to be determined for calculation of registration fees of the main broker only. The other type of transaction would be arbitrage transaction where the broker of one exchange may place an order for purchase or sale of securities with the broker of another exchange in order to take advantage of the price differential for the same scrip on the two exchanges. In such cases, the transactions would be recorded on both the stock exchanges and therefore it would only be proper that this forms a part of the turnover of both the brokers.

 

4.6 Government securities

 

The Committee considered the question of including the turnover of the Government securities in the total turnover of a broker. It was reported to the Committee that the volume of transactions in Government securities is very large and on account of such volume the brokerage paid by the institutions is in percentage terms ranging often between 0.02-0.05 percent. In view of this, the Committee was of the opinion that the turnover of Government securities should be calculated separately and on this turnover registration fee of One Thousandth of one percent may be charged rather than One Hundredth of one percent charged on any other turnover. If PSU bonds and units are traded in the same manner the concessional registration fee of One Thousandth of one percent of turnover should be charged.

 

  1. Transactions off-market and not reported to stock exchange

 

The committee was also informed that the brokers are allowed to net out transactions in their offices if for the same scrip they have a buying client as well as selling client. Brokers are also expected to inform the exchange the purchases or sales made by them as principals. However, the Committee was told that as per the market practice such transactions are not fully reported to the stock exchanges. The Committee felt that merely because such transactions are not reported to the stock exchanges, they cannot be excluded from the broker’s turnover. The Committee, therefore, recommends that such transactions should form part of the broker’s turnover for calculation of registration fees.

 

V SUMMARY OF CONCLUSION AND RECOMMENDATION

 

  1. The committee concluded that using turnover as the basis of payment of registration fees was a well established practice in a country like the US and that it was a fair basis.

     

  2. The committee concluded the incidence of fees was not unreasonable.

     

  3. The committee recommends that for jobbing transactions identified and included in the turnover as proposed in the report, the scale of fees may be reduced to One Two Hundredth of 1 percent.

     

  4. The committee recommends that in the case of carry forward renewal or badla transactions the off-setting entries (as clarified in the report ) made by the exchange may not be counted as part of the turnover. However, in those exchanges where such off-setting entries are not made the question of any exclusion from turnover will not arise.

     

  5. For Government securities and PSU bonds and units traded in the similar manner, the turnover may be calculated separately and a registration fee of One Thousandth of one percent may be charged on such turnover rather than the present scale of One Hundredth of one percent.

     

  6. If brokers are carrying out transactions in securities without reporting these to the stock exchanges those transactions would be taken into account for the purpose of turnover and the individual broker would be responsible for reporting such transactions for payment of registration fees. Stock exchanges would ensure that registration fees are properly calculated and paid to the Securities and Exchange Board of India.

     

  7. The trade put through on other stock exchanges would be included in the turnover on that exchange.

     

  8. The activities such as underwriting and collection of deposits would not be taken into account for the purpose of calculating the turnover of the brokers.

 

sd/-

Shri R.S. Bhatt

` (Chairman)

 

sd/- sd/-

Shri N J Jhaveri Shri M. R. Mayya

(Member) (Member)

 

sd/-

Shri C.B.Bhave

(Member-Secretary)

 

 

 

 

Date : 18th December, 1992

Place : Bombay

 

ANNEXURE I

 

Members who met the Expert Committee set up by SEBI on 14th December 1992

 

 

  1. Shri H. K. Shah

     

  2. Shri Dilip Mohan Hemchand

     

  3. Shri Kirit Govardhandas Bhagwandas

     

  4. Shri Arvind M Shah

     

  5. Shri Madanlal Dalmia

     

  6. Shri Brijmohan Sagarmal

     

  7. Shri H M Kothari

     

  8. Shri Asit C Mehta

     

  9. Shri Bhagirath Merchant

 

Ref.SMD-I/1509

January 14, 1993

The President/Executive Directors,

All Stock Exchanges

(Except Coimbatore & Meerut).

 

Dear Sir,

Contract notes, margins, timely settelement

Please refer to Ministry of Finance’s letter F.No.4/16/SE/91 dated August 19, 1991 regarding certain measures such as showing brokerage separately in contract notes, imposition of minimum daily margin of 25% on all shares in specified list, ensuring timely settlement and broad-basing of the governing boards, to be taken by the stock exchanges in the interest of long term growth of stock market and for ensuring investor protection. You were also required to submit periodical reports on implementation of these measures to SEBI as well as the Central Government,

 

In this connection, we have been requested by the Ministry of Finance to send them immediately a detailed report on the progress made by the stock exchanges on implementation of these directives. As SEBI has issued fresh directives vide its letter SMD-II.11615/92 dated 20.11.92, regarding the composition of the governing board, etc., you are requested to send to us the progress report on implementation of the remaining directives, viz., showing brokerage separately in contract notes, minimum margin of 25% on shares in specified list and ensuring timely settlement as well as the steps taken by the stock exchanges to implement SEBI’s directives of 20.11.1992 referred to above. The above information may be forwarded by fax/telex on an urgent basis.

 

Kindly treat this as most urgent.

 

 

Yours faithfully,

 

sd/-

 

(S. T. GERELA)

 

Ref.SMD-I/2378

February 12, 1993

The President/Executive Directors

of all recognised stock exchanges

 

Dear Sir,

Dealing in odd lots shares

As you are aware, with the spate of issues of rights shares and fully and convertible debentures in the current financial year (i.e. 1992-93), the volume of odd lot shares and debentures has reportedly increased manifold, but the secondary market for them is not that active. Consequently, the investors across the country are finding it difficult to deal in odd lot shares and debentures. Though some stock exchanges have taken steps to resolve this problem by conducting separate trading sessions for odd lot shares, it is obvious that these arrangements are not adequate to meet the needs of the investors. We, therefore, would be glad to know the efforts made by your Exchange in this regard. Please arrange to send to us at an early date the following details regarding odd lot and debentures trading sessions at your Exchange:

 

  1. Frequency of such sessions;

  2. Their duration and

  3. Volume of business transacted per such session since April 1992.

 

In case, the exchange has not provided such facilities so far, you are requested to provide them to the investors and member brokers to deal in odd lot shares and debentures at the Exchange. The availability/introduction of such facilities at the Stock exchange may please be given wider publicity through the notice boards at the Exchange as well as the press to inform the investors regarding availability of such facilities.

 

Please keep us advised of the action taken in this regard.

 

Meanwhile, please acknowledge the receipt of this letter.

 

 

Yours faithfully,

 

sd/-

 

U. C. DIKSHIT

EXECUTIVE DIRECTOR

 

 

SR. EXECUTIVE DIRECTOR

April 20, 1993

SMD/SED/6919/93

To the President

Bombay/Ahmedabad/Calcutta/Madras/

Hyderabad/Madhya Pradesh/Bangalore/

Cochin/Uttar Pradesh/Pune/Ludhiana/

Gauhati/Mangalore/Magadh/Jaipur/

Saurashtra-Kutch/Vadodara/Delhi/

Coimbatore/Bhubaneshwar Stock Exchanges

 

Dear Sirs,

Order under Sec 8 of the SC[R] Act, 1956

Please refer to the earlier correspondence on the subject resting with our letter no. SMD/SED/0049/93 dated January 1, 1993. The Board after taking into account suggestions made by various stock exchanges has decided to direct the stock exchanges to amend the rules or Articles of Association in respect of various matters including those relating to the constitution of the governing bodies of the stock exchanges. A statutory directive dated April 19, 1993 issued by the Board is enclosed for necessary action at an early date and in any case not later than six months from the date of the order.

 

While making the proposed amendments please ensure to make consequential amendments to the Rules/Articles of Association. The draft of the proposed amendments may be sent to us for approval.

 

Please acknowledge receipt.

 

 

Yours faithfully,

 

sd/-

 

C. B. BHAVE

 

SECURITIES AND EXCHANGE BOARD OF INDIA

 

Order under Section 8 of the SCRA Act

 

WHEREAS:

 

  1. With a view to protect the interest of investors and to promote development of and to regulate the securities market and in particular the stock exchanges in terms of Section 11 of the Securities and Exchange Board of India Act, 1992 and further pursuant to sub-section (1) of Section 8 of the Securities Contracts (Regulation) Act (hereinafter referred to as the Act) and the powers delegated by the Central Government under its notification no. SO/573(E) dated July 3, 1992 issued under 29 A of the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India (hereinafter referred to as " the Board") had through its communication dated August 19, 1992 consulted the stock exchanges on certain specific issues relating to the reconstitution of the governing bodies of the stock exchanges (hereinafter referred to as "governing bodies"), the appointment of Executive Directors including the constitution of disciplinary, arbitration and default committees of the stock exchanges; AND

 

  1. After taking into account, the views expressed by several stock exchanges, the Board by its communication dated November 20, 1992 advised all the stock exchanges to take steps to amend their Rules or Articles of Association; AND

 

  1. In response to the said communication dated November 20, 1992, while several stock exchanges have expressed their willingness to carry out the amendments to their respective Rules and Articles of Association, others have either suggested modifications or opposed or shown reluctance to carry out such amendments; AND

     

  2. By a further communication dated January 1, 1993 the Board had proposed specific terms of office for President and Vice-President of the Stock Exchanges, AND

     

  3. The Board has since considered various proposals in the light of further suggestions received from the stock exchanges pursuant to above mentioned communications and it is of the opinion that in interest of the investors and the capital market as also in the public interest , it is necessary and expedient to amend the Rules or Articles of Association, as the case may be, of the stock exchanges in the manner indicated in this Order for the following reasons namely :

 

(i) The governing bodies as constituted at present have failed to effectively and promptly implement the directives issued by the Central Government;

 

(ii) Some governing bodies have shown reluctance or indifference or have failed to take adequate steps for the appointment of Executive Director;

 

(iii) The disciplinary, arbitration and default committees as constituted at present have failed to take quick, effective or timely action against erring brokers;

 

  1. The governing bodies as constituted at present have failed to enforce the Articles of Association, Rules, Regulations and Bye-laws of the stock exchanges;

 

  1. It is a matter of common knowledge that when some members get elected on the governing board including as President or Vice-President or as members for several years they get into a position whereby they can exert excessive influence in the affairs of the stock exchange which is not desirable in the public interest;

 

(vi) There is a need to broad base the membership of the governing bodies, and make them fully representative of various interests in the securities market in order to ensure that the affairs of the stock exchanges are conducted on healthy lines with the highest standards of professional conduct, business ethics and morality to inspire and sustain the confidence of the investing public.

 

NOW THEREFORE in exercise of the powers conferred by sub-section (1) of Section 8 of the Securities Contracts (Regulation) Act, 1956, read with the powers delegated to the Board by the Central Government under section 29A of the said Act, the Board hereby directs all the recognised stock exchanges, more particularly mentioned in the Schedule hereunder written, to take steps, immediately but in any case not later than six months from the date of this Order, for amendment of their respective Rules or Articles of Association, as the case may be, be provide for the following matters :-

 

  1. Unless otherwise agreed to by the Board, the governing body of a stock exchange, shall normally comprise of 13 members and shall be constituted as follows:

 

  1. six members of the stock exchange to be elected by the members of the stock exchange.

     

  2. not more than three members to be nominated by the Central Government or the Board in accordance with the Act;

     

  3. three public representatives to be nominated by the Board;

 

Provided that the Board may at any time appoint public representatives more than three so that the total number of members nominated under this clause and clause (ii) above may not exceed the total number of elected members under clause (i) above;

 

  1. one Executive Director to be appointed by the stock exchange.

 

One-third of the elected members under clause 1( I) shall retire at each annual general meeting and shall be eligible to offer themselves for re-election.

 

Provided, that where a person has been a member elected for two consecutive terms on the governing body he shall not offer himself for re-election for a further period of two years.

 

  1. The members to be appointed under clause 1(ii) above, shall not be subject to retirement by rotation and shall hold the office at the pleasure of the Central Government or the Board as the case may be.

 

3. (i) Public Representatives to be nominated under clause 1(iii) above shall be from amongst the persons of integrity having necessary professional competence and experience in the areas related to securities markets;

 

  1. For purposes of nomination as public representatives, the governing body of the stock exchange may forward the names of persons to the Board for such nomination. The Board shall, however have the right to nominate persons, whose names have not been forwarded by the governing body of the stock exchange.

 

(iii)The public representatives to be nominated on the governing body shall hold the office for a period of one year from the date of assumption of the office or till the Annual General Meeting whichever is earlier.

 

4. (i) The President of a stock exchange shall be elected from amongst the members of the governing body within ten days after the conclusion of the Annual General Meeting and no approval from the Central Government or the Board would be required for appointment of any person as the President.

 

(ii) The President appointed as above shall hold his office for one year and shall be eligible for re-election.

 

Provided that no member who has held the office of the President for two consecutive terms shall be eligible to offer himself for re-election unless a period of one year has elapsed since he last held such office.

 

(iii) The Vice-President of a stock exchange shall be elected from amongst the members of the governing body within ten days after the conclusion of the Annual General Meeting and no approval of the Central Government or the Board would be required for appointment of any person as the Vice President.

 

(iv) The Vice President appointed as above shall hold his office for one year and shall be eligible for re-election;

 

Provided that no member who has held the office of the Vice President for two consecutive terms shall offer himself for re-election unless a period of one year has elapsed since he last held such office.

 

  1. The appointment, the terms and conditions of service, the renewal of appointment and the termination of service of an Executive Director shall be subject to prior approval of the Board.

 

  1. The Rules or Article of Association, as the case may be, of the stock exchange shall provide that besides the governing body, it shall be the duty of the Executive Director to give effect to the directives, guidelines and orders issued by the Board in order to implement the applicable provisions of law, rules, regulations as also the Rules or the Articles of Association, Regulations and Bye-laws of the stock exchange.

 

Any failure in this regard will make him liable for removal or termination of service by the stock exchange with the prior approval of the Board or on receipt of direction to that effect from the Board, subject to the concerned Executive Director being given an opportunity of being heard against such termination.

 

  1. The Rules or Articles of Association, as the case may be, shall provide for nomination of not more than forty percent of the members of the exchange on the arbitration, disciplinary and default committees and the balance sixty percent shall be nominated on the said committees from persons other than members of the stock exchange with the prior approval of the Board.

 

8.The members presently constituting the governing body shall; immediately after the amendment of the Rules or Articles of Association, as the case maybe or after the issue of an order by the Board under sub-section (2) of Section 8 of the Act, retire to the extent necessary in order to ensure that the composition of the governing body as reconstituted, is in conformity with the Rules or Articles of Association as the case may be.

 

For purposes of this requirement, the members, who have been longest in the office since their last appointment, shall retire. In respect of the members, who were appointed on the same day, the persons, who shall retire may be determined by agreement or lots.

 

 

Dated at Bombay this 20th day of April, 1993.

 

 

Sd/-

 

G.V. RAMAKRISHNA

CHAIRMAN

SECURITIES AND EXCHANGE BOARD OF INDIA

 

SCHEDULE

 

 

  1. The Stock Exchange, Bombay

  2. The Delhi Stock Exchange Association Ltd

  3. The Calcutta Stock Exchange Ltd

  4. The Ahmedabad Stock Exchange Association Ltd

  5. Madras Stock Exchange Ltd

  6. The Ludhiana Stock Exchange Association Ltd

  7. The Uttar Pradesh Stock Exchange Ltd

  8. Jaipur Stock Exchange Ltd

  9. The Magadh Stock Exchange Ltd

  10. The Gauhati Stock Exchange Ltd

  11. Madhya Pradesh Stock Exchange Ltd

  12. Saurashtra-Kutch Stock Exchange Ltd

  13. Vadodara Stock Exchange Ltd

  14. Pune Stock Exchange Ltd

  15. Bhubaneshwar Stock Exchange Association Ltd

  16. Bangalore Stock Exchange Ltd

  17. Kanara Stock Exchange Ltd

  18. Cochin Stock Exchange Ltd

  19. The Hyderabad Stock Exchange Ltd

  20. The Coimbatore Stock Exchange Ltd.

 

 

SR. EXECUTIVE DIRECTOR

SMD/SED/9012/93

May 14, 1993

To, Presidents/Executive Directors/Secretary

of all the Stock Exchanges

 

Dear Sir,

Financial requirements and norms for corporate brokers

Please refer to our letter no. SMD/SED/1644/93 dated January 18, 1993 on the subject. In the light of the comments received from various stock exchanges, Securities and Exchange Board of India has since finalised the financial requirements and norms as per the Annexure are hereby specified for admission of a company as a corporate member.

 

You are requested to take note of the same and do the needful in the matter.

 

Please acknowledge receipt

 

Thanking You,

 

 

Yours faithfully,

 

sd/-

 

(C. B. BHAVE)

 

Financial requirements and norms for Corporate Members.

 

In pursuance of clause (ii) of sub-rule 8 of the Securities Contracts (Regulation) Rules, 1957, the Securities and Exchange Board of India., hereby specifies the following financial requirements and norms for admission of a company as a corporate member of any stock exchange:-

 

  1. Minimum paid up capital

A company seeking admission as a corporate member of any stock exchange shall have a minimum paid up capital as mentioned below:

  1. for stock exchanges at Bombay and Calcutta- Rs. 30 Lakhs

  2. for stock exchanges at Delhi Ahmedabad and Madras Rs. 20 Lakhs

  3. for other Stock Exchanges Rs. 10 Lakhs

 

  1. Maintenance of Net Worth

 

A corporate member shall at all times maintain a net worth, i.e. the aggregate of paid up capital plus free reserves, which shall conform to the capital adequacy norms as specified by the Securities and Exchange Board of India.

 

Explanation:- For purposes of computation of the net-worth, the following assets shall not be taken into account:

  1. fixed assets including land and building,

  2. receivables which are due and outstanding for more than three months,

  3. value of the stock exchange card,

  4. doubtful debts and advances.

  5. pledged securities.

 

  1. Additional finance and other requirements.

 

  1. A corporate member shall in addition to clauses 1 and 2 above, also satisfy such other financial requirements as may be specified from time to time by the stock exchange of which such company is a corporate member.

  2. No separate financial requirements need to be fulfilled in respect of branches of a corporate member

 

4..Multiple membership

Where a corporate member seeks to become a member of more than one stock exchange, the requirements mentioned in clauses 1, 2 and 3 above shall be fulfilled in respect of each of the stock exchanges. Further, separate and segregated accounts in respect of each of the stock exchanges of which he is a member shall be maintained.

 

  1. Acceptance of Deposits

 

A corporate member may accept deposits (not being the amounts collected by way of margin and dues collected from the clients) as per the limits provided by the Reserve bank of India under the Non-Banking Financial Companies(Reserve Bank) Directions, 1977.

 

  1. Restrictions on employment of certain persons as director.

A corporate member shall not employ or appoint any person as a director whose registration as an intermediary has been canceled by the Securities and Exchange Board of India in accordance with the rules and regulations applicable to such intermediary.

 

SCHEDULE

 

  1. The Stock Exchange, Bombay

  2. The Delhi Stock Exchange Association Ltd.

  3. The Calcutta Stock Exchange Association Ltd.

  4. The Ahmedabad Stock Exchange Association Ltd.

  5. Madras Stock Exchange Ltd.

  6. The Ludhiana Stock Exchange Association Ltd.

  7. The Uttar Pradesh Stock Exchange Association Ltd.

  8. Jaipur Stock Exchange Ltd.

  9. The Magadh Stock Exchange Ltd.

  10. The Gauhati Stock Exchange Ltd.

  11. Madhya Pradesh Stock Exchange Ltd.

  12. Saurashtra Kutch Stock Exchange Ltd.

  13. Vadodara Stock Exchange Ltd.

  14. Pune Stock Exchange Ltd.

  15. Bhubaneshwar Stock Exchange Association Ltd.

  16. Bangalore Stock Exchange Ltd.

  17. Kanara Stock Exchange Ltd

  18. Cochin Stock Exchange Ltd.

  19. The Hyderabad Stock Exchange Ltd.

  20. The Coimbatore Stock Exchange Ltd.

 

Ref. SMD-I/10719

July 9, 1993.

The President/ Executive Director,

Bombay, Ahmedabad, Calcutta, Delhi,

Madras, Hyderabad, Madhya Pradesh Bangalore,

Pune, Mangalore, Magadh, Jaipur,

Saurashtra Kutch and Vadodara Stock Exchange.

 

Dear Sir,

Progress report persuant to inspection

As you are aware, SEBI had conducted an inspection of your Exchange, and based on findings of the inspection, certain suggestions were made to improve the working and practices and procedures at the Exchange. These suggestions have already been forwarded to you and you were also advised to submit periodical progress reports on implementation of these suggestions. You are therefore, requested to please submit to us the detailed progress report as on June 30, 1993 on implementation of various suggestions to the Exchanges made by SEBI in its inspection report and a suitable time-frame for implementations of suggestions which have not yet been implemented. Your report in this regard should be sent immediately on the receipt of this letter.

 

 

Yours faithfully,

 

 

sd/-

 

  1. T. GERELA)

 

SR. EXECUTIVE DIRECTOR

No. SMD/SED/93/11362

August 5, 1993

The President/ Executive Director,

Bombay, Calcutta, Delhi,

Madras, Stock Exchanges.

 

Dear Sir,

Market makers

As you are aware we had circulated a Consultative Paper on ‘Market Makers’ and your comments thereon were invited. After taking into account the comments received from various participants in the market the Securities and Exchange Board of India (SEBI) has decided to introduce the concept of market making in your exchange as per the scheme attached. The Reserve Bank of India is separately issuing guidelines to commercial banks to enable the market makers approved by SEBI to avail of bank credit. I would request you to circulate this scheme amongst your members and inform them that they could apply to SEBI through the Exchange for acting as a market maker.

 

 

Yours faithfully,

 

 

sd/-

 

C B BHAVE

 

encl: a/a

 

cc: The President/Executive Directors of

Ahmedabad, , Bhubaneshwar, Cochin, Coimbatore, Gauhati,

Hyderabad, Madhya Pradesh Bangalore, Ludhiana,

Pune, Mangalore, Magadh, Jaipur, Uttar Pradesh,

Saurashtra Kutch and Vadodara Stock Exchange and OTC for their information.

 

GUIDELINES FOR MARKET MAKERS

 

SEBI had issued in April 1993, a preliminary paper proposing to encourage market making in less liquid scrips. Comments and suggestions have been received from some Stock Exchanges, Chambers of Commerce, Investors’ Associations, Brokers and others. After considering them carefully the following guidelines for market makers are issued.

 

  1. Market makers may be introduced in a phased way in the Stock Exchanges and to begin with, market making would be introduced only in the Stock Exchanges of Bombay, Calcutta, Delhi and Madras.

     

  2. Market makers will be approved by the SEBI on the recommendation of the Stock Exchange and after taking into account criteria such as financial strength as per the audited balance sheet and the profit and loss account for the latest period, the volume of transactions done in the last year by the member in the scrips for which he chooses to be market maker, his total turnover for the corresponding period, turnover as a jobber if he is operating as a jobber in any of the scrips, defaults by the member, timely payment of margins, disciplinary action, pending arbitration etc.

 

The list of scrips for which he chooses to act as a market maker should be furnished to and also approved by the SEBI

 

  1. Each such market maker approved by the SEBI should make a market for a minimum of 5 scrips(Equity Shares). Initially market making would be introduced only for those scrips which are not included in the BSE National Index. Each market maker shall be required to acquire at least 30,000 shares in each of the scrips. SEBI may vary the minimum number of shares required to be acquired based on the face value of the share, average delivery per settlement, floating stock of the company etc.

     

  2. Initially not more than two market makers in each stock exchange would be permitted for the same scrip. The jobbers working at present in different scrips could continue to do so.

     

  3. The market maker shall execute contracts in the designated scrips on a delivery and payment basis in the same settlement(but not on the basis of badla). In order to get his shares transferred in his name, if he so requires, he will be permitted to stop making the market for designated periods prior and subsequent to the record date after due notice to the market and with the prior approval of SEBI.

     

  4. Under the scheme, the market maker would be required to give a continuous two-way quote along with the depth(Number of tradable lots) for the scrips in which he has been authorised to operate as a market maker. The market maker will not be allowed to vary his quote on any day unless he has concluded at least one trade of marketable lot in the preceding quotation given by him during the day. The buying and selling spreads would be determined by the supply and demand conditions prevailing in the market. Restrictions on the spread may be imposed, if necessary at a later date after observing the functioning of the market making mechanism.

     

  5. Separate trading counters will be provided to the market makers on the floor of the exchange.

     

  6. The market maker will function within the Bye-Laws Rules, Regulations of the Stock Exchanges.

     

  7. If the market maker acts as a broker as well, he will have to maintain separate books of accounts for the transactions in his role as a market maker and separately for his role as a broker. The two sets of transactions will have to be reported daily to the Stock Exchange in a segregated manner.

     

  8. The Market maker will be exempt from the margin requirements for trading in the scrips in which he is making the market.

     

  9. Market making would require financial resources. For this purpose, the commercial Banks would provide suitable bank credit to market makers approved by SEBI with a margin on the scrips for which they make the market against security and collateral as the banks normally take for their commercial lending. RBI will issue separate guidelines for the same.

     

  10. The market maker is required to give a month’s notice to SEBI if he wants to terminate the market making in any of the scrips, and SEBI may withdraw his recognition as a Market maker if it is found that the market maker is either not abiding by the conditions laid down above, or is interrupting his activities as a market maker without justifiable reasons. Banks will have the right to recall the loan on either of these two circumstances.

     

  11. Members of Stock Exchanges of Bombay, Delhi, Calcutta, and Madras may apply to SEBI through their respective stock exchanges indicating their SEBI registration number, the scrips in which they wish to make market, their turnover in 1991-1992 on the basis of which they have paid SEBI registration fee.

 

Ref.SMD-I/22367

September 10, 1993

The President/Executive Director,

All recognised Stock Exchanges

 

Dear Sirs,

Submission of Annual Report and Accounts

As you are aware that according to Section 7 of the Securities Contracts(Regulations) Act, 1956, every recognised Stock Exchange is required to furnish to the Central Government a copy of the Annual Report about its activities during the preceding year and matters required to be included therein have been detailed in Rule 17 of the Securities Contracts(Regulations) Rules, 1957. Under Sub-Section (2) of this rule, every exchange is also required to furnish to the Government within one month of the holding of the Annual General Meeting a copy of its audited Balance Sheet and Profit and Loss account for the preceding financial year.

 

You may be further aware that vide Government notification dated July 30, 1992, the powers exercisable under Section 7 of the Securities Contracts(Regulations) Act, 1956,, are also to be exercisable by SEBI.

 

In terms of the powers vested with the SEBI under the above Section of the Securities Contracts(Regulations) Act, 1956, you are advised to please send a copy each of the audited Balance Sheet and Profit and Loss account for the financial year 1992-93 and onwards to the SEBI also.

 

Please acknowledge the receipt of this letter.

 

 

Yours faithfully,

 

sd/-

 

(U. C. DIKSHIT)

Executive Director

 

Ref.SMD-I/22532

October 19, 1993

The President/Executive Director, of

All recognised Stock Exchanges

 

Dear Sir,

INB to be on C/N & transfer deed

You are aware that while delivering shares in the market, the delivering broker is required to affix, on the reverse of the transfer deed a rubber stamp indicating his name, clearing number allotted to him by the Stock Exchange of which he is a member and date of such delivery. This is to facilitate the last purchaser, in the event of any problems of bad delivery etc., to approach the first introducing broker for rectification of defect(s). However in the absence of any indication of Stock Exchange of which the introducing broker is a member, this task is rendered rather difficult. To overcome this problem SEBI vide D O no. SE/965 dated February 3rd, 1992 had advised all the Stock Exchanges to instruct their member brokers to affix before their names and clearing numbers, the abbreviation of the Stock Exchange of which they are members, viz., BOM(for Bombay Stock Exchange), CAL (for Calcutta Stock Exchange), MAD (for Madras Stock Exchange), DE (for Delhi Stock Exchange) etc. It is however, observed that the suggestion made by SEBI has not been implemented by the member-brokers of the various Stock Exchanges.

 

Meanwhile, SEBI has registered brokers of 21 recognised Stock Exchanges in the country under Section 12(1) of SEBI Act, 1992 and given each of them a unique registration number. This is based on ISO9000 specifications and would eventually help in integration of local bourses with bourses elsewhere in the world. This registration number which is uniform in its structure, takes in to account the Stock Exchange of which the broker is a member. Each of the Stock Exchanges in the country has been given a two-digit code which is incorporated in the twelve digit registration number given to the brokers. The codes followed for the different Stock Exchanges are as given in the Annexure. The code number for the exchange is the first two digits after the letters "INB" in the registration number.

 

Since his registration number would facilitate better monitoring and data management across the Stock Exchanges, it is suggested that these numbers should over a period of time replace the existing system of allotment of clearing numbers to member-brokers followed by different Stock Exchanges. However taking cognizance of the practical difficulties that might be faced especially on the trading floor, the usage of these numbers to begin with, may be limited to the following:

 

(1) All the brokers should have their SEBI Registration number preprinted on their contract notes.

(2) All brokers should affix rubber stamp on the reverse of transfer deeds with their trade name and SEBI registration number as it appears in the SEBI Registration Certificate. Also the stamp should indicate the name of the Stock Exchange of the which the Broker is a member. The rubber Stamp should be as under :

 

Name & Name of the Stock Exchange : e.g. J.V.Shah, BOM

SEBI Registration Number :

The brokers should also be instructed to invariably fill in the date of delivery while delivering the shares in the market.

 

(3) All the stock Exchanges should incorporate the SEBI Registration numbers of the brokers in the various computer reports generated by them. The various Stock Exchanges which are planning to introduce screen based trading may consider the possibility of using the SEBI Registration number and doing away with the existing system of clearing code numbers.

 

You are therefore requested to please instruct all the member brokers of your exchange to immediately implement the suggestions at (1) and (2) above and let us have your views in regard to (3) above.

 

A copy of the instructions issued to the member brokers in this regard may please be endorsed to us.

 

In the meantime, please acknowledge the receipt of this letter.

 

 

Yours faithfully,

 

 

sd/-

 

(U.C.DIKSHIT)

 

Encl: a/a

 

/mg

 

ANNEXURE

TABLE FOR EXCHANGE CODES

 

 

CODE

EXCHANGE NAME

01

Bombay

02

Ahmedabad

03

Calcutta

04

Madras

05

Delhi

06

Hyderabad

07

Madhya Pradesh

08

Bangalore

09

Cochin

10

Uttar Pradesh

11

Pune

12

Ludhiana

13

Gauhati

14

Mangalore

15

Magadh

16

Jaipur

17

Bhubaneshwar

18

Saurashtra Kutch

19

Vadodara

20

OTCEI

21

Coimbatore

 

 

SR. EXECUTIVE DIRECTOR

SMD/SED/CIR/93/22570

October 21, 1993

To all the Presidents/Executive Directors

of all Stock Exchanges

 

Dear Sir,

Capital Adequacy Norms For Brokers

This has reference to SEBI’s letter No. SMD-I/11087/92 dated 4th November, 1992. On receiving the comments from various stock exchanges on the norms circulated by us it has been decided that the norms as set out in the annexure shall be made applicable to the stock brokers in all the stock exchanges. You are, therefore, hereby directed to make the necessary provisions in Your Bye-laws and Regulations for the purpose. The amendments to be made to the Bye-laws and Regulations should be forwarded to us for formal approval.

 

As may be seen from the annexure, the norms are required to made applicable to all stock brokers with effect from December 1, 1993 onwards and will be gradually enhanced to the final limit by December 1, 1994. You are, therefore, requested to take urgent steps to get the Bye-laws and Regulations of the Exchange amended at the earliest.

 

 

Yours faithfully,

 

sd/-

 

C B BHAVE

 

 

encl: a/a

 

CAPITAL ADEQUACY NORMS FOR STOCK BROKERS

 

  1. The Capital Adequacy requirements shall consist of the following two components:

 

    1. BASE MINIMUM CAPITAL

An absolute minimum of Rs 5 lakhs as a deposit with the exchange shall be maintained by member brokers of the Bombay and Calcutta Stock Exchange, and Rs 3.5 lakhs by the Delhi and Ahmedabad Stock Exchanges. In case of the other stock exchanges the minimum required shall be Rs 2 lakhs. This requirement is irrespective of the volume of business of an individual broker. The security deposit kept by the members in the exchanges shall form part of the base minimum capital.

 

FORM IN WHICH BASE MINIMUM CAPITAL TO BE MAINTAINED

25% of the base minimum capital shall be maintained in cash with the Exchange. Another 25% shall remain in the form of a long term (3 years or more) fixed deposit with the bank on which the stock exchange has given a completely unencumbered and unconditional lien. The remaining shall be maintained in the form of securities with a 30% margin. The portion of the base minimum capital in the form of securities, shall comprise securities standing in the name of members. The securities deposited in this regard shall be pledged in favour of the exchange, with the member and the exchange jointly apprising the companies concerned regarding the fact of pledges. The value of the securities shall be reviewed by the Exchange at least every two months keeping in view the market fluctuations and the exchange can call for additional securities if necessary.

 

B. ADDITIONAL OR OPTIONAL CAPITAL RELATED TO VOLUME OF BUSINESS

The additional or optional capital required of a member shall at any point of time be such that together with the base minimum capital it is not less than 8% of the gross outstanding business in the exchange. The gross outstanding business would mean aggregate of upto date sales and purchases by a member broker in all securities put together (including inter-client business not executed on the floor of the exchange) at any point of time during the current settlement.

 

Explanation:- No netting of sales and purchases made on behalf of clients will be permitted. However, sales and purchases made by the broker on his own behalf in the same security will be allowed to be netted and his exposure will be limited to the price differential.

 

The requirement of 8% of the gross outstanding business for base minimum capital together with the additional capital may be phased in the following manner:

 

    1. A requirement of 3% being enforced from December 1, 1993.

    2. The requirement being enhanced to 5% from June 1, 1994.

    3. The requirement of full 8% being enforced from December 1, 1994.

 

On enforcement of full norms the "gross outstanding" business of a member at any point of time shall not exceed 12.5 times of his base and additional capital requirements.

 

On the outstanding business reaching 10 times base and additional capital, it shall be the responsibility of the member to intimate the exchange.

 

If the outstanding business reaches 12.5 times base and additional capital, the member shall not increase his outstanding business until additional capital has been brought into business and the stock exchange is satisfied that the member could be allowed to trade further.

 

In the interim period in which the norms of 8% has not been enforced proportionate ratios would be applied.

 

    1. CALCULATION

 

The capital of a member shall be computed as follows:-

 

    1. Fixed Assets,

    2. Pledged Securities,

    3. Member’s card

    4. Non-allowable Securities,

    5. Bad Deliveries,

    6. Doubtful Debts and Advances,*

    7. Prepaid Expenses,

    8. Intangible Assets,

    9. 30% of Marketable securities

 

* Explanation:- Includes debts/advances overdue for more than three months or given to Associates.

 

The members who do not maintain proper books of accounts or do not submit copies of their audited accounts in the stipulated time shall be liable to be asked to deposit the additional capital in the form of cash with the exchange. An auditors certificate shall be submitted by each member every quarter indicating the net liquid capital with the member/member firm.

 

2) MARGIN REQUIREMENTS

 

The Stock exchange shall suitably modify the daily carry forward and renewal margin so as to ensure that the working capital of the members is not unduly locked up. However, the stock exchange shall continue to have the authority to impose suitable margins as per their judgement in the context of the market situation.

 

  1. MONITORING REQUIREMENTS

 

It shall be the responsibility of the member to inform the exchange regarding compliance with the additional capital maintained in the business. It shall also be the duty of the member broker to intimate the stock exchange on reaching a gross outstanding position of 10 times his base and additional capital

 

For every quarter (ending March 31, June 30, September 30 and December 31) from the date in which the capital adequacy norms come into force, the members who maintain the additional capital in their books, would have to furnish to the exchange an auditor’s certification to the effect that the additional capital required as per the capital adequacy norms have been maintained in the business and that the member has complied with the requirement of informing the exchange on reaching the limits stated above. Such certification will be provided within one month of the end of the quarter.

 

  1. PENALTIES

 

Failure to comply with the capital adequacy norms will invite penalties including fines and suspension from trading. Failure to inform the Stock Exchange on reaching the prescribed limits will also be punishable under the Bye-laws of the Stock Exchange.

 

  1. BUSINESS EXEMPT FROM CAPITAL REQUIREMENTS

 

Transactions in which the broker deposits delivery within 48 hours with the stock exchange/clearing house/or a designated depository.

 

  1. REQUIREMENTS FOR CAPITAL ADEQUACY AS AN UNDERWRITER

 

The capital adequacy requirement for members doing underwriting business will be separately prescribed by SEBI as per the provisions of SEBI (Underwriters) Regulations, 1993.

******

 

SR EXECUTIVE DIRECTOR

SMD-II(N)/22718/93

October 27, 1993

To

The President/Executive Director

of All the Stock Exchanges

 

Dear Sir,

Submission of Audit Certificates by brokers.

Please refer to our letter No.SMD/SED/0012/92, dated December 31, 1992 regarding the aforesaid subject. In this regard, I draw your attention to the Circular No. F1/5/SE/83, of Govt of India, Ministry of Finance, Department of Economic Affairs, Stock Exchange Division, dated May 31, 1984 (copy enclosed). You may kindly intimate to us the number of members who are yet to file the Audit Reports with the Stock Exchange and the members who have been given extension to file such reports.

 

You may recall that last year the audit reports for 1991-92 were received very late and the members had pleaded that they were not aware of this requirement. The Exchanges were required to take penal action but the action was mild on account of the fact that it was the first year of serious implementation. This year all Exchanges must take stringent action to ensure that the reports are received in time. For those members not following the deadline deterrent action may be taken.

 

You may give us the details of the action taken by you alongwith the names of the members who have not complied with the time limit. Your reply should reach us by December 5, 1993.

 

 

Yours sincerely,

 

 

sd/-

 

C. B. BHAVE

 

cc: Regional Offices.

 

IMMEDIATE

 

No. F.1/5/SE/83

Government of India

Ministry of Finance

Department of Economic Affairs

Stock Exchange Division

 

New Delhi, the 31st May, 1984.

To,

The President/

The Executive Director,

Bombay/Calcutta/Delhi/Madras/

Ahmedabad Stock Exchange.

The President,

Bangalore/Hyderabad/Madhya Pradesh/Cochin/Uttar Pradesh/

Pune/Ludhiana/Gauhati Stock Exchange.

 

SUBJECT: Audit of Accounts of members of Stock Exchanges

by Chartered Accountants.

 

Dear Sir,

I am directed to refer this Ministry's letter of even number dated the 29th January, 4th March, 11th August, 1983 and 11th January, 1984 regarding the subject noted above and to say that this Ministry have since finalised the norms of audit of members of Stock Exchanges in consultation with the Institute of Chartered Accountants of India and representatives of the Stock Exchanges. The nature and scope of the audit are given below:

 

2. The accounts of 'active' members of Stock Exchanges for every accounting year beginning after 31st March, 1984 shall be audited by qualified Chartered Accountants. An `active' member of the stock exchange refers to a member who has done business in securities even for a single day in the accounting year.

 

3. The annual audit of accounts of a member of the Stock Exchange will be of nature of the normal audit conducted in the case of companies, co-operative societies and other entities.

 

4. The audit will cover books of accounts and other documents as specified under Rule 15 of the Securities Contracts (Regulation) Rules, 1957. The above books of accounts and other documents should be maintained in such a manner that the following information also is readily available :

 

a) Settlement for transactions in specified shares/securities (with clients and brokers on each settlement)

 

b) Transactions in non-specified shares/securities scrip-wise.

 

c) Shares/securities received from the clearing house and delivered to the clearing house.

 

d) Shares/securities from customers for sale and those delivered to the customers after the purchase.

 

It is clarified that it would be considered sufficient compliance with the above requirement if one or more of the above records are maintained in a composite form, provided they give the required information in a ready and clear manner.

 

5. In addition to the books and documents required to be kept as prescribed in paragraph 4 above, the members of Stock Exchange may also at their option keep the following books;

a) Petty Cash Book

b) Order Book

c) Register of shares/securities sent for transfer

d) Register showing transfer of shares rejected by the company

e) Contract and transfer stamps register

 

6. The auditor should submit his report in the following format:

 

We have audited the attached balance-sheet of M/s. ABC as at ______________ and the profit and loss account for the year ended on that date annexed thereto and report that;

 

a) We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit.

 

b) In our opinion, proper books of account and records as specified in Rule 15 of the Securities Contracts (Regulation) Rules, 1957 have been kept so far as appeared from our examination of such books.

 

c) The stock broker has complied with the requirements of stock exchange so far as they relate to maintenance of accounts and was regular in submitting the required accounting information to the stock exchange.

 

d) The balance sheet and the profit and loss account referred to in this report are in agreement with the books of account.

 

e) In our opinion and to the best of our information and according to the explanation given to us, the said balance sheet and the profit and loss account read together with the notes thereon give a true and fair view insofar as it relates to the balance sheet, of the state of affairs of M/s. ABC, and insofar as it related to the profit and loss account, of the profit of M/s. _____________ for the year ended on that date.

 

  1. The audit should be completed within six months of the date of closing of the books of account. In individual cases, an extension for a period not exceeding 3 months may be granted by the concerned Executive Director/Secretary of the Stock Exchange if he is satisfied that adequate reasons exist for granting such an extension. The audit report should be made out in triplicate and addressed to the member of the Stock Exchange. The member should submit within 30 days of the receipt of the audit report, two of the copies of the audit reports to the Executive Director/Secretary of the concerned Stock Exchange, who would submit quarterly one of the copies of all the audit reports received during a quarter to the Ministry within one month of the end of the quarter. The audit reports to be submitted to the aforesaid authorities need not be accompanied by the copies of the relevant profit and loss account and balance sheet. However, the said Stock Exchange authorities and/or the Ministry of Finance shall have a right to obtain a copy of the profit and loss account and/or the balance sheet wherever they considered necessary.

 

8. The Stock Exchanges would evolve a system of monitoring so that it is ensured that all their active members submit the report within the prescribed time. Besides, the reports so received should be examined and appropriate action should be taken on the deficiencies. The Stock Exchanges would further see that condition regarding the submission of audit reports to Government are strictly adhered.

 

9. All active members of Stock Exchanges irrespective of their size shall be subject to the audit of their accounts.

 

(D. R. MEHTA)

Joint Secretary to the Government of India

 

Sr. Executive Director

SMD (B)/104/22775/93

October 29, 1993

To Presidents/Executive Directors

of all Stock Exchanges

 

Dear Sir,

Common irregularities observed in brokers books

The Securities and Exchange Board of India (SEBI), has conducted inspections of member brokers of various Stock Exchanges, during the course of which certain common irregularities have been observed. It has been represented to us that these lacunae have arisen because of ignorance of statutory requirements. Members have also attempted to justify such malpractices on the grounds that these are "market practices". It is necessary to clearly understand that irregularities/violations of rules and regulations cannot be justified on the ground either that they are market practices or that the member was unaware of statutory requirements.

 

We are, enclosing herewith, for the benefit of the members of your Exchange, a list of some lacunae. These may be circulated among them. Members may also be advised that we would be taking a serious view, if such deficiencies are observed during the course of our inspections.

 

Contract Notes

 

  1. Contracts notes are not issued to clients.

     

  2. Even when contract notes are issued, they do not conform to statutory requirements.

     

  3. Brokerage is not shown separately on contract notes.

     

  4. In case of contracts entered into by brokers on a principal-to-principal basis with their clients, contract notes should be issued in Form B and written permission, in respect of each such transaction, should be taken from clients and preserved by the member. This requirement is overlooked.

     

  5. Stamps are not affixed on the contract notes.

     

  6. Contract notes are signed by persons other then authorised signatories.

 

Service to Investors

 

  1. The brokers do not pass on to the client the correct rate at which a transaction was executed.

     

  2. Brokerage charged is in excess of that permitted under the Regulations.

     

  3. There are delays between pay-out by the exchange to their members and the transmission of shares/money received in such pay-out to their clients by brokers without any record of reasons for such delay.

 

Regulatory Aspects

 

  1. Members do not maintain all the books of accounts and other documents, that they are required to.

     

  2. Compliance with trading restrictions imposed by Stock Exchanges is poor.

     

  3. It is observed that members have been trading in unlisted securities and in securities prior to their admission to dealings by Exchanges.

 

This is not an exhaustive list of irregularities/violations. However, it may help the members in avoiding recurrence of such instances.

 

 

Yours faithfully,

 

sd/-

 

C B Bhave

 

cc: Shri S T Gerela (P K Singhal)

Officer

Securities and Exchange Board of India

Mittal Court, ‘B’ Wing,

Nariman Point,

BOMBAY 400021

 

SR. EXECUTIVE DIRECTOR

SMD (B)/92/22828/93

November 1, 1993

To Presidents/Executive Directors of

all Stock Exchanges

 

Dear Sir,

Insider Trading Norms for Exchange Employees

The Securities and Exchange Board of India (Insider Trading) Regulations, 1992, have been notified on November 19, 1992. Regulation 2(h)(ii) of the Regulations, includes officials and members of Stock Exchanges as persons "deemed to be a connected person". In view of the fact that companies, to comply with the Listing Agreement, furnish various types of Price Sensitive information, to the exchange, it is our suggestion that you may work out and prescribe for officials and employees of your exchange internal norms for the following items:-

 

  1. Identification of types of intimations given by companies to Stock Exchanges which could be considered to be price sensitive in relation to companies listed on your exchange, their associates and subsidiaries. For e.g. (a) earnings forecast or material changes therein. (b) proposals for mergers and acquisitions. (c) significant changes in investment plans. (d) acquisition or loss of a significant contract. (e) significant disputes with major suppliers, consumers or sub-contractors. (f) significant decisions affecting product pricing, profitability etc;

     

  2. Identification of employees/officers or sections of employees/officers of the exchange who are likely to have access to such information;

     

  3. Nomination of an officer or officers who would give clarifications to employees, of the exchange, regarding their ability to deal in securities without attracting charges of Insider Trading;

     

  4. The controls on handling price sensitive information and the dissemination of such information, as fast as possible, so as to eliminate the non-public character of such information;

     

  5. In regard to receipt of information from companies, you may devise standard written procedures for the receipt, processing and dissemination of such information to members of your exchange. The procedures may also incorporate a time frame.

     

  6. Declaration of purchase and sale of securities subject to a minimum limit to be obtained from employees and officers. This should include transactions done by relatives of employees and officers.

     

  7. Identification of employees/officers, whose relatives (as defined in Section 6 of the Companies Act, 1956 read with Schedule 1A of that Act) are engaged in dealing in securities, as member of exchanges(s), sub-brokers(s), or other intermediaries, as principal, director, partner or employee.

 

You will appreciate that the above items have been given only as illustrative and do not form any exhaustive list of items that need to be covered. We may be apprised of the steps taken by Stock Exchanges in this matter.

 

 

Yours faithfully,

 

 

sd/-

 

C. B. BHAVE

 

 

cc: Shri S T Gerela (P K Singhal)

Officer,

Securities and Exchange Board of India,

Mittal Court, ‘B’ Wing,

Nariman Point,

Bombay 400 021.

 

SR. EXECUTIVE DIRECTOR

November 18, 1993

Ref.:SMD/SED/CIR/93/23321

TO PRESIDENTS/EXECUTIVE DIRECTORS

OF ALL THE STOCK EXCHANGES

 

Dear sir,

Regulation Of Transactions Between Clients And Brokers

This has reference to SEBI’s letter No.SMD/SED/2913/93 dated March 9, 1993. On receiving the comments from various stock exchanges on the norms circulated by us it has been decided that the norms as set out in the annexure shall be made applicable to the stock brokers in all the stock exchanges. You are, therefore, hereby directed to make necessary provisions in your Bye-laws and Regulations for the purpose. The amendments to be made to the Bye-laws and Regulations should be forwarded to us for formal approval.

 

The norms are required to be made applicable in all the stock exchanges with effect from January 1, 1994 onwards. These may be widely circulated amongst member-brokers so that they are made aware of the proposed measures.

 

 

Yours faithfully,

 

sd/-

 

C.B. BHAVE

 

encl: a/a

 

cc: Shri S.T. Gerela (SURESH B. MENON)

Officer

SEBI

Bombay

 

REGULATION OF TRANSACTIONS BETWEEN CLIENTS AND BROKERS

 

  1. It shall be compulsory for all Member brokers to keep the money of the clients in a separate account and their own money in a separate account. No payment for transactions in which the Member broker is taking a position as a principal will be allowed to be made from the client’s account. The above principles and the circumstances under which transfer from client’s account to Member broker’s account would be allowed are enumerated below.

 

A] Member Broker to

keep Accounts: Every member broker shall keep such books of accounts, as will be necessary, to show and distinguish in connection with his business as a member -

 

    1. Moneys received from or on account of each of his clients and,

    2. the moneys received and the moneys paid on Member’s own account.

 

B] Obligation to pay

money into "clients

accounts". Every member broker who holds or receives money on account of a client shall forthwith pay such money to current or deposit account at bank to be kept in the name of the member in the title of which the word "clients" shall appear (hereinafter referred to as "clients account"). Member broker may keep one consolidated clients account for all the clients or accounts in the name of each client, as he thinks fit: Provided that when a Member broker receives a cheque or draft representing in part money belonging to the client and in part money due to the Member, he shall pay the whole of such cheque or draft into the clients account and effect subsequent transfer as laid down below in para D (ii).

 

C] What moneys to be

paid into "clients

account". No money shall be paid into clients account other than -

    1. money held or received on account of clients;

    2. such money belonging to the Member as may be necessary for the purpose of opening or maintaining the account;

    3. money for replacement of any sum which may by mistake or accident have been drawn from the account in contravention of para D given below;

    4. a cheque or draft received by the Member representing in part money belonging to the client and in part money due to the Member.

D] What moneys to be

withdrawn from

"clients account". No money shall be drawn from clients account other than -

    1. money properly required for payment to or on behalf of clients or for or towards payment of a debt due to the Member from clients or money drawn on client’s authority, or money in respect of which there is a liability of clients to the Member, provided that money so drawn shall not in any case exceed the total of the money so held for the time being for such each client;

    2. such money belonging to the Member as may have been paid into the client account under para 1 C [ii] or 1 C [iv] given above;

    3. money which may by mistake or accident have been paid into such account in contravention of para C above.

 

E] Right to lien, set-off

etc., not affected. Nothing in this para 1 shall deprive a Member broker of any recourse or right, whether by way of lien, set-off, counter-claim charge or otherwise against moneys standing to the credit of clients account.

 

  1. It shall be compulsory for all Member brokers to keep separate accounts for client’s securities and to keep such books of accounts, as may be necessary, to distinguish such securities from his/their own securities. Such accounts for client’s securities shall, inter-alia provide for the following:-

 

    1. Securities received for sale or kept pending delivery in the market;

    2. Securities fully paid for, pending delivery to clients;

    3. Securities received for transfer or sent for transfer by the Member, in the name of client or his nominee(s);

    4. Securities that are fully paid for and are held in custody by the Member as security/margin etc. Proper authorization from client for the same shall be obtained by Member;

    5. Fully paid for client’s securities registered in the name of Member, if any, towards margin requirements etc.;

    6. Securities given on Vyaj-badla. Member shall obtain authorization from clients for the same.

 

  1. Member Brokers shall make payment to their clients or deliver the securities purchased within two working days of pay-out unless the client has requested otherwise. Stock Exchange shall issue a Press Release immediately after the pay-out.

 

  1. Member Brokers shall buy securities on behalf of client only on receipt of margin of minimum 20 percent on the price of the securities proposed to be purchased, unless the client already has an equivalent credit with the broker. Member may not, if they so desire, collect such a margin from Financial Institutions, Mutual Funds and FII’s.

 

  1. Member brokers shall sell securities on behalf of client only on receipt of a minimum margin of 20 percent on the price of securities proposed to be sold, unless the member has received the securities to be sold with valid transfer documents to his satisfaction prior to such sale. Member may not, if they so desire, collect such a margin from Financial Institutions, Mutual Funds and FII’s.

 

  1. Member brokers shall issue the contract note for purchase/sale of securities to a client within 24 hours of the execution of the contract.

 

  1. In case of purchases on behalf of clients, Member brokers shall be a liberty to close out the transactions by selling the securities, in case the client fails to make the full payment to the Member Broker for the execution of the contract within two days of contract note having been delivered for cash shares and seven days for specified shares or before pay-in day (as fixed by Stock Exchange for the concerned settlement period), whichever is earlier; unless the client already has an equivalent credit with the Member. The loss incurred in this regard, if any, will be met from the margin money of that client.

 

  1. In case of sales on behalf of clients, Member broker shall be at liberty to close out the contract by effecting purchases if the client fails to deliver the securities sold with valid transfer documents within 48 hours of the contract note having been delivered or before delivery day (as fixed by Stock Exchange authorities for the concerned settlement period), whichever is earlier. Loss on the transaction, if any, will be deductible from the margin money of that client.

************

 

The Presidents/Executive Directors

of all recognised Stock Exchanges in India

Ref . SMD-1/23341

November 18, 1993

Dear Sir,

Regulation of transaction between clients and members

I am enclosing with this letter a note listing a set of precautions to be exercised by the member-brokers of recognised Stock Exchanges while selling shares on behalf of clients, entertaining new clients, etc. We are of the opinion that the cautions listed in the enclosed note, if exercised by the member-brokers of the Exchanges, will benefit them as well as investors immensely and also contribute to the healthy working of the Secondary Market.

 

It is requested that the enclosed note be placed before the Governing Board of your Exchange at their next meeting and their suggestions / views in this regard communicated to us by January 1, 1994. This will enable us to finalise the set of guidelines for incorporating the same in the relevant rules, regulations and bye-laws of the different Stock Exchanges in the country to ensure uniformity in dealings with the clients.

 

 

Yours faithfully,

 

sd/-

 

( C. B. BHAVE )

Sr. Executive Director

 

Encl :a/a

 

cc : Regional Offices

 

SECURITIES AND EXCHANGE BOARD OF INDIA

 

Precautions to be exercised by member-brokers of recognised Stock Exchanges while selling shares on behalf of clients, entertaining new clients, etc.

 

It is expected that the member-brokers of Stock Exchanges know their clients through a proper introductory procedure and exercise due precaution while dealing with the clients. However, it is observed that in certain recent cases, such precautions in dealing with the clients have not been exercised by a few member-brokers resulting in serious problems for the market as well as investors. It is, therefore, considered necessary that these precautions may be listed so as to be uniformly followed by member-brokers of all the recognised Stock Exchanges across the country. This will protect the interests of the member-brokers, instil transparency and discipline in the deal between clients and brokers and will contribute to the healthy working of the Secondary Capital Market. Some of the precautions to be exercised by the member-brokers are listed below. These precautions are classified into two categories as [a] Mandatory and [b] precautions by way of a guideline.

 

SEBI is of the view that member-brokers of the Exchanges should compulsorily follow the precautions suggested in Part [a] below which should form a part of their operating system, whereas those suggested in Part [b] may be treated as guidelines and followed as and when circumstances warrant.

 

[a] Mandatory -

 

(i) Ensure that the client is personally known to the member-broker or has been introduced to him by a person known to him.

(ii) A record of introduction of all clients may be kept by member-brokers and they should insist on their sub-brokers also to maintain a similar record. The following data on the clients can be maintained :

a) Name, address, telephone number, age

b) Status - whether in employment / business.

c) If in business - Nature of business and business address.

d) Banker & bank account numbers through which operations are to be done.

e) Name, address of contact through whom client has been introduced.

    1. Names of all persons on whose behalf the client is operating and necessary legal documents authorising the client to act on behalf of such persons.

 

g) In case a private limited company or a public company or a trust is a client, the details such as its authorised / subscribed capital, total trust funds and the resolution duly authorising the person acting on behalf of the company.

(iii) A satisf