SEBI
CIR/MRD/DP/ 14 /2013 dtd. 17-Apr-2013
Master Circular for Stock Exchange - Cash Market
Securities and Exchange Board of India (SEBI) has been issuing various circulars/directions from time to time. In order to enable the users to have an access to all the applicable circulars/directions at one place, Master Circular for Stock Exchange/ Cash Market has been prepared.
This Master Circular is a compilation of the circulars/communications issued by SEBI up to March 31, 2013 and shall come into force from the date of its issue. This Master Circular shall supersede previous Master Circular CIR/MRD/DP/11/2012 dated April 13, 2012.
MASTER CIRCULAR FOR STOCK EXCHANGESANNEXURE 1
TRADING PART - I
1.This Master Circular includes circulars issued upto March 31, 2013.
2.Master Circular is a compilation of all the existing/applicable circulars issued by Market Regulation Department... + Read more
Securities and Exchange Board of India (SEBI) has been issuing various circulars/directions from time to time. In order to enable the users to have an access to all the applicable circulars/directions at one place, Master Circular for Stock Exchange/ Cash Market has been prepared.
This Master Circular is a compilation of the circulars/communications issued by SEBI up to March 31, 2013 and shall come into force from the date of its issue. This Master Circular shall supersede previous Master Circular CIR/MRD/DP/11/2012 dated April 13, 2012.
MASTER CIRCULAR FOR STOCK EXCHANGESANNEXURE 1
TRADING PART - I
1.This Master Circular includes circulars issued upto March 31, 2013.
2.Master Circular is a compilation of all the existing/applicable circulars issued by Market Regulation Department of SEBI to Stock Exchanges and shall come into force from the date of its issue.
MASTER CIRCULAR – TRADING – PART I
SECTION – 1: BULK DEALS AND BLOCK DEALS 5
1.1 Bulk Deal 51.2 Block Deal 5
SECTION – 2: CIRCUIT FILTER / PRICE BANDS 7
2.1 Index based Market wide circuit filter 7
2.2 Scrip wise price bands 7
2.3 Dynamic Price Bands 7
2.4Trade controls in Normal Trading Session for Initial Public Offering
(IPO) and Re-listed scrips 8
SECTION – 3: IMPLEMENTATION OF UNIFORM SECURITY SPECIFIC
ACTION IN STOCK EXCHANGES 11
3.1 Uniform security specific measure 11
SECTION – 4: MARGIN TRADING 12
4.1 Margin trading 12
4.2 Securities eligible for margin trading 12
4.3 Eligibility requirements for brokers to provide margin trading facility to
clients 12
4.4 No-objection certificate 13
4.5 Agreement 13
4.6 Source of Funds for the broker for providing margin trading facility to
his clients and maximum permissible borrowing by any broker 13
4.7 Margin requirements 14
4.8 Liquidation of securities by the broker in case of default by the client 15
4.9 Maintenance of Records 15
4.10 Disclosure of exposure to the Margin Trading Facility 15
4.11 Arbitration 16
4.12 Usage of Investor Protection Fund and Trade/Settlement Guarantee
Fund 16
4.13 General provisions 16
SECTION – 5: MARKET MAKER 18
5.1 Guidelines for Market Maker 18
5.1.1 Criterion for selection of scrips for Market Making 19
5.1.2 Exclusivity of Market Makers 19
5.1.3 Number of Market Makers for each share 20
5.1.4 Qualifications for a registered Market Maker 20
5.1.5 The obligations and responsibilities of Market Makers 20
5.1.6 Rights of the Market Maker 20
5.1.7 Voluntary De-registration 21
5.1.8 Compulsory De-registration 21
5.1.9 Dissemination of Information 21
5.1.10 Number of Shares per Market Maker 21
5.1.11 Risk Containment Measures and monitoring for Market Makers 21
5.2 Guidelines for Market Maker on Small and Medium Enterprise (SME) Exchange/ Separate Platform for of existing exchange having nation wide terminal . 22
SECTION – 6: NEGOTIATED DEALS 23
6.1 Negotiated Deals 23
SECTION – 7: ODD LOT 24
7.1 Trading and Settlement of trades in dematerialised securities 24
SECTION – 8: PERMANENT ACCOUNT NUMBER 25
8.1 Mandatory PAN requirement for transaction in Cash Market 25
8.2 PAN as a sole identification number for all transactions in the securities market 25
8.3 Incase of Central and State Govt., and officials appointed by courts 25
8.4. Exemptions for Investors in Sikkim 26
8.5 Incase of FIIs/Institutional Clients 26
8.6 Incase of UN entities and multilateral agencies which are exempted from
paying taxes/ filling tax returns in India 26
8.7 Incase of HUF, Association of Persons (AoP), Partnership Firm,
unregistered Trust, Registered Trust, Corporate Bodies, minors, etc 27
8.8 Incase of Slight mismatch in PAN card details as well as difference in
maiden name and current name (predominantly in the case of married
women) of the investors 27
8.9 Incase of NRI/PIOs 27
8.10 PAN requirement for transfer of shares in physical form 27
SECTION – 9: PROPRIETARY TRADING 29
9.1 Disclosure of Proprietary Trading by Broker to Client 29
9.2 Pro-account Trading Terminal ..29
SECTION – 10: SHORT SELLING AND SECURITIES LENDING AND BORROWING SCHEME 31
10.1 Broad Framework for Short Selling and Securities Lending and
Borrowing 31
10.2 Annexure 1 – Broad framework for short selling 31
10.3 Annexure 2 - Broad framework for securities lending and borrowing 32
10.4 Operationalisation of Short Selling and Securities Lending and Borrowing 36
10.5 Introduction of roll-over facility 36
10.6 Introduction of Liquid Index Exchange Traded Funds (ETFs) under the
SLB scheme 37
SECTION – 11: SPOT AND OFF-THE-FLOOR TRANSACTIONS 38
SECTION – 12: SECURITIES TRANSACTION TAX 39
12.1 Implementation of Securities Transaction Tax 39
SECTION – 13: TIME STAMPING OF ORDERS 39
13.1 Time Stamping of Orders 39
SECTION – 14: TRADING IN GOVERNMENT SECURITIES 40
14.1 Government Securities 40
SECTION – 15: UNIQUE CLIENT CODE 41
SECTION - 16: TRANSACTION CHARGES BY THE STOCK EXCHANGES. 42
SECTION – 17: PRESERVATION OF RECORDS 43
SECTION – 18: CALL AUCTION 44
18.1 Call Auction in Pre-Open Session 44
18.2 Call Auction in Pre-open session for Initial Public Offering (IPO) and Re-
listed scrips 48
18.3 Introduction of Periodic Call Auction for Illiquid Scrips 50
SECTION – 19: RECONCILIATION OF SHARE CAPITAL AUDIT (Earlier Secretarial Audit) 52
SECTION – 20: CHANGE OF NAME BY LISTED COMPANIES 54
20.1 Change of Name of Listed Companies 54
SECTION – 21: OFFER OF SALE OF SHARES BY PROMOTERS THROUGH STOCK EXCHANGE MECHANISM 55
SECTION – 22: LIQUIDITY ENHANCEMENT SCHEMES FOR ILLIQUID SECURITIES IN EQUITY CASH MARKET 62
REFERENCE – List of Circulars 65
SECTION – 1: BULK DEALS AND BLOCK DEALS 1.1 Bulk Deal1
A “bulk” deal constitutes all transactions in a scrip (on an exchange) where the total quantity of shares bought/sold is more than 0.5% of the number of equity shares of the company listed on the exchange. The quantitative limit of 0.5% can be reached through one or more transactions executed during the day in the normal market segment.
Disclosures
i. The disclosure shall be made with respect to all transactions in a scrip where total quantity of shares bought/sold is more than 0.5% of the number of equity shares of the company listed on the stock exchange.
ii. The brokers shall disclose to the stock exchange the name of the scrip, name of the client, quantity of shares bought/sold and the traded price.
iii. The disclosure shall be made by the brokers immediately upon execution of the trade.
iv. The Stock exchanges shall disseminate the aforesaid information on the same day after market hours to the general public.
1.2 Block Deal2
Block deal is execution of large trades through a single transaction without putting either the buyer or seller in a disadvantageous position. For this purpose, stock exchanges are permitted to provide a separate trading window.
Block deal will be subject to the following conditions:
i. The said trading window may be kept open for a limited period of 35 minutes from the beginning of trading hours i.e. the trading window shall remain open from 9.55 am to 10.30 am.
ii. The orders may be placed in this window at a price not exceeding +1% from the ruling market price/previous day closing price, as applicable.
iii. An order may be placed for a minimum quantity of 5,00,000 shares or minimum value of Rs.5 crore.
1 Circular No. SEBI/MRD/SE/Cir-7 /2004 dated January 14, 2004 Circular No. MRD/DoP/SE/Cir- 19 /05 dated September 2, 2005
2 Circular No. MRD/DoP/SE/Cir- 19 /05 dated September 2, 2005
iv. Every trade executed in this window must result in delivery and shall not be squared off or reversed.
v. The stock exchanges shall disseminate the information on block deals such as the name of the scrip, name of the client, quantity of shares bought/sold, traded price, etc to the general public on the same day, after the market hours.
vi. Disclosure of trade details of ”bulk deals” as specified in para 1.1 shall be continued to be made by the stock exchanges to the general public on the same day after the market hours.
All appropriate trading and settlement practices as well as surveillance and risk containment measures, etc., as applicable to the normal trading segment, shall be applicable and implemented in respect of this special window as well
SECTION – 2: CIRCUIT FILTER / PRICE BANDS 2.1 Index based Market wide circuit filter3
These circuit breakers are used to stop adverse movements either way. The circuit breakers are applied at three stages of the index movement either way at 10%, 15% and 20%. The market wide circuit breakers would be triggered by movement of either BSE Sensex or the NSE S&P CNX Nifty whichever is breached earlier.
i. In case of a 10% movement of either of these indices, there would be a 1 hour market halt if the movement takes place before 1 pm. In case the movement takes place at or after 1 pm but before 2:30 pm there will be a trading halt for 1/2 hour. In case the movement takes place at or after 2:30 pm there will be no trading halt at the 10% level and the market will continue trading.
ii. In case of a 15% movement of either index, there will be a 2 hour halt if the movement takes place before 1 pm. If the 15% trigger is reached on or after 1 pm but before 2 pm, there will be a 1 hour halt. If the 15% trigger is reached on or after 2 pm the trading will halt for the remainder of the day.
iii. In case of a 20% movement of the index, the trading will be halted for the remainder of the day.
These percentages are translated into absolute points of index variations on a quarterly basis and at the end of each quarter these absolute points of index variations are revised and applicable for the next quarter.
2.2 Scrip wise price bands
i. In addition to the market wide index based circuit filters, there are individual scrip wise price bands of 20% either way, for all scrips in the compulsory rolling settlement except for the scrips on which derivatives products are available or scrips included in indices on which derivatives products are available.
2.3 Dynamic Price Bands (earlier called Dummy Filters or Operating Range)4
i. For scrips excluded from the requirement of price bands, stock exchanges have implemented a mechanism of dynamic price bands (commonly known as dummy filters or operating range) which prevents acceptance of orders
3 Circular No. SMDRPD/Policy/Cir-37 /2001 dated June 28, 2001
4 Circular No. CIR/MRD/DP/34/2012 dated December 13, 2012
for execution that are placed beyond the price limits set by the stock exchanges. Such dynamic price bands are relaxed by the stock exchanges as and when a market-wide trend is observed in either direction.
ii. It has been decided to tighten the initial price threshold of the dynamic price bands. Stock exchange shall set the dynamic price bands at 10% of the previous closing price for the following securities:
(a) Stocks on which derivatives products are available,
(b) Stocks included in indices on which derivatives products are available,
(c) Index futures,
(d) Stock futures.
iii. Further, in the event of a market trend in either direction, the dynamic price bands shall be relaxed by the stock exchanges in increments of 5%. Stock exchanges shall frame suitable rules with mutual consultation for such relaxation of dynamic price bands and shall make it known to the market.
2.4 Trade controls in Normal Trading Session for Initial Public Offering (IPO)
and Re-listed scrips5
1. Trade Timing
The normal trading session for IPO and Re-listed scrips on their first day of trading shall commence only subsequent to conclusion of the Call Auction session for such scrip on BSE and NSE. The duration of the Call Auction session is prescribed vide SEBI circular no CIR/MRD/DP/01/2012 dated January 20, 2012.
Eligible scrip
I. IPO scrips
Price Bands
a. For issue size up to Rs. 250 cr, the applicable price bands for the first day shall be-
i. In case equilibrium price is discovered in the Call Auction, the price
band in the normal trading session shall be 5% of the equilibrium price.
ii. In case equilibrium price is not discovered in the Call Auction, the price band in the normal trading session shall be 5% of the issue price.
5 Circular No. CIR/MRD/DP/02/2012 dated January 20, 2012
iii. On Stock exchanges, not eligible to offer Call Auction, the reference price for price bands for the first day shall be –
A. in case equilibrium price is discovered in the Call Auction at BSE/NSE, the price band in the normal trading session shall be 5% discovered equilibrium price. In case of multiple equilibrium prices, the discovered equilibrium price closer to the issue price shall be taken as the reference price for price band on the first day.
B. in case equilibrium price is not discovered in the Call Auction, the price in the normal trading session band shall be 5% of the issue price.
Additionally, the trading shall take place in TFT segment for first 10 days from commencement of trading.
b. For issue size greater than Rs. 250 cr, the applicable price bands for the first day shall be –
i. In case equilibrium price is discovered in the Call Auction, the price band in the normal trading session shall be 20% of the equilibrium price.
ii. In case equilibrium price is not discovered in the Call Auction, the price band in the normal trading session shall be 20% of the issue price.
iii.On Stock exchanges, not eligible to offer Call Auction, the reference price for price bands for the first day shall be –
A.in case equilibrium price is discovered in the Call Auction at BSE/NSE, the price band in the normal trading session shall be 20% discovered equilibrium price. In case of multiple equilibrium prices, the discovered equilibrium price closer to the issue price shall be taken as the reference price for price band on the first day
B.in case equilibrium price is not discovered in the Call Auction, the price band in the normal trading session shall be 20% of the issue price.
II.Re-listed scrips
Price Bands
Trading shall take place in the TFT segment for the first 10 days with applicable price bands, wherein for the first day –
i Incase equilibrium price is discovered in the Call Auction, the price band in the normal trading session shall be 5 % of the discovered price.
ii Incase equilibrium price is not discovered in the Call Auction, the scrip shall continue to trade in call auction sessions until price is determined.
SECTION – 3: IMPLEMENTATION OF UNIFORM SECURITY SPECIFIC ACTION IN STOCK EXCHANGES
3.1Uniform security specific measure6
All stock exchanges shall implement the security specific decisions taken by BSE/NSE such as transferring of scrips from rolling settlement to trade for trade segment and vice-versa, imposition of margins, suspension of trading, etc in cases where such securities are also listed and traded on those stock exchanges. For this purpose, all the stock exchanges shall obtain the necessary information regurlarly from the website(s) of BSE/NSE and concurrently implement the security specific decisions taken by BSE/NSE.
In the event of any stock exchange not able to implement the decisions taken by BSE/NSE with regard to particular scrip, such stock exchange(s) shall not make available trading in such scrip in the normal rolling settlement.
6 Circular No. SEBI/MRD/SE/Cir- 12/2004 dated February 26, 2004
SECTION – 4: MARGIN TRADING
4.1Margin trading7
SEBI had, vide Circular No.SMD/Policy/Cir-6 dated 7/5/97, clarified, inter alia, that borrowing and lending of funds by a trading member in connection with or incidental to or consequential upon the securities business would not be disqualified under rule/s 8(1)(f) & 8(3)(f) of Securities Contract (Regulations) Rules, 1957. In continuation of the said circular, member-brokers are allowed to provide margin trading facility to their clients, in the cash segment, subject to the following conditions:
4.2Securities eligible for margin trading
SEBI vide circular dated March 11, 2003 has categorized the securities under 3 groups, namely, Group 1, Group 2 and Group 3. The securities having mean impact cost of less than or equal to 1 and having traded on atleast 80% (+/-5%) of the days for the previous eighteen months, have been categorized as Group 1. The securities in Group 1 would be eligible for margin trading facility.
In addition to the Group 1 securities, all the securities which are offered in the Initial Public Offerings (IPOs) and which meet the conditions for inclusion in the derivatives segment of the Stock Exchanges would be eligible for Margin Trading Facility.8
4.3Eligibility requirements for brokers to provide margin trading facility to
Clients Only corporate brokers with a “net worth” of at least Rs.3.00 crore would be eligible to offer margin trading facility to their clients. The “net worth” for the purpose of margin trading facility would mean “Capital” (excluding preference share capital) plus free reserves less non allowable assets, i.e fixed assets, pledged securities, member’s card, non-allowable securities, bad deliveries, doubtful debts and advances (including debts and advances overdue for more than 3 months or given to associates), pre paid expenses, intangible assets and 30% of the marketable securities.”
7 Circular No. SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004
8 Circular No. MRD/DoP/SE/Cir-08/2005 dated March 4, 2005
The broker shall submit to the stock exchange a half-yearly certificate, as on 31st March and 30th September of each year, from an auditor confirming the net worth (as specified in clause 4.3 above). Such a certificate shall be submitted not later than 30th April and 31st October of the year.
4.4No-objection certificate9
Before providing Margin Trading Facility to a client who has already availed of Margin Trading Facility from another broker, the broker is required to obtain a no-objection certificate in writing from the other broker. The other broker shall be required to convey his objection, if any, in writing, within a period of 21 days from the date of receipt of query from the broker, failing which the broker would be free to proceed with providing Margin Trading Facility to the client.
4.5 Agreement
The broker shall enter into an agreement with his client for providing the margin trading facility, on the lines of the model agreement, enclosed as Annexure 1. The broker/exchange may modify the agreement only for stipulating any additional or more stringent conditions, provided that no such modification shall have the effect of diluting any of the conditions laid down in the circular or in the model agreement.
4.6Source of Funds for the broker for providing margin trading facility to his
clients and maximum permissible borrowing by any broker
i.For the purpose of providing the margin trading facility, a broker may use his own funds or borrow from scheduled commercial banks and/or NBFCs regulated by RBI. A broker shall not be permitted to borrow funds from any other source.
ii.The broker shall not use the funds of any client for providing the margin trading facility to another client, even if the same is authorised by the client.
iii.At any point of time, the total indebtedness of a broker for the purpose of margin trading shall not exceed 5 times of his net worth (calculated as stated at 4.3 above).
iv.The “maximum allowable exposure” of the broker towards the margin trading facility shall be within the self imposed prudential limits and shall not, in any case, exceed the borrowed funds and 50% of his “net worth”.10
9 Circular No. MRD/DoP/SE/Cir-08/2005 dated March 4, 2005
10 Circular No. SEBI/MRD/SE/SU/Cir-16/04 dated March 31, 2004
v.The term “exposure” will mean the aggregate outstanding margin trading amount in the books of the broker for all his clients. While providing the margin trading facility, the broker shall be prudent and also ensure that there is no concentration on any single client. In any case, the exposure to any single client at any point of time shall not exceed 10% of the broker’s lendable resources (i.e. borrowed funds for the purpose o margin trading + 50% of net-worth).11
vi.While providing the margin trading facility, the broker shall be prudent and also ensure that there is no concentration on any single client. In any case, the exposure to any single client at any point of time shall not exceed 10% of the “total exposure” of the broker, (calculated as per para 4.6 (v) above).
4.7 Margin requirements
The initial and maintenance margin for the client shall be a minimum of 50% and 40% respectively, to be paid in cash. For this purpose;
i.“initial margin” would mean the minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to meet full settlement obligations.
ii.“Maintenance margin” would mean the minimum amount, calculated as a percentage of the market value of the securities, calculated with respect to the last trading day’s closing price, to be maintained by the client with the broker.
When the balance deposit in the client’s margin account falls below the required maintenance margin, the broker shall promptly make margin calls. However, no further exposure can be granted to the client on the basis of any increase in the market value of the securities.
The exchange/broker shall have the discretion to increase the margins (as mentioned above) and in such a case, the margin call shall be made, as and when required.
Fixed deposits with banks and Bank Guarantees shall be treated as cash equivalents and shall be considered as acceptable form of intial and maintenance margins for the purpose of availing the Margin Trading Facility.12
11 Circular No. SEBI/MRD/SE/SU/Cir-16/04 dated March 31, 2004
12 Circular No .MRD/DoP/SE/Cir-08/2005 dated March 4, 2005
4.8 Liquidation of securities by the broker in case of default by the client
The broker may liquidate the securities if the client fails to meet the margin call made by the broker or fails to deposit the cheques on the day following the day on which the margin call has been made or where the cheque deposited by the client has been dishonoured.
The broker may also liquidate the securities in case the client’s deposit in the margin account (after adjustment for mark to market losses) falls to 30% or less of the latest market value of the securities, in the interregnum between making of the margin call and receipt of payment from the client.
However, the broker shall not liquidate or use in any manner the securities of the client in any situation other than the ones mentioned above.
4.9 Maintenance of Records
The broker shall maintain separate client wise accounts of the securities purchased on margin trading with depositories and shall enable the client to observe the movement of securities from his account (through internet). The broker shall also maintain a separate record of details (including the sources) of funds used for the purpose of margin trading.
The books of accounts, maintained by the broker, with respect to the margin trading facility offered by it, shall be got audited on a half yearly basis. The broker shall submit an auditor’s certificate to the exchange/s, within one month from the date of the half year ending 31st March and 30th September of a year certifying, inter alia, the extent of compliance with the conditions of margin trading facility.
SEBI and the stock exchange/s shall have the right to inspect the books of accounts and/or any other documents maintained by the broker with respect to the margin trading facility.
4.10 Disclosure of exposure to the Margin Trading Facility
The broker shall disclose to the stock exchange/s details on gross exposure including name of the client, Unique Identification Number (UIN) under the SEBI (Central Database of Market Participants) Regulations, 2003, name of the scrip and if the broker has borrowed funds for the purpose of providing margin trading facility, name of the lender and amount borrowed, on or before 12 noon on the following day.
The stock exchange/s shall disclose the scrip wise gross outstanding in margin accounts with all brokers to the market. Such disclosure regarding margin trading done on any day shall be made available after the trading hours on the following day, through its website.
The formats for such disclosures by the broker to the exchange and the exchange to the public are enclosed at Annexure 2 and 3 respectively.
The stock exchanges shall also put in place a suitable mechanism to capture and maintain all relevant details including member-wise, client-wise, scrip-wise information and source of funds of the members, pertaining to margin trading on their exchange, both on daily as well as on cumulative basis.
4.11 Arbitration
The arbitration mechanism of the exchange would not be available for settlement of disputes, if any, between the client and broker, arising out of the margin trading facility. However, all transactions done on the exchange, whether normal or through margin trading facility, shall be covered under the arbitration mechanism of the exchange.
4.12 Usage of Investor Protection Fund and Trade/Settlement Guarantee Fund
The amounts lying in the aforesaid funds would not be available for settling any loss suffered in connection with the margin trading facility. However, the aforesaid funds will continue to be available for all transactions done on the exchange, whether normal or through margin trading facility.
4.13 General provisions
The brokers wishing to extend the facility of margin trading to their clients would be required to obtain prior permission from the exchange/s where the margin trading facility is proposed to be provided. The exchange shall have the right to withdraw this permission at a later date, after giving reasons for the same.
A broker should take adequate care and exercise due diligence before providing margin trading facility to any client. Any broker providing margin trading facility to a client shall ensure that the client has obtained a Unique Identification Number (UIN) under the SEBI (Central Database of Market Participants) Regulations, 2003.
A client will be allowed to obtain margin trading facility from one broker per exchange for buying securities in that exchange. To ensure this, it shall be obligatory on the part of every broker to,
a) obtain a declaration from his client whether he has availed of any margin trading facility from any broker in any exchange, or whether his request for margin trading with any broker was rejected and if so, in both the cases, obtain the name of the broker and his registration number; and
b) also verify the details from the concerned broker/s.
Before providing margin trading facility to a client who has already availed of margin trading facility from another broker in the same exchange, the broker shall ensure that the client has liquidated his outstanding in the margin trading account with the other broker, and obtain a certificate to this effect in writing from that broker.
SECTION – 5: MARKET MAKER 5.1 Guidelines for Market Maker13
With the view to infuse liquidity in the market, the concept of market maker was proposed. Since the introduction of electronic trading and “order matching” system in all the stock exchanges there has been a reduction in transaction costs, speedier execution of trades and gains in liquidity. The volumes have risen a hundred fold in respect of many shares. Increase in trading volume on the exchanges, however, has not been reflected always in the liquidity of all the listed shares. There are a large number of shares that are not actively or frequently traded although many of them have some fundamental strength and intrinsic value. The introduction of market making facility for such shares could be a possible means to infuse liquidity in such shares. The guidelines for market maker as provided in the annexure are enumerated below.
Annexure
Over the past several years the securities market has witnessed a sea change. The market has become more modern in terms of infrastructure, adoption of best international practices and introduction of competition. With the maturity of the regulatory framework and increased market surveillance, the market has also become safer and investor is better protected. The extensive reforms introduced by SEBI over the last few years have enhanced the integrity, transparency and efficiency of the operations of the securities market. The introduction of electronic trading and “order matching” system in all the stock exchanges, have led to reduction in transaction costs, speedier execution of trades and gains in liquidity. The, spreads have dropped by a factor of 10 and volumes have risen a hundred fold in respect of many shares. Increase in trading volume on the exchanges, however, has not been reflected always in the liquidity of all the listed shares. There are a large number of shares that are not actively or frequently traded although many of them have some fundamental strength and intrinsic value. The introduction of market making facility for such shares could be a possible means to infuse liquidity in such shares.
In the year 1993 guidelines for the Market Makers were issued vide our circular
no.SMD/SED/93/11362 dated August 05, 1993. However, the scheme did not elicit
adequate response. With a view to study the concept of “Market Making” and to draft
13 Circular No. SMDRP/POLICY/CIR-04/2000 dated January 20, 2000.
operational procedures for market making, eligibility criteria for Market Makers, risk containment measures, etc, SEBI constituted a Committee on March 24, 1998 under the chairmanship of Shri G P Gupta, then Chairman, UTI and current Chairman and Managing Director of IDBI. The Committee submitted its report to SEBI in August 31, 1999.
The Market Maker would operate under the regulatory framework as envisaged and laid out herewith in these guidelines. The Exchange would act as a SRO for the purposes of monitoring and effective operations of the Market Makers. The Exchanges have been accorded flexibility to make modifications to the scheme to make it more attractive to the Market Maker to take up commitments under this scheme, however, the terms of selection of scrips, the capital adequacy norms and the risk containment measures such as the price bands and margins would not be altered from those stipulated in these guidelines.
5.1.1 Criterion for selection of scrips for Market Making
The stock exchanges shall formulate its own benchmarks for selecting the scrips for market making, however, the shares satisfying any of the following criteria would not be eligible for market making :-
• Shares included in the BSE Sensex of the Stock Exchange, Mumbai and the S&P CNX Nifty of the NSE;
• Share where the average number of trades is more than 50;
• Shares where the value of trades on a daily basis is more than Rs.10,00,000/-;
• Shares where the company is not in operation and the Networth erosion is beyond 50%The list of scrips eligible for market making shall be reviewed by the exchanges so as to shift the scrips from one category to the other, after an observation period of two-three months to ensure permanence in the trend.
The market making would be on a voluntary basis for these shares. But, if Market Maker is not available for such shares, the share will continue to be traded under the existing system.
5.1.2 Exclusivity of Market Makers
If a share is eligible for market making and Market Makers are available, then, the share would trade only under a quote driven system and all orders must flow through Market Makers.
5.1.3 Number of Market Makers for each share
There would not be more than five Market Makers in any of the eligible shares on an exchange who will be selected on the basis of objective criteria to be evolved by the Exchange which would include capital adequacy, networth, infrastructure, minimum volume of business etc.
5.1.4 Qualifications for a registered Market Maker
Any member of the Exchange would be eligible to act as Market Maker provided he meets the criteria laid down by the exchange. The member brokers desirous of acting as Market Maker in the eligible scrips shall apply to the concerned stock exchange for registration as Market Makers.
5.1.5 The obligations and responsibilities of Market Makers
The Market Maker shall fulfil the following conditions to provide depth and continuity in trading the shares:
(a) The Market Maker shall be required to provide a 2-way quote on a continuous basis;
(b) The minimum depth of the quote shall be Rs.5,000/- or one market lot whichever is higher;(in case of demat shares, for which there is no market lot, the same market lot as existed in the physical segment would be applicable for this purpose.)
(c) The quote shall be provided in such a way that the quotes are not absent from the screen for more than 30 minutes at a time;
(d) Execution of the order on a continuous basis at the quoted price and quantity must be guaranteed by the Market Maker;
(e) the Market Maker must give commitment to buy and sell shares upto a certain quantity in hich they make markets;
(f) The Market Maker will be eligible to change quotes even if no transaction has been executed at the displayed quote. In any case the obligation of the Market Maker will end at 1% less than the circuit filter limits;
(g) The Market Maker may compete with other Market Makers for better quotes to the investors;
(h) Once registered as a Market Maker, he has to start providing quotes within 5 trading days of registration and shall be subject to the guidelines laid down for market making by the exchange.
(i) Once registered as a Market Maker, he has to mandatorily act in that capacity for a minimum period of three months.
5.1.6 Rights of the Market Maker
The Market Maker has the right to information about the share, in which he is making the market including the availability of trading and financial information, performance of the company in the last three years, etc. on a continuous basis.
5.1.7 Voluntary De-registration
The Market Makers may be allowed to de-register voluntarily from a particular share(s) provided it has fulfilled its obligations for a minimum period of three months and a one-month notice is given to the exchange.
5.1.8 Compulsory De-registration
If a Market Maker fails to fulfil his obligations as a Market Maker for more than three consecutive trading days, he will automatically stand de-registered from that share and may not be permitted to act as a Market Maker for any other security for a minimum period of three months.
5.1.9 Dissemination of Information
a) The exchange should disseminate a list of Market Makers in a share to the public
b) Exchange should disseminate the price and volume of turnover in shares eligible for market making.
5.1.10 Number of Shares per Market Maker
The number of companies in whose shares a Market Maker would make market should be linked to his capital adequacy.
5.1.11 Risk Containment Measures and monitoring for Market Makers Margins
All applicable margins should be levied and collected without any waiver/exemption.
Capital Adequacy
The exchanges would prescribe the capital adequacy requirement for its members commensurate with a number of companies in which Market Maker proposes to make market, the type of shares, and keeping in mind that the Market Maker works against the market and thus bear the brunt of the adverse trend. The monitoring of this requirement would be done by the exchange and any violation of this requirement would be liable for punitive action to be taken by the Disciplinary Action Committee (DAC) of the Exchange, which may also include monitory penalty apart from the trade restriction as decided by the DAC. An exchange may lay down additional criteria also for Market Makers as risk containment measures. Price Band and Spreads
There would be no change to the circuit filters or price bands, which are imposed by SEBI from time to time for the shares in which market making is available. The spreads between the bid and ask price would be as follows:-
For shares priced
Upto Rs 10 - no limit on spreads
>Rs. 10 and upto Rs 20 - 10% maximum spread
>Rs. 20/- and upto Rs.50/- - 5% maximum spread
>Rs.50/- and upto Rs. 100/- 4% maximum spread
>Rs. 100/- - 3% maximum spread
5.2 Guidelines for Market Maker on Small and Medium Enterprise (SME) Exchange/ Separate Platform for of existing exchange having nation wide terminal
Circular No CIR/MRD/DP/ 14 /2010 dated April 26, 2010 has been included under the heading “Small and Medium Enterprise” in the “Master Circular on Administration of Stock Exchanges, Arbitration in recognised Stock Exchanges and Stock Exchanges / trading platform for Small & Medium Enterprises and guidelines for Market Makers on SMEs” dated December 31, 2010.
SECTION – 6: NEGOTIATED DEALS 6.1 Negotiated Deals14
i. All negotiated deals (including cross deals) shall not be permitted except for those which are executed on the screens of the exchanges in the price and order matching mechanism of the exchanges just like any other normal trade. Provided, however, that Foreign Institutional Investors (FIIs) can avail of the provisions of the special bargains on the exchanges in accordance with their bye-laws or obtain suitable exemptions from exchanges for purchases or sales between FIIs in such companies where the ceiling of FII investment of 24% or 30 % as the case may be, has been reached.
ii. Negotiated deals in listed corporate debt securities shall not be permitted and all such trades will have to be executed on the price and order matching mechanism of the stock exchanges as in the case of equities.
iii. Government debt securities and money market instruments are under the regulatory jurisdiction of RBI and do not fall within the purview of SEBI. Therefore the aforesaid decision will not apply to such securities.
iv.Exemptions would also be granted for dis-investment of Public Sector Enterprises by SEBI on a case to case basis.15
v.No Exchange shall allow the ‘All or None’ or ‘Minimum Fill’ order facility in their trading system.16
14 Circular No. SMDRP/POLICY/CIR-32/99 dated September 14, 1999
15 Circular No. SMDRP/Policy/Cir-41/2000 dated September 11, 2000
16 Circular No. SMDRP/POLICY CIR-2/99 dated January 14, 1999
SECTION – 7: ODD LOT
7.1 Trading and Settlement of trades in dematerialised securities17
The stock exchanges should provide an additional trading window, which would give one time facility for small investors to sell physical shares (which are in compulsory demat list) not exceeding 500 shares in number irrespective of their value.
This facility shall be available only to registered holders of shares. The shares standing in the name of individuals/HUF shall alone constitute a good delivery. The selling/delivering member must necessarily be the introducing member. The buyers of the shares shall not be permitted to reintroduce the shares in the market in the physical form. This facility should be made available on all trading days.
17 Circular No. SMDRP/Policy/Cir.- 21/99 dated July 08, 1999
SECTION – 8: PERMANENT ACCOUNT NUMBER
8.1 Mandatory PAN requirement for transaction in Cash Market18
PAN shall be mandatory for all entities/ persons who are desirous of transacting in the securities market.
The Stock exchanges shall ensure that the members of their exchanges shall;
i. Collect copies of PAN cards issued to their existing as well as new clients
by the Income Tax Department and maintain the same in their record after verifying with the original.
ii. Cross-check the aforesaid details collected from their clients with the details on the website of the Income Tax Department i.e. http:// incometaxindiaefiling.gov.in/challan/enterpanforchallan.jsp.
iii. Upload details of PAN so collected to the Exchanges as part of unique client Code.
8.2 PAN as a sole identification number for all transactions in the securities
market19
In light of the Hon’ble Finance Minister’s announcement in the Union Budget for the year 2007-08, and in order to strengthen the (Know Your Client) KYC norms and identify every participant in the securities market, it has been decided that PAN would be the sole identification number for all participants transacting in the securities market, irrespective of the amount of transaction.
8.3 Incase of Central and State Govt., and officials appointed by courts20
In the view of Rule 114 C (1)(c) of Income Tax Rules, PAN may not be insisted in the case of securities market transactions undertaken on behalf of Central Government and State Government, and by the officials appointed by the courts e.g. Official liquidator, Court receiver etc. (under the category of Government).
18 Circular No. MRD/DoP/SE/Cir- 8 /2006 dated July 13, 2006
19 Circular No. MRD/DoP/Cir-05/2007 dated April 27, 2007
20 Circular No. MRD/DoP/Cir-20/2008 dated June 30, 2008
8.4. Exemptions for Investors in Sikkim21
In the light of the observations of the Hon’ble High Court of Sikkim in its Order dated March 31, 2006 as forwarded by the Sikkim Chamber of Commerce vide their letter No.See/52/06-07 dated May 11, 2006, the investors residing in the State of Sikkim are exempted from the mandatory requirement of PAN for-
(a) DP
(b) Broker
(c) MF
However, this would be subject to the DP / Broker / MF verifying the veracity of the claim of the investors that they are residents of Sikkim, by collecting sufficient documentary evidence in support of their address as provided in the SEBI Circular No.MRD/DoP/Dep/Cir-29/2004 dated August 24, 2004.
8.5 Incase of FIIs/Institutional Clients22
The custodians are advised to verify the PAN details of the institutional clients with the original PAN card and provide copy of such verified PAN details to the brokers duly certified. This would be applicable in respect of institutional clients, namely, FIIs, MFs, VCFs, FVCIs, Scheduled Commercial Banks, Multilateral and Bilateral Development Financial Institutions, State Industrial Development Corporations, Insurance Companies registered with IRDA and Public Financial Institution as defined under section 4A of the Companies Act, 1956.
As regards proof of address of FIIs/sub-accounts, a copy of the Power of Attorney (POA) given by the FIIs/FII sub-accounts to the Custodians (which are duly notarized and/or apostiled or consularised) that gives the registered address of the FIIs/sub-accounts can be accepted as proof of address.
8.6 Incase of UN entities and multilateral agencies which are exempted from paying taxes/ filling tax returns in India23
UN entities/ multilateral agencies which are exempt from paying taxes/filling
tax returns in India are exempt from the mandatory requirement of PAN, subject
21 Circular No. MRD/DoP/Dep/Cir-09/06 dated July 20, 2006
22 Circular No. MRD/DoP/Dep/SE/Cir-13/06 dated September 26, 2006 Circular No. MRD/DoP/Dep/Cir-09/06 dated July 20, 2006
23 Circular No. MRD/DoP/Dep/Cir-09/06 dated July 20, 2006 to the DPs collecting documentary evidence in support of such claim of investors.
8.7 Incase of HUF, Association of Persons (AoP), Partnership Firm, unregistered Trust, Registered Trust, Corporate Bodies, minors, etc.24
The BO account would be in the name of natural persons, PAN of the respective HUF, AoP, Partnership Firm, Unregistered Trust, etc shall be obtained.
As regards Registered Trust, Corporate Bodies and minors, PAN of the respective entities shall be obtained when accounts are opened in their respective names.
8.8 Incase of Slight mismatch in PAN card details as well as difference in maiden name and current name (predominantly in the case of married women) of the investors25
DPs can collect the PAN card proof as submitted by the account holder. However, this would be subject to the DPs verifying the veracity of the claim of such investors by collecting sufficient documentary evidence in support of the identity of the investors as provided in the SEBI Circular No. MRD/DoP/Dep/Cir-29/2004 dated August 24, 2004.
8.9 Incase of NRI/PIOs26
The Directorate of Income Tax (Systems), has issued guidelines, facilitating the citizens of India residing outside India, Foreign citizens and other persons (like companies/ trusts/ firms) having no office of their own in India to obtain PAN based on the copy of their passport as ID proof and a copy of passport/ bank account in the country of residence as address proof.
In the light of the above, the facility of opening a “limited purpose BO/ Trading account” by them without PAN has been withdrawn.
8.10 PAN requirement for transfer of shares in physical form27 28
24 Circular No. MRD/DoP/Dep/Cir-09/06 dated July 20, 2006
25 Circular No. MRD/DoP/Dep/SE/Cir -09/06 dated July 20, 2006
26 Circular No. MRD/DoP/Dep/SE/Cir -17/06 dated October 27, 2006
27 Circular No. MRD/DoP/ Cir-05/2009 dated May 20, 2009
28 Circular No. SEBI/MRD/DoP/SE/RTA/Cir-03/2010 dated January 07, 2010
As regards transfer of shares in physical form of listed companies, for securities market transactions and off-market/ private transactions, it shall be mandatory for the transferee(s) to furnish copy of PAN card to the Company/RTAs for registration of such transfer of shares.
It shall be also be mandatory to furnish a copy of PAN in the following cases –
a. Deletion of name of the deceased shareholder(s), where the shares are held in the name of two or more shareholders.
b. Transmission of shares to the legal heir(s), where deceased shareholder was the sole holder of shares.
c. Transposition of shares – when there is a change in the order of names in which physical shares are held jointly in the names of two or more shareholders.
Incase of mismatch in PAN card details as well as difference in maiden name and current name (in case of married women) of the investors -
The RTAs can collect the PAN card as submitted by the transferee(s). However, this would be subject to the RTAs verifying the veracity of the claim of such transferee(s) by collecting sufficient documentary evidence in support of the identity of the transferee(s) as provided for at para. 2 in the SEBI circular no.MRD/DoP/Dep/Cir-29/2004 dated August 24, 2004 read with SEBI circular no. MRD/DoP/Cir-08/2007 dated June 25, 2007.
SECTION – 9: PROPRIETARY TRADING
9.1 Disclosure of Proprietary Trading by Broker to Client29
With a view to increase the transparency in the dealings between the broker and the client, every broker shall disclose to his client whether he does client based business or proprietary trading as well.
i. The broker shall disclose the aforesaid information to his existing clients within a period of one month from the date of this circular.
ii. Further, the broker shall disclose this information upfront to his new clients at the time of entering into the Know Your Client agreement.
In case of a broker who at present does not trade on proprietary account, chooses to do so at a later date, he shall be required to disclose this to his clients before carrying out any proprietary trading.
9.2 Pro-account Trading Terminal30
Pro-account should be used by the broker to place orders of member of the broking firm. It has been observed that certain members are putting large number of orders on pro-account from various locations rather than using “pro-account” at the terminals located at the corporate office from where the owner / directors normally function. It has further been observed that these trades executed from various locations under “pro-account” are, many a time, transferred subsequently to the respective clients in the back office of the members. This practice is in clear violation of the requirement of putting the orders of clients under the appropriate client code through trading terminals.
In order to prevent any misuse if this facility, if any, stock exchanges should ensure the following:-
i. Facility of placing orders on “pro-account” through trading terminals shall be extended only at one location of the members as specified / required by the members
ii. Trading terminals located at places other than the above location shall have a facility to place orders only for and on behalf of a client by entering client code details as required / specified by the Exchange / SEBI.
29 Circular no. SEBI/MRD/SE/Cir- 42 /2003 dated November 19, 2003.
30 Circular no. SEBI/MRD/SE/Cir- 32/2003/27/08 dated August 27, 2003.
iii. In case any member requires the facility of using “pro-account” through trading terminals from more than one location, such member shall be required to submit an undertaking to the stock exchange stating the reason for using the “pro-account” at multiple locations and the stock exchange may, on case to case basis after due diligence, consider extending the facility of allowing use of “pro-account” from more than one location.
SECTION – 10: SHORT SELLING AND SECURITIES LENDING AND BORROWING SCHEME
10.1 Broad Framework for Short Selling and Securities Lending and Borrowing31
Pursuant to the recommendations of the Secondary Market Advisory Committee (SMAC) of SEBI it was decided to permit all classes of investors to short sell. In order to provide a mechanism for borrowing of securities to enable settlement of securities sold short, it has also been decided to put in place a full-fledged securities lending and borrowing (SLB) scheme for all market participants in the Indian securities market under the over-all framework of “Securities Lending Scheme, 1997” of SEBI. The Securities Lending Scheme was notified by SEBI on February 06, 1997. The guidelines for this facility of short selling and framework for securities lending and borrowing are specified in Annexure 1 and 2.
To enable the mechanism of short selling, the facility of securities lending and borrowing (SLB) scheme, was put in place for all market participants, under the overall framework of “Securities Lending Scheme, 1997” of SEBI.
10.2 Annexure 1 – Broad framework for short selling
1. “Short selling” shall be defined as selling a stock which the seller does not own at the time of trade.
2. All classes of investors, viz., retail and institutional investors, shall be permitted to short sell.
3. Naked short selling shall not be permitted in the Indian securities market and accordingly, all investors would be required to mandatorily honour their obligation of delivering the securities at the time of settlement.
4. No institutional investor shall be allowed to do day trading i.e., square-off their transactions intra-day. In other words, all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfill their obligations on a gross basis. The custodians, however, would continue to settle their deliveries on a net basis with the stock exchanges.
5. The stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver 31 Circular No. MRD/DoP/SE/Dep/Cir- 14 /2007 dated December 20, 2007. securities at the time of settlement which shall act as a sufficient deterrent against failure to deliver.
6. A scheme for Securities Lending and Borrowing (SLB) shall be put in place to provide the necessary impetus to short sell. The introduction of a fullfledged securities lending and borrowing scheme shall be simultaneous with the introduction of short selling by institutional investors.
7. The securities traded in F&O segment shall be eligible for short selling. SEBI may review the list of stocks that are eligible for short selling transactions from time to time.
8. The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.
9. The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public on a weekly basis. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.
10.3 Annexure 2 - Broad framework for securities lending and borrowing
1. The stock exchanges shall put in place, a full fledged securities lending and borrowing(SLB) scheme, within the overall framework of “Securities Lending Scheme, 1997” (the scheme), that is open for all market participants in the Indian securities market.
2. To begin with, the SLB shall be operated through Clearing Corporation/Clearing House of stock exchanges having nation-wide terminals who will be registered as Approved Intermediaries (AIs) under the SLS, 1997.
3. The SLB shall take place on an automated, screen based, order-matching platform which will be provided by the AIs. This platform shall be independent of the other trading platforms.
4. To begin with, the securities traded in F&O segment shall be eligible for lending & borrowing under the scheme.
5.All categories of investors including retail, institutional etc. will be
permitted to borrow and lend securities. The borrowers and lenders shall access the platform for lending/borrowing set up by the AIs through the clearing members (CMs) (including banks and custodians) who are authorized by the AIs in this regard.
6. The AIs, CMs and the clients shall enter into an agreement (which may have one or more parts) specifying the rights, responsibilities and obligations of the parties to the agreement. The agreement shall include the basic conditions for lending and borrowing of securities as prescribed under the scheme. In addition to that, AIs may also include suitable conditions in the agreement to have proper execution, risk management and settlement of lending and borrowing transactions with clearing member and client. Given the nature of the client base, while the major responsibility of ensuring compliance with “Know Your Client” (KYC) norms in respect of the clients rests with CMs, the exact role of AIs/CMs vis-à-vis the clients in this regard needs to be elaborated in the aforesaid agreement between the AI/CMs/clients. In this regard, there would be one master agreement with two individual parts to the same. The first part of the agreement would be between the AIs and the CMs and the second part of the agreement would be between the CMs and the clients. There would be adequate cross referencing between the two parts of the agreement so that all the concerned parties, viz., the AIs/CMs and the clients agree completely and are aware of all the provisions governing the SLB transactions between them. However, there shall be no direct agreement between the lender and the borrower. The CM will attach a certified copy of the first part of the agreement signed with the AI in the second part of the agreement signed with each client. The model agreements in this regard would be devised by the stock exchanges.
7. The AIs shall allot a unique ID to each client which shall be mapped to the Permanent Account Number (PAN) of the respective clients. The AIs shall put in place appropriate systemic safeguards to ensure that a client is not able to obtain multiple client IDs.
8. The tenure of contracts in SLB may be upto a maximum period of 12 months. The Approved Intermediary (Clearing corporation/ Clearing House) shall have the flexibility to decide the tenure (maximum period of 12 months). 32
32 Circular No. SEBI/MRD/DoP/SE/Dep/Cir- 01 /2010 dated January 06, 2010
9. The settlement cycle for SLB transactions shall be on T+1 basis. The settlement of lending and borrowing transactions shall be independent of normal market settlement.
10. The settlement of the lending and borrowing transactions shall be done on a gross basis at the level of the clients i.e. no netting of transactions at any level will be permitted.
11. AIs would frame suitable risk management systems to guarantee delivery of securities to borrower and return of securities to the lender. In the case of lender failing to deliver securities to the AI or borrower failing to return securities to the AI, the AI shall conduct an auction for obtaining securities. In the event of exceptional circumstances resulting in non-availability of securities in auction, such transactions would be financially closed-out at appropriate rates, which may be more than the rates applicable for the normal close-out of transactions, so as to act as a sufficient deterrent against failure to deliver securities.
12. Position limits at the level of market, CM and client shall be decided from time to time by AIs in consultation with SEBI. To begin with (a) the market– wide position limits for SLB transactions shall be 10% of the free-float capital of the company in terms of number of shares (b) No clearing member shall have open position of more than 10% of the market-wide position limits or Rs. 50 crore (base value), whichever is lower (c) For a FII/MF, the position limits shall be the same as of a clearing member (d) The client level position limits shall be not more than 1% of the market-wide position limits.
13. There shall be no lending/borrowing activity during the periods of corporate action in the security and shall be disclosed by AI to the market.
14. Details of treatment of corporate actions during the tenure, such as Dividend, stock split etc., are specified as below:33
a. Dividend: The dividend amount would be worked out and recovered from the borrower on the book closure/ record date and passed on to the lender.34
b. Stock split: The positions of the borrower would be proportionately adjusted so that the lender receives the revised quantity of shares.
33 Circular No. MRD/DoP/SE/Cir-31/2008 dated October 31, 2008
34 Circular No. CIR/MRD/DP/ 33 /2010 dated October 07, 2010
c. Other corporate actions such as bonus/ merger/ amalgamation /
open offer etc: The transactions would be foreclosed from the day prior to the ex-date. The lending fee would be recovered on a pro-rata basis from the lender and returned to the borrower.
15. Any borrowing/lending and return of securities would not amount to purchase/disposal/transfer of the same for the purpose of compliance with the extant FDI/FII limits and the norms regarding acquisition of shares/disclosure requirements specified under the various Regulations of SEBI.
16. Adequate systems shall be put in place by the stock exchanges/Depositories to distinguish the SLB transactions from the normal market transactions in the demat system.
17. AIs shall provide suitable arbitration mechanism for settling the disputes arising out of the SLB transactions executed on the platform provided by them.
18. AIs shall disseminate in public domain, the details of SLB transactions executed on the platform provided by them and the outstanding positions on a weekly basis. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.
19. The time for SLB session may be extended to the normal trade timings of 9:15 am to 3:30 pm.35,36
20. Risk Management-
a. With regard to risk management in SLB, it is advised that common risk management practices shall be followed by stock exchanges for SLB. It is reiterated that the exchanges should ensure that the risk management framework strikes a balance between ensuring commercial viability of SLB transactions and ensuring adequate and proper risk management. Exchanges should satisfy themselves regarding the adequacy of the risk management system.
b. Margins in SLB allowed to be taken in the form of cash and cash equivalents as prescribed in the circular MRD/DoP/Cir-07/2005 dated February 23, 2005.
35 Circular No. MRD/DoP/SE/Cir-31/2008 dated October 31, 2008
36 Circular No. SEBI/DNPD/Cir-47/2009 dated October 23, 2009
21. The lender / borrower shall be provided with a facility for early recall / repayment of shares.37
22. In case the borrower fails to meet the margin obligations, the Approved Intermediary (AI) shall obtain securities and square off the position of such defaulting borrower, failing which there shall be a financial close-out.
23. In case lender recalls the securities anytime before completion of the contract, the AI on a best effort basis shall try to borrow the security for the balance period and pass it onward to the lender. The AI will collect the lending fee from the lender who has sought early recall.
24. In case of early recall by the lender, the original contract between the lender and the AI will exist till the contract with the new lender for the balance period is executed and the securities returned to the original lender.
25. In case of early repayment of securities by the borrower, the margins shall be released immediately on the securities being returned by the borrower to the AI. The AI shall on a best effort basis, try to onward lend the securities and the income arising out of the same shall be passed on to the borrower making the early repayment of securities.
26. In case AI is unable to find a new borrower for the balance period, the original borrower will have to forego lending fee for the balance period.
27. In case of early recall by lender or early repayment of securities by borrower, the lending fee for the balance period shall be at a market determined rate.
10.4 Operationalisation of Short Selling and Securities Lending and Borrowing38
The broad framework for short selling by institutional investors and a full fledged securities lending and borrowing scheme for all market participants were operationalised with effect from April 21, 2008.
10.5 Introduction of roll-over facility39
10.5.1 Any lender or borrower who wishes to extend an existing lent or borrow position shall be permitted to roll-over such positions i.e. a lender who is
37 Circular No. SEBI/MRD/DoP/SE/Cir-01/2010 dated January 06, 2010
38 Circular No. MRD/DoP/SE/Cir-05/2008 dated March 19, 2008
39 Circular No. CIR/MRD/DP/30/2012 dated November 22, 2012
due to receive securities in the pay out of an SLB session, may extend the period of lending. Similarly, a borrower who has to return borrowed securities in the pay-in of an SLB session, may, through the same SLB session, extend the period of borrowing. The roll-over shall be conducted as part of the SLB session.
10.5.2 Rollover shall not permit netting of counter positions, i.e. netting between the ‘borrowed’ and ‘lent’ positions of a client.
10.5.3 Roll-over shall be available for a period of 3 months i.e. the original contract plus 2 rollover contracts.
10.6 Introduction of Liquid Index Exchange Traded Funds (ETFs) under the SLB scheme
10.6.1 Liquid Index ETFs shall be eligible for trading in the SLB segment.
10.6.2 For the purposes of this circular, an Index ETF shall be deemed ‘liquid’ provided the Index ETF has traded on at least 80% of the days over the past 6 months and its impact cost over the past 6 months is less than or equal to 1%.
10.6.3 Positions limits for SLB in respect of ETFs shall be based on the assets under management of the respective ETF.
SECTION – 11: SPOT AND OFF-THE-FLOOR TRANSACTIONS40 11.1 Spot and Off-the-Floor transactions
With regard to reporting of transaction both spot and off-the floor:
i. Brokers are required to report all transactions done on a spot basis on the same day to the exchange.
Ii Brokers are required to report on the same day all transactions adjusted in their books -whether between two clients or whether between a client and the broker as a principal to the exchange.
40 Circular No. SMD/RCG/CIR/(BKG)/293/95 dated March 14, 1995
SECTION – 12: SECURITIES TRANSACTION TAX 12.1 Implementation of Securities Transaction Tax41
As per Union Budget for 2004-2005 Securities Transaction Tax (STT) shall be levied on all transactions done on the stock exchange.
The stock exchanges have been entrusted with the responsibility of levying, collection and remittance of the STT on all transactions from the date of notification by the Government of India. The Government of India will have to ensure the necessary systems and procedures are put in place for proper implementation as per STT rules, September 28, 2004, notified by the government.
No stock exchange shall permit trading activity unless it implements necessary software and procedures for the levy, collection and remittance of STT and that the MDs/EDs/Administrators of the respective exchanges certify to the effect that necessary systems and procedures are in place for the said purpose.
SECTION – 13: TIME STAMPING OF ORDERS 13.1 Time Stamping of Orders42
Broker member(s) have to maintain record of time when the client places the order and reflect the same in contract note along with the time of execution of the order.
41 Circular No. MRD/DoP/SE/Cir-28/2004 dated August 23, 2004
42 Circular No. SMD/POLICY/IECG/ 1 – 97 dated February 11, 1997
SECTION – 14: TRADING IN GOVERNMENT SECURITIES 14.1 Government Securities43
Trading in government securities can be done in demat using Subsidiary General ledger (SGL), by entities who have an account with the RBI. These entities are allowed to open Constituent Subsidiary General Ledger (CSGL) accounts on behalf of their client in order to facilitate trading of government securities in the demat form. RBI has mentioned in detail steps for eliminating trading of government securities in the physical form.
Reserve Bank of India has been encouraging holding of government securities in the dematerialized mode in the following ways:
• All entities having a Subsidiary General Ledger (SGL) account with RBI are allowed to open Constituent Subsidiary General Ledger (CSGL) accounts on behalf of their clients.
• Although being non-banks, depositories (NSDL/CDSL) and organisations such as SHCIL have been provided an additional SGL account to open CSGL accounts on behalf of their clients.
• The cost of postage incurred by the depositories on remitting interest and redemption proceeds is being reimbursed by RBI so as to encourage dematerialized holding and retail participation in Gilts.
• Guidelines have been issued to the banks prescribing the safeguards to be adopted for maintenance of CSGL accounts.
To impart transparency in government securities traded by clients (through CSGL accounts), a special feature has been incorporated in the Negotiated Dealing System (NDS) for reporting and settlement of such trades. Provision has also been made in the NDS for giving quotes on behalf of clients i.e. CSGL account holders.
43 Circular No. SMDRP/POLICY/CIR-14/2002 dated June 25, 2002
SECTION – 15: UNIQUE CLIENT CODE
15.1 Unique Client Code44
It shall be mandatory for the broker to use unique client code for all clients. For this purpose the broker shall collect and maintain in their back office the Permanent Account Number (PAN) allotted by the Income Tax Department for all their clients.
Incase of other entities –
1. Brokers shall verify the documents with respect to the unique code retain a copy of the document.
2. The brokers shall also be required to furnish the above particulars of their clients to the stock exchanges/clearing corporations and the same would be updated on a monthly basis. Such information for a specific month should reach the exchange within 7 working days of the following month.45
3. The stock exchanges shall be required to maintain a database of client details submitted by brokers. Historical records of all quarterly submissions shall be maintained for a period of 7 years by the exchanges.
15.2 Unique Client Code for Mutual Funds and FIIs46
MFs and the FIIs shall enter the unique client codes pertaining to the parent MF and parent FII at the order entry level and do allocation to the individual schemes of the MFs and sub-accounts of the FIIs in the post closing session.
44 Circular No. SMDRP/Policy/CIR-39/2001 dated July 18, 2001
45 Circular no. SEBI/MRD/SE/Cir-34 /2003/29/09 dated September 29, 2003
46 Circular No. SEBI/SMD/SE/11/2003/31/03 dated March 31, 2003 Circular No. MRD/DoP/SE/Cir- 35/2004 dated October 26, 2004
SECTION - 16: TRANSACTION CHARGES BY THE STOCK EXCHANGES.47 16.1 Transaction charges are being levied by the stock exchange on the trades executed on their trading platform.
16.2 Stock exchanges, while revising such transaction charges, are advised to ensure that:
a) The stock exchange system is capable of handling additional load.
b) It does not affect the existing risk management system.
c) It does not favour selective trades or selective category of investor.
d) It does not encourage generation of artificial demand.
e) It does not result in any market irregularities.
f) It is uniformly applied to trades of similar nature.
g) It is imposed in fair and transparent manner.
47 Circular No MRD/DoP/SE/Cir-14/2009 dated October 14, 2009
SECTION – 17: PRESERVATION OF RECORDS48
17.1 In supersession to SEBI circular no. SEBI/MRD/SE/Cir-15/2005 dated August 4, 2005 and SEBI/MRD/SE/Cir-23/05 dated December 22, 2005, Rules 14 and 15 of Securities Contracts (Regulation) Rules, 1957, require every recognized stock exchange and its members to maintain and preserve the specified books of account and documents for a period ranging from two years to five years. As per regulation 18 of SEBI (Stock Brokers & Sub-brokers) Regulations, 1992, every stock broker shall preserve the specified books of account and other records for a minimum period of five years. In case such documents are maintained in electronic form, provisions of Information Technology Act, 2000 in this regard shall be complied with.
17.2 Further, enforcement agencies like CBI, Police, Crime Branch etc. collect copies of the various records/documents during the course of their investigation. Therefore if a copy is taken by such enforcement agency either from physical or electronic record then the respective original is to be maintained till the trial or investigation proceedings have concluded.
48 Circular No MRD/DoP/SE/Cir- 21 /2009 dated December 9, 2009
SECTION – 18: CALL AUCTION 18.1 Call Auction in Pre-Open Session49
1. The issue regarding call auction and its use in various session, including pre-open session was deliberated in Secondary Market Advisory Committee (SMAC). Based on the recommendation of the committee and proposal received from the stock exchanges, it has been decided to introduce call auction mechanism in pre-open session.
2. To begin with, pre-open session shall be introduced on a pilot basis by BSE and NSE for the scrips forming part of Sensex and Nifty. The list of scrips is placed at annexure ‘A’. In case of any change in the composition of Sensex and Nifty, pre-open session shall be introduced for such incoming scrips. Pre-open session shall also continue for the scrips moving out of Sensex and Nifty, though they will not be reckoned for the computation of the index.
3. With effect from April 1, 2013 pre-open call auction session shall be applicable to all exchanges with active trading and for all scrips that are not classified as illiquid as per para 18.3 (1.2).50
4. The pre-open session shall be for a duration of 15 minutes i.e. from 9:00 a.m. to 9:15 a.m., out of which 8 minutes shall be allowed for order entry, order modification and order cancellation, 4 minutes for order matching and trade confirmation and the remaining 3 minutes shall be the buffer period to facilitate the transition from pre-open session to the normal market.
5. The session shall close randomly during last one minute of order entry i.e. anytime between 7th and 8th minute of the order entry. Such random closure shall be system driven.
6. Limit orders and market orders shall be entered during the pre-open session and both shall be reckoned for computation of equilibrium price. No iceberg order will be allowed i.e orders shall be disclosed in full quantity.
7. Price band of 20% shall be applicable on the securities during pre-open session.
8. With effect from April 1, 2013 price bands in pre-open session shall be as applicable in the normal market.50
49 Circular No. CIR/MRD/DP/21/2010 dated July 15, 2010
50 Circular No. CIR/MRD/DP/ 6/2013 dated February 14, 2013
9. In case the index breaches the prescribed threshold limit upon the closure of pre-open session, the procedure as prescribed in SEBI Circular Ref. No. SMDRPD/Policy/Cir-37 /2001 dated June 28, 2001 shall be applicable from the time continuous normal market opens.
10. The equilibrium price shall be the price at which the maximum volume is executable. In case more than one price meets the said criteria, the equilibrium price shall be the price at which there is minimum order imbalance quantity (unmatched order quantity). The absolute value of the minimum order imbalance quantity shall be taken into consideration.
Further, in case more than one price has same minimum order imbalance quantity, the equilibrium price shall be the price closest to the previous day’s closing price. In case the previous day’s closing price is the mid-value of a pair of prices which are closest to it, then the previous day’s closing price itself shall be taken as the equilibrium price. In case of corporate action, previous day’s closing price shall be the adjustable closing price or the base price.
Explanation: A scenario may arise, wherein; more than one price may have same minimum imbalance quantity. Example on the same is given hereunder:
Price Buy (Qty) Cum. Buy Qty Sell (Qty) Cum. Sell Qty Unmatched Quantity Vol. tradable
106 0 3000 8000 -8000 0
103 2000 2000 3000 5000 -3000 2000
96 3000 5000 1000 2000 3000 2000
94 1500 6500 1000 1000 5500 1000
92 2000 8500 0 8500 0
90 1000 9500 0 9500 0
In the said example 103 and 96 are the prices wherein, the volume tradable and unmatched quantity is the same. To derive the equilibrium price, the said prices i.e. 103 and 96 which is closest to the previous day’s closing price shall be considered. In case the previous day’s closing price is 95, then, 96 may be considered as the equilibrium price. In case the previous day’s closing price is 105, then, 103 may be considered as the equilibrium price. In case the previous day’s closing price is 99.5 which is the mid-value of 103 and 96, then the equilibrium price shall be the previous day’s closing price i.e. 99.5.
11. Pursuant to the discovery of price in the pre-open session, at the time of order execution, limit orders shall be given priority over market orders. The sequence for executing orders is given below:
a) Eligible Limit orders shall be matched with eligible limit orders.
b) Residual eligible limit orders shall be matched with market orders.
c) Market orders to be matched with market orders.
12. In case of pending unmatched orders in pre-open session, they shall be shifted to the order book of the normal market following time priority. Unmatched market orders will shift to the normal market order book as limit orders at a price as discovered in the pre-open session.
13. In case the equilibrium price is not discovered in the pre-open session51:
a) Wherein, there are only market orders, the market orders shall be matched at previous day’s close price and all unmatched market orders shall be shifted to the order book of the normal market at previous day’s close price following time priority. Previous day’s close price shall be the opening price.
b) Wherein, there are no market orders to be matched, all unmatched market orders (at previous day’s close price) and limit orders shall be shifted to the order book of the normal market following price time priority.
14. The current risk management system for cash market shall be applicable to pre-open session.
15. All orders shall be checked for margin sufficiency at order level for inclusion in pre-open session.50
16. The following information shall be disseminated during pre-open session:
a) Indicative equilibrium price of the scrip
b) Indicative cumulative buy and sell quantity of the scrip
c) Indicative Index
51 Circular No. CIR/MRD/DP/32/2010 dated September 17, 2010
17. This framework for call auction shall be reviewed after 3 months from the commencement of the pre-open session.
18. The Stock Exchanges shall issue the necessary guidelines in this regard and shall put in place the necessary systems to ensure the operationalization of the above.
18.2 Call Auction in Pre-open session for Initial Public Offering (IPO) and Re-listed scrips52
1. Duration of Session
The session shall be for a duration of 60 minutes i.e. from 9:00 a.m. to 10:00 a.m., out of which 45 minutes shall be allowed for order entry, order modification and order cancellation, 10 minutes for order matching and trade confirmation and the remaining 5 minutes shall be the buffer period to facilitate the transition from pre-open session to the normal trading session.
The session shall close randomly during last one minute of order entry i.e.
anytime between 44th and 45th minute of the order entry. Such random closure shall be system driven.
2. Eligible Scrips
I. IPO scrips on the first day of trading
a. Price Bands
There shall be no price bands in the pre-open session.
b. Market Orders
Market orders shall not be accepted in pre-open session.
c. Matched Orders
For matched orders the provisions of SEBI circulars and letter mentioned at para 1 above shall apply.
d. Un-matched orders
All outstanding orders will be moved to the normal trading session at their Limit price.
II. Re-listed Scrips
a. Price Bands
There shall be no price bands for re-listed scrips during pre-open session.
b. Market Orders
Market orders shall not be accepted in the pre-open session.
52 Circular No. CIR/MRD/DP/01/2012 dated January 20, 2012
c. Matched Orders
For matched orders the provisions of SEBI circulars and letter mentioned at para 1 above shall apply.
d. Un-matched orders
i. In case equilibrium price is discovered, all outstanding orders shall be moved to the normal trading session at their limit price.
ii. In case equilibrium price is not discovered, all orders shall be cancelled and the scrip shall continue to trade in call auction mechanism until price is determined.
3. Risk Management – For IPO scrips with an issue size greater than Rs 250 cr the risk management provisions as prescribed vide SEBI circular dated July 15, 2010 and letter dated September 17, 2010 shall remain applicable for pre-open session. For IPO scrips with issue size upto Rs 250 cr and Re-listed scrips it is advised that margins shall be checked and blocked for 100% of the order value at the order level itself before considering the order eligible for inclusion in pre-open session.
4. The date of commencement of pre-open session for all eligible scrips shall be uniform between both the stock exchanges.
18.3 Introduction of Periodic Call Auction for Illiquid Scrips53 1. Periodic Call Auction for Illiquid scrips
1.1 Trading in illiquid scrips in the equity market shall be conducted only through periodic call auction sessions.
1.2 Criteria for illiquidity – For the purpose of this circular, a scrip, whether trading in normal market or trade for trade settlement, shall be classified as illiquid on a stock exchange if all the following conditions are met:
1.2.1 The average daily trading volume of a scrip in a quarter is less than 10000;
1.2.2 The average daily number of trades is less than 50 in a quarter; 1.2.3 The scrip is classified as illiquid at all exchanges where it is traded.
1.3 Entry into periodic call auction mechanism – Stock exchanges shall identify illiquid scrips at the beginning of every quarter and move such scrips to periodic call auction mechanism.
1.4 Exit from periodic call auction mechanism – Stock exchanges shall move scrips from periodic call auction mechanism to normal trading session if the following criteria are met:
1.4.1. The scrip has remained in periodic call auction for at least two quarters
1.4.2. It is not classified as illiquid as per para 1.2
1.5 Notice to market – For entry and exit of scrips in the call auction
mechanism, a notice of two trading days shall be given to the market.
1.6 Number of auction sessions – Periodic call auction sessions of one hour each shall be conducted throughout the trading hours with the first session starting at 9:30am.
1.7 Session duration - The call auction session duration shall be one hour, of which 45 minutes shall be allowed for order entry, order modification and order cancellation, 8 minutes shall be for order matching and trade confirmation and remaining 7 minutes shall be a buffer period for closing the current session and facilitating the transition to next session. The session shall close randomly during last one minute of order entry between the 44th & 45th minute. Such random closure shall be system driven.
53 Circular No. CIR/MRD/DP/6/2013 dated February 14, 2013
1.8 Un-matched orders- All un-matched orders remaining at the end of a call auction session shall be purged.
1.9 Price band – A maximum price band of 20% shall be applicable on the scrips through the day. Exchanges may reduce the price bands uniformly based on surveillance related concerns.
1.10 If the Market wide Index Circuit Breaker gets triggered at any time during the periodic call auction session, the session shall be cancelled and all orders shall be purged. The periodic call auction session shall be resumed at the nearest half hour after the normal market resumes.
1.11 Penalty for certain trades - In the event where maximum of buy price entered by a client (on PAN basis) is equal to or higher than the minimum sell price entered by that client and if the same results into trades, a penalty shall be imposed on such trades. The penalty shall be calculated and charged by the exchange and collected from trading members on a daily basis. Trading members may recover such penalty from clients. The penalty so collected shall be deposited to Investor Protection Fund. Penalty for each such instance per session will be higher of the following:
a. 0.50% of the trade value for sale and 0.50% of trade value for the buy, resulting in 1% penalty for the client on PAN basis.
OR
b. 2500/- for the buy trade and 2500/- for the sell trade, resulting in penalty of 5000/- for the client on PAN Basis.
SECTION – 19: RECONCILIATION OF SHARE CAPITAL AUDIT (Earlier Secretarial Audit) 54
All the issuer companies shall subject themselves to a “Reconciliation of Share Capital audit”55 to be undertaken by a qualified Chartered Accountant or a Company Secretary, for the purposes of reconciliation of the total admitted capital with both the depositories and the total issued and listed capital.
The audit shall cover the following aspects and certify among others:
a. That the total of the shares held in NSDL, CDSL and in the physical form tally with the issued / paid-up capital.
b. That the Register of Members (RoM) is updated.
c. That the dematerialisation requests have been confirmed within 21 days and state the shares pending confirmation for more than 21 days from the date of requests and reasons for delay.
d. The details of changes in share capital (due to rights, bonus, preferential issue, IPO, buyback, capital reduction, amalgamation, de-merger etc) during the quarter and certify in case of listed companies whether in-principle approval for listing from all stock exchanges was obtained in respect of all further issues.
The issuer companies shall submit the audit report on a quarterly basis within 30 days from the end of each quarter to the stock exchange/s where they are listed. Any difference observed in the admitted, issued and listed capital shall be immediately brought to the notice of SEBI and both the Depositories by the stock exchanges. This report shall also be placed before the Board of Directors of the issuer company.
Submission of Audit Report56
The stock exchanges are advised as under:
a) To draw the attention of the listed companies to the aforesaid provisions and the need for effective compliance with the said provisions. Further, stock
54 Circular No. D&CC/FITTC/CIR – 16/2002 dated December 31, 2002
55 Circular No. CIR/MRD/DP/30/2010 dated September 6, 2010
56 Circular No. SEBI/MRD/Policy/CIR-13/2004 dated March 3, 2004
exchanges are advised to inform the companies that submission of the audit report is a continuous requirement and accordingly, comply with the same regularly on time.
b) To put in place a system for monitoring the compliance of the aforesaid disclosure requirements by the listed companies.
c) To draw the attention of the companies that failure to comply with the aforesaid provisions would be viewed seriously and penal actions including adjudication proceedings would be initiated by SEBI against the companies.
d) To take any other suitable steps to ensure compliance by the companies with the audit requirement.
e) To submit the status reports to SEBI on the extent of compliance with the audit requirement by the listed companies, within 45 days from the end of each quarter.
SECTION – 20: CHANGE OF NAME BY LISTED COMPANIES 20.1 Change of Name of Listed Companies
1. The Exchanges are advised to amend Clause 32 and 41 of the Listing Agreement to provide that companies who changed their name suggesting a new line of business (including software business), shall disclose the turnover and income, etc., from such new activities separately in the quarterly/ annual results required to be submitted/ published in compliance with these clauses. Companies which have changed their name after January 1, 1998 or change the name hereafter shall make such disclosures and shall continue to make these disclosures for a period of 3 years from the date of change in the name.57
2. In addition to the above, all listed companies which decide to change their names shall be required to comply with the following conditions58:
2.1 A time period of atleast 1 year should have elapsed from the last name change.
2.2 Atleast 50% of its total revenue in the preceding 1 year period should have been account for by the new activity suggested by the new name.
OR
The amount invested in the new activity/project (Fixed Assets +
Advances + Works In Progress) is atleast 50% of the assets of the company. The ‘Advances’ shall include only those extended to contractors and suppliers towards execution of project, specific to new activity as reflected in the new name59.
To confirm the compliance of the aforesaid provision 2.2, the company shall submit auditor’s certificate to the exchange.
2.3 The new name along with the old name shall be disclosed through the web sites of the respective stock exchange(s) where the company is listed and also through the EDIFAR web site for a continuous period of one year, from the date of the last name change.
57 Circular No. SMDRP/POLIY/CIR-8/99 dated April 26, 1999
58 Circular No. SEBI/MRD/Policy/AT/Cir/20/2004 dated April 30, 2004
59 Circular No. Cir/MRD/DP/07/2011 dated June 16, 2011
SECTION – 21: OFFER FOR SALE OF SHARES BY PROMOTERS THROUGH STOCK EXCHANGE MECHANISM60
21.1 Offer For Sale of Shares by Promoters through the Stock Exchange Mechanism 1. Eligibility
(a) Exchanges
The facility of offer for sale of shares shall be available on Bombay Stock
Exchange (BSE), National Stock Exchange (NSE) and MCX-SX.
(b) Sellers
(i) All promoter(s)/ promoter group entities of such companies that are eligible for trading and are required to increase public shareholding to meet the minimum public shareholding requirements in terms Rule 19(2)(b) and 19A of Securities Contracts (Regulation) Rules, 1957 (SCRR), read with clause 40A (ii) (c) of Listing Agreement.
(ii) All promoter(s)/ promoter group entities of top 100 companies by market capitalization in any of the last four completed quarters, market capitalization being calculated as average market capitalization in a quarter.61
For (i) and (ii) above, the promoter/promoter group entities should not have purchased and/or sold the shares of the company in the 12 weeks period prior to the offer and they should undertake not to purchase and/or sell shares of the company in the 12 weeks period after the offer. However, within the cooling off period of +12 weeks, the promoter(s)/promoter group entities can offer their shares only through OFS/ Institutional Placement Programme (IPP) with a gap of 2 weeks between successive offers.
The above shall also be applicable on promoter(s) /promoter group entities who have already offered their shares through OFS/IPP.
(c) Buyers
60 Circular No. CIR/MRD/DP/18/2012 dated July 18, 2012 supersedes Circular No. CIR/MRD/DP/05/2012 dated February 1, 2012, Circular No.CIR/MRD/DP/07/2012 dated February 23, 2012 and Circular No. CIR/MRD/DP/8/2012 dated February 27, 2012
61 Circular No. CIR/MRD/DP/04/2013 dated January 25, 2013
All investors registered with the brokers of the aforementioned stock exchanges other than the promoter(s)/ promoter group entities.
2. Definitions
(a) "Single Clearing Price” is the price at which the shares are allocated to the successful bidders in a proportionate basis methodology.
(b) “Multiple Clearing Prices” are the prices at which the shares are allocated to the successful bidders in a price priority methodology.
(c) “Indicative Price” is the volume weighted average price of all the valid bids62.
(d) “Floor Price” is the minimum price at which the seller intends to sell the shares.
3. Size of Offer for sale of shares
The size of the offer shall be a minimum of Rs 25 crores. However, size of offer can be less than Rs 25 crores so as to achieve minimum public shareholding in a single tranche.
4. Advertisement and offer expenses
(a) Advertisements about the offer for sale of shares through stock exchange(s), if any, shall be made after the announcement/ notice of the offer for sale of shares to the stock exchanges in accordance with para 5 (b) below and its contents, shall be restricted to the contents of the notice as given to the stock exchange under Para 5 (b).
(b) All expenses relating to offer for sale of shares through stock exchange(s) shall be borne by the seller(s).
62 Circular No. CIR/MRD/DP/04/2013 dated January 25, 2013
5. Operational Requirements
(a) Appointment of Broker
The Seller(s) will appoint broker(s) for this purpose. The Seller’s broker(s) may also undertake transactions on behalf of eligible buyers.
(b) Announcement/ Notice of the Offer for sale of shares
Seller(s) shall announce the intention of sale of shares at least one clear trading day prior to the opening of offer, along with the following information:
(i) ame of the seller(s) (promoter/ promoter group) and the name of the company whose shares are proposed to be sold.
(ii) Name of the Exchange(s) where the orders shall be placed. In case orders are to be placed on both BSE and NSE or MCX-SX, one of them shall be declared as the Designated Stock Exchange (“DSE”).
(iii) Date and time of the opening and closing of the offer.
(iv) Allocation methodology i.e. either on a price priority (multiple clearing prices) basis or on a proportionate basis at a single clearing price.
(v) Number of shares being offered for sale.
(vi) The maximum number of shares that the seller may choose to sell over and above the offer made at point (v) above. The name of the broker(s) on behalf of the seller(s).
(vii) The date and time of the declaration of floor price, if the seller(s) chooses to announce it to the market. Alternatively, a declaration to the effect that the floor price will be submitted to the DSE in a sealed envelope that shall be disclosed post closure of the offer.
(viii) Conditions, if any, for withdrawal or cancellation of the offer.
(c) Floor price
(i) In case the seller chooses to disclose the floor price, the seller(s) shall declare it after the close of trading hours and before the close of business hours of the exchanges on T-1 day else the seller(s) shall give the floor price in a sealed envelope to DSE before the opening of the offer. (T day being the day of the offer for sale)
(ii) The floor price if not declared to the market, shall not be disclosed to anybody, including the selling broker(s).
(iii) Sealed envelope shall be opened by the DSE after the closure of the offer for sale and the floor price suitably disseminated to the market.
(d) Timelines
(i) The duration of the offer for sale shall be as per the trading hours of the secondary market and shall not exceed one trading day.
(ii) Orders shall be placed during trading hours63.
(e) Order Placement
(i) A separate window for the purpose of sale of shares through OFS shall be created. The following orders shall be valid in the OFS window:
A. Orders with 100% of margin paid upfront by institutional investors and non-institutional investors. Such orders can be modified or canceled at any time during the trading hours.
B. Orders without paying upfront margin by institutional investors only. Such orders cannot be modified or cancelled by the investors or stock brokers, except for making upward revision in the price or quantity.64
(ii) Cumulative bid quantity shall be made available online to the market throughout the trading session at specific intervals in respect of orders with 100% upfront margin and separately in respect of orders placed without any upfront margin. Indicative price shall be disclosed to market throughout the trading session. The indicative price shall be calculated based on all valid bids/orders.65
(iii) If the security has a price band in the normal segment, the same shall not apply for the orders placed in the offer for sale. Stock specific tick size as per the extant practice in normal trading session shall be made applicable for this window.
(iv) In case of shares under offer for sale, the trading in the normal market shall also continue. However, in case of market closure due to the incidence of breach of ‘Market wide index based circuit filter’, the offer for sale shall be halted.
(v) Only limit orders/ bids shall be permitted.
(vi) Multiple orders from a single buyer shall be permitted.
(vii) In case floor price is disclosed, orders/ bids below floor price shall not be accepted.
6. Risk Management
63 Replaced vide Circular No. CIR/MRD/DP/04/2013 dated January 25, 2013
64 Amended Vide Circular No. CIR/MRD/DP/04/2013 dated January 25, 2013
65 Amended Vide Circular No. CIR/MRD/DP/04/2013 dated January 25, 2013
(a) Clearing Corporation shall collect 100% margin in cash from non-institutional investors. In case of institutional investors who place orders/bids with 100% of margin upfront, custodian confirmation shall be within trading hours. In case of institutional investors who place orders without upfront margin, custodian confirmation shall be as per the existing rules for secondary market transactions. The funds collected shall neither be utilized against any other obligation of the trading member nor co-mingled with other segments.66
(b) In case of order/bid modification or cancellation, such funds shall be released/collected on a real time basis by the clearing corporation.67
(c) The seller(s) shall deposit the entire quantity of shares offered for sale including the additional shares disclosed at Para 5(b)(vi) as payin with the clearing corporation/clearing house of DSE prior to the commencement of the offer. No other margin shall be charged on the seller(s).
7. Allocation
(a) Minimum of 25% of the shares offered shall be reserved for mutual funds and insurance companies, subject to allocation methodology. Any unsubscribed portion thereof shall be available to the other bidders.
(b) The orders shall be cumulated by the DSE immediately on close of the offer. Based on the methodology for allocation to be followed as disclosed in the notice, the DSE shall draw up the allocation. i.e. either on a price priority (multiple prices) basis or on a proportionate basis at a single clearing price.
(c) No allocation will be made incase of order/ bid is below floor price.
(d) No single bidder other than mutual funds and insurance companies shall be allocated more than 25% of the size of offer for sale.
(e) The allocation details shall be shared by the DSE with the other exchanges after the allocation is crystallized.
8. (i) Settlement
(a) The allocation and the obligations resulting thereof shall be intimated to the brokers on T day.
(b) Settlement shall take place on trade for trade basis. For non-institutional orders/bids and for institutional orders with 100% margin, settlement shall take place on T+1 day. In case of orders/bids of institutional investors with no margin, settlement shall be as per the existing rules for secondary market.68
66 Replaced vide Circular No. CIR/MRD/DP/04/2013 dated January 25, 2013
67 Amended vide Circular No. CIR/MRD/DP/04/2013 dated January 25, 2013
68 Replaced vide Circular No. CIR/MRD/DP/04/2013 dated January 25, 2013
(c) Funds collected from the bidders who have not been allocated shares shall be released after the download of the obligation.
(d) On T+1 day, to the extent of obligation determined, the clearing Corporation/ Clearing house of DSE shall transfer such number of shares to the clearing corporation/clearing house of the other stock exchange, without consideration of money. Excess shares, if any, shall be returned to seller broker(s). The direct credit of shares shall be given to the demat account of the successful bidder provided such manner of credit is indicated by the broker/bidder.
(ii) Handling of default in pay-in
(a) In case of default in pay-in by any investor, 10% of the order value shall be charged as penalty from the investor and collected from the broker. This amount shall be credited to the Investor Protection Fund of the stock exchange.69
(b) The price at which allotments have been made based on the allocation on T day shall not be revised as a result of any default in pay-in.
(c) Issuer shall have the option to cancel in full or conclude the offer.
(d) Allotment details after settlement shall also be disseminated by the exchange.
(e) Allocation details after settlement shall be consolidated by the DSE and excess shares, if any, shall be returned by the respective Clearing Corporation/ Clearing house to the seller(s) broker(s).
(f) Settlement Guarantee Fund shall not be available for OFS through stock exchange mechanism.
9. Issuance of Contract Notes
The brokers shall be required to issue contract note to the client based on the allotment price and quantity in terms of conditions specified by the exchange.
10. Withdrawal of offer
The offer for sale may be withdrawn prior to its proposed opening. In such a case there will be a cooling off period of 10 trading days from the date of withdrawal before an offer is made once again. The stock exchange(s) shall suitably disseminate details of such withdrawal.
11. Cancellation of offer
69 Replaced vide Circular No. CIR/MRD/DP/04/2013 dated January 25, 2013
Cancellation of offer shall not be permitted during the bidding period. If the seller(s) fails to get sufficient demand at or above the floor price, he may choose to either conclude the offer or cancel it in full. The seller may also choose to conclude the offer or cancel it in full, in case of defaults in settlement obligation.
SECTION – 22: LIQUIDITY ENHANCEMENT SCHEMES FOR ILLIQUID SECURITIES IN EQUITY CASH MARKET70
22.1 Liquidity Enhancement Schemes for Illiquid Securities in Equity Cash Market
1. Pursuant to the introduction of LES scheme in derivatives segment to enhance liquidity in illiquid derivative products, there was demand that similar scheme may also be introduced for the Equity Cash market. It has therefore been decided to permit stock exchanges to introduce LES to enhance liquidity of illiquid securities in their Equity Cash market.
2. LES may be introduced in any of the following securities:
a. Securities having a mean impact cost greater than or equal to 2% for an order size of Rs.1 lakh, where mean impact cost of the security on the stock exchange is calculated over the past 60 trading days.
b. Securities introduced for trading in the “permitted to trade” category.
3. LES may be continued till such time as the security achieves mean impact cost of less than 2% for an order size of Rs.1 lakh on the stock exchange during the last 60 trading days.
4. Discontinuation of LES for any security shall be done after advance notice of 15 days.
5. Stock exchanges may re-introduce LES on a security if the criterion as mentioned in para 2(a) is satisfied.
6. In case any stock exchange introduces LES on securities eligible under para 2(a) above, other stock exchanges may also introduce LES in the same securities even if those are not eligible on their stock exchange under 2(a). Such LES of other stock exchanges shall not be continued beyond the period of LES at the initiating stock exchange.
7. The stock exchange shall ensure that the LES, including any modification therein or its discontinuation,
a. has the prior approval of its Board and its implementation and outcome is monitored by the Board at quarterly intervals;
b. prescribes and monitors the obligations of liquidity enhancers (liquidity provider, market maker, maker-taker or by whatever name called);
c. disburses the incentives linked to performance;
d. is objective, transparent, non-discretionary and non-discriminatory;
e. does not compromise market integrity or risk management;
70 Circular No. MRD/DP/05/2013 dated February 08, 2013
f. complies with all the relevant laws; and
g. is disclosed to the market atleast 15 days in advance and its outcome (incentives granted and volume achieved – liquidity enhancer wise and security wise) is disseminated monthly within a week of the close of the month.
8. The incentives under LES shall be transparent and measurable. These may take either of the two forms:
(a) Discount in fees, adjustment in fees in other segments or cash payment;
(b) Shares, including options and warrants, of the stock exchange.
9. If a stock exchange chooses the form specified in Para ‘9a’ above, the incentives under all LES (both Equity Cash and Derivative Segment), during a financial year, shall not exceed 25% of the net profits or 25% of the free reserves of the Stock Exchange, whichever is higher, as per the audited financial statements of the preceding financial year. If, however, a stock exchange chooses the form specified in Para ‘9b’ above, the shares, including the shares that may accrue on exercise of warrants or options, given as incentives under all LES (both Equity Cash and Derivative Segment), during a financial year, shall not exceed 25% of the issued and outstanding shares of the Stock Exchange as on the last day of the preceding financial year. Further, the Exchange shall ensure that it is compliant with the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 at all times.
10. From a market integrity perspective, the stock exchange shall ensure the following, in respect of LES for both Equity Cash market and Derivative Segment:
a. The Exchange must have systems and defined procedures in place to monitor collusion between trading members indulging in trades solely for seeking incentives and prevent payment of incentives in such cases.
b. In addition to (a) above, incentives in the form of cash payments, warrants, discount in fees, etc may not be provided for the trades where the counterparty is self, i.e., same Unique Client Code (UCC) is on both sides of the transaction.
c. Any violations of clauses in this para shall be viewed most seriously.
d. In this regard, SEBI circular CIR/DNPD/5/2011 dated June 02, 2011 stands modified to the extent as mentioned in para 10 and 11.
11. The Stock Exchange shall submit half-yearly reports on the working of its LES for review of SEBI.
12. This circular shall not be applicable to securities listed on SME Platform or SME Exch Further, the conditions specified in SEBI circular
SMDRP/Policy/CIR-04/2000 dated January 20, 2000 shall not be applicable for the LES introduced pursuant to this circular.
REFERENCE – List of Circulars
1. Circular No. SMD/RCG/CIR/(BKG)/293/95 dated March 14, 1995.
2. Circular No. SMD/POLICY/IECG/ 1 – 97 dated February 11, 1997.
3. Circular No. SMDRP/POLICY CIR-2/99 dated January 14, 1999.
4. Circular No. SMDRP/POLICY/Cir-8/99 dated April 26, 1999.
5. Circular No. SMDRP/POLICY/CIR-32/99 dated September 14, 1999.
6. Circular No. SMDRP/Policy/Cir.- 21/99 dated July 08, 1999.
7. Circular No. SMDRP/POLICY/CIR-04/2000 dated January 20, 2000.
8. Circular No. SMDRP/Policy/Cir-41/2000 dated September 11, 2000.
9. Circular No. SMDRPD/Policy/Cir-37 /2001 dated June 28, 2001.
10 Circular No. SMDRP/Policy/CIR-39/2001 dated July 18, 2001.
11. Circular No. SMDRP/POLICY/CIR-14/2002 dated June 25, 2002.
12. Circular No D&CC/FITTC/CIR – 16/2002 dated December 31, 2002.
13. Circular No. SEBI/SMD/SE/11/2003/31/03 dated March 31, 2003.
14. Circular No. SEBI/MRD/SE/Cir- 42 /2003 dated November 19, 2003.
15. Circular No. SEBI/MRD/SE/Cir- 32/2003/27/08 dated August 27, 2003.
16. Circular No. SEBI/MRD/SE/Cir-34 /2003/29/09 dated September 29, 2003
17. Circular No. SEBI/MRD/SE/Cir-7 /2004 dated January 14, 2004.
18. Circular No. SEBI/MRD/SE/Cir- 12/2004 dated February 26, 2004.
19. Circular No SEBI/MRD/Policy/CIR-13/2004 dated March 3, 2004.
20. Circular No. SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004.
21. Circular No. SEBI/MRD/SE/SU/Cir-16/04 dated March 31, 2004.
22. Circular No. SEBI/MRD/Policy/AT/Cir-20/2004 dated April 30, 2004.
23. Circular No. MRD/DoP/SE/Cir-28/2004 dated August 23, 2004.
24. Circular No. MRD/DoP/SE/Cir- 35/2004 dated October 26, 2004.
25. Circular No. MRD/DoP/SE/Cir-08/2005 dated March 4, 2005.
26. Circular No. MRD/DoP/SE/Cir- 19 /05 dated September 2, 2005.
27. Circular No. MRD/DoP/SE/Cir- 8 /2006 dated July 13, 2006.
28. Circular No. MRD/DoP/Dep/Cir-09/06 dated July 20, 2006.
29. Circular No. MRD/DoP/Dep/SE/Cir -09/06 dated July 20, 2006.
30. Circular No. MRD/DoP/Dep/SE/Cir-13/06 dated September 26, 2006.
31. Circular No. MRD/DoP/Dep/SE/Cir -17/06 dated October 27, 2006.
32. Circular No. MRD/DoP/Cir-05/2007 dated April 27, 2007.
33. Circular No. MRD/DoP/SE/Dep/Cir- 14 /2007 dated December 20, 2007.
34. Circular No. MRD/DoP/SE/Cir- 05 /2008 dated March 19, 2008.
35. Circular No. MRD/DoP/Cir-20/2008 dated June 30, 2008.
36. Circular No. MRD/DoP/SE/Cir- 31 /2008 dated October 31, 2008.
37. Circular No. MRD/DoP/ Cir-05/2009 dated May 20, 2009.
38. Circular No. MRD/DoP/SE/Cir-14/2009 dated October 14, 2009.
39. Circular No. MRD/DoP/SE/Cir- 21 /2009 dated December 9, 2009.
40. Circular No. SEBI/MRD/DoP/SE/Dep/Cir- 01 /2010 dated January 06, 2010.
41. Circular No. SEBI/MRD/DoP/SE/RTA/Cir-03/2010 dated January 07, 2010.
42. Circular No. CIR/MRD/DP/21/2010 dated July 15, 2010.
43. Circular No CIR/MRD/DP/30/2010 dated September 6, 2010.
44. Circular No. CIR/MRD/DP/32/2010 dated September 17, 2010.
45. Circular No. CIR/MRD/DP/ 33/2010 dated October 07, 2010.
46. CIrcular No. CIR/MRD/DP/07/2011 dated June 16, 2011.
47. Circular No. CIR/MRD/DP/01/2012 dated January 20, 2012.
48. Circular No. CIR/MRD/DP/02/2012 dated January 20, 2012.
49. Circualr No. CIR/MRD/DP/05/2012 dated February 01/ 2012.
50. Circular No. CIR/MRD/DP/7/2012 dated February 23, 2012.
51. Circular No. CIR/MRD/DP/8/2012 dated February 27, 2012.
52. Circular No. CIR/MRD/DP/18/2012 dated July 18, 2012.
53. Circular No. CIR/MRD/DP/30/2012 dated November 22, 2012.
54. Circular No. CIR/MRD/DP/34/2012 dated December 13, 2012.
55. Circular no. CIR/MRD/DP/04/2013 dated January 25, 2013.
56. Circular No. CIR/MRD/DP/05/2013 dated February 08, 2013.
57. Circular No. CIR/MRD/DP/6/2013 dated Februaty 14, 2013.
MASTER CIRCULAR FOR STOCK EXCHANGESANNEXURE 2
TRADING PART - II
1. This Master Circular includes circulars issued upto March 31, 2013.
2. Master Circular is a compilation of all the existing/applicable circulars issued by Market Regulation Department of SEBI to Stock Exchanges and shall be applicable from the date of its issue.
MASTER CIRCULAR – TRADING – PART II
SECTION – 1: INTERNET TRADING 4
1.1 Conditions to be met by Broker for providing Internet Based Trading Service 4
1.2 Securities Trading through Wireless medium on Wireless Application
Protocol (WAP) platform 7
1.3 Securities Trading using Wireless Technology 8
1.4 Additional Requirements for Internet Based Trading (IBT) and
Securities trading using Wireless Technology (STWT) 10
SECTION – 2: DIRECT MARKET ACCESS 11
2.1 Direct Market Access Facility 11
2.2 Application for Direct Market Access (DMA) facility 11
2.3 Operational specifications 11
2.4 Terms and Conditions 12
2.5 DMA Facility through Investment Manager 13
2.6 Risk Management 13
2.7 Broker to be liable for DMA trades 14
2.8 Cross Trades 14
2.9 Other legal provisions 14
ANNEXURE I - PART A 14
ANNEXURE I - PART B 17
ANNEXURE II 20
SECTION – 3: ELECTRONIC CONTRACT NOTE 21
3.1 Use of Digital Signature on Contract Notes 21
3.2 Issuance of Contract Notes in electronic form 21
3.3 Electronic issuance of contract notes – Additional conditions 21
3.4 Format for Issuance of Electronic Contract Notes 23
SECTION - 4: INTRODUCTION OF NEW TRADING SEGMENT 25
4.1 New Trading Segment 25
4.2 Guidelines for Providing Dedicated Debt Segment on Stock Exchanges ..25
SECTION – 5: STRAIGHT THROUGH PROCESSING 30
5.1 Mechanism 30
5.2 The system flow of the STP framework 30
5.3 SEBI (STP centralised hub and STP service providers) Guidelines, 2004 32
5.4 Work flow for institutional investors 33
5.5 Clarification 36
5.6 Modifications in the prescribed messaging formats 36
SECTION – 6 : TRADING TERMINALS 38
6.1 Usage of software by Broker/ Sub-broker 38
6.2 Standing Committee 38
6.3 Expansion of trading terminals of the Exchange 39
6.4 Broad Guidelines for opening Trading Terminals abroad 39
6.5 Annexure - Guidelines For Opening Of Trading Terminals Abroad 39
SECTION – 7: SMART ORDER ROUTING 42
7.1 Introduction of Smart Order Routing 42
SECTION – 8: ALGORITHMIC TRADING 46
8.1 Broad Guidelines on Algorithmic Trading 46
REFERENCE – List of Circulars 50
SECTION – 1: INTERNET TRADING
1.1 Conditions to be met by Broker for providing Internet Based Trading Service1
To provide Internet Based Trading Service the broker will be required to apply to the respective stock exchange for a formal permission. The stock exchange should grant approval or reject the application as the case may be, and communicate its decision to the member within 30 calendar days of the date of completed application submitted to the exchange.
However before giving permission to broker to start internet based services, stock exchange shall ensure that the broker meets the minimum condition of the criteria’s’ mentioned in circular. The criteria’s are mentioned as below:
i. Networth Requirement –
The broker must have a minimum net worth of Rs.50 lacs if the broker is providing the Internet based facility on his own. However, if some brokers collectively approach a service provider for providing the internet trading facility, net worth criteria as stipulated by the stock exchange will apply. The net worth will be computed as per the SEBI circular no FITTC/DC/CIR-1/98 dated June 16, 1998.
ii. Operational and System Requirements :
a. Operational Integrity – The Stock Exchange must ensure that the system used by the broker has provision for security, reliability and confidentiality of data through use of encryption technology. (Basic minimum security standards are specified in following paras). The Stock Exchange must also ensure that records maintained in electronic form by the broker are not susceptible to manipulation.
b. System Capacity - The Stock Exchange must ensure that the brokers maintain adequate backup systems and data storage capacity. The Stock Exchange must also ensure that the brokers have adequate system capacity for handling data transfer, and arranged for alternative means of communications in case of Internet link failure.
c. Qualified Personnel - The Stock Exchange must lay down the minimum qualification for personnel to ensure that the broker has suitably qualified and adequate personnel to handle communication including trading instructions as well as other back office work which is likely to increase because of higher volumes.
1 Circular No. SMDRP/POLICY/CIR- 06/2000 dated January 31, 2000
d. Written Procedures - Stock Exchange must develop uniform written procedures to handle contingency situations and for review of incoming and outgoing electronic correspondence.
e. Signature Verification/ Authentication - It is desirable that participants use authentication technologies. For this purpose it should be mandatory for participants to use certification agencies as and when notified by Government / SEBI. They should also clearly specify when manual signatures would be required.
iii. Client Broker Relationship –
a. Know Your Client - The Stock Exchange must ensure that brokers comply with all requirements of “Know Your Client” and have sufficient, verifiable information about clients, which would facilitate risk evaluation of clients.
b. Broker-Client Agreement - Brokers must enter into an agreement with clients spelling out all obligations and rights. This agreement should also include inter alia, the minimum service standards to be maintained by the broker for such services specified by SEBI/Exchanges for the Internet based trading from time to time. Exchanges will prepare a model agreement for this purpose. The broker agreement with clients should not have any clause that is less stringent/contrary to the conditions stipulated in the model agreement prepared by the Exchanges for this purpose.
c. Investor Information - The broker web site providing the internet based trading facility should contain information meant for investor protection such as rules and regulations affecting client broker relationship, arbitration rules, investor protection rules etc. The broker web site providing the Internet based trading facility should also provide and display prominently, hyper link to the web site/ page on the web site of the relevant stock exchange(s) displaying rules/ regulations/circulars. Ticker/quote/order book displayed on the web-site of the broker should display the time stamp as well as the source of such information against the given information.
d. Order/Trade Confirmation - Order/Trade confirmation should also be sent to the investor through email at client’s discretion at the time period specified by the client in addition to the other mode of display of such confirmations on real time basis on the broker web site. The investor should be allowed to specify the time interval on the web site itself within which he would like to receive this information through email. Facility for reconfirmation of orders which are larger than that specified by the member’s risk management system should be provided on the internet based system.
e. Handling Complaints by Investors - Exchanges should monitor complaints from investors regarding service provided by brokers to ensure a minimum level of service. Exchange should have separate cell specifically to handle Internet trading related complaints. It is desirable that exchanges should also have facility for on-line registration of complaints on their web-site.
iv. Risk Management –
Exchanges must ensure that brokers have a system-based control on the trading limits of clients, and exposures taken by clients. Brokers must set pre-defined limits on the exposure and turnover of each client.
The broker systems should be capable of assessing the risk of the client as soon as the order comes in. The client should be informed of acceptance/rejection of the order within a reasonable period. In case system based control rejects an order because of client having exceeded limits etc., the broker system may have a review and release facility to allow the order to pass through.
Reports on margin requirements, payment and delivery obligations, etc. should be informed to the client through the system.
v. Contract Notes - Contract notes must be issued to clients as per existing regulations, within 24 hours of the trade execution.
vi. Cross Trades - As in the case of existing system, brokers using Internet based systems for routing client orders will not be allowed to cross trades of their clients with each other. All orders must be offered to the market for matching.
vii. Others – The other criteria’s mentioned deal with Network Security Protocols and Interface Standards, Network Security, Standards of Web Interface Protocols and System operations.
In addition to the requirements mentioned above, all existing obligations of the broker as per current regulations will continue without changes.
1.2 Securities Trading through Wireless medium on Wireless Application Protocol (WAP) platform.2
A broker providing stock trading through WAP must be a SEBI registered broker who also has an Internet website which complies with all the requirements laid down by SEBI in its circular no. SMDRP/Policy/Cir-06/2000 dated January 31, 2000. With regard to the requirements mentioned in the aforesaid circular, some additional requirements are to be met by the broker for providing securities transaction through WAP. These requirements are provided in the following criteria’s:
i. Network Security
a. The break in data encryption at the WAP gateway server raises security issues. Until the shortcoming is addressed by WAP, the WAP server should be hosted by the broker itself and not by a third party.
b. Suitable firewalls should be installed between trading set-up directly connected to an Exchange trading system and the WAP server.
c. WTLS (Wireless Transport Layer Security) level security or a higher level of security (as and when available) for wireless communication is mandatory for wireless transactions.
d. The WTLS encrypts data upto the WAP Gateway server. Transmission from the WAP Gateway server to the Internet server should be secured using Secured Socket Level Security, preferably with 128 bit encryption, for server access through Internet. Alternately, the WAP Gateway server and Internet server may be co-hosted. The server resource should not be shared for any other applications.
e. The following security measures applicable for fixed Internet based systems should be made mandatory:
i) User ID
ii) First Level password (Private code)
iii) Automatic expiry of passwords at the end of a reasonable duration. Reinitialize access on entering fresh passwords
iv) All transaction logs with proper audit facilities to be maintained in the system.
f. Digitally signed transactions ensure client authentication and support non-repudiation. Digital certification should be mandatory
2 Circular No. SMDRP/Policy/Cir-48/2000 dated October 11, 2000
for participants as and when certification agencies are notified by Government / SEBI.
g. In case of failure of the network, alternative means of communication such as telephone, Internet or e-mail should be available.
ii. Price Quotes/ Order/ Trade Confirmations
a. Stock quotes should be time-stamped.
b. All orders and trades must be identified by a unique ID. Order confirmation must be provided to the user on submitting the order. Order modification/ cancellation facilities must also be provided. This may be provided using alternate protocols in case the same is not supported by WAP.
c. Trade confirmation should be provided to the user through e-mail and/or on the mobile phone.
iii. System operations.
a. Brokers should follow the similar logic/priorities used by the Exchange to treat client orders.
b. Orders/ trades placed through either fixed Internet or WAP system should be accessible from both systems.
c. Brokers should maintain all activities/ alerts log with audit trail facility.
d. Broker Web Server should have internally generated unique numbering for all client order/trades.
iv. Risk Management.
It is emphasised that risk management should be comprehensive and the risk management systems should take into account the overall positions of clients, irrespective of the medium of trading.
1.3 Securities Trading using Wireless Technology3
1. It has been decided that SEBI registered brokers who provide Internet Based Trading as specified by SEBI circular no. SMDRP/POLICY/CIR-06/2000 dated January 31, 2000 shall be eligible to provide securities trading using wireless technology. All relevant requirements applicable to internet based trading shall also be applicable to securities trading using wireless technology.
3 Circular No. CIR/MRD/DP/ 25/2010 dated August 27, 2010
2. Securities Trading using Wireless technology shall include devices such as mobile phone, laptop with data card, etc, that use Internet Protocol (IP).
3. In addition, the stock exchange shall ensure that the broker complies with the following -
a. There shall be secure access, encryption and security of communication for internet based trading and securities trading using wireless technology. DOT policy and regulation shall govern the level of encryption.
b. Adequate measures should be taken for user identification, authentication and access control using means such as user-id, passwords, smart cards, biometric devices or other reliable means, to prevent misuse of facility by unauthorized persons.
c. Unique identification number as given in case of internet based trading shall be made applicable for securities trading using wireless technology.
d. In case of failure of the wireless network, alternative means of communication for placing orders should be available.
e. Additional provisions specifying possible risks, responsibilities and liabilities associated with securities trading using wireless technology should be incorporated in the Broker-Client agreement as an addendum or by bringing to the notice of clients, who are desirous of availing such facility, and taking their concurrence on the same.
f. As it may not be possible to give detailed information to the investor on a hand held device e.g. mobile phones, it may be ensured that minimum information may be given with addresses of the Internet web site/web page where detailed information would be available.
g. Order confirmation should be provided to the user on submitting the order. Order modification / cancellation facilities should also be provided. Trade confirmation should be provided to the user, along with history of trades for the day.
h. Session login details should not be stored on the devices used for internet based trading and securities trading using wireless technology.
i. Network security protocols and interface standards should be as per prevalent industry standards and sound audit trails should be available for all transactions conducted using wireless devices.
j. The broker’s server routing orders to the exchange trading system shall be located in India.
K .Stock exchanges shall arrange for periodic systems audits of broker systems to ensure that requirements specified in the circulars are being met.
l. Stock exchange shall also include securities trading using wireless technology in their ongoing investor awareness and educational programme
1.4 Additional Requirements for Internet Based Trading (IBT) and Securities trading using Wireless Technology (STWT)4
1. The stock exchange shall ensure that the broker comply with the following –
a. The broker shall capture the IP (Internet Protocol) address (from where the orders are originating), for all IBT/ STWT orders.
b. The brokers system should have built-in high system availability to address any single point failure.
c. There should be secure end-to-end encryption for all data transmission between the client and the broker through a Secure Standardized Protocol. A procedure of mutual authentication between the client and the broker server should be implemented.
d. The broker system should have adequate safety features to ensure it is not susceptible to internal/ external attacks.
e. In case of failure of IBT/ STWT, the alternate channel of communication shall have adequate capabilities for client identification and authentication.
f. Two-factor authentication for login session may be implemented for all orders emanating using Internet Protocol. Public Key Infrastructure (PKI) based implementation using digital signatures, supported by one of the agencies certified by the government of India, is advisable. Further the two factors in the Two-factor authentication framework should not be same.
g. In case of no activity by the client, the system should provide for automatic trading session logout.
Further to the above, the following practice is advisable –
h. The back-up and restore systems implemented by the broker should be adequate to deliver sustained performance and high availability. The broker system should have on-site as well as remote site back-up capabilities.
4 Circular No. CIR/MRD/DP/08/2011 dated June 30, 2011
SECTION – 2: DIRECT MARKET ACCESS 2.1 Direct Market Access Facility5
Direct Market Access (DMA) is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure without manual intervention by the broker. Some of the advantages offered by DMA are direct control of clients over orders, faster execution of client orders, reduced risk of errors associated with manual order entry, greater transparency, increased liquidity, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools / algorithms for trading.
While ensuring conformity with the provisions of the Securities Contract (Regulations) Act, 1956 (42 of 1956), Stock Exchanges may facilitate Direct Market Access for investors subject to the following conditions:
2.2 Application for Direct Market Access (DMA) facility
Brokers interested to offer DMA facility shall apply to the respective stock exchanges giving details of the software and systems proposed to be used, which shall be duly certified by a Security Auditor as reliable. The stock exchange should grant approval or reject the application as the case may be, and communicate its decision to the member within 30 calendar days of the date of completed application submitted to the exchange.
The stock exchange, before giving permission to brokers to offer DMA facility shall ensure the fulfillment of the conditions specified hereinafter. 2.3 Operational specifications
All DMA orders shall be routed to the exchange trading system through the broker’s trading system. The broker’s server routing DMA orders to the exchange trading system shall be located in India.
The broker should ensure sound audit trail for all DMA orders and trades, and be able to provide identification of actual user-id for all such orders and trades. The audit trail data should available for at least 5 years.
Exchanges should be able to identify and distinguish DMA orders and trades from other orders and trades. Exchanges shall maintain statistical data on DMA trades and provide information on the same to SEBI on a need basis.
5 Circular No. MRD/ DoP/SE/Cir- 7 /2008 dated April 03, 2008.
The DMA system shall have sufficient security features including password protection for the user ID, automatic expiry of passwords at the end of a reasonable duration, and re-initialisation of access on entering fresh passwords.
Incase where the clients access the DMA server of the broker through a third party service provider, the password maintenance and authentication can be done either by the broker of by third party network service provider, so long as the exchange/broker ensures secured access and communication and a sound audit trail for all DMA orders/ trades. The authorized user and client details should be part of the order details received and authenticated at the DMA server of the broker.6
Brokers should follow the similar logic/priorities used by the Exchange to treat DMA client orders. Brokers should maintain all activities/ alerts log with audit trail facility. The DMA Server should have internally generated unique numbering for all such client order/trades.
A systems audit of the DMA systems and software shall be periodically carried out by the broker as may be specified by the exchange and certificate in this regard shall be submitted to the exchange.
The exchanges and brokers should provide for adequate systems and procedures to handle the DMA trades.
2.4 Terms and Conditions7
i. Exchange shall specify from time to time the categories of investors to whom the DMA facility can be extended. Currently, this facility is available for institutional clients. Brokers shall specifically authorize clients or investment managers acting on behalf of clients for providing DMA facility, after fulfilling Know Your Client requirements and carrying out necessary due diligence. The broker shall maintain proper records of such due diligence.
ii. In order to bring uniformity on the requirement of documentation for trading account opening process, in view of the SEBI circular no CIR/MIRSD/16/2011 dated August 22, 2011, the specific Broker – Client Agreement for the purpose of DMA shall be replaced with the “Terms and Condition” document as specified at Annexure I. The “Terms and Conditions” shall be provided to the client or investment manager acting on behalf of a client (s) for availing the DMA facility. In case the DMA facility provided by the stock broker is used by the client the paragraphs one to eighteen of Part A of Annexure-I shall be applicable. In case the DMA facility provided by the stock broker is used by the client through an investment manager the paragraphs one to eighteen of Part B of Annexure-I shall be
6 Letter no MRD/DoP/NSE/129791/2008 dated June 24, 2008
7 Circular No. CIR/MRD/DP/20/2012 dated August 02, 2012
applicable and additionally, the investment manager shall provide to the stock broker the details as specified at Annexure-II.
2.5 DMA Facility through Investment Manager8
i. The facility of DMA provided by the stock broker shall be used by the client or an investment manager of the client. A SEBI registered entity shall be permitted to act as an investment manager on behalf of institutional clients. In case the facility of DMA is used by the client through an investment manager, the investment manager may execute the necessary documents on behalf of the client(s).
ii. The exchange/ broker shall ensure that proper audit trails are available to establish identity of the ultimate client.
2.6 Risk Management
The broker shall ensure that trading limits/ exposure limits/ position limits are set for all DMA clients based on risk assessment, credit quality and available margins of the client. The broker system shall have appropriate authority levels to ensure that the limits can be set up only by persons authorized by the risk / compliance manager.
The broker shall ensure that all DMA orders are routed through electronic/automated risk management systems of the broker to carry out appropriate validations of all risk parameters including Quantity Limits, Price Range Checks, Order Value, and Credit Checks before the orders are released to the Exchange.
All DMA orders shall be subjected to the following limits:
(a) Order quantity / order value limit in terms of price and quantity specified for the client.
(b) All the position limits which are specified in the derivatives segment as applicable.
(c) Net position that can be outstanding so as to fully cover the risk emanating from the trades with the available margins of the specific client.
(d) Appropriate limits for securities which are subject to FII limits as specified by RBI.
The broker may provide for additional risk management parameters as they may consider appropriate.
8 Circular No. MRD/ DP/20/2012 dated August 02, 2012
2.7 Broker to be liable for DMA trades
The broker shall be fully responsible and liable for all orders emanating through their DMA systems. It shall be the responsibility of the broker to ensure that only clients who fulfill the eligibility criteria are permitted to use the DMA facility.
2.8 Cross Trades
Brokers using DMA facility for routing client orders shall not be allowed to cross trades of their clients with each other. All orders must be offered to the market for matching.
2.9 Other legal provisions
In addition to the requirements mentioned above, all existing obligations of the broker as per current regulations and circulars will continue without change. Exchanges may also like to specify additional safeguards / conditions as they may deem fit for allowing DMA facilities to their brokers.
ANNEXURE I – TERMS AND CONDITIONS
PART – A: DMA FACILITY USED BY THE CLIENT
1. The client is expected to be fully aware of the risks associated with the market and the financial instruments being traded on stock exchanges through DMA. The client shall be responsible for complying with laws, rules, regulations, notifications etc issued by regulatory authorities as may be applicable from time to time.
2. The client shall ensure that DMA facility provided by the Broker is used only to execute the trades of the client and shall not be used for transactions on behalf of any other person / entity.
3. The client shall be responsible for ensuring that, only persons authorized by it shall access and use the DMA facility provided by the Broker. All orders originating from such facility / system shall be deemed to be authorized by the client.
4. Where the client accesses or proposes to access the Broker’s DMA platform through external applications, including but not restricted to services of third party service provider(s), own application(s), etc., the client shall ensure that such applications have adequate security features including but not limited to access controls, password protection etc; and that appropriate agreement(s) with such third party service provider(s) etc. for ensuring secured access and communication has been executed and are in place.
5. The client shall ensure that no person authorized by them to place orders through DMA facility provided by the broker has been / is involved in any adverse action by any regulatory authorities in any jurisdiction.
6. The client shall provide the names of authorized individual users to the broker prior to placing DMA orders.
7. The client shall not use or allow the use of DMA facility to engage in any form of market misconduct including insider trading and market manipulation or conduct that is otherwise in breach of applicable laws, rules and regulation.
8. The client is aware that Algorithmic trading i.e. generation of orders using automated execution logic is governed by Algorithmic trading guidelines issued by SEBI and Exchanges and requires prior approval of the exchanges. The client shall ensure that new algorithms and changes to existing approved algorithms are not used through the DMA facility without prior approval of concerned stock exchanges. The client shall ensure that it has necessary checks and balances, in place to identify and control dysfunctional algorithms and the Broker shall have the right to shut down the DMA facility and remove any outstanding client orders in case of any suspected dysfunctional algo.
9. The client is aware that authentication technologies and strict security measures are required for routing orders through DMA facility and undertakes to ensure that the password of the client and/or his representative are not revealed to any third party.
10. The client acknowledges that all DMA orders placed by them through the DMA facility would be validated by the risk management system of the broker. The Broker has the right to accept or reject any DMA order placed by the client at its sole discretion.
11. The client shall be solely responsible for all acts or omissions of any person using a DMA facility and shall be bound to accept and settle all transactions executed through the DMA facility provided by the Broker notwithstanding that such order(s) may have been submitted erroneously or by an unauthorized user, or that its data is inaccurate or incomplete when submitted, or the client subsequently determines for whatever reason that the order should not have been submitted.
12. The client shall notify the Broker in the event of DMA facility being compromised. Upon receipt of this notice, client’s DMA facility shall be
promptly disabled but the client shall continue to be responsible for any misuse of the DMA facility or any orders placed through the DMA facility as a result of the compromise of the DMA facility at their end. The Broker shall not be liable for any loss, liability or cost whatsoever arising as a result of any unauthorized use of DMA facility at the client’s end.
13. In the event of winding-up or insolvency of the client or his otherwise becoming incapable of settling their DMA obligation, broker may close out the transaction of the client as permissible under bye-laws, rules, regulations of the exchanges. The client shall continue to be liable for any losses, costs, damages arising thereof.
14. The client is fully aware of the risks of transmitting DMA orders to the Broker’s DMA facility through vendor systems or service providers and the Broker is not responsible for such risks.
15. The client should be aware of the fact that neither the DMA facility will be uninterrupted nor error free nor the results that may be obtained from the use of the service or as to the timeliness, sequence, accuracy, completeness, reliability or content of any information, service or transaction provided through DMA. The DMA service is provided on an "as is", "as available" basis without warranties of any kind, either express or implied, including, but not limited to, those of information access, order execution, merchantability and fitness for a particular purpose. The Broker shall not be liable for any loss, damage or injury including but not limited to direct lost profits or trading losses or any consequential, special, incidental, indirect, or similar damages from the use or inability to use the service or any part thereof.
16. The Broker shall have the right to withdraw the DMA facility in case of:-
a. Breach of the limits imposed by the broker or any regulatory authority.
b. On account of any misuse of the DMA facility by the client or on instructions from SEBI/Exchanges.
c. Any other reason, at the discretion of the broker
Broker shall endeavor to give reasonable notice to the client in such instances
17. The Broker shall not be liable or responsible for non-execution of the DMA orders of the client due to any link/system failure at the client/ Broker/ exchange(s) end.
18. This document shall not be altered, amended and /or modified by the parties in a manner that shall be in contravention of any other provisions of this document. Any additional terms and conditions should not be in contravention with rules / regulations /bye-laws/circulars, of the relevant authorities including applicable stock exchanges as amended from time to time.
PART – B: DMA FACILITY USED BY THE CLIENT THROUGH AN INVESTMENT MANAGER
1. The client shall be solely responsible for all acts or omissions of any person using a DMA facility and shall be bound to accept and settle all transactions executed through the DMA facility provided by the Broker to the investment manager acting on behalf of the client, notwithstanding that such order(s) may have been submitted erroneously or by an unauthorized user, or that its data is inaccurate or incomplete when submitted, or the client subsequently determines for whatever reason that the order should not have been submitted.
2. The investment manager is expected to be fully aware of the risks associated with the market and the financial instruments being traded on stock exchanges through DMA. The investment manager shall be responsible for complying with laws, rules, regulations, notifications etc issued by regulatory authorities as may be applicable from time to time.
3. Where the DMA facility provided by the Broker is used to execute trade on behalf of one or more clients, by the investment manager, then it is represented and warranted that, at each time an order is placed by such investment manager through the DMA facility of the Broker -
a. The investment manager has due authority to deal on behalf of the client(s) through the Broker, specifying the roles and responsibilities of the investment manager in execution of transactions on behalf of the client(s).
b. The investment manager shall comply with any applicable laws, rules and regulations affecting or relating to trading operations.
c. The investment manager and the client(s) are bound by the terms and conditions hereof;
d. The investment manager using the DMA facility for routing client(s) orders shall not cross trades of their client(s) with each other. Accordingly, all orders should be offered in the market.
e. The stock exchange or SEBI may at any time call for any information from a client(s) or an investment manager acting on behalf of the client(s) with respect to any matter relating to the activity of the investment manager. The investment manager shall also furnish any information specifying the roles and responsibilities of the investment manager in execution of transactions on behalf of the client(s), as and when required by the exchanges or SEBI.
4. The investment manager shall be responsible for ensuring that, only persons authorized by it shall access and use the DMA facility provided by the Broker. All orders originating from such facility / system shall be deemed to be authorized by the client.
5. Where the investment manager accesses or proposes to access the Broker’s DMA platform through external applications, including but not restricted to services of third party service provider(s), own application(s), etc., the investment manager shall ensure that such applications have adequate security features including but not limited to access controls, password protection etc; and that appropriate agreement(s) with such third party service provider(s) etc. for ensuring secured access and communication has been executed and are in place.
6. The investment manager shall ensure that no person authorized by them to place orders through DMA facility provided by the broker has been / is involved in any adverse action by any regulatory authorities in any jurisdiction.
7. The investment manager shall provide the names of authorized individual users to the broker prior to placing DMA orders.
8. The investment manager shall not use or allow the use of DMA facility to engage in any form of market misconduct including insider trading and market manipulation or conduct that is otherwise in breach of applicable laws, rules and regulation.
9. The investment manager is aware that Algorithmic trading i.e. generation of orders using automated execution logic is governed by Algorithmic trading guidelines issued by SEBI and Exchanges and requires prior approval of the exchanges. The investment manager shall ensure that new algorithms and changes to existing approved algorithms are not used through the DMA facility without prior approval of concerned stock exchanges. The investment manager shall ensure that it has necessary checks and balances, in place to identify and control dysfunctional algorithms and the Broker shall have the right to shut down the DMA facility and remove any outstanding client orders in case of any suspected dysfunctional algo.
10. The investment manager is aware that authentication technologies and strict security measures are required for routing orders through DMA facility and undertakes to ensure that the password of the investment manager and/or his representative are not revealed to any third party.
11. The investment manager acknowledges that all DMA orders placed by them through the DMA facility would be validated by the risk management system of the broker. The Broker has the right to accept or reject any DMA order placed by the investment manager at its sole discretion.
12. The investment manager shall notify the Broker in the event of DMA facility being compromised. Upon receipt of this notice, client’s DMA facility shall be promptly disabled but the client shall continue to be responsible for any misuse of the DMA facility or any orders placed through the DMA facility as a result of the compromise of the DMA facility at their end. The Broker shall not be liable for any loss, liability or cost whatsoever arising as a result of any unauthorized use of DMA facility at the client’s end.
13. In the event of winding-up or insolvency of the client or his otherwise becoming incapable of honoring their DMA obligation, broker may close out the transaction of the client as permissible under bye-laws, rules, regulations of the exchanges. The client shall continue to be liable for any losses, costs, damages arising thereof.
14. The investment manager is fully aware of the risks of transmitting DMA orders to the Broker’s DMA facility through vendor systems or service providers and the Broker is not responsible for such risks.
15. The investment manager should be aware of the fact that neither the DMA facility will be uninterrupted nor error free nor the results that may be obtained from the use of the service or as to the timeliness, sequence, accuracy, completeness, reliability or content of any information, service or transaction provided through DMA. The DMA service is provided on an "as is", "as available" basis without warranties of any kind, either express or implied, including, but not limited to, those of information access, order execution, merchantability and fitness for a particular purpose. The Broker shall not be liable for any loss, damage or injury including but not limited to direct lost profits or trading losses or any consequential, special, incidental, indirect, or similar damages from the use or inability to use the service or any part thereof.
16. The Broker shall have the right to withdraw the DMA facility in case of:-
a. Breach of the limits imposed by the broker or any regulatory authority.
b. On account of any misuse of the DMA facility by the client/ investment manager or on instructions from SEBI/Exchanges.
c. Any other reason, at the discretion of the broker .Broker shall endeavor to give reasonable notice to the client in such instances.
17. The Broker shall not be liable or responsible for non-execution of the DMA orders of the client due to any link/system failure at the client/Broker/exchange(s) end.
18. This document shall not be altered, amended and /or modified by the parties in a manner that shall be in contravention of any other provisions of this document. Any additional terms and conditions should not be in contravention with rules/regulations /bye-laws/circulars, of the relevant authorities including applicable stock exchanges as amended from time to time.
ANNEXURE II
On the letter head of the Investment manager
PART A
DETAILS OF THE INVESTMENT MANAGER: NAME OF THE INVESTMENT MANAGER: NAME OF THE HOME REGULATOR:
COUNTRY OF JURISDICTION OF HOME REGULATOR:
REGISTERED /REGULATED IN HOME JURISDICTION AS:
SEBI REGISTRATION NUMBER:
PART B
CLIENT(s) DETAILS:
S. No. Name of the entity Name of the regulator Regulated in India as Registration Number PAN
SECTION – 3: ELECTRONIC CONTRACT NOTE
3.1 Use of Digital Signature on Contract Notes9
Pursuant to the discussions in the SMAC and provisions of the IT Act, it is clarified that the brokers are allowed to issue contract notes authenticated by means of digital signatures provided that the broker has obtained digital signature certificate from Certifying Authority under the IT Act, 2000. Mode of confirmation by the client may be as specified in the agreement between the broker and the client.
3.2 Issuance of Contract Notes in electronic form10
The contract notes can be issued by the brokers in electronic form authenticated by means of digital signatures.
3.3 Electronic issuance of contract notes – Additional conditions11
All the members of stock exchanges who are desirous of issuing Electronic Contract Notes (ECNs) to their clients shall comply with the following conditions:-
I. Issuing ECNs when specifically consented
The digitally signed ECNs may be sent only to those clients who have opted to receive the contract notes in an electronic form, either in the Member – Client agreement / Tripartite agreement or by a separate letter. The mode of confirmation shall be as per the agreement entered into with the clients.
II. Where to send ECNs
The usual mode of delivery of ECNs to the clients shall be through e-mail. For this purpose, the client shall provide an appropriate e-mail account to the member which shall be made available at all times for such receipts of ECNs.
III. Requirement of digital signature
All ECNs sent through the e-mail shall be digitally signed, encrypted, non¬tamperable and shall comply with the provisions of the IT Act, 2000. In case the ECN is sent through e-mail as an attachment, the attached file shall also be secured with the digital signature, encrypted and non-tamperable.
IV. Requirements for acknowledgement, proof of delivery, log report etc.
9 Circular No. SMDRP/POLICY/CIR-56/00 dated December 15, 2000
10 Circular No. SEBI/SMD/SE/15/2003/29/04 dated April 29, 2003
11 Circular No. MRD/DoP/SE/Cir-20/2005 dated September 8, 2005
i. Acknowledgement
The acknowledgement of the e-mail shall be retained by the member in a soft and non-tamperable form.
ii. Proof of delivery
a. The proof of delivery i.e., log report generated by the system at the time of sending the contract notes shall be maintained by the member for the specified period under the extant regulations of SEBI/stock exchanges and shall be made available during inspection, audit, etc.
b. The member shall clearly communicate to the client in the agreement executed with the client for this purpose that non-receipt of bounced mail notification by the member shall amount to delivery of the contract note at the e-mail ID of the client.
iii. Log Report for rejected or bounced mails
a. The log report shall also provide the details of the contract notes that are not delivered to the client/e-mails rejected or bounced back.
b. Also, the member shall take all possible steps (including settings of mail servers, etc) to ensure receipt of notification of bounced mails by the member at all times within the stipulated time period under the extant regulations of SEBI/stock exchanges.
V. When to issue or send in Physical mode
i. Issue in Physical mode
In the case of those clients who do not opt to receive the contract notes in the electronic form, the member shall continue to send contract notes in the physical mode to such clients.
ii. Send in Physical mode
Wherever the ECNs have not been delivered to the client or has been rejected (bouncing of mails) by the e-mail ID of the client, the member shall send a physical contract note to the client within the stipulated time under the extant regulations of SEBI/stock exchanges and maintain the proof of delivery of such physical contract notes.
VI. General requirements
i. ECNs through website
In addition to the e-mail communication of the ECNs in the manner stated above, in order to further strengthen the electronic communication channel, the member shall simultaneously publish the ECN on his designated web-site in a secured way and enable relevant access to the clients.
ii. Access to the website
In order to enable clients to access the ECNs posted in the designated website in a secured way, the member shall allot a unique user name and password for the purpose, with an option to the client to access the same and save the contract note electronically or take a print out of the same.
iii. Preservation/Archive of electronic documents
The member shall retain/archive such electronic documents as per the extant rules/regulations/circulars/guidelines issued by SEBI/Stock Exchanges from time to time.
3.4 Format for Issuance of Electronic Contract Notes12
The format of the electronic contract notes, prescribed by the exchanges were not in conformity with the format of the physical contract note particularly with respect to the pre-printed terms and conditions. Hence members issuing electronic contract notes were also issuing physical contract notes which amounted to duplication and unnecessary reconciliation between the physical and electronic contract notes.
In order to streamline the issuance of electronic contract notes as a legal document like the physical contract note, the exchanges are advised to implement the following:
i. The exchanges would prescribe a standard format for the electronic contract note (based on the model format prescribed in Annexure (for Equity) and (for Debt13) in its bye-laws, rules and regulations.
ii. The exchange bye-laws, rules and regulations for issuance of electronic contract note shall be amended to include all the standard pre-printed terms and conditions in the physical contract note. The electronic contract
12 Circular No. DNPD/ Cir-9/04 dated February 3, 2004
13 Circular No. SEBI/MRD/SE/Cir-11/2004 dated February 25, 2004
note would mention the relevant bye-laws / rules / regulations of the exchange subject to which the said contract note is being issued.
iii. The exchange shall also modify / amend other relevant bye-laws, rules and regulations with respect to signing of the electronic contract note with a digital signature so as to make the modified format of the electronic contract note a valid legal document like the physical contract note.
iv. The mechanism of record keeping of electronic contract notes in a soft non-tamperable form shall be prescribed by the exchange in compliance with the provisions of the IT Act, 2000.
SECTION - 4: INTRODUCTION OF NEW TRADING SEGMENT 4.1 New Trading Segment14
Introduction of any new trading segment on the exchanges would require stock exchanges to seek the prior approval of SEBI.
While applying to SEBI for the approval for the introduction of new segment, the exchange shall provide the information on the parameters for the new segment and also the rationale for introduction of the new segment.
4.2 Guidelines for Providing Dedicated Debt Segment on Stock Exchanges15
1. The market for debt securities differs from equity markets in several ways such as risk, returns, liquidity, type of participants and method of trading. While publicly issued debt securities are listed, traded and settled in a manner similar to equity, privately placed debt is usually traded between institutional investors on ‘Over the Counter' (OTC) basis. Such OTC transactions are mandatorily reported on reporting platforms at FIMMDA, BSE and NSE. The settlement for such transactions is different from that in equity markets or publicly issued debt securities.
2. Whereas the equity markets in India offer trading infrastructure comparable to the best available globally, the debt markets lack such infrastructure. In order to cater to the unique characteristics of debt markets, it has been decided to provide dedicated a debt segment on the stock exchanges.
3. The debt segment shall offer separate trading, clearing, settlement, reporting facilities and membership to deal in :
i. "debt securities" as defined in Securities and Exchange Board of India (Issue and Listing of Debt ecurities) Regulations, 2008;
ii. Government Securities, Treasury Bills, State Government loans, SLR and Non-SLR Bonds issued by Financial Institutions, municipal bonds, single bond repos, basket repos and CBLO kind of products subject to RBI approval, where required;
iii. Securitized debt instruments as defined in SEBI (Public Offer and Listing of Securitized Debt Instruments)Regulations, 2008;
iv. any other debt instruments as may be specified from time to time by the competent authority.
4. An existing stock exchange or new stock exchange desirous of setting up debt segment may make an application to SEBI, providing operational, regulatory and any other necessary details.
14 Circular No. SEBI/MRD/SE/Cir-38/2003 dated October 8, 2003
15 Circular No. CIR/MRD/DP/03/2013 dated January 24, 2013
5. The broad framework /features for debt segment shall be as under-
A. Listing: This segment shall list all the securities and debt instruments mentioned at para 3 above.
B. Trading:
i. The debt segment shall offer electronic, screen based trading providing for order matching, request for quote, negotiated trades etc.
ii. The trading facility may be provided using exchange network including using access methods such as internet trading, mobile trading or any other methods specified by SEBI.
iii. The debt segment shall provide separate platforms for the markets described below -
a. Retail market - which shall be a market for listing of and trading in publicly-issued debt instruments and where participation by registered trading members can be on their own account or for execution of orders placed their clients.
b. Institutional market - which shall be a market for non-publicly¬issued debt instruments with a market lot size of minimum Rs 1 crore.
iv. In addition to institutional investors, Direct Market Access (DMA) facility shall be extended to other investors to participate in Institutional market of debt segment. In this regard, the provisions as stipulated in SEBI circular MRD/DoP/SE/Cir- 7 /2008 dated April 03, 2008, MRD/DoP/SE/Cir- 03 /2009 dated February 20, 2009 and CIR/MRD/DP/ 20 /2012 August 02, 2012 and modifications thereto shall be applicable.
C. Trading Rules:
i. The trading hours shall be from 9:00 hours to 17:00 hours to be in alignment with trading hours of government securities as issued by RBI.
ii. The day count convention of Actual/Actual shall be followed for calculating interest rates.
iii. The stock exchange shall facilitate availability of price quotes on clean price, dirty price and yield.
iv. There shall be no shut period during which trades/ transfers are restricted for payment of interest or part redemptions. For other corporate actions such as redemptions/ put-call options, issuers may choose to specify a shut period.
v. The record date shall be fixed not more than 15 days prior to date of corporate action which shall be displayed on trading terminal by stock exchanges.
vi. In case of negotiated trades by members of the debt segment, the trades shall be reported to stock exchange within 30 minutes of the trade.
D. Clearing and Settlement:
i. All trades shall be cleared and settled through a clearing corporation. For this purpose, all trading members shall be self clearing members or may clear through a clearing member.
ii. The settlement shall depend on the market type, as given below:
a. For institutional market: All trades shall be settled on T+1 rolling settlement on DVP-I basis using RBI RTGS account. Stock exchanges/clearing corporation may opt to provide clearing and settlement on DVP-II or DVP-III basis for this market in future and shall put in place appropriate risk management framework for the same.
b. For retail market: The trades shall be settled on T+2 rolling settlement on DVP-III basis with settlement guarantee.
E. Risk management framework:
i. For retail market, a uniform margin rate of 10% shall be applicable on debt instruments with rating of AA or above (or with similar rating nomenclature) by recognised credit rating agencies and 25% for all other debt instruments. Further, in case of shortages, there shall be compulsory close-out with a mark up of 5% in case of debt instruments which are assigned a credit rating of AA and above and 10% in case of other debt instruments.
ii. For institutional market, as and when settlement is done on DVP-II or DVP-III basis, appropriate margins may be prescribed after approval by SEBI.
iii. The clearing corporation shall specify appropriate risk management framework for each market, wherein it shall, inter-alia, provide for computation and collection of margins, capital adequacy norms and collateral requirements for the clearing members, settlement guarantee fund as applicable. This shall be approved by SEBI.
F. Trade repository: With an objective to have centralised repository for trades in debt instruments, the stock exchanges shall report trade information to a common trade repository as may be specified by SEBI.
G. Membership:
i. Any entity desirous of becoming trading member, self clearing member and/or clearing member of debt segment shall seek registration under SEBI (Stock Broker and Sub-Broker) Regulations, 1992.
ii. Institutions such as scheduled commercial banks, primary dealers, pension funds, provident funds, insurance companies, mutual funds and any other investors as may be specified by sectoral regulators from time to time, can trade on the debt segment either as clients of registered trading members or directly as trading member on proprietary basis only (i.e own-account trades only). Such institutions desirous of trading on own account only shall be given trading membership under SEBI (Stock Broker and Sub-Broker) Regulations, 1992 as proprietary trading member.
iii. For an interim period of six months from the date of this circular or till the application for registration as per amended SEBI (Stock Broker and Sub-Broker) Regulations,1992 is refused by the Board or till cessation of membership, whichever is earlier, the transitional provisions shall be -
a. Institutional market of debt segment: Any existing registered trading member and/or clearing member/self clearing member in derivative segment or currency derivatives segment desirous of trading or clearing trades in debt segment shall be permitted to trade or clear trades.
b. Retail market of debt segment: Any existing registered stock broker/trading member and /or clearing member/self clearing desirous of trading or clearing trades in debt segment shall be permitted to trade or clear trades.
iv. The trading member, proprietary trading member, clearing member and self clearing member of debt segment shall have net worth and deposit as prescribed in SEBI (Stock Broker and Sub-broker) Regulations, 1992.
v. The Base Minimum Capital for stock broker/trading member shall be in line with SEBI circular dated December 19, 2012.
vi. The stock exchanges and clearing corporation may specify additional membership criteria for trading member/proprietary trading member and clearing member/self clearing member respectively.
H. Market Making: With the view to infuse liquidity in the market, market makers shall be permitted in the debt segment. Market making may be provided by merchant bankers, issuers through brokers or any other entity as may be specified. The rules for market making shall be specified by the stock exchanges with approval of SEBI.
SECTION – 5: STRAIGHT THROUGH PROCESSING 5.1 Mechanism16
Straight through Processing (STP) is generally understood to be a mechanism that automates the end to end processing of transactions of financial instruments. It involves use of a system to process or control all elements of the work flow of a financial transaction, what are commonly known as the Front, Middle, Back office and General Ledger. In other words, STP allows electronic capturing and processing of transactions in one pass from the point of order origination to final settlement. STP thus streamlines the process of trade execution and settlement and avoids manual entry and re-entry of the details of the same trade by different market intermediaries and participants. Usage of STP enables orders to be processed, confirmed, settled in a shorter time period and in a more cost effective manner with fewer errors. Apart from compressing the clearing and settlement time, STP also provides a flexible, cost effective infrastructure, which enables e-business expansion through online processing and access to enterprise data. It has been mandated that all the institutional trades executed on the stock exchanges would be processed through the STP System.
5.2 The system flow of the STP framework17
1) While several STP Service Providers provide STP service to the market participants to resolve the issue of inter-operability between the STP Service Providers it was decided in consultation with the stock exchanges and the STP Service Providers that a STP Centralised Hub would be setup.
2) The system flow for the STP framework shall be as follows: -
a) STP user intending to send an instruction would send the message to his STP service provider after digitally signing the same.
b) The STP service provider would verify the signature of the STP user and forward it to the
i) recipient STP user, if the recipient STP user is availing services of the same STP service provider; or the
ii) STP centralized hub if the recipient STP user is not with the same STP service provider. In such a case the STP service provider would be required to prepare a message as per the STP centralized hub prescribed message format,
16 Ref. No. DNPD/Cir- 22 /04 dated April 01, 2004
17 Ref. No. DNPD/Cir-23/04 dated April 27, 2004
enclose the user’s message, digitally sign the message and then send it to the STP centralized hub
c) On receipt of the message by the STP centralized hub, the STP centralized hub would:
i) verify the signature of the sending STP service provider only.
ii) send an acknowledgment to the sending STP service provider.
d) The STP centralized hub would forward the message to the recipient STP service provider after digitally signing on the message.
e) The recipient STP service provider on receipt of the message from the STP centralized hub shall verify the signature of the STP centralized hub, verify if the recipient STP user is associated with it and send an appropriate acknowledgment with digital signature to the STP centralized hub. The STP centralized hub would in turn forward the acknowledgment (received from the recipient STP service provider) duly signed to the sending STP service provider.
f) The recipient STP service provider shall forward the message to the recipient STP user. The recipient STP user would receive the message and verify the signature of the recipient STP service provider and sending STP user.
3) To enable inter-operation, the STP centralized hub would provide a utility / client software to the STP service provider. The STP service provider’s point of interface with the STP centralized hub would be through this utility / client software. The PKI (Public key infrastructure) system for the interface shall be implemented at a later stage.
4) The block diagram of the entire STP System is enclosed in Annexure I.
5.3 SEBI (STP centralised hub and STP service providers) Guidelines, 200418
1) SEBI in order to regulate the STP service has issued the SEBI (STP centralised hub and STP service providers) Guidelines, 2004 (herein referred to as “STP Guidelines”) which also prescribe the model agreement between the STP centralised hub and the STP service providers.
2) The STP guidelines prescribe the eligibility criteria and conditions of approval for the STP centralised hub and the STP service providers, obligations and responsibilities of the STP centralised hub and the STP service providers and code of conduct for the STP service providers. The STP centralised hub and the STP service providers shall abide by these Guidelines.
3) To prescribe contractual obligations between the STP centralised hub and the STP service providers and to facilitate standardisation of service, a model agreement between the STP centralised hub and the STP service providers has also been prescribed by SEBI and is prescribed as Schedule II of the STP Guidelines. The agreement between the STP centralised hub and the STP service provider shall include the provisions included in the model agreement.
18 Ref.No. DNPD/Cir-24/04 dated May 26, 2004 (STP Guidelines)
5.4 Work flow for institutional investors19
1. SEBI in consultation with the STP centralized hub, STP service providers and the STP users has prescribed the transaction work flow for the STP system. All institutional investors shall follow the following transaction work flow on a mandatory basis from July 1, 2004:
a. A contract note in electronic form in the prescribed format (IFN 515 messaging format) shall be issued by the broker & sent to the custodian and / or the institutional investor.
b. In case the contract note is processed directly by the institutional investor, the institutional investor shall send the trade confirmation of acceptance or rejection of the contract note to the broker by using the IFN 598 messaging format. The custodian shall also send the confirmation of acceptance or rejection of such contract note to the broker using the messaging standard IFN 548.
c. In case the contract note is processed by the custodian on behalf of the institutional investor, the custodian shall send the confirmation of acceptance or rejection of the contract note to the broker by using the IFN 548 messaging format.
d. The institutional investor shall send settlement instructions to its custodian in IFN 540 to IFN 543 messaging formats to the custodian for the following trade types:
i. IFN 540: settlement instruction for a clearing house buy trade
ii. IFN 541: settlement instruction for a delivery-v/s-payment (DVP) buy trade
iii. IFN 542: settlement instruction for a clearing house sell trade
iv. IFN 543: settlement instruction for a delivery-v/s-payment (DVP) sell trade
e. The custodian shall confirm / reject the execution of the settlement instructions to the institutional investor in IFN 544 to IFN 547 messaging formats in the following manner:
i. IFN 544: confirmation / rejection of an instruction received in messaging format IFN 540
ii. IFN 545: confirmation / rejection of an instruction received in messaging format IFN 541
iii. IFN 546: confirmation / rejection of an instruction received in messaging format IFN 542
19 Ref.No. DNPD/Cir-25/04dated June 10, 2004
iv. IFN 547: confirmation / rejection of an instruction received in messaging format IFN 543
f. It is clarified that if a message (for the activities mentioned above) is sent using the STP centralised hub framework from one user to another user, then the confirmation / rejection for such a message shall also be sent using the STP centralised hub framework.
2. SEBI vide circular no. DNPD/Cir-9/04 dated February 3, 2004 had prescribed the format of the contract note in electronic form. After deliberation with the STP service providers and the market participants the following changes have been incorporated to the existing messaging format (IFN 515):
a. The mandatory requirement of mentioning the relevant bye-laws / rules / regulations of the exchange subject to which the said contract note is being issued on each contract note stands modified in the following manner:
i. The requirement is not mandatory but optional
ii. The broker shall ensure that the relevant bye-laws / rules / regulations of the exchange subject to which the contract note is being issued, is mentioned in the broker-client agreement and the tripartite agreement between the broker-sub-broker-client agreement (if applicable).
iii. The existing field for the above provision shall not be deleted and may be used as a free text field for one constituent to communicate remarks (if any) to another constituent.
b. The clause of ‘payment of consolidated stamp duty’ for each contract note shall be mentioned in the broker-client agreement and the tripartite agreement between the broker-sub-broker-client agreement (if applicable). The said clause may be stated in the free text field (as mentioned in point 2 (a) (iii) above) of each contract note.
c. In the field "market type" (field 70E) a category of ‘TT’ i.e. trade for trade and ‘OT’ i.e. Others shall be added to represent the supplementary categories of market types.
d. The order time was prescribed as a mandatory field in the contract note. The order time shall now be included in the optional fields.
e. There are certain securities which are not de-materalised and hence do not have an ISIN code. For such securities (where ISIN number is not available) the STP users would be required to input the security code given by the exchange in the ISIN number field. In case the number length of the exchange scrip code is shorter than the prescribed field length of 12 characters, the code shall be prefixed with zeros.
f. In order to maintain a complete audit trail, it is clarified that in case an electronic contract note is rejected, the custodian (in messaging format IFN 548) or the fund manager (in messaging format IFN 598) shall be required to send a rejection message to the broker. Only on receipt of the rejection message, the broker shall cancel the rejected contract note and issue a fresh contract note bearing a new number.
g. In order to bring in standardisation in the input of the identification codes in the prescribed messaging standards, it is clarified that the following codes shall be used by the various entities:
i. Brokers: SEBI registration number (until MAPIN ID is available for every broker)
ii. Mutual Funds and schemes of Mutual Funds: SEBI registration number for Mutual Funds and Unique client code issued by the exchanges for schemes (until MAPIN ID is available for each scheme of a mutual fund)
iii. FIIs and sub-accounts: SEBI registration number for FII and Unique client code issued by the exchanges for sub-account (until MAPIN ID is available for each FII and their sub-accounts)
iv. Custodians: SEBI registration number (until MAPIN ID is available for every custodian)
v. STP service providers and STP centralised hub: MAPIN ID
vi positories and exchanges / clearing house / clearing corporation: MAPIN ID.
vii. Other Institutional Investors like financial institutions, banks etc.: Unique client code issued by the exchanges (until MAPIN ID is available for each Institutional Investor)
h. All market participants shall issue the electronic contract note for institutional trades in the modified format enclosed in Annexure I.
3. The prescribed messaging formats for IFN 540, IFN 541, IFN 542, IFN 543, IFN 544, IFN 545, IFN 546, IFN 547, IFN 548 and IFN 598 are enclosed in Annexure II. After consultation with the market participants and confirming their preparedness, it has been decided to make these messaging formats (in addition to IFN 515) mandatory for all institutional trades.
4. It is reiterated that the STP system shall be initially mandatory for all institutional trades in the equity segment.
5. The standard terms of contract as are required to be mentioned in the Contract Notes as per the Bye-laws and Regulations of exchanges, which are not contained in electronic contract notes, shall be incorporated in the Client Broker Agreement or where applicable, the Tripartite Agreement between the stock broker, sub-broker and the client. The stamp duty in respect of the electronic contract notes shall be paid by the broker.
5.5 Clarification20
Descriptors as stated above shall mean the following:
a. IFN 540: settlement instruction for a buy trade free of paymentb. IFN 541: settlement instruction for a buy trade against payment
c. IFN 542: settlement instruction for a sell trade free of payment
d. IFN 543: settlement instruction for a sell trade against payment
e. IFN 544: confirmation of a settlement instruction for a buy trade free of payment (response to IFN 540)
f. IFN 545: confirmation of a settlement instruction for a buy trade against payment (response to IFN 541)
g. IFN 546: confirmation of a settlement instruction for a sell trade free of payment (response to IFN 542).
h. IFN 547: confirmation of a settlement instruction for a sell trade against payment (response to IFN 543).
It is also clarified that in the IFN 515 message, if trade is intended to be settled by the custodian with the Clearing Corporation (by accepting the settlement obligation), then it shall be termed as “FREE” and if the trade is intended to be settled by the broker with the Clearing Corporation then it shall be termed as “APMT” (meaning against payment) in the tag 22h of the IFN 515 message.
5.6 Modifications in the prescribed messaging formats21
In order to integrate the STT in the STP system, it would be necessary to provide for necessary fields in the appropriate messaging standards. After deliberation with the STP centralised hub and the STP service providers, it has been decided to make the following modifications in the prescribed messaging formats:
a) Message Types that shall be modified are IFN515, IFN540, IFN541, IFN542 and IFN543
b) A Qualifier shall be used to identify Securities Transaction Tax Amount: "COUN", Country, National Federal Tax.
20 Ref. No. DNPD/14785/04 dated July 08, 2004
21 Ref. No. DNPD/Cir-28/04 dated September 28, 2004
c) The change in the ISO Structure for the impacted message types shall be as follows:
M 16R AMT Start of block
format: (Qualifier)
/(Currency Code)
(Amount)
For: Securities Transaction tax Amount
on identify the Qualifier: "COUN" (4 Upper case Characters)
M 19A Amount :4!c//3!a11d Securities Narrative: "INR" (3 Upper
Transaction Letters)
Tax Amount Amount: Up to 10 digits
(only Integer value allowed) followed by a comma (used as decimal sign) . Comma is mandatory. Amount can be zero or greater than zero.
M 16S AMT End of block
d) Securities Transaction Tax Block shall be placed before the Settlement Amount Block in the stated Message Types. (IFN515, IFN540, IFN541, IFN542 and IFN543)
e) Securities Transaction Tax block will be mandatory amount block in IFN515 and optional amount block in IFN540, IFN541, IFN542 and IFN543.
f) If the Contract Note (issued by means of IFN 515) is rejected on the basis of Securities Transaction Tax amount then the reason for the rejection shall be specified in the "Tag70D Narrative" field and "Tag 24B Reason" specified should be "NARR".
SECTION – 6: TRADING TERMINALS 6.1 Usage of software by Broker/ Sub-broker22
It is informed that all the Stock Exchanges have to obtain an undertaking in the form of an affidavit from the members of the exchange to the effect that the members as well as their sub-brokers are using only the authorized software.
6.2 Standing Committee23
A standing Committee shall be set up by each Stock Exchange to investigate the problem of computerised trading system, such as hanging/ slowdown/ breakdown. The Standing Committee shall introduce an outside computer expert. The Committee will submit a repot to the Governing Board/ Council of Stock Exchange. The Board/Council will deliberate on the report and suitable action/remedial measure will be taken.
The standing committee is required to be set up with the objective to investigate problems of computerised trading system, such as, hanging/ slowdown/ breakdown. With the view to ensure implementation/ compliance, the exchanges are advised as under:-
i. All instances of hanging /slowdown / breakdown and any other problem in the computerized trading system, even if the disruption is less than five minutes, should be reported to the Committee for its consideration.
ii. The Committee, upon examination of the issue/s shall submit a report to the Governing Board / Council of the Stock Exchange.
iii. The Governing Board / Council of the Stock Exchange shall deliberate on the aforesaid report and take suitable action / remedial measure.
iv. Further, in case of stoppage beyond five minutes the exchange should also explain and report to SEBI about the incident as well as the remedial measures taken. The Stock Exchange shall also issue a press release in this regard for greater transparency and in the interest of investors.
22 Circular No. SEBI/MRD/Policy/SE/15864/2003 dated August 21, 2003
23 Circular No. MRD/DoP/SE/Cir- 14/2006 dated September 28, 2006
6.3 Expansion of trading terminals of the Exchange24
The stock exchanges are allowed to set-up terminals at any place in the country, subject to the following conditions:
i The Exchange would ensure that there is adequate monitoring and surveillance mechanism for such outstation terminals in order to oversee the trades;
ii All such trades would be subject to usual margin, capital adequacy and
inter-day trading limits fixed for the brokers by the Exchange;
iii The Exchange would ensure that investors eventually do not pay the brokerage on such trades exceeding the maximum brokerage permitted as per the rules of the Exchanges; and
iv The Exchange would introduce the system of guaranteeing trades or set up a Clearing Corporation.
6.4 Broad Guidelines for opening Trading Terminals abroad25
The guidelines relating to eligibility norms, RBI permission, Permission from Foreign Regulatory Authority, Operation Of terminals, Contract note, Settlement Procedure, Surveillance and Monitoring, Jurisdiction etc. for opening trading terminals abroad are provided in the Annexure.
6.5 Annexure - Guidelines for Opening of Trading Terminals Abroad
With the rapid expansion of the Indian capital market it was felt that a facility should be provided whereby an eligible overseas investor can place an order on a real-time basis, rather than telephonically.
The Stock Exchanges/ Members shall follow the following guidelines for opening and maintaining the trading terminals abroad:
a. Eligibility Criteria
Such trading terminals shall be opened only by the Stock Brokers of the stock exchanges registered with SEBI and opening of terminals through sub-brokers shall not be permitted. These terminals shall be opened by the members only after obtaining permission from the respective stock exchanges.
b. RBI Permission
Such terminals abroad would be opened subject to the guidelines laid down by the RBI from time to time.
24 Circular No. SMD/POLICY CIR-33/99 dated October 15, 1999
25 Circular No. SMDRP/POLICY/TTA-14072/CIR-23/99 dated July 12, 1999
c. Permission by the Foreign Regulatory Authorities
The installation of such trading terminals shall be subject to the prior permission of the concerned regulatory authorities of the respective foreign countries, wherever required.
d. Operation of the terminals
Any investor abroad who is permitted to invest in India i.e. NRIs/OCBs/FIIs/PIOs shall be able to place orders on the trading terminal of the Exchange available at the office of the Indian broker maintained abroad. The order fed on the live terminal shall be executed on the computer of the Exchange in India. The service to the clients shall be provided by the broker’s overseas office and its local office. These terminals shall include any of other options that the respective exchange may provide for connecting its trading terminal abroad to its trading system in India.
e. Contract Note
The contract note in favour of the client abroad shall be issued in India, however the same could be printed in the broker’s office abroad and shall be subject to the jurisdiction of the respective stock exchanges.
f. Capital Adequacy, Margins System & Brokerage
All such trades would be subject to usual margins, capital adequacy and intra-day trading limits and such other requirements fixed for the brokers by the Exchange.
The respective stock exchange shall ensure that investors do not pay the brokerage on such trades exceeding the maximum brokerage permitted as per the rules, regulations and bye-laws of the exchange.
No Negotiated Deals shall be permitted through these terminals and only screen based order matching system shall be available on these terminals.
g. Settlement Procedure
All trades shall be settled in India in dematerialized form only. Clients with status of FIIs shall settle the trade through their registered custodian/ designated bank. Clients with the status of NRIs/PIOs/OCBs shall settle the trade through a designated bank. Such a designated bank shall be responsible for repatriation of funds.
h. Monitoring & Surveillance
The respective stock exchange shall ensure that there is adequate monitoring and surveillance mechanism for such overseas terminals in order to oversee trades.
i. Grievance Redressal Mechanism
The investors’ grievance for such cases shall be resolved by the respective Indian Stock Exchange through the existing arbitration mechanism.
The concerned Stock Exchange shall ensure that their members have the adequate arrangements for resolving the investors grievances and timely settlement of arbitration cases arising out of trades which are executed on these terminals.
j. Jurisdiction
The agreement between the trading member and constituent should, inter alia, state that, all trades, transactions and contracts are subject to the Rules, Bye Laws and Regulations of the Exchange and shall be deemed to be and shall take effect as wholly made, entered into and to be performed in the city of , India and the parties to such trade shall be
deemed to have submitted to the jurisdiction of the Courts in , India for the purpose of giving effect to the provisions of the Rules, Bye Laws and Regulations of the Exchange.
SECTION – 7: SMART ORDER ROUTING 7.1 Introduction of Smart Order Routing26
1. SEBI has received proposal from the stock exchanges and market participants for introducing Smart Order Routing which allows the brokers trading engines to systematically choose the execution destination based on factors viz. price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order.
2. Upon examination of the proposal, feedback of the stock exchanges and based on the recommendations of the Technical Advisory Committee, it has been decided to permit Smart Order Routing in Indian Securities Market.
3. Stock Exchanges are advised to ensure the following conditions with regard to the Smart Order Routing facility:
a. Stock broker interested to offer Smart Order Routing facility shall apply to the respective stock exchanges.
b. Stock broker shall submit a third party system audit of its Smart Order Routing system and software. Stock exchanges shall disseminate to its stock brokers a list of approved system auditors (CISA or equivalent) qualified to undertake such system audits.
c. Stock broker shall provide the following to the respective stock exchanges:
I An undertaking to the respective stock exchanges that Smart Order
Routing shall route orders in a neutral manner.
Ii Provide the features of the Smart Order Routing to stock exchange.
d. Stock exchange shall communicate its decision to the broker within 30 calendar days from the date of receipt of complete application by the stock exchange. Stock exchange shall not consider testing and demonstration of the SOR system/software as a criterion for declaring the application of the broker as ‘complete’. Further, testing and demonstration of SOR system/software, if required, shall be suitably scheduled within the aforesaid period of 30 calendar days.
In case of rejection of the application on smart order routing of a stock broker, the stock exchange shall communicate such reasons of rejections to the stock broker. Further, the decision of the stock exchange on the SOR application of the stock broker and reasons for rejection of the SOR
26 Circular No. CIR/MRD/DP/26/2010 dated August 27, 2010
application shall also be communicated to all the other stock exchanges where the broker’s SOR facility intends to route orders.27
e. Stock exchange shall ensure that brokers adhere to the best execution policy while using Smart Order Routing.
f. Smart Order Routing facility shall be provided to all class of investors.
g. Stock Broker shall communicate to all clients the features, possible risks, rights, responsibilities and liabilities associated with the smart order routing facility. The client desirous of availing such facility shall do so by entering into a broker-client agreement, as applicable. For the existing clients, the same shall be implemented through an addendum to the existing broker-client agreement, as applicable.28
h. Stock broker shall maintain logs of all activities to facilitate audit trail. Broker shall maintain record of orders, trades and data points for the basis of decision.
i. In case the client has availed Smart Order Routing facility and does not want to use the same for a particular order, the same shall be well documented by the stock broker.
j. System audit of the Smart Order Routing systems and software shall be
periodically carried out by the brokers as may be specified by the exchange and certificate in this regard shall be submitted to the exchange.
K Stock exchange shall ensure that Smart Order Routing is not used to place orders at venues other than the recognised stock exchanges.
l. The stock broker shall carry out appropriate validation of all risk parameters before the orders are placed in the Smart Order Routing system.
m. Stock exchange shall provide unique identification number for the orders placed through Smart Order Routing system. Further, stock exchanges shall maintain data on Smart Order Routing orders and trades.
n. Stock exchange shall have necessary surveillance mechanism in place to monitor trading done through Smart Order Routing.
27 Circular No. CIR/MRD/DP/ 36 /2010 dated December 09, 2010
28 Circular No. CIR/MRD/DP/ 36 /2010 dated December 09, 2010
o. Stock broker shall ensure that alternative mode of trading system is available in case of failure of Smart Order Routing facility.
p. Stock exchange shall ensure that within a period of three months from implementation of Smart Order Routing, a system is put in place to time stamp market data feed that is disseminated to the market, if the same is not already available.
q. Stock exchange shall strengthen investor grievance cell in order to address complaints, if any, received with regard to Smart Order Routing. Further, in case of any disputes or complaints, stock exchanges shall share necessary data as and when required in order to facilitate necessary examination.
r. Stock exchange shall synchronise their system clocks with atomic clock before the start of market.
s. The broker server routing orders placed through Smart Order Routing system to the exchange trading system shall be located in India. Stock exchange shall permit SOR approved brokers to offer SOR facility through all their servers irrespective of their location in India.29
t. All other existing obligations for the broker as per current regulations and circulars will continue.
u. Stock exchange may specify additional safeguards as they deem fit for allowing Smart Order Routing facility to their brokers.
v. Stock exchange shall permit smart order routing for all orders, without restricting to any specific type of order. The choice on order types shall be left to the client.30
w. If stock exchange desires to advise its brokers to seek re-approval, it may do so only in case of 31
(a) Inclusion of a new stock exchange for offering SOR facility; and/or,
(b) Material changes in the software/system of the smart order routing facility.
4. The initial list of system auditors for SOR for all the three stock exchanges i.e. BSE, NSE and MCX-SX is given below32 –
29 Circular No. CIR/MRD/DP/ 36 /2010 dated December 09, 2010
30 Circular No. CIR/MRD/DP/ 36 /2010 dated December 09, 2010
31 Circular No. CIR/MRD/DP/ 36 /2010 dated December 09, 2010
i. HCL Technologies
ii. iSec Services Pvt. Ltd
iii. Tata Consultancy Services
iv. Jain & Jain Chartered Accoutants
v. Kanhere Consultants Pvt Ltd
vi. Kochar Consultants Pvt Ltdvii. Deloitte Touche Tohmatsu India Pvt Ltd
viii. Ernst & Young Pvt Ltd.
ix. KPMG
32 Letter no MRD/DoP/ST/OW/11982/11 dated April 08, 2011
SECTION – 8: ALGORITHMIC TRADING33 8.1 Broad Guidelines on Algorithmic Trading Definition
1. Algorithmic Trading – Any order that is generated using automated execution logic shall be known as algorithmic trading.
Guidelines to the stock exchanges and the stock brokers
2. Stock exchanges shall ensure the following while permitting algorithmic trading:
(i) The stock exchange shall have arrangements, procedures and system capability to manage the load on their systems in such a manner so as to achieve consistent response time to all stock brokers. The stock exchange shall continuously study the performance of its systems and, if necessary, undertake system upgradation, including periodic upgradation of its surveillance system, in order to keep pace with the speed of trade and volume of data that may arise through algorithmic trading.
(ii) In order to ensure maintenance of orderly trading in the market, stock exchange shall put in place effective economic disincentives with regard to high daily order-to-trade ratio of algo orders of the stock broker. Further, the stock exchange shall put in place monitoring systems to identify and initiate measures to impede any possible instances of order flooding by algos.
(iii) The stock exchange shall ensure that all algorithmic orders are necessarily routed through broker servers located in India and the stock exchange has appropriate risk controls mechanism to address the risk emanating from algorithmic orders and trades. The minimum order-level risk controls shall include the following:
a. Price check - The price quoted by the order shall not violate the price bands defined by the exchange for the security. For securities that do not have price bands, dummy filters shall be brought into effective use to serve as an early warning system to detect sudden surge in prices.
33 Circular No. CIR/MRD/DP/09/2012 dated March 30, 2012
b. Quantity Limit check - The quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.
(iv) In the interest of orderly trading and market integrity, the stock exchange shall put in place a system to identify dysfunctional algos (i.e. algos leading to loop or runaway situation) and take suitable measures, including advising the member, to shut down such algos and remove any outstanding orders in the system that have emanated from such dysfunctional algos. Further, in exigency, the stock exchange should be in a position to shut down the broker’s terminal.
(v) Terminals of the stock broker that are disabled upon exhaustion of collaterals shall be enabled manually by the stock exchange in accordance with its risk management procedures.
(vi) The stock exchange may seek details of trading strategies used by the algo for such purposes viz. inquiry, surveillance, investigation, etc.
(vii) The stock exchange shall include a report on algorithmic trading on the stock exchange in the Monthly Development Report (MDR) submitted to SEBI inter-alia incorporating turnover details of algorithmic trading, algorithmic trading as percentage of total trading, number of stock brokers / clients using algorithmic trading, action taken in respect of dysfunctional algos, status of grievances, if any, received and processed, etc.
(viii) The stock exchange shall synchronize its system clock with the atomic clock before the start of market such that its clock has precision of atleast one microsecond and accuracy of atleast +/- one millisecond.
3. Stock exchange shall ensure that the stock broker shall provide the facility of algorithmic trading only upon the prior permission of the stock exchange. Stock exchange shall subject the systems of the stock broker to initial conformance tests to ensure that the checks mentioned below are in place and that the stock broker’s system facilitate orderly trading and integrity of the securities market. Further, the stock exchange shall suitably schedule such conformance tests and thereafter, convey the outcome of the test to the stock broker.
For stock brokers already providing algo trading, the stock exchange shall ensure that the risk controls specified in this circular are implemented by the stock broker.
Additionally, the annual system audit report for a stock broker, as submitted to the stock exchange, shall include a specific report ensuring that the checks are in place. Such system audit shall be conducted by Certified Information System Auditors (CISA) empanelled by stock exchanges. Further, the stock exchange shall subject the stock broker systems to more frequent system audits, if required.
4. The stock broker, desirous of placing orders generated using algos, shall satisfy the stock exchange with regard to the implementation of the following minimum levels of risk controls at its end -
(i) Price check – Algo orders shall not be released in breach of the price bands defined by the exchange for the security.
(ii) Quantity check – Algo orders shall not be released in breach of the quantity limit as defined by the exchange for the security.
(iii) Order Value check - Algo orders shall not be released in breach of the ‘value per order’ as defined by the stock exchanges.
(iv) Cumulative Open Order Value check – The individual client level cumulative open order value check, may be prescribed by the broker for the clients. Cumulative Open Order Value for a client is the total value of its unexecuted orders released from the stock broker system.
(v) Automated Execution check – An algo shall account for all executed, un¬executed and unconfirmed orders, placed by it before releasing further order(s). Further, the algo system shall have pre-defined parameters for an automatic stoppage in the event of algo execution leading to a loop or a runaway situation.
(vi) All algorithmic orders are tagged with a unique identifier provided by the stock exchange in order to establish audit trail.
5. The other risk management checks already put in place by the exchange shall continue and the exchange may re-evaluate such checks if deemed necessary in view of algo trading.
6. The stock broker, desirous of placing orders generated using algos, shall submit to the respective stock exchange an undertaking that -
(i) The stock broker has proper procedures, systems and technical capability to carry out trading through the use of algorithms.
(ii) The stock broker has procedures and arrangements to safeguard algorithms from misuse or unauthorized access.
(iii) The stock broker has real-time monitoring systems to identify algorithms that may not behave as expected. Stock broker shall keep stock exchange informed of such incidents immediately.
(iv) The stock broker shall maintain logs of all trading activities to facilitate audit trail. The stock broker shall maintain record of control parameters, orders, trades and data points emanating from trades executed through algorithm trading.
(v) The stock broker shall inform the stock exchange on any modification or change to the approved algos or systems used for algos.
7. The stock exchange, if required, shall seek conformance of such modified algo or systems to the requirements specified in the circular.
REFERENCE – List of Circular
1. Circular No. SMDRP/POLICY/TTA-14072/CIR-23/99 dated July 12, 1999.
2. Circular No. SMD/POLICY CIR-33/99 dated October 15, 1999.
3. Circular No. SMDRP/POLICY/CIR- 06/2000 dated January 31, 2000.
4. Circular No. SMDRP/Policy/Cir-48/2000 dated October 11, 2000.
5. Circular No. SMDRP/POLICY/CIR-56/00 dated December 15, 2000.
6. Circular No. SEBI/SMD/SE/15/2003/29/04 dated April 29, 2003.
7. Circular No. SEBI/MRD/Policy/SE/15864/2003 dated August 21, 2003.
8. Circular No. SEBI/MRD/SE/Cir-38/2003 dated October 8, 2003.
9. Circular No. DNPD/ Cir-9/04 dated February 3, 2004.
10 Circular No. SEBI/MRD/SE/Cir-11/2004 dated February 25, 2004.
11. Ref. No. DNPD/Cir- 22 /04 dated April 01, 2004.
12. Ref. No. DNPD/Cir-23/04 dated April 27, 2004.
13. Ref.No. DNPD/Cir-24/04 dated May 26, 2004 (STP Guidelines).
14. Ref.No. DNPD/Cir-25/04dated June 10, 2004.
15. Ref. No. DNPD/14785/04 dated July 08, 2004.
16. Ref. No. DNPD/Cir-28/04 dated September 28, 2004.
17. Circular No. MRD/DoP/SE/Cir-20/2005 dated September 8, 2005.
18. Circular No. MRD/DoP/SE/Cir- 14/2006 dated September 28, 2006.
19. Circular No. MRD/ DoP/SE/Cir- 7 /2008 dated April 03, 2008.
20. Letter no. MRD/DoP/NSE/129791/2008 dated June 24, 2008.
21. Circular No. MRD/ DoP/SE/Cir- 03 /2009 dated February 20, 2009.
22. Circular No. CIR/MRD/DP/ 25/2010 dated August 27, 2010.
23. Circular No. CIR/MRD/DP/26/2010 dated August 27, 2010.
24. Circular No. CIR/MRD/DP/ 36 /2010 dated December 09, 2010.
25. Letter no MRD/DoP/ST/OW/11982/11 dated April 08, 2011.
26. Circular No. CIR/MRD/DP/8/2011 dated June 30, 2011.
27. Circular No. CIR/MRD/DP/09/2012 dated March 30, 2012.
28. Circular No. CIR/MRD/DP/20/2012 dated August 02, 2012.
29. Circular No. CIR/MRD/DP/03/2013 dated January 24, 2013.
MASTER CIRCULAR FOR STOCK EXCHANGESANNEXURE 3
SETTLEMENT
1. This Master Circular includes circulars issued upto March 31, 2013.
2. Master Circular is a compilation of all the existing/applicable circulars issued by Market Regulation Department of SEBI to Stock Exchanges and shall come into force from the date of its issue.
MASTER CIRCULAR – SETTLEMENT
SECTION – 1: ACTIVITY SCHEDULE 4
1.1 Rolling settlement 4
1.2 Activity Schedule for T+2 Rolling Settlement 4
1.3 Systems for effecting settlement on T+2 basis 4
1.4 Activity schedule for Auction Session 6
SECTION – 2: CLOSE-OUT AND AUCTION / NO DELIVERY PERIOD / BOOK
CLOSURE AND RECORD DATES 7
2.1 Close-out Procedure 7
2.2 Close out procedure for cases where “No Delivery Period” is abolished 7 2.3 Close-out Procedure in case of indefinitely suspended/delisted scrips 7 2.4 Close-out mark up in respect of Debentures and Bonds traded on the
Stock Exchanges 7
2.5 Auction 8
2.6 Proceeds from Auction/ Close-out 8
SECTION – 3 :DELIVERY VERSUS PAYMENT (DVP) / HAND DELIVERY
BARGAINS 9
3.1 Hand Delivery Bargains/ DVP 9
SECTION – 4 : INVESTOR PROTECTION FUND / CUSTOMER PROTECTION
FUND 10
4.1 Guidelines for Investor Protection Fund at Stock Exchanges 10
4.2 Constitution and Management of the IPF/CPF 10
4.3 Contribution to IPF/CPF 10
4.4 Manner of filling /inviting claims from investors 11
4.5 Eligible Claims 11
4.6 Determination of Legitimate Claims 12
4.7 Threshold limit for claims 12
4.8 Disbursements of claims from the IPF/CPF 12
4.9 Miscellaneous 13
4.10 Settlement of Claims 13
4.10.1 Dealing through the registered sub-broker of a defaulting broker 13
4.11 Investor Services Fund 13
4.12 Utilization of Investor Protection Fund/ Investor Service Fund 14
4.13 Utilization of Interest Income earned on IPF 14
SECTION – 5: MODE OF PAYMENT AND DELIVERY 15
5.1 Mode of Payment and Delivery 15
SECTION – 6: SETTLEMENT IN CASE OF HOLIDAYS 16
6.1 Settlement of Transaction in case of Holidays 16
6.2 Settlement in case of Unscheduled Holidays 16
SECTION – 7 : TRADE GUARANTEE FUND/ SETTLEMENT GUARANTEE
FUND 17
7.1 Trade Guarantee Fund/ Settlement Guarantee Fund 17
7.2 The Objective of the Fund 17
7.3 Corpus of the fund 17
7.4 Contribution to the Fund 19
7.5 Management of the fund: 19
7.6 Access to the Fund ..19
7.7 Recoupment of the corpus 19
7.8 Utilisation of Settlement Guarantee Fund 19
SECTION -8: TRANSFER OF FUNDS AND SECURITIES 21
8.1 Transfer of Funds and Securities from member to client 21
SECTION – 9: TRANSFER DEED 22
9.1 Affix stamp of member affiliation to stock exchange on reverse of
transfer deed (Physical Shares) 22
9.2 Transfer Deed with or without Inscription 22
9.3 Delay in transfer of shares by companies 22
SECTION – 10 : UNIFORM NORMS FOR GOOD/BAD DELIVERY NORMS 26
10.1 Transfer Deeds 26
10.2 Share Certificates 37
10.3 Miscellaneous 40
10.4 Clarification with regard to 97 and 100 of the Norms for G/B Norms 43
SECTION – 11 : Abolition of no-delivery period for all types of corporate actions ..44
REFERENCE – List of Circulars 45
SECTION – 1: ACTIVITY SCHEDULE
1.1 Rolling settlement
In April 2002, the Indian capital markets introduced T+3 rolling settlement cycle. The settlement cycle of T+3 under the Rolling Settlement System, was shortened further to T+2 rolling settlement, w.e.f. April 01, 2003.
1.2 Activity Schedule for T+2 Rolling Settlement1
The activity schedule is as under:
S. No. Day Time Description of activity
1 T Trade Day
2 T+1 By 1.00 pm Completion of custodial confirmation of trades to CC/CH. (There is no separate extended time limit for late confirmations).
By 2.30 pm Completion of process and download
obligation files to brokers/ custodians by the CC/CH.
3 T+2 Until 10.30
am Accept Pay-in instructions from investors into pool account
By 10.30 am Submit final pay-in files to the depository and the clearing bank.
By 1.30 pm Pay-out of securities and funds.
1.3 Systems for effecting settlement on T+2 basis2
The stock exchanges shall also put in place the following systems for effecting settlement on T+2 basis.
a. A facility of late confirmation of trades by the custodians shall be provided. However, the time limit for late confirmation shall be fixed in a manner that the download of the final obligation files to brokers is not delayed.
b. The stock exchanges would levy an additional charge to discourage late confirmations by the custodians.
c. The stock exchanges would provide a system for handling shortages of funds and securities in an expeditious manner to adhere to the time schedule for pay-out.
1 Circular No. MRD/Dop/SE/Dep/Cir-18/2005 dated September 02, 2005
2 Circular No. SMD/POLICY/Cir - /03 dated February 6, 2003
d. The stock exchanges would also amend their byelaws to mandate the pay out of funds and securities to the clients by the broker within 24 hours of the payout.
e. The stock exchanges shall design an alternative clearing and settlement system in respect of companies whose shares have not been dematerialised to align the clearing and settlement system for such stocks with the T + 2 rolling settlement.
f. The stock exchanges shall not normally permit changes in the Client ID and would keep a strict vigil on cases of client code modification and would implement a monetary penalty structure that would escalate with the number of such incidences. Besides, the exchanges may take necessary action against members making repeated changes. However, genuine mistakes may be allowed to be rectified.
g. Stock exchanges would encourage members to adopt automatic downloading of pay-in files for securities and funds. The members would also be encouraged to adopt direct transfer of securities/ funds to clients’ account on pay-out.
The stock exchanges may also provide the following facilities desirable for further smoothing clearing and settlement process, though these may not be pre¬conditions for introduction of T + 2 rolling settlement.
a. Facility of online confirmation of trades by custodians.
b. System to capture the details of the client’s depository account and bank account.
c. System for online transmitting the client wise pay-in obligation to depository so that the depository in turn could download the security pay-in instructions to depository participants in respect of the investor maintaining account with them.
d. System wherein the pay-out files could be sent to the clearing banks with a request to online credit to the bank accounts of the clients.
e. The stock exchanges would support development of front end software for brokers to map the Client ID through abbreviated keys to facilitate faster order entry for inserting the unique client code speedily.
1.4 Activity schedule for Auction Session3
The activity schedule given below shall be applicable with effect from February 1, 2011 –
Rolling settlement for T day trade
S. No. Day Description of activity
1 T Trade Day
2 T+2 Pay-in/Pay-out of securities and funds
Auction settlement for T day trade
3 T+2 Auction session
4 T+3 Pay-in/pay-out and close-out of auction
Incase of bank holidays, when multiple settlements (say S1 and S2) are conducted on the same day (say Tm), on the working day immediately following the day(s) of the closure, the auction session shall be as under:
a. The auction of first settlement (S1) shall be conducted on the same day (Tm) and settled the next day (Tm+1).
b. The auction for the second settlement (S2) shall be conducted on the next day (Tm+1) along with the shortages/auction of that day. The settlement of the same shall happen on the subsequent day (Tm+2).
3 Circular No. CIR/MRD/DP/ 39 /2010 dated December 28, 2010
SECTION – 2: CLOSE-OUT AND AUCTION / NO DELIVERY PERIOD / BOOK CLOSURE AND RECORD DATES
2.1 Close-out Procedure4
The Close out Procedure is as below:-
"The close out Price will be the highest price recorded in that scrip on the exchange in the settlement in which the concerned contract was entered into and upto the date of auction/close out
OR
20% above the latest available closing price at the exchange on the day on which auction offers are called for.
WHICHEVER IS HIGHER.”
2.2 Close out procedure for cases where “No Delivery Period”5 is abolished
In cases where “no delivery period” is abolished any short delivery by any member in the previous settlement where delivery was to be on cum basis can be closed out to the extent of the short delivery. In case of such direct close-out, the mark-up price would be 10%.
The reference price for such close out shall be the latest available closing price at the exchange.6
2.3 Close-out Procedure in case of indefinitely suspended/delisted scrips7
In the case of close out for scrips which have been indefinitely suspended/ delisted, the reference price would be the twenty-six weeks average traded price while the close out mark up would be 20%.
2.4 Close-out mark up in respect of Debentures and Bonds traded on the Stock Exchanges8
The debentures and bond issued by the companies which are traded at the
exchanges do not experience daily price variation in fashion similar to the
equities. Therefore close out mark up of 5% would be applied in case of
4 Circular No. SMD/Policy/Cir-08/2002 dated April 16, 2002 Circular No. SMD/Policy/IECG/5548/96 dated December 09, 1996
5 Circular No. SMD/Policy/Cir-08/2002 dated April 16, 2002
6 Circular No. SMD/Policy/Cir-08/2002 dated April 16, 2002
7 Circular No. SMD/Policy/Cir-21/02 dated September 04, 2002
8 Circular No. SEBI/SMD/SE/Cir-26/2003/25/06 dated June 25, 2003
debentures and bonds which are assigned a credit rating of triple A and above. However, for the other debentures and the bonds without the triple A credit rating, the existing close out mark up of 20% shall be applicable as is applicable in the case of equities.
2.5 Auction9
i. In no case the auction would be held more than once unless the same is approved by a special resolution of the Governing Board. The outstanding position at the end of the first auction cycle shall be automatically closed out.
ii. In no case the auction shall be held beyond a period of one week from the pay in day of the settlement in which the concerned contract had been entered into.
2.6 Proceeds from Auction/ Close-out10
The Proceeds from Auction/ Close-out should be used to settle the claim of the
aggrieved party. Any amount remaining thereof should be credited to the Investor Protection Fund instead of crediting it to the defaulting party’s account.
9 Circular No. SMD/Policy/IECG/5548/96 dated December 09, 1996
10 Circular No. SMD/Policy/Cir-10/99 dated May 04, 1999
SECTION – 3: DELIVERY VERSUS PAYMENT (DVP) / HAND DELIVERY BARGAINS
3.1 Hand Delivery Bargains/ DVP11
All transactions executed on the stock exchanges shall be settled through the Clearing Corporation/House of the stock exchanges except for the following exceptional circumstances under which Hand Delivery Bargains/DVP may be permitted by the stock exchanges without attracting any margins and any penalty:
a. Total connectivity failure to the exchange/STP. (Specific connectivity issues of the custodians and members shall not be considered as valid exceptions).
b. International Holidays that may be decided upfront by the stock exchanges in consultation with the custodians.
c. Closing down of national/international centres due to calamities
11 Circular No. MRD/DoP/SE/Cir- 17/2005 dated September 2, 2005
SECTION – 4: INVESTOR PROTECTION FUND / CUSTOMER PROTECTION FUND12
4.1 Guidelines for Investor Protection Fund at Stock Exchanges
The Central Government, vide notification No. F. No. 14/4/SE/85 dated August 22, 1985, has stipulated the setting up of the Investor Protection Fund (IPF)/ Customer by Stock Exchanges. This fund should take care of legitimate investment claims which are not of speculative nature of the clients of defaulting member(s).
4.2 Constitution and Management of the IPF/CPF
1. The Investor Protection Fund/Customer Protection Fund (hereinafter referred to as IPF/CPF) shall be administered by way of a Trust created for the purpose.
2. The IPF/CPF Trust shall consist of atleast one public representative, one representative from the registered investor associations recognized by SEBI and the Executive Directors/Managing Directors/Administrators of the Stock Exchange.
3. The Stock Exchange shall provide the secretariat for the IPF/CPF Trust.
4. The Stock Exchange shall ensure that the funds in the IPF/CPF are well segregated and that the IPF/CPF is immune from any liabilities of the Stock Exchange.
4.3 Contribution to IPF/CPF
5. the following contributions shall be made by the Stock Exchange to the IPF/CPF:-
a. 1% of the listing fees received, on a quarterly basis.
b. 100 % of the interest earned on the 1% security deposit kept by the issuer companies at the time of the offering of securities for subscription to the public, immediately on refund of the deposit.
c. The difference of amount of auctions / close-out price in pursuance of circular no. SMDRP/Policy/Cir-10/1999 dated May 04, 1999.
d. The amount received from the proceeds of the sale of the securities written off as per para 4 & 5 of SEBI circular No. FITTC/FII/02/2002 dated May 15, 2002.
12 Circular No. MRD/DoP/SE/Cir-38/2004 dated October 28, 2004
e. The amounts specified in pursuance of Regulation 28(12) (e) (ii), Regulation 28(13) and Regulation 29 (2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
6. As regards the contribution towards the IPF based on the transaction charges collected from the members of the exchange, the Stock Exchanges shall continue with the present practice followed by the respective Stock Exchanges.
4.4 Manner of filling /inviting claims from investors
7. In accordance with its bye-laws, rules or regulations, the Stock Exchange shall publish a notice inviting the legitimate claimants to file claims against the defaulter member brokers within a specified period of time, called as the “specified period”.
8. The specified period for inviting legitimate claims against a defaulter member, shall be a minimum of ninety days13.
9. The Stock Exchange shall publish the notice in all the editions of atleast one English national daily with wide circulation and in atleast one regional language daily with wide circulation at the place where the Stock Exchange is situated.
10. The notice calling for claims shall also be displayed on the premises of the Stock Exchange as well as on the web-sites of the Stock Exchange for the entire specified period.
11. The notice shall contain the specified period, the maximum compensation limit for a single claim of an investor, etc.
4.5 Eligible Claims
12. The claims received against the defaulter members during the specified period shall be eligible for compensation from the IPF/CPF.
13. If any eligible claims arise within three years from the date of expiry of the specified period such claims shall be borne by the stock exchanges without any recourse to the IPF/CPF14.
Provided that any claims received after three years from the date of expiry of the specified period may be dealt with as a civil dispute.
Provided further that in cases where any litigations are pending against the defaulter member, the residual amount, if any, may be retained by the stock exchange until such litigations are concluded.
13 Circular No. CIR/MRD/DP/06/2011 dated June 16, 2011
14 Circular No. CIR/MRD/DO/06/2011 dated June 16, 2011
14. The claims of the investors/clients shall be eligible for compensation from the IPF/CPF and in no case the claims of a broker or an associate of the member broker of the Stock Exchange shall be eligible for compensation out of the IPF/CPF.
15. The claims of the investors/clients arising out of speculative transactions shall not be eligible for compensation from the IPF/CPF. The claim should not be a sham or collusive.
4.6 Determination of Legitimate Claims
16. The IPF/CPF Trust may adopt the arbitration mechanism at the Stock Exchange to determine the legitimacy of the claims received from the claimants.
17. The IPF/CPF Trust may also seek the advice of the Defaulters Committee to sanction and ratify the payments to be made to the investors.
4.7 Threshold limit for claims
18. The Stock Exchanges are free to fix suitable compensation limits, in consultation with the IPF/CPF Trust. However, the amount of compensation available against a single claim of an investor arising out of default by a member broker of a Stock Exchange shall not be less than Rs. 1 lakh in case of major Stock Exchanges viz., BSE and NSE, and Rs. 50,000/- in case of other Stock Exchanges.
19. The Stock Exchange, in consultation with the IPF/CPF Trust, shall review and progressively increase the amount of compensation available against a single claim from an investor, atleast every three years.
20. The Stock Exchange shall disseminate the compensation limit fixed by them and any change thereof, to the public through a Press Release and also through its web site.
4.8 Disbursements of claims from the IPF/CPF
21. The IPF/CPF Trust shall disburse the amount of compensation from the IPF/CPF to the investor and such a compensation shall not be more than the maximum amount fixed for a single claim of an investor.
22. [Deleted]15
23. The compensation shall be disbursed to the investor from the IPF/CPF in case there is a shortage of defaulter brokers’ assets after its realisation16.
15 Circular No. CIR/MRD/DP/06/2011 dated June 16, 2011
16 Circular No. CIR/MRD/DP/06/2011 dated June 16, 2011
24. The Stock Exchange shall ensure that the amount realised from the assets of the defaulter member is returned to the defaulter member after satisfying the claims of the Stock Exchange and the SEBI in accordance with the bye-laws of the Stock Exchange17.
Provided that in case of a member broker having membership on the multiple stock exchanges, amount realised from the assets of the defaulter member shall be returned to the said member only after satisfying eligible claims of the concerned stock exchange, SEBI, and other stock exchanges.
4.9 Miscellaneous18
25. Post-demutualisation, the balance of the IPF/CPF lying un-utilised with the Stock Exchanges, shall continue to be utilised only for such purposes as prescribed by SEBI.
26. However, if the Stock Exchange is wound up post-demutualisation, then the balance in the IPF/CPF lying un-utilised with the Stock Exchange shall be transferred to SEBI. The funds will be maintained in a separate account and SEBI would act as trustee of these funds. The funds shall be utilised for purposes of Investor education, awareness, research etc.
4.10 Settlement of Claims
4.10.1 Dealing through the registered sub-broker of a defaulting broker19
With respect to entertaining the claims against the defaulter member for compensation from the Investor Protection Fund/ Customer Protection Fund (IPF/ CPF) where the clients have dealt through the registered sub-broker of the defaulting broker, the clients of the registered sub-broker would also be eligible for claims against the defaulting member broker for compensation from the IPF/ CPF.
4.11 Investor Services Fund 20
The Exchange is directed to set aside atleast 20% of the listing fees for providing services to the investing public. The exchange is also directed to provide daily quotation, other publications, computerised services and other services to the members of the stock exchange at cost price.
17 Circular No. CIR/MRD/DP/06/2011 dated June 16, 2011
18 Circular No. MRD/DoP/SE/Cir-38/2004 dated October 28, 2004
19 Circular No. SMD/Policy/Cir-15/2002 dated June 26, 2002
20 Ref. No. SE/10118 dated October 12, 1992
4.12 Utilization of Investor Protection Fund/ Investor Service Fund21
To bring about a uniformity/ consistency regarding the functioning of the Investor Protection Fund/ Investor Service Fund of stock exchanges, it is advised that all stock exchanges should open/ maintain atleast one service center for the benefit of the public/ Investors. However, the major stock exchanges are free to open as many investor centers as required. These investor centers will provide the following basic minimum facilities to the investors:
i. The Center will provide 4 financial newspapers with atleast one in the regional language.
ii. The Investor Services Center will install computer software(marketed by some vendors) which provide information about Corporates including annual reports, general, financial & other important information. The information will be made available through computers with one master terminal and some dummy terminals through which investors could access this information. Other facilities like copying will be made available to the investors at minimum cost.
iii. The Center will provide facilities for receiving/recording investor complaints. Special Staff recruited/deployed by the Exchange for this purpose will register the complaints and provide counselling service to the investors. Status of complaints will be maintained and updated in the computer system of the Center.
iv. The Center will provide for other infrastructure facilities such as telephone, photocopier, furniture, sitting space etc.
v. The Investor Service Center will provide published material of the Stock Exchange for the benefit of the investors. It should also provide the prospectus and application forms for the forthcoming public issues.
vi. The Center will provide for dummy terminals to display the prices of the scrips listed on the Exchange on real-time basis, to enable investors watch the price movements of the stocks.
vii. The Center will maintain a library on relevant laws, financial analysis, market trend analysis etc. for the education of the investors.
4.13 Utilization of Interest Income earned on IPF22
In order to promote investor education and to create greater investor awareness, all the stock exchanges are permitted to utilize interest income earned on Investor Protection Fund for investor education, awareness and research.
21 Circular No. SMD/Policy/Cir-32/97 dated December 03, 1997
22 Circular No. SMD/DBA-1/SS/Policy/Cir-34/2000 dated August 2, 2000
SECTION – 5: MODE OF PAYMENT AND DELIVERY 5.1 Mode of Payment and Delivery23
i. Brokers and sub-brokers should not accept cash from the client whether against obligations or as margin for purchase of securities and / or give cash against sale of securities to the clients.
ii. All payments shall be received / made by the brokers from / to the clients strictly by account payee crossed cheques / demand drafts or by way of direct credit into the bank account through EFT, or any other mode allowed by RBI. The brokers shall accept cheques drawn only by the clients and also issue cheques in favour of the clients only, for their transactions. However, in exceptional circumstances the broker or sub-broker may receive the amount in cash, to the extent not in violation of the Income Tax requirement as may be in force from time to time.
iii. Similarly in the case of securities also giving / taking delivery of securities in “demat mode” should be directly to / from the “beneficiary accounts” of the clients except delivery of securities to a recognized entity under the approved scheme of the stock exchange and / or SEBI.
23 Circular No. SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003
SECTION – 6: SETTLEMENT IN CASE OF HOLIDAYS
6.1 Settlement of Transaction in case of Holidays24
Often the holidays of Banks and Stock Exchanges, holidays among Stock Exchanges in different states, are not common. This results in situations where Stock Exchanges are burdened with multiple settlements on the working day immediately following the day(s) of closure. Thus with the view to enable smooth Settlement process and enable Exchanges meet their obligations the Advisory Committee on Derivatives and Market Risk Management (RMG) in consultation with the Stock Exchanges and the Depositories has provided the following guidelines:
i. The Stock Exchanges shall clear and settle the trades on a sequential basis i.e., the pay-in and the pay-out of the first settlement shall be completed before the commencement of the pay-in and pay-out of the subsequent settlement(s).
ii. The cash/Securities pay out from the first settlement shall be made available to the member for meeting his pay-in obligations for the subsequent settlement/s.
iii. Further, in-order to meet his pay-in obligations for the subsequent settlement, the member may need to move securities from one depository to another. The Depositories shall, therefore, facilitate the inter-depository transfers within one hour and before pay-in for the subsequent settlement begins.
iv. The Stock Exchanges/Depositories shall follow a strict time schedule to ensure that the settlements are completed on the same day.
v. The Clearing Corporation/Clearing House of the Stock Exchanges shall execute Auto DO facility for all the settlements together, so as to make the funds and the securities available with the member on the same day for all the settlements, thereby enabling the availability of the funds/securities at the client level by the end of the same day.
6.2 Settlement in case of Unscheduled Holidays25
If the settlement holiday is unscheduled (on account of strike etc.) the clubbing of settlement at the last minute may not be possible and the provision of SEBI letter (ref. No. SMD/Policy/25249/2001 dated march 19, 2001 to Stock Exchanges) referred in the circular shall be applicable.
24 Circular No. SEBI/MRD/Policy/AT/Cir- 19/2004 dated April 21, 2004
25 Circular No. SMDRPD/Policy/Cir-43/2001 dated August 20, 2001
SECTION – 7: TRADE GUARANTEE FUND/ SETTLEMENT GUARANTEE FUND
7.1 Trade Guarantee Fund/ Settlement Guarantee Fund26
In order to ensure timely completion of the settlement, all the stock exchanges were advised to set up clearing house/clearing corporation or settlement guarantee fund. The failure of one member has cascading effects on others as well. Thus objective behind the establishment of clearing corporation/settlement guarantee fund is to ensure that there is no delay in settlement due to failure of any member to honour his commitment to the exchange on time.
7.2 The Objective of the Fund
The objective of the SGF is to guarantee settlement of all transactions of the members of the exchange inter-se through the stock exchange. In the event of a member failing to honour his settlement commitments, the SGF will undertake to fulfill the commitment of that member and will complete the settlement without affecting the normal settlement process. In the case of clearing corporation, all the trades are settled through the clearing corporation and clearing corporation becomes the counter party for all the trades. The clearing corporation also guarantees settlement of all trades.
7.3 Corpus of the fund
The corpus of the fund should be adequate to meet out all the contingencies arising on account of failure of any member/members. The risk/liability to the fund depends on various factors such as trade volume, delivery percentage, maximum settlement liability of the members, the history of defaults at the exchange, capital adequacy of the members, and the degree of surveillance and safety measures i.e. imposition of mark to market margins, trade restrictions etc., implemented by the exchange. A fixed formula, therefore, cannot be prescribed to estimate the risk/liability of the fund. However, in order to assess the fair quantum of the corpus of SGF, an assessment on the following factors prevailing at the particular Stock Exchange may be necessary.
Risk Management system in force at the Exchange
i.The extent of implementation of various margins systems and the level of threshold limits.
ii.The percentage of margins (paid by the members) to their pay-in liabilities
iii.Control on off-market transactions
26 Circular No. SMD/POLICY/SGF/CIR-13/97 dated June 09, 1997 Circular No. SEBI/SMD/SE/21 /2003/05/06 dated June 5, 2003 Circular No. SMDRP/POLICY /CIR -16/2001 dated March 9, 2001
iv.Capital adequacy of members (Base minimum capital and the additional capital deposited with the Exchange)
v.The effectiveness of the surveillance system at the Exchange.
viMinimum expenses limit fixed by the Exchange.
2.The track record of defaults of members (Gross amount of default and the net amount) in the last 10 years.
3.The track record of disciplinary action for financial defaults taken by the Exchange in the last 10 years
4.The settlement liability of the top 10 members ( settlement liability wise ) in the highest settlement in the last 1 year..
5.Implementation of suggestions made in the SEBI Inspection Reports by the Stock Exchange.
6.The projected volume of business and deliveries at the Exchange for the next three years.
A realistic assessment on the adequacy of the above factors relating to the particular Stock Exchange need to be made. In case of any deficiency / non-satisfactory level of performance of the Exchange, the expected level of risk/liability to the SGF will increase and accordingly it will require a higher level of corpus.
Further in order to assess the minimum level of corpus of SGF, the following norms may be considered.
a.that may be assumed that in a worst case, the top ten members (highest settlement in last one year settlement liability-wise) of the exchange would default simultaneously in a settlement.
b. It may be assumed that there will be a maximum loss of 20% in the value on the net basis in the process of reversing the trade or squaring off the position.
c. The loss may be assumed to be recovered from the following sources :
• Margins deposited with the Exchange.
• The short fall will be first met from Income of the SGF (interest on deposits and recurring sources such as the turnover based contributions from members etc).
• The, balance, shortfall, if any might be recovered from the corpus of SGF.
In the normal course, the total income from the interest earned on cash portions
of the corpus of SGF and other recurring contributions to SGF by member should
be adequate to take care of the unexpected liability as per (b) above, For example if the total loss on settlement liabilities of the top ten brokers is Rs 2 Crs in a particular settlement, income generation from the fund (including recurring income) should not be less than Rs 2 Crs p.a.
7.4 Contribution to the Fund
The basic objective of the fund is to provide safety to the members against the risk of failure of any other member/s in the settlement, therefore the contribution to the corpus of SGF should be made by the members. The exchange may contribute towards the corpus of the fund out of the free reserves and by way of appropriation of the members fund lying with it. The base minimum capital contributed by the members may be used for building up the corpus of the SGF. For better liquidity, it should be ensured that the securities accepted towards contribution to the base minimum capital consist of only NIFTY (NSE 50 Index) Scrips which are freely usable by SGF in meeting out any risk / liability. The members may also be required to contribute to the fund by way of bank guarantee revocable at the instance of SGF against the default by any member. In order to generate regular income to the fund, the members should pay turnover based contribution to this fund. This contribution made by the members should not be recovered from investors.
7.5 Management of the fund:
The management of the SGF should be in the hands of an independent committee represented by members and outsiders. The constitution of the committee should be approved by SEBI.
7.6 Access to the fund:
In the event of a failure of member/s to honour their settlement commitment, the SGF will fulfill the commitment only after declaring the member/s as defaulter/s and such member/s would not be eligible to continue to trade and default proceedings as per the bye-laws of the exchange would have to be initiated against him.
7.7 Recoupment of the corpus
It should be ensured that the corpus of the SGF will not fall below the initial corpus or 75% of the closing value of the fund as on date immediately preceding March 31, which ever is higher and it will increase in proportion of increase in membership / turnover.
7.8 Utilisation of Settlement Guarantee Fund
In cases where amount shortages in a settlement for a trading member are in excess of the base minimum capital (BMC) prescribed, the trading facility of the member shall be withdrawn and the securities pay-out due to the member shall be withheld. The trading facility of the member shall be withdrawn and the securities pay-out due to the member shall be withheld, even in cases where the amount of shortages exceed 20% of the BMC and is less than the BMC on six occasions within a period of three months.
On complete recovery of the shortages, the member shall be permitted to trade with a reduced gross exposure as follows:
Cumulative Funds Shortage Exposure limit allowed (%of current exposure
limit)
20% of BMC – 50% of BMC 80%
50% of BMC – 100% of BMC 60%
This reduced gross exposure level shall be maintained for the member for ten rolling settlements. If the cumulative funds shortages for the next ten rolling settlements (previously four rolling settlements), is less than 20% of BMC, the exposure limits shall be restored. However, if a member provides a deposit equivalent to his cumulative fund shortages as the 'funds shortage collateral' in his clearing account the exposure limit may be restored immediately upon meeting the shortage. Such deposit shall be kept with the Exchange for a period of ten rolling settlements and shall be released only if no further funds shortages are reported for the member in next ten rolling settlements. The member shall not be given any exposure benefit or any interest payment on the amount so deposited as 'funds shortage collateral'. Members may deposit the ‘funds shortage collateral' by way of cash, fixed deposit receipts or bank guarantee.
The outstanding amount would carry a penal interest of not less than 0.07% (previously 0.09%) per day.
The amounts lying in the aforesaid funds would not be available for settling any loss suffered in connection with the margin trading facility. However, the aforesaid funds will continue to be available for all transactions done on the exchange, whether normal or through margin trading facility.27
27 Circular No. SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004
SECTION -8: TRANSFER OF FUNDS AND SECURITIES 8.1 Transfer of Funds and Securities from member to client28
The member shall transfer Funds and Securities from their respective pool account to the respective beneficiary account of their client within 1 working day after the pay-out day.
The Securities lying in the pool account beyond the above period would not be eligible for delivery in the subsequent settlement(s) and would also be not eligible for pledging or stock lending purpose, until the same is credited to the beneficiary accounts.
The Securities lying in the pool account beyond the stipulated 1 day shall attract a penalty at the rate of 6 basis point per week on the value of securities. The penalty so collected by the depositories shall be credited to a separate account with the depository and earmarked for defraying the expenses in connection with the investors’ education and awareness programs conducted by the depositories.
The securities, which are lying in these accounts beyond the specified time period, shall initially be identified based on FIFO (First-In First-Out) basis. However, with effect from March 5, 2001, the securities shall be identified based on the settlement number basis. The clearing corporation/houses of the stock exchanges shall provide the settlement-wise details of securities to the depositories and the depositories shall maintain the settlement-wise records for the purpose.
Further with effect from April 2, 2001, stock exchanges shall introduce the settlement system for direct delivery of securities to the investors. Clearing corporation/clearing house (CC/CH) shall ascertain from each clearing member, the beneficial account details of their respective clients who are due to receive pay out of securities. Based on this, the CC/CH shall send pay out instructions to the depositories so that the client receives pay out of securities directly to the extent of instructions received from the respective clearing members. To the extent of instruction not received, the securities shall be credited to the CM pool account.
28 Circular No. MRD/DoP/SE/Dep/Cir-30/2004 dated August 24, 2004 Circular No. SEBI/MRD/Policy/AT/Cir- 19/2004 dated April 21, 2004 Circular No. SMDRP/Policy/Cir-05/2001 dated February 01, 2001
SECTION – 9: TRANSFER DEED
9.1 Affix stamp of member affiliation to stock exchange on reverse of transfer
deed (Physical Shares)29
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. The following steps are to be followed in order 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).
(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.
9.2 Transfer Deed with or without Inscription30
All Transfer Deeds with or without the inscription of the name of the Stock Exchange on the reverse shall be treated as good delivery provided they are complete in all other respects and otherwise in order.
9.3 Delay in transfer of shares by companies31
A) Pending Transfer of Share
i) In case the transfer deed and the share certificates are with the company awaiting transfer beyond 30 days and in cases where the same are returned by the company to the investor with a company objection including due to signature difference (other than court cases where
29 Ref.SMD-I/22532 dated October 19, 1993
30 Ref. SMD/6059 dated October 17, 1994
31 Circular No. SMDRP/POLICY/CIR-46/2001 dated September 27, 2001
injunction has been ordered), companies shall effect the transfer of shares on obtaining from the transferee the proof of purchases duly acknowledged by the stock exchange/broker. If so desired, a company may also obtain indemnity bond from the transferee. Before effecting transfer, the company shall within 10 days of the date of such direction, send letters under registered post AD/Speed Post AD to the transferor(s) asking for their confirmations/no-objection, so as reach the company within 15 days from the date of receipt of the letter by the transferor. If the confirmation is received /no-objection is not received within 15 days from the transferor(s), the transfer would be effected immediately thereafter. The valid objection, if any should be accompanied by correspondingly old prohibitory order from a competent authority. Immediately after effecting the transfer of shares, the benefits (i.e. Bonus, rights, dividend) held back by the company shall be handed over to the transferee. If such benefits have been passed on to the transferor, the concerned stock exchange shall arbitrate through the brokers of the transferor and the transferee to determine the rightful claimant. Keeping in view the provisions of Section 206 A of the Companies Act and Section 27 of the Securities Contracts (Regulation) Act, 1956, in such cases, the Stock Exchanges should entertain claims for resolving through arbitration even if they are beyond the stipulated time of 4 months.
ii) In respect of complaints (other than court cases where injunction has been ordered) where the original transfer deeds have been lost in the process of rectification on account of company objection, companies shall transfer the shares as per the first proviso to sub-section (1) of Section 108 of the Companies Act on obtaining from the transferee the proof of purchases duly acknowledged by the stock exchange/broker on an indemnity bond from the transferee. Before effecting transfer, the company shall within 10 days of the date of such direction, send letters under registered post AD /Speed post AD to the transferor(s) asking for their confirmations/no - objection, so as reach the company within 15 days from the date of receipt of the letter by the transferor. If the confirmation is received/no objection is not received within 15 days, the transfer would be effected immediately thereafter. The valid objection, if any, by the transferor shall be accompanied by correspondingly old prohibitory order from a competent authority. Immediately after effecting the transfer of shares, the benefits (i.e. Bonus, rights, dividend) held back by the company shall be handed over to the transferee. If such benefits have been passed on to the transferor, the concerned stock exchange shall arbitrate through the brokers of the transferor and the transferee to determine the rightful claimant. Keeping in view the provisions of the Section 206 A of the Companies Act and Section 27 of the Securities Contracts (Regulation)
Act, 1956, in such cases, the Stock Exchanges should entertain claims, even if they are beyond the stipulated time.
iii) In respect of companies where shares and transfer deeds are lying with the investor or introducing broker-member(IM), and IM has already paid/replaced shares to buyer/broker due to bad delivery on account of objection memo raised by the company, but there was a delay on the part of the company in raising objection beyond the stipulated time period of 1 month, shares shall be tranferred by the company to the investor/IM, as applicable, provided no objection certificate of the buyer/buying broker is provided.
B) Procedure for dealing with Company objections in future
i) In respect of complaints where shares and transfer deeds are lying with the investor of introducing the broker-member (IM) and IM has already paid/replaced shares to buyer /broker due to bad delivery on account of objection memo raised by the company, but there was a delay on the part of the company in raising objection beyond the stipulated time period of 1 month. In such cases the company would be liable to compensate the aggrieved party for the opportunity losses during the intervening period.
ii) In cases of company objection due to signature difference (Other than court cases where injunction is ordered), companies shall effect the transfer of shares by following the procedure mentioned below. Before effecting transfer, the company shall within 10 days of receipt of shares from the transferee, send letters under registered post AD/ Speed Post AD to the transferor(s) asking for their confirmations/no-objection, so as to reach the company within 15 days from the date of receipt of the letter by the transferor. If the confirmation is received/no objection is not received within 15 days, the transfer would be effected immediately thereafter. The valid objection, if any, should be followed/accompanied by a prohibitory order from a competent authority and should reach the company within 30 days thereafter, failing which the transfer would be effected. Immediately, after effecting the transfer of shares, the benefits (i.e. Bonus, rights, dividend) held back by the company shall be handed over to the transferee. If such benefits have been passed on to the transferor, the concerned stock exchange shall arbitrate through the brokers of the transferor and the transferee to determine the rightful claimant. Keeping in view the provisions of Section 206 A of the Companies Act and Section 27 of the Securities Contracts (Regulation) Act, 1956, In such cases, the Stock Exchanges are hereby advised to entertain claims even if they are beyond the stipulated time.
iii) In cases where transfer deed and the share certificates are with the company and the company has not effected transfer of shares, within the stipulated time period of one month, without communicating the investor any valid objection. In such cases the company would be liable to compensate the opportunity losses occurred to the investor(buyer). In addition, the company shall transfer the shares immediately and keeping in view the provisions of Section 206A of the Companies Act and Section 27 of the Securities Contracts (Regulation) Act, 1956, provide all benefits (i.e. bonus shares, dividend) which accrued to the investor during the intervening period on account of such delay.
iv) Once a share certificate is returned by a transfer agent as a "company Objection" keeping in view the provisions of Section 206 A of the Companies Act and Section 27 of the Securities Contracts (Regulation) Act, 1956, all benefits must be held in abeyance by the company till such time the transfer actually takes place or a valid no objection is received from the Transferee on his receiving replacement.
v) Every time an introducing broker replaces a bad delivery share or pays for the share to the receiving broker/buyer investor as per market norms, a No Objection Certificate to transfer the shares in the name of introducing member from the receiving broker/buyer investor shall be given to the introducing member broker/seller investor, as applicable, through the Bad Delivery Cell mechanism.
C) Duplicate Share Certificate
Where the investor has complained about issuing of duplicate share certificate(s) by the company on the basis of allegedly forged/stolen documents furnished by a third party, the company shall verify and satisfy itself of the claim of the investor, within 15 days of receipt of the claim and take steps including invoking of indemnity bond to issue shares and corresponding benefits to the rightful owner in terms of section 84 of the Companies Act read with Rule 3 of the Companies (Issue of Share Certificates) Rules, 1960.
SECTION – 10: UNIFORM NORMS FOR GOOD/BAD DELIVERY NORMS32 10.1 Transfer Deeds
No
. Description Good/Bad
1. Transfer Deeds in the prescribed form and printed with the words “For the Stock Exchange.” GOOD
Stock Exchange emblem may or may not be printed. Month and year of printing may or may not be put on the reverse of the Transfer Deed.
2. Mutilated Transfer Deed with the signatures of the transferor, witness, Directors and officer of the Company/distinctive numbers/ any material portion badly torn overwritten, or defaced.
Typical Cases : BAD
GOOD
GOOD BAD
A) Material portion defined here only pertains to the material portions at the time of delivery and not prospective one. For a buyer
Consideration column, Specimen signature column, Name, Address, Occupation will also be the material portion.
Material portion includes of transferor’s name and signature, company name, folio no., certificate number, distinctive nos., number of shares, name and signature of the transferee, specimen signature of transferee
B) Transfer Deed torn in the prospective material portion
• Torn and pasted with self-adhesive tape on which the required details can filled in without any difficulty.
• Transfer Deed torn in non material portion and held together by a transparent tape.
• Transfer Deed torn end-to-end in any angle.
3. Transfer Deeds with correction in the material portion like, erasure, overwriting, alteration or crossing out by transferor / Authorised Signatory. GOOD if
properly authenticat
ed under
the full
signatures
32 Circular no. SMD/RCG/2796/96 dated July 16, 1996
Circular no. SMD/POLICY/CIR/7-97 dated April 16, 1997
Circular no. SMD/POLICY/GBDN/CIR-25/97 dated October 09, 1997
of the
transferors.
Transfer Deeds with correction in the material portion like, erasure, overwriting, alteration or crossing out in material portion. Good if
properly authenticat
Undernoted corrections/ alterations are not considered in material ed under
portion. the full
signatures of all the transferor( s).
A) Minor spelling mistake in the following fields are valid without the transfer’s authorisation provided the word can be properly identified : Good.
a. Name of the company.
b. Number of shares in words.
c. names of the Shareholders
Illustration Good Bad
Telco Teelco Tisco
Fifty Feefty feefteen
Ramesh Rameesh Rajesh
B) Eraseure, overwriting, alteration or crossing out in one or two character in folio numbers. Good.
C) Erasure, overwriting, alteration or crossing out in one or two Good if
character of “Distinctive Numbers”.
D) Erasure, overwriting, alteration or crossing out in one or two certificate number does not contain any
erasure, overwritin
g, alteration
character of “Certificate Numbers “. ,or
crossing out.
Good if
E) Erasure, overwriting, alteration or crossing out in Number of Shares in figure.
F) Erasure, overwriting, alteration or crossing out in Number of Shares in figures.
Erasure, overwriting, alteration or crossing out in one or two character in “Numbers of Shares “in words.
G) List of certificate numbers and distinctive numbers attached to transfer deed signed by all transferors. distinctive number does not contain any
erasure, alteration or crossing out.
Good if Numbers in words does not contain
any
erasure, overwritin g,
alteration or crossing out.
Good if Numbers of Shares of figurews does not contain
any
erasure, overwritin g,
alteration or crossing out.
Good
4. If the name of the transferor (s) in the share certificate & the name in the transfer deed(s) differs materially.
Differences of the following type (vice-versa) BAD
A) Addition or Deletion of 1 or 2 alphabets
B) Krishna Chandra Chelura - C C Krishna
C) Corporation - Corpn/Corp.
D) Ashok Gupta - Gupta Ashok GOOD BAD
GOOD
GOOD
5. Transfer Deeds signed as ‘Choonilal’ whereas in share certificate the name is spelt as ‘Chunilal’.
Other than any apparent difference in seller’s signature must be accepted.
In case of apparent difference like S Rao signing as David
In case S Rao signing as Subhash since the first letter of the signature matches with the initial. GOOD
BAD GOOD
6. Transferor’s signature in English, Hindi or any one of the Scheduled languages in India.
Assamese, Bengali, Gujarati, Hindi, Kannada, Kashmiri, Malayalam, Marathi, Oriya, Punjabi, Sanskriti, Tamil, Telugu and Urdu - as per Constitution of India - English Schedule ( Article 314 (I) and 451). GOOD
7. Signature of the Transferor is in an Indian language other than the Scheduled languages of India or when the Transferor has affixed his thumb impression. If attested by any person authorised to attest signatures under the Seal/Stamp of his office. GOOD
8. Transfer Deeds in respect of joint holdings signed by all the joint holders in any order .
Provided the signatures are against the relative names filled up in the Transfer Deed. GOOD
9. Transfer Deeds without the name of the Company, name(s) of Transferor(s), Folio No., share certificate no., Distinctive no., and number of shares being written. BAD
10. In one lot with one Transfer Deed name on one certificate reading as “Ramesh C Talati” an on another certificate as “Ramesh Chunilal Talati” but Register Folios same on both.
In one lot, separate transfer deeds are required for each registered folio. If the transferor’s name is identical and folios are different and there is only one transfer deed. GOOD
GOOD
GOOD
11. In one lot with one Transfer Deed names on different certificates reading as Ramesh Chunilal Talati and Talati Ramesh Chunilal but Register Folio is same. GOOD
12. Income Tax Authority or Collector signs as Transferor. (Number and Date of the relative Order necessary). GOOD
13. Instead of Executor’s signature, his Agent’s Signature is put on the Transfer Deed. (Number and Date of Registration of Poser of Attorney necessary). GOOD
14. Executor’s signature without his rubber stamp. (Number and Date of Registration of Power of Attorney necessary). GOOD
15. In the case of Units transfer deed in the name of a Minor and signed by natural Guardian. (In the case of Court Guardian, a court order is required).
Shares cannot be held in the name of a Minor unless accompanied by Court Order granting permission for sales/purchase which is beneficial to the Minor. GOOD
GOOD - if accompani ed by the relevant Court
Order for
sale.
16. Transfer Deeds signed by an individual against whom insolvency proceedings are pending.
• Unless the transfer deed is duly certified and countersigned by the Official Assignee. BAD GOOD
17. Transfer deeds signed under Power of Attorney where the power given is subject to conditions.
• Transfer deed signed by Director of the Company and Under board Resolution not mentioned on the front or the reverse of the transfer deed.
Transfer deed signed by an authorised signatory under Power of Attorney .
• Transfer deed signed by an authorised signatory of a custodian and the P A registration no is mentioned on face or the reverse of the transfer deed.
• Where the transfer deeds are signed by an authorised signatory under a Board Resolution and the stamp UNDER BOARD RESOLUTION is mentioned on the face or the reverse of the transfer BAD GOOD
GOOD
only if P A regn no, date
signature and stamp of the
introducin g Member is
mentioned on the reverse of the
Transfer Deed.
GOOD
deed. GOOD
17. Transfer deeds signed under Power of Attorney where the power given is subject to conditions.
• Transfer deed signed by Director of the Company and Under board Resolution not mentioned on the front or the reverse of the transfer deed.
( Stamp of introducing member is not required to be affixed on the reverse of the transfer deed)
• Transfer deed signed by an authorised signatory under Power of Attorney .
• Transfer deed signed by an authorised signatory of a custodian and the P A registration no. is mentioned on face or the reverse of the transfer deed.
( Stamp of introducing member is not required to be affixed on the reverse of the transfer deed)
• Where the transfer deeds are signed by an authorised signatory under a Board Resolution and the stamp UNDER BOARD RESOLUTION is mentioned on the face or the reverse of the transfer deed.
( Stamp of introducing member is not required to be affixed on the reverse of the transfer deed) BAD GOOD
GOOD
only if P A regn no,
date
signature and stamp of the
introducin g Member is
mentioned
on the
reverse of
the
Transfer Deed.
GOOD
GOOD
18. Transfer Deed signed by a custodian on behalf of a client
• In the signature column the custodian does not put the stamp as ‘Constituted Attorney’ on behalf of the transferor.
• Transfer Deed signed by a Custodian on behalf of the client and in the signature column it puts the stamp “By Constituted Attorney to the transferor” with the P/A number given on the reverse of the TD with the stamp and signature of the custodian.
The above mentioned details entered on the face of the TD and not mentioned on the reverse of the TD BAD GOOD
GOOD
18. Transfer Deed signed by a custodian on behalf of a client
• In the signature column the custodian does not put the stamp as ‘Constituted Attorney’ on behalf of the transferor.
• Transfer Deed signed by a Custodian on behalf of the client and in the signature column it puts the stamp “By Constituted Attorney to the transferor” with the P/A number given on the reverse of the TD with the stamp and signature of the custodian.
The above mentioned details entered on the face of the TD and not mentioned on the reverse of the TD BAD GOOD
GOOD
19. Shares sold by FIIs and transfer deed signed by a Custodian on behalf of the FII.
(Copy of RBI approval is not required to be attached with each market lot). GOOD
19. Shares sold by FIIs and transfer deed signed by a Custodian on behalf of the FII.
(Copy of RBI approval is not required to be attached with each market lot). GOOD
20. In case of GDR,
• photocopies of the RBI approval attached to the deliveries ; OR
• if RBI approval number and date is mentioned on the transfer deed and attested by the introducing member. GOOD
GOOD
21. Consideration amount and date of execution of the transfer deeds are filled in. BAD
22. Transfer Deeds signed by or on behalf of a Company against which liquidation proceedings are pending.
• Unless the Transfer Deed is certified and countersigned by the Liquidators. BAD
GOOD
23. The name of the delivering broker with his SEBI Registration number and date not mentioned at the back of the Transfer Deed.
In case the shares are delivered to the Clearing House by the Custodian and the Transfer de4ed bears the stamp of Custodian along with the Clearing Number of the Broker on whose behalf the shares are delivered.
The date should be the pay-in date/ delivery date only. BAD
GOOD
24. Shares held by a TRUST and Signed on the Transfer Deed as ‘NAME OF TRUST - PROPRIETOR’.
TD signed as “NAME OF TRUST - TRUSTEE’.
Shares held in the name of a trust, if accompanied by a copy of the
resolution or the relevant portion of the trust deed authorising the BAD
BAD GOOD
trustees to transact in securities on behalf of the trust.
25. If shares held are duly registered by the company in the name of the HUF ( Shares held by HUF and signed by KARTA). GOOD
26. Transferor’s signature witnessed by a person but his full name not give. (as long as the name and address of the witness are perfectly legible). GOOD
27. Witness’s name, address and signature is in a language other than English specified by the Ministry of Finance.
Assamese, Bengali, Gujarati, Hindi, Kannada, Kashmiri, Malayalam, Marathi, Oriya, Punjabi, Sanskrit, Tamil, Telugu and Urdu - as per Constitution of India - English Schedule ( Article 314(I) and 451).
If signed in a language other than specified by the Ministry of Finance. GOOD
BAD
28. Attestation stamp in any one of the Scheduled languages in India, Indian languages :
Assamese, Bengali, Gujarati, Hindi, Kannada, Kashmiri, Malayalam, Marathi, Oriya, Punjabi, Sanskrit, Tamil, Telugu and Urdu - as per Constitution of India - English Schedule ( Article 314(I) and 451). GOOD
29. Transferor’s signature attested by a Bank official
• only the designation mentioned.
• If the name, Designation of the attesting authority signing alongwith the complete address is given BAD GOOD
30. Attestation by Gram Panchayat or a Surpanch or Village Magistrate or Village Munsiff under his seal. GOOD
31. Signature attested by any person authorised to attest signatures with his full name and address with the Official Seal/Stamp of his office. GOOD
32. Transferor’s signature is attested by a Notary Public.
(The necessary seal, rubber stamp, adhesive stamps as prescribed for such attestation should be affixed in cases where Notary attestation is required i.e. In cases where Rectification of objections is required due to signature differences). GOOD
33. Transfer Deed is signed by the transferor
• signature is clearly of a name different than the name of the transferor.
• If signature is same for two different shareholders under two different Transfer Deeds. BAD
BAD
34. Marketable lot with more than five transfer deeds. Upto five transfer deeds used to make a marketable lot. BAD GOOD
35. New shares which are issued on prorata basis and old shares standing in the folio and name of same transferor and accompanied by one transfer deed for a marketable lot. (The new share dividend declared for the previous year i.e. the old new compensatory value (ONCV) would be payable on the entire market lot). GOOD
36. Company’s name has been changed but it has not been corrected on the share certificate. GOOD
37. Abbreviated name of a Company filled up in the transfer deed.
If from the abbreviated name the identity of the company can be ascertained. The name of the Company should be identifiable ., e.g.
TELCO, TISCO, L&T, etc. GOOD
38. Exact position of Tds to be attached on top of the certificate. TD should be placed on the top of the share certificate.
39. Transferor and witness is the same. BAD
40. Transfer Deed in the prescribed form and name of a particular Stock Exchange filled in or not. GOOD
41. Transfer Deed not in the prescribed form. BAD
42. Witness and attesting authority identical. GOOD
43. Transfer Deeds bearing signatures of witnesses, the address of the witness being in a different city or town or Centre other than that of Transferor or Transferee. GOOD
44. Prescribed Authority (ROC) seal overlapping and stamped twice.
Even if the signature of the Registrar of Companies is partly printed and the date stamp is also partly printed but both the signature and the date should be apparent. GOOD
45. The Endorsement of the Prescribed Authority (e.g. Registrar of Companies ) bears the same date as the date from which the Register of Members of the Company is closed. GOOD
46. If the Endorsement of the Prescribed Authority (e.g. Registrar of Companies) bears a date prior to the date of issue of share certificate or the date of allotment of shares.
Provided the Endorsement of the Prescribed Authority bears a date of or after the date from which the Register of Members of the Company closed last. Good
47. Transfer Deed endorsed by the Prescribed Authority on a date prior to closure of the Register of Members of the Company delivered after the date of closure of Register of Members. Bad
48. Transfer Deeds accompanying debenture certificates or any other permissible listed security (other than equity) whether date-stamped by the Prescribed Authority or not.
Provided for the convertible portion a separate date-stamped Transfer Deed is delivered. Good
49.Transferor’s signature on the transfer deed with the date on which he has signed. GOOD
50.Witness is a Non-Resident and the address given is of a foreign country. GOOD
51.Distinctive numbers range “To” partly filled in the transfer deed., e.g. 4589201 - 300 etc. GOOD
52.In the case of mutual funds, the ROC stamp and signature are missing (except in case of Schemes of Unit Trust of India). GOOD
53.Certificates with multiple folios per market lot attached to separate transfer deed (subject to guideline no.35 above). GOOD
54.Logo of the Stock Exchange on the reverse of the transfer deed missing. GOOD
55.Attestation of the transferor’s signature is not mandatory.
except in the case where the transfer has been returned by the company due to SIGNATURE DIFFERENCE. GOOD
56.Units issued with the terms ‘either or survivor’, if signed by all holders If signed by any one of the holders GOOD
GOOD
57.Transferor’s signature on the transfer deed is facsimile signature for Registered Custodians. GOOD
58.Certified Transfer Deed
Provided the name and address of the Transferor the distinctive numbers of the shares covered by the Transfer Deed and date of certification are given. Good
59.Any erasure or alteration in the Certified Transfer Deed.
When authenticated by an authorised signatory of the Company. Good
60.Certified Transfer Deeds and share certificates delivered in part for bargains in market trading unit. Good
61.In case of shares under lock in-period, if the transfer deed date is prior to the lock-in period last date but the date of introduction into the market is after the last date of lock-in period.
If the transfer deed date is prior to the lock-in period last date and the date of introduction into the market is before the last date of lock-in period. GOOD BAD
62.Some companies allot record numbers for shares issued by them apart from distinctive number ranges. For these shares, if record number is filled up along with distinctive number ranges on the transfer deed. GOOD
If only the record number has been filled up instead of distinctive number ranges on the transfer deed. BAD
62ransfer deeds (dated July 1, 1997 and thereafter)33 bearing rubber
Astamps on the reverse thereof other than those of members of the stock exchanges/clearing house/clearing corporations, SEBI registered sub-brokers and Remisiers registered with the stock exchanges. BAD
33 Circular No. SMD/POLICY/SUB BROKER/CIR-12/97 dated June 2 1997
10.2 Share Certificates
63.Name of the company or emblem is not readable in the common seal or GOOD.
there is no common seal on the share certificate -
64.The last date for payment of call has expired and the call has not been paid or if the call has been paid, the necessary Call Report has not been attached.
The call payment receipt with the stamp of the Bank before or on the due date if attached to the securities is good delivery for three months from the last date of call payment or next book closure announced by the company whichever is later.
All call payment receipts after due date must be endorsed as “cheque/draft realised” by the Bank/co./Registrars. BAD
GOOD
GOOD
65.All securities with stickers issued by the companies in lieu of endorsement. GOOD
66.If call money paid but not endorsed on share certificate even after the book closure but transfers affected after the call payment date. BAD
67.If the final call is endorsed but the initial or the initial and the second call not endorsed. (i.e. if marked “FULLY PAID”). GOOD
68.in case of fully convertible debentures, after the debentures have been converted into equity, if the call money endorsement has been done only for the equity portion and not for the debenture portion. GOOD
69.Call paid endorsements made by the Company with the call amount,
date of payment and signature of the Authorised Signatory with or GOOD
without the Rubber Stamp of the Company.
70.In the case of partly paid shares, when a call has been made but not paid and delivery effected during the period of ten days before the last date fixed for payment.
If the call receipts are attached to the documents. BAD GOOD
71.Application Receipts and Call money receipts not bearing bank stamps and payment details. BAD
72.Any significant correction, erasure, overwriting, crossing out or
alteration in the quantity of shares, in the last registered holders name or in any material particulars on the share certificate.
Unless the Authorised Signatory who has signed on the certificate, authenticates the correction Or the correction is initialed and authenticated by any other officer under the Company’s rubber stamp. BAD GOOD
73.Certificates badly torn as is not to be in deliverable condition or share BAD
certificate torn through and through or badly torn as to obliterate or render illegible or create the impression of cancelling the numbers or directors or other signature or the date or any other particulars or if it is written upon or damaged or mutilated by advertisements, printing, rubber stamp or otherwise or if a material part of the certificate be torn out or cut off.
74. Share certificates defaced or mutilated in portion:
The following will be considered as material portion in the case of share certificate:
(i) Share certificate torn end to end and pasted with transparent self- adhesive tape.
(ii) Where shares have been transferred to a new holder and if torn at the original holders name portion.
(iii) Folio number and name overwritten in one or two characters and not authenticated by the authorised signatory.
(iv) If the share certificate is torn at the company name portion but is decipherable.
(v) Corrections in transfer Number or Date of transfers, if legible and not authenticated.
(vi) Share Certificates with bar codes not concealing any material information. BAD
BAD GOOD
GOOD GOOD GOOD GOOD
75.If the name of the Company has been disfigured in the body of the share certificate so as to affect it materially.
If the name of the company is identifiable. BAD GOOD
76.Certificates in the case of UNITS discharged by the transferor for
purpose of repurchase and then cancelled by him and initialled. BAD
77.Share certificate contains one name but the transfer deed consists of two signatures.
If both the signatures on the transfer deed are identical in nature or can be identified as signature of the same person. If the transferor has signed twice but has struck off the 2nd signature. BAD
GOOD
78.Share certificate contains name of one transferor but transfer deed contains two names and signature respectively. BAD
79.Preferential / promoters quota shares under lock-in period delivered which are not transferable. BAD
80.Share certificate issued without the signature of Secretary / Authorised signatory.
If the shares are transferred subsequently and the authorised signatory has signed against such transfer. BAD
GOOD
81.Signature missing in the initial column but signed by Authorised signatory in the required column on the reverse of the certificate. GOOD
82.Endorsement effected on the reverse of the certificate and struck off and again endorsed. GOOD subject to
proper authenticat ion by the Company by putting
a round
stamp of
the Company.
83.Certificate with company’s old registered office crossed out and new address stamped without authentication. GOOD
84.Certificate without mentioning the place of issue. GOOD
85. Revenue stamp affixed on the certificate concealing any material portion of the certificate.
Provided any material portion like lock-in period date, NRI details are not affected. GOOD
86.Revenue stamps affixed / impressed by the Company on the share certificate has come off. GOOD
87.Any alteration or erasure or correction without initials in the transfer endorsement on the back of the share certificate as for example made in the year 1960 and subsequently the shares have again been transferred by the Company, say in 1961. GOOD
88.Share certificates with irrelevant or extraneous rubber stamp or writings on the scrip.
Provided the rubber stamp or the writings does not affect any material portion of the scrip. GOOD
89.ncrease or decrease of the Capital and if the certificate does not carry the endorsement on the face of the certificate. GOOD
90.Absence of holder’s discharge on the Letter of Allotment. GOOD
91.share Certificate and Transfer Deed not attached together. BAD
92.Shares standing in the name of Non-Resident Individuals.
Provided the declaration stamp as per the RBI guideline is affixed and countersigned by the introducing member. GOOD
93.Name of the holder printed in two lines which looks like joint holding or one line of address printed and looking like second holder. GOOD
94.Lock in period mentioned in the certificate, without specific date of release of lock in. BAD
95.Shares issued in the name of Sole Proprietor / Partnership firm signed by the Proprietor / Partner.BAD
Units / debentures issued in the name of Sole Proprietor / partnership firm signed by the Proprietor / partner.
96.In case the shares of a company are not pari passu with the existing equity shares of the company in two financial years then new share dividend declared for the previous year i.e. the old new compensatory value (ONCV) for two years has to be paid.
The full dividend declared will have to be paid (interim + final). GOOD
10.3 Miscellaneous
No.Description
97Validity period of Company Objection by the last buying broker to be notified to the Exchange/ Introducing Broker is 12 months from the date of the objection memo. In all other pending cases of company objections bearing a date prior to July 16, 1996, the validity period will be as per rules – of the respective exchanges – as existing prior to July 16, 1996.
98 Objections must be accompanied with Share Certificates.
99 Shares lodged for transfer after book closure (but before one year from the date of date stamping the transfer deed) are returned under objection can be lodged as company objection.
100 Where the shares have been duly transferred by the company in the name of the
transferee, and thereafter the company sends a letter informing transferee that
the shares have been transferred based on fraudulent documents, such cases can
be lodged as company objection subject to the following conditions and
procedure :
• In cases where the company has transferred certificates which are fake and later sends a letter informing that the shares have been transferred on fraudulent certificates, such cases will NOT be treated as company objections and the company will be responsible for the transfer.
• In cases where the shares are under stop transfer, stay order, non-transferable (lock-in period) or shares are partly paid and the company has transferred the shares and later sends a letter informing that the shares have been transferred on fraudulent documents, such cases will NOT be treated as company objections and the company will be responsible for the transfer.
• In cases where the certificates are genuine but the transfer deed is forged (i.e. the company has transferred the shares in good faith) the shares can be accepted as company objection. In such cases the company should necessarily enclose the copies of both sides of the transfer deeds based on which shares were transferred by the company in favor of the holder and which later on has been found to be based on forged documents, and all subsequent transfers thereafter along with the objection.
Procedure :
(In order to simplify the understanding of the procedure, the following illustration has been used:
A ---> B ---> C ---> D ---> X ---> Y ---> Z
The shares were first sold through ‘A’ in the market. After passing through ‘B’ and ‘C’ the shares were lodged by ‘D’ to the company for transfer. After receiving the shares duly transferred from the company in his name ‘D’ sold the shares in the market. These shares after passing through ‘X’ and ‘Y’ are finally sent by ‘Z’ to the company for transfer in his/her name. After receiving the shares from the company duly transferred in his name, ‘Z’ has received a letter from the company stating that the shares transferred in the name of ‘D’ were based on fraudulent documents.
• ‘Z’ will report the objection along with the company objection against ‘D’.
• ‘D’ will rectify/replace the shares within 21 days as per the BDC procedures.
• ‘D’ may in turn lodge the bad delivery for rectification through the BDC against ‘A’.
The validity period of reporting such cases will be 36 months from the date of latest transfer by the company (in the above example 36 months from the date the shares were transferred in the name of ‘Z’).
The company will also furnish copies of both sides of transfer deed based on which shares were transferred in favor of ‘Z’ and ‘D’ along with the objection memo.
101 In case of joint holding, and in event of death of any of the holders, transfer can take place on the basis of death certificate accompanying the transfer deed only for a period of two years from the date of the death or ensuing book closure, whichever is later.
The Introducing member of a recognised stock exhange may certify/attest copy
of the death certificate and also issue an identity certificate in case where the
name of the deceased on the share certificate is not identical with the name on the
death certificate - GOOD
102 While rectifying objections due to signature differences, a fresh signature by the transferor (if the same transfer deed is re-submitted) alongwith attestation is mandatory. Fresh transfer deed is mandatory if objection is rectified after book closure date.
103 In case Rights/Bonus shares tendered as corporate benefits are reported as bad delivery, if it is odd lot, the value of shares based on the rate prevalent on the day
of reporting bad delivery will be paid.
104 Rectification/replacement of transfer deed under objection should be in market lot only (even if transfer deed under objection is submitted in non-market lot).
105 If Jumbo transfer deed is submitted as company objection, original transfer deeds need not be returned by the receiving member.
106 When documents are returned under signature difference, the transfer deed can be attested by the introducing member. If the introducing member is a corporate, the Director or authorised signatory can attest the transfer deed, under his company's stamp, with SEBI Registration Number.
107 For reporting as company objections, the transferee portion of the transfer deed should be duly filled in.
108 For reporting as company objection, the following documents are required:
A. If they are returned as objection from the company due to the above reason:
. company objection memo stating that the shares are fake/ forged
. copies of both sides of the transfer deeds
. copies of both sides of the share certificates
B Otherwise one of the following documents are required:
. public notice given by the company/registrar
. notification from any stock exchange
. letter of intimation from the company to stock exchange.
109 For reporting missing/lost/stolen shares as objection the following documents are required :
A. If they are returned as objection from the company due to above reason:
• company objection memo stating that the shares are missing/lost/ stolen accompanied by a copy of Court Order or FIR or copy of acknowledged police complaint
• copies of both sides of the transfer deeds
• copies of both sides of the share certificates
B. Otherwise one of the following documents are required :
• public notice given by the company /registrar
• notification from any stock exchange
• letter of intimation from the company to stock exchange
In cases where duplicate shares have been issued to a third party under the
provisions of section 108 (1) A of the Companies Act, the company should also
provide the name and address of the third party to whom the duplicate shares
have been issued along with the date of request for duplicate shares by the third
party.
110 Attestation is required where signature of transferor is in an Indian language other than the Scheduled languages in India or when the transferor has affixed his thumb impression (guideline no. 7) In other cases, attestation is compulsory only when shares come under objection due to signature difference. Hence, guideline Nos. 28, 29, 30, 31 & 32 apply only to transfer deeds which come under objection due to signature difference.
Note:-
Text in BOLD has been amended vide circular dated August 19, 1996 Text in Italics has been amended vide circular dated April 16, 1997
Text underlined has been amended vide circular dated October 09, 1997.
10.4 Clarification with regard to 97 and 100 of the Norms for G/B Norms34
It has come to the notice of SEBI that there is a conflicting interpretation of clause 97 and clause 100 of uniform norms for Good/Bad delivery with respect to validity period of company objection memos. Keeping in view the above and as discussed with representatives of the Stock Exchanges, in such cases the provisions of clause 97 will prevail.
34 Circular No. SMDRP/POLICY/CIR-42/2001 dated August 10, 2001
SECTION 11 - Abolition of no-delivery period for all types of corporate actions 35
11.1 Pursuant to the recommendations made by the Secondary Market Advisory Committee of SEBI at its meeting held on June 30, 2009, it is decided to do away with ‘no-delivery period’ for all types of corporate actions in respect of the scrips which are traded in the compulsory dematerialized mode and accordingly, short deliveries, if any, of the shares traded on cum-basis may be directly closed out. In case of such direct close-out, the mark-up price would be as stated in SEBI circular no. SMD/POLICY/Cir-08/2002 dated April 16, 2002.
11.2 The aforesaid will come into effect from August 1, 2009, and accordingly will apply to all corporate actions for which the record date / book closure falls on or after August 10, 2009.
35 Circular No. MRD/DoP/SE/Cir-07/2009 datad July 21, 2009
REFERENCE – List of Circulars
1. Ref. No. SE/10118 dated October 12, 1992.
2. Ref. SMD-I/22532 dated October 19, 1993.
3. Ref. SMD/6059 dated October 17, 1994.
4. Circular No. SMD/RCG/2796/96 dated July 16, 1996.
5. Circular No. SMD/Policy/IECG/5548/96 dated December 09, 1996.
6. Circular No. SMD/POLICY/CIR/7-97 dated April 16, 1997.
7. Circular No. SMD/POLICY/SUB BROKER/CIR-12/97 dated June 2 1997.
8. Circular No. SMD/POLICY/SGF/CIR-13/97 dated June 09, 1997.
9. Circular No. SMD/POLICY/GBDN/CIR-25/97 dated October 09, 1997.
10. Circular No. SMD/Policy/Cir-32/97 dated December 03, 1997.
11. Circular No. SMD/Policy/Cir-10/99 dated May 04, 1999.
12. Circular No. SMD/DBA-1/SS/Policy/Cir-34/2000 dated August 2, 2000.
13. Circular No. SMDRP/Policy/Cir-05/2001 dated February 01, 2001.
14. Circular No. SMDRP/POLICY /CIR -16/2001 dated March 9, 2001.
15. Circular No. SMDRP/POLICY/CIR-42/2001 dated August 10, 2001.
16. Circular No. SMDRPD/Policy/Cir-43/2001 dated August 20, 2001.
17. Circular No. SMDRP/POLICY/CIR-46/2001 dated September 27, 2001.
18. Circular No. SMD/Policy/Cir-08/2002 dated April 16, 2002.
19. Circular No. SMD/Policy/Cir-15/2002 dated June 26, 2002.
20. Circular No. SMD/Policy/Cir-21/02 dated September 04, 2002.
21. Circular No. SMD/POLICY/Cir - /03 dated February 6, 2003.
22. Circular No. SEBI/SMD/SE/21 /2003/05/06 dated June 5, 2003.
23. Circular No. SEBI/SMD/SE/Cir-26/2003/25/06 dated June 25, 2003.
24. Circular No. SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003.
25. Circular No. SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004.
26. Circular No. SEBI/MRD/Policy/AT/Cir- 19/2004 dated April 21, 2004.
27. Circular No. MRD/DoP/SE/Dep/Cir-30/2004 dated August 24, 2004.
28. Circular No. MRD/DoP/SE/Cir-38/2004 dated October 28, 2004.
29. Circular No. MRD/DoP/SE/Cir- 17/2005 dated September 2, 2005.
30. Circular No. MRD/Dop/SE/Dep/Cir-18/2005 dated September 02, 2005.
31. Circular No. MRD/DoP/SE/Cir-21/2006 dated December 14, 2006.
32. Circular No. MRD/DoP/SE/Cir-07/2009 datad July 21, 2009.
33. Circular No CIR/MRD/DP/ 39 /2010 dated December 28, 2010.
34. Circular No. CIR/MRD/DP/06/2011 dated June 16, 2011.
MASTER CIRCULAR FOR STOCK EXCHANGESANNEXURE 4
COMPREHENSIVE RISK MANAGEMENT
1. This Master Circular includes circulars issued upto March 31, 2013.
2. Master Circular is a compilation of all the existing/applicable circulars issued by Market Regulation Department of SEBI to Stock Exchanges and shall come into force from the date of its issue.
MASTER CIRCULAR - COMPREHENSIVE RISK MANAGEMENT
SECTION 1 - RISK MANAGEMENT FRAMEWORK 3
1.1 Comprehensive Risk Management Framework for the cash market 3
1.1.1 Overview 3
1.1.2 Liquid Assets 3
1.1.3 Liquidity Categorization of Securities 6
1.1.4 Monthly Review 6
1.1.5 Categorisation of newly listed securities 6
1.1.6 Calculation of mean impact cost 7
1.1.7 Mark to Market Losses 7
1.1.8 Computation of VaR Margin 8
1.1.9 Collection of VaR Margin 9
1.1.10 VaR Margin rate 9
1.1.11 Extreme Loss Margin 10
1.1.12 Margining Of Institutional Trades in Cash Market 10
1.1.13 Shortfall of Margins / Pay-in of funds 11
1.1.14 Review of Margining with respect to Exchange Traded Funds (ETFs 11
1.1.15 Base Minimum Capital 12
1.1.16 Additional Margins 14
1.1.17 Margins from the Client 15
1.1.18 Provision of early pay-in. 15
1.2 Methodology for computation of MTM Margin 15
1.3 Margins not to exceed the purchase value of a buy transaction 16
1.4 Collateral deposited by Clients with brokers 17
1.5 Securities as collateral for foreign institutional trades in cash market 18
Corporate bonds as collateral in cash market 18
1.6 Pre Trade Risk Controls 19
REFERENCE - List of Circulars 22
SECTION 1 - RISK MANAGEMENT FRAMEWORK1
1.1 Comprehensive Risk Management Framework for the cash market 1.1.1 Overview
The core of the risk management system is the liquid assets deposited by members with the exchange/clearing corporation. These liquid assets shall cover the following four requirements:
a. MTM (Mark To Market) Losses: Mark to market losses on outstanding settlement obligations of the member.
b. VaR Margins: Value at risk margins to cover potential losses for 99% of the days.
c. Extreme Loss Margins: Margins to cover the expected loss in situations that lie outside the coverage of the VaR margins.
d. Base Minimum Capital: Capital required for all risks other than market risk (for example, operational risk and client claims).
At all points of time, the liquid assets of the member shall be adequate to cover all the above four requirements. There are no other margins in the risk management system.
1.1.2 Liquid Assets
The acceptable liquid assets and the applicable haircuts are listed below:
Item Haircut (see Note A) Limits
Cash Equivalents
Cash 0 No limit
Bank fixed deposits 0 No limit
Bank guarantees 0 Limit on exchange’s
exposure to a single bank (see Note B)
Securities of the
Central Government 10% No limit
1 Circular No. MRD/DoP/SE/Cir-07/2005 dated February 23, 2005
Units of liquid
mutual funds or
government
securities mutual
funds (by whatever name called which invest in government securities) 10% No limit
Other Liquid Assets
1. Cannot be used for mark to market losses (see Note C)
2. Total of Other Liquid Assets cannot exceed total of Cash Equivalents (see Note D)
Liquid (Group I)
Equity Shares (see
section 3 for
classification of equity shares on the basis of liquidity) Same as the VaR margin for the respective shares (see section 5.1 below) Limit on exchange’s
exposure to a single
issuer (see Note E)
Mutual fund units
other than those
listed under cash
equivalents Same as the VaR margin for the units computed using the traded price on stock exchange, if available, or else, using the NAV of the unit treating it as a liquid security (see section 5.1 below).
Card value of
eligible exchanges (see Note F) 50% if the last sale or
auction of card in the
exchange took place
during the last six
months.
75% if the last sale or auction of card in the exchange took place during the last twelve months but not within the last six months.
100% if no sale or auction of card in the exchange has taken place during the last twelve months. Eligible only for Extreme Loss Margin
Corporate Bonds Fixed percentage based Not to exceed 10% of the
or VaR based Haircut. A total liquid assets of the
higher haircut may be considered to cover the expected time frame for liquidation. To begin with the haircut shall be a minimum of 10% clearing member.
Notes:
A. The valuation of the liquid assets shall be done on a daily basis except for the card value which shall be taken on the basis of the last sale or auction.
B. The exchanges shall lay down exposure limits either in rupee terms or as percentage of the Trade Guarantee Fund (TGF) / Settlement Guarantee Fund (SGF) that can be exposed to a single bank directly or indirectly. The total exposure would include guarantees provided by the bank for itself or for others as well as debt or equity securities of the bank which have been deposited by members towards total liquid assets.
Not more than 5% of the TGF/SGF or 1% of the total liquid assets deposited with the exchange, whichever is lower, shall be exposed to any single bank which has a net worth of less than Rs 500 Crores and is not rated P1 (or P1+) or equivalent, by a RBI recognized credit rating agency or by a reputed foreign credit rating agency, and not more than 50% of the TGF/SGF or 10% of the total liquid assets deposited with the exchanges, whichever is lower, shall be exposed to all such banks put together.
C. Mark to market losses shall be paid by the member in the form of cash or cash equivalents.
D. Cash equivalents shall be at least 50% of liquid assets. This would imply that Other Liquid Assets in excess of the total Cash Equivalents would not be regarded as part of Total Liquid Assets.
E. The exchanges shall lay down exposure limits either in rupee terms or as percentage of the Trade Guarantee Fund (TGF)/Settlement Guarantee Fund (SGF) that can be exposed to a single issuer directly or indirectly and in any case the exposure of the TGF/SGF to any single issuer shall not be more than 15% of the total liquid assets forming part of TGF/SGF of the exchange.
F. As a transitional arrangement pending demutualization of stock exchanges, the value of the membership card in eligible stock exchanges may be included as part of the member’s liquid assets only to cover Extreme Loss Margin. To be eligible for this treatment, the exchange shall maintain an amount equivalent to at least 50% of the aggregate card value of all members in the form of cash and liquid assets.
1.1.3 Liquidity Categorization of Securities
The securities shall be classified into three groups based on their liquidity:
Group Trading Frequency (over the previous six months – see Note A) Impact Cost (over the previous six months – see Note A
Liquid Securities
(Group I) At least 80% of the days Less than or equal to 1%
Less Liquid
Securities (Group II) At least 80% of the days More than 1%
Illiquid Securities
(Group III) Less than 80% of the days N/A
Notes:
A. For securities that have been listed for less than six months, the trading frequency and the impact cost shall be computed using the entire trading history of the scrip.
1.1.4 Monthly Review
The trading frequency and impact cost shall be calculated on the 15th of each month on a rolling basis considering the previous six months for impact cost and previous six months for trading frequency. On the basis of the trading frequency and impact cost so calculated, the securities shall move from one group to another group from the 1st of the next month.
1.1.5 Categorisation of newly listed securities
For the first month and till the time of monthly review as mentioned in section 3.1, a newly listed stock shall be categorised in that Group where the market capitalization of the newly listed stock exceeds or equals the market capitalization of 80% of the stocks in that particular group. Subsequently, after one month, whenever the next monthly review is carried out, the actual trading frequency and impact cost of the security shall be computed, to determine the liquidity categorization of the security.
In case any corporate action results in a change in ISIN, then the securities bearing the new ISIN shall be treated as newly listed scrip for group categorization.
1.1.6 Calculation of mean impact cost
The mean impact cost shall be calculated in the following manner:
a. Impact cost shall be calculated by taking four snapshots in a day from the order book in the past six months. These four snapshots shall be randomly chosen from within four fixed ten-minutes windows spread through the day.
b. The impact cost shall be the percentage price movement caused by an order size of Rs.1 Lakh from the average of the best bid and offer price in the order book snapshot. The impact cost shall be calculated for both, the buy and the sell side in each order book snapshot.
c. The computation of the impact cost adopted by the Exchange shall be disseminated on the website of the exchange.
d. The exchanges shall use a common methodology for carrying out the calculations for mean impact cost. The stock exchanges which are unable to compute the mean impact cost calculations at their exchanges shall use the impact cost calculations of BSE/NSE. Such stock exchanges shall enter into a formal legal agreement with the relevant stock exchanges for liquidating the positions of their members if necessary, on that stock exchange. If a Stock Exchange is unable to compute the mean impact cost of the scrips traded at the Exchange, as well as not been able to enter into a formal arrangement for liquidation of positions, it shall levy margins on the scrips as applicable to Group II or Group III as explained above, as classification between scrips in Group I or Group II would not be possible at that Exchange.
e. The details of calculation methodology and relevant data shall be made available to the public at large through the website of the exchanges. Any change in the methodology for the computation of impact cost shall also be disseminated by the exchange.
1.1.7 Mark to Market Losses
Mark to Market Losses shall be collected in the following manner:
a. The Stock Exchanges shall collect the mark to market margin (MTM) from the member/broker before the start of the trading of the next day.
b. The MTM margin shall also be collected/adjusted from/against the cash/cash equivalent component of the liquid net worth deposited with the Exchange.
c. The MTM margin shall be collected on the gross open position of the member. The gross open position for this purpose would mean the gross of all net positions across all the clients of a member including his proprietary position. For this purpose, the position of a client would be netted across his various securities and the positions of all the clients of a broker would be grossed. Further, there would be no netting across two different settlements.
d. There would be no netting off the positions and setoff against MTM profits across 2 rolling settlements i.e. T day and T-1 day. However, for computation of MTM profits/losses for the day, netting or setoff against MTM profits would be permitted.
e. The methodology for computation of MTM margin is also illustrated by way of an example which is placed in Annexure II.
f. The margin so collected shall be released along with the pay-in, including early pay-in of securities.
VaR Margin
1.1.8 Computation of VaR Margin
The VaR Margin is a margin intended to cover the largest loss that can be encountered on 99% of the days (99% Value at Risk). For liquid stocks, the margin covers one-day losses while for illiquid stocks, it covers three-day losses so as to allow the clearing corporation to liquidate the position over three days. This leads to a scaling factor of square root of three for illiquid stocks.
For liquid stocks, the VaR margins are based only on the volatility of the stock while for other stocks, the volatility of the market index is also used in the computation. Computation of the VaR margin requires the following definitions:
• Scrip sigma means the volatility of the security computed as at the end of the previous trading day. The computation uses the exponentially weighted moving average method applied to daily returns in the same manner as in the derivatives market.
• Scrip VaR means the higher of 7.5% or 3.5 scrip sigmas.
• Index sigma means the daily volatility of the market index (S&P CNX Nifty or BSE Sensex) computed as at the end of the previous trading day. The computation uses the exponentially weighted moving average method applied to daily returns in the same manner as in the derivatives market.
• Index VaR means the higher of 5% or 3 index sigmas. The higher of the Sensex VaR or Nifty VaR would be used for this purpose.
The VaR Margins are specified as follows for different groups of stocks:
Liquidity Categorization One-Day VaR Scaling factor for
illiquidity VaR Margin
Liquid Securities (Group I) Scrip VaR 1.00 Scrip VaR
Less Liquid Securities (Group II) Higher of Scrip VaR and three times Index VaR 1.73
(square root of
3.00) Higher of 1.73 times Scrip VaR and 5.20 times Index VaR
Illiquid Securities (Group III) Five times Index VaR 1.73
(square root of
3.00) 8.66 times Index VaR
1.1.9 Collection of VaR Margin
a. The VaR margin shall be collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade. Collection on T+1 day is not acceptable.
b. The VaR margin shall be collected on the gross open position of the member. The gross open position for this purpose would mean the gross of all net positions across all the clients of a member including his proprietary position.
c. For this purpose, there would be no netting of positions across different settlements.
d. The VaR margin so collected shall be released along with the pay-in, including early pay-in of securities.
1.1.10 VaR Margin rate2
VaR margin rate was calculated at the end of the trading day and then applied to the open positions of the subsequent trading day. However, in the derivative market, the risk parameter files for computation of the margins were updated intra-day.
With a view to ensure market safety and protect the interest of investors and also to further align the risk management framework across the cash and derivative markets, it has been decided that the risk arrays should be updated intra-day in the cash market as has been done in the derivative market. The applicable VaR margin rates shall be updated atleast 5 times in a day, which may be carried out by taking the closing price of the previous day at the start of trading and the prices at 11:00 a.m., 12:30 p.m., 2:00 p.m. and at the end of the trading session.
2 Circular no. MRD/DoP/SE/Cir- 6 /2006 dated June 16, 2006
1.1.11 Extreme Loss Margin
The term Extreme Loss Margin replaces the terms “exposure limits” and “second line of defence” that have been used hitherto. It covers the expected loss in situations that go beyond those envisaged in the 99% value at risk estimates used in the VaR margin.
a. The Extreme Loss Margin for any stock shall be higher of:
• 5%, and
• 1.5 times the standard deviation of daily logarithmic returns of the stock price in the last six months. This computation shall be done at the end of each month by taking the price data on a rolling basis for the past six months and the resulting value shall be applicable for the next month.
b. The Extreme Loss Margin shall be collected/ adjusted against the total liquid assets of the member on a real time basis.
c. The Extreme Loss Margin shall be collected on the gross open position of the member. The gross open position for this purpose would mean the gross of all net positions across all the clients of a member including his proprietary position.
d. For this purpose, there would be no netting of positions across different settlements.
e. The Extreme Loss Margin so collected shall be released along with the pay-in.
1.1.12 Margining Of Institutional Trades in Cash Market3
All Institutional trades in the cash market would be subject to payment of margins as applicable to transactions of other investors. For this purpose institutional investors shall include –
a. Foreign Institutional Investors registered with SEBI.
b. Mutual Funds registered with SEBI.
c. Public Financial Institutions as defined under section 4A of the Companies Act, 1956.
d. Banks, i.e., a banking company as defined under Section 5(1)(c) of the Banking Regulations Act, 1949.
e. Insurance companies registered with IRDA.
f. Pension Fund regulated by Pension Fund Regulatory and Development Authority (PFRDA)4.
3 Circular No. MRD/DoP/SE/Cir- 06 /2008 dated March 19 2008
4 Included vide letter dated May 27, 2009 to Stock Exchanges
All institutional trades in the cash market would be margined on a T+1 basis with the margin being collected from the custodian upon confirmation of trade.
1.1.13 Shortfall of Margins / Pay-in of funds
a. Margin shortfall
In case of any shortfall in Margin, the terminals of the broker shall be immediately deactivated.
b. Pay-in shortfall
i. In cases where the amount of shortage in a settlement for a trading member is in excess of the base minimum capital (BMC) prescribed, the trading facility of the member shall be withdrawn and the securities pay¬out due to the member shall be withheld.
ii. In cases where the amount of shortage exceeds 20% of the BMC but less than the BMC on six occasions within a period of three months, then also the trading facility of the member shall be withdrawn and the securities pay-out due to the member shall be withheld.
iii. Upon recovery of the complete shortages, the member shall be permitted to trade subject to his providing a deposit equivalent to his cumulative funds shortage as the 'funds shortage collateral'. Such deposit shall be kept with the Exchange for a period of ten rolling settlements and shall be released thereafter. Such deposit shall not be available for adjustment against margin liabilities and also not earn any interest. The deposit may be by way of cash, fixed deposit receipts or bank guarantee.
iv. The exchange may levy a penal interest of not less than 0.07% per day on the pay-in shortage of the member.
1.1.14 Margining with respect to Exchange Traded Funds (ETFs)5
A. Use of VaR Methodology with respect to Exchange Traded Funds
I. Index ETFs are based on a basket of securities. However, for computing margins on ETFs they are treated at par with stocks and margins that are applicable on stocks are being applied for ETFs.
II. In order to bring efficiency in margining of index ETFs, it has been decided that VaR margin computation for ETFs that track an index shall be computed as higher of 5% or three times sigma of the ETF.
III. The revised margin framework is applicable to ETFs that tracks broad based market indices and does not include ETFs which track sectoral indices.
5 Circular No. CIR/MRD/DP/26/2012 dated September 26, 2012
B. Introduction of Cross-Margining facility in respect of offsetting positions in ETFs based on equity indices and constituent stocks.
I. SEBI vide its circular SEBI/DNPD/Cir-44/2008 dated December 02, 2008 allowed cross margining across cash segment and exchange traded derivatives segments.
II. In order to facilitate efficient use of margin capital by market participants, it has been decided to extend cross margining facility to ETFs based on equity index and its constituent stocks for following off¬setting positions in cash market segment, as follows:
a. ETFs and constituent stocks (in the proportion specified for the ETF) to the extent they offset each other,
b. ETFs and constituent stocks futures (in the proportion specified for the ETF) to the extent they offset each other and
c. ETFs and relevant Index Futures to the extent they offset each other.
d. In the event of a suspension on creation / redemption of the ETF units, the cross-margining benefit shall be withdrawn.
1.1.15 Base Minimum Capital
A. Requirement of Base Minimum Capital for Stock Broker and Trading Member6
a. Members holding registration as "stock-broker" in cash segment and "trading member" in derivatives segment shall maintain BMC based on their risk profiles as prescribed in table below: -
Categories BMC Deposit
Only Proprietary trading without Algorithmic trading (Algo) Rs 10 Lacs
Trading only on behalf of Client (without proprietary trading) and without Algo Rs 15 Lacs
Proprietary trading and trading on behalf of Client without Algo Rs 25 Lacs
All Trading Members/Brokers with Algo Rs 50 Lacs
6 Circular No. MRD/DRMNP/36/2012 dated December 19, 2012
Explanation: The profiling of members may be explained with the following example – A scenario may arise, wherein, a member has registration as a “stock broker” as well as a “trading member” and is engaged as a principal doing proprietary trading on cash segment and is also engaged as an agent and transacting only on behalf of the clients in the derivatives segment. Further, the member may not have availed facility for algorithmic trading. In such a case, the profile of such a member shall be assessed as “Proprietary trading and trading on behalf of client without Algo”. The applicable BMC deposit for such a member shall be Rs 25 Lacs.
b. This BMC deposit requirement stipulated in the table above is applicable to all stock brokers / trading members of exchanges having nation-wide trading terminals.
c. For stock brokers / trading members of exchanges not having nation-wide trading terminals, the deposit requirement shall be 40% of the above said BMC deposit requirements.
d. The BMC deposit shall be maintained for meeting contingencies in any segment of the exchange. For members having registration for more than one segment of the same exchange, the BMC deposit requirement shall not be additive for such number of segments and shall be the highest applicable BMC deposit, across various segment.
e. No exposure shall be granted against such BMC deposit. The Stock Exchanges shall be permitted to prescribe suitable deposit requirements, over and above the SEBI prescribed norms, based on their perception and evaluation of risks involved.
f. Minimum 50% of the deposit shall be in the form of cash and cash equivalents. The existing guidelines on collateral composition shall continue to remain applicable.
B. BMC requirement for stock exchanges having average daily turnover of less than Rs 1 crore
Stock Exchanges shall maintain the BMC at Rs. 1 lakh if the average daily turnover is less than Rs.1 crore for any three consecutive months.
C. Refund of excess BMC over Rs. 1 lakh
The excess of the BMC over Rs 1 lakh may be refunded to the members of the exchange subject to the following conditions:
a. The member has been inactive at the stock exchange for the past 12 months, i.e. he has not carried out any transaction on that stock exchange during the past 12 months.
b. There are no investor complaints pending against the member.
c. There are no arbitration cases pending against the member.
d. The exchange shall retain/deduct/debit from the BMC to be refunded, the amount of any complaints/claims of the investors against the member and for dues crystallized and contingent to the exchange/SEBI arising out of pending arbitration cases, appealed arbitration awards, administrative expenses, SEBI turnover fees, e.t.c.
e. The exchange shall ensure that the member has paid the SEBI turnover fees and has obtained a No-Objection Certificate (NoC) from SEBI in this regard.
D. Re-enhancement of BMC
If the average daily turnover of the exchange exceeds the prescribed level of Rs.1 crore for a period of one month at any time, the exchange shall enhance the requirement of the BMC of the members back to the level as prescribed in Para A above and shall obtain undertaking to this effect from the members.
1.1.16 Additional Margins
Exchanges/clearing corporations have the right to impose additional risk containment measures over and above the risk containment system mandated by SEBI. However, the Stock Exchanges should keep the following three factors in mind while taking such action:
a. Additional risk management measures (like ad-hoc margins) would normally be required only to deal with circumstances that cannot be anticipated or were not anticipated while designing the risk management system. If ad-hoc margins are imposed with any degree of regularity, exchanges should examine whether the circumstances that give rise to such margins can be reasonably anticipated and can therefore be incorporated into the risk management system mandated by SEBI. Exchanges are encouraged to analyse these situations and bring the matter to the attention of SEBI for further action.
b. Any additional margins that the exchanges may impose shall be based on objective criteria and shall not discriminate between members on the basis of subjective criteria.
c. Transparency is an important regulatory goal and therefore every effort must be made to make the risk management systems fully transparent by disclosing their details to the public.
1.1.17 Margins from the Client
Members should have a prudent system of risk management to protect themselves from client default. Margins are likely to be an important element of such a system. The same shall be well documented and be made accessible to the clients and the Stock Exchanges. However, the quantum of these margins and the form and mode of collection are left to the discretion of the members.
1.1.18 Provision of early pay-in.7
i. As regards the transactions executed on behalf of institutional clients in the cash market, it shall be permissible to maintain their entire margin in the form of approved securities with appropriate haircuts as specified in the SEBI circular dated February 23, 2005.
ii. Necessary systems shall be put in place to enable early pay-in of funds. In cases where early pay-in of funds is made by the members, the outstanding position to that extent of early pay-in shall not be considered for computing the margin obligations.
iii. Necessary systems shall be put in place so as to enable adjustment of the pay-in obligations of the members from the cash component of the liquid assets deposited by them.
Exemptions
i. In cases where early pay-in of securities is made, the outstanding position
to the extent of early pay-in shall not be considered for margin purpose.
1.2 Methodology for computation of MTM Margin
For a Client A, his MTM profit/ loss would be calculated separately for his positions on T-1 and T day (two different rolling settlements). For the same day positions of the client, his losses in some scrips can be set off/netted against profits of some other scrips. Thus, we would arrive at the MTM loss/profit figures of the two different days T and T-1. These two figures cannot be netted. Any loss will have to be collected and same will not be setoff against profit arising out of positions of the other day.
Thus, as stated above MTM profits / losses would be computed for each of the
clients Client A, Client B, Client C etc. As regards collection of margin from the
broker, the MTM would be grossed across all the clients i.e. no setoff of loss of
7 Circular No. MRD/DoP/SE/Cir-10/2008 dated April 17, 2008
one client with the profit of another client. In other words, only the losses will be added to give the total MTM loss that the broker has to deposit with the exchange.
T-1 day T day Total profit/lloss of Client MTM for broker
Client A Security X 800 300
Security Y -500 -1200
Total 300 -900 -900
Client B Security Z 700 -400
Security W -1000 800
Total -300 400 -300
Client C Security X 1000 500
Security Z -1500 -800
Total -500 -300 -800
Client D Security Y 700 -200
Security R -300 800
Total 400 600 1000
BROKER -2000
In this example, the broker has to deposit MTM Margin of Rs 2000. 1.3 Margins not to exceed the purchase value of a buy transaction8
In case of a buy transaction in cash market, VaR margins, Extreme loss margins and mark to market losses together shall not exceed the purchase value of the transaction. Further, in case of a sale transaction in cash market, the existing practice shall continue viz., VaR margins and Extreme loss margins together shall not exceed the sale value of the transaction and mark to market losses shall also be levied.
8 Circular No. MRD/DoP/SE/Cir-08/2009 datad July 27, 2009
1.4 Collateral deposited by Clients with brokers9
For brokers to maintain proper records of client collateral and to prevent misuse of client collateral, it is advised that:-
1. Brokers should have adequate systems and procedures in place to ensure that client collateral is not used for any purposes other than meeting the respective client’s margin requirements / pay-ins. Brokers should also maintain records to ensure proper audit trail of use of client collateral.
2. Brokers should further be able to produce the aforesaid records during inspection. The records should include details of :-
a. Receipt of collateral from client and acknowledgement issued to client on receipt of collateral.
b. Client authorization for deposit of collateral with the exchange / clearing corporation / clearing house towards margin
c. Record of deposit of collateral with exchange / clearing corporation / clearing house.
d. Record of return of collateral to client.
e. Credit of corporate action benefits to clients.
3. The records should be periodically reconciled with the actual collateral deposited with the broker.
4. Brokers should issue a daily statement of collateral utilization to clients which shall include, inter-alia, details of collateral deposited, collateral utilised and collateral status (available balance / due from client) with break up in terms of cash, Fixed Deposit Receipts (FDRs), Bank Guarantee and securities.
5. In case of complaints against brokers related to misuse of collateral deposited by clients, exchanges should look into the allegations, conduct inspection of broker if required and based on its findings take necessary action.
6. In case client collateral is found to be mis-utilised, the broker would attract appropriate deterrent penalty for violation of norms provided under
9 Circular No. MRD/DoP/SE/Cir- 11/2008 dated April 17, 2008
Securities Contract Regulation Act, SEBI Act, SEBI Regulations and circulars, Exchange Byelaws, Rules, Regulations and circulars.
1.5 Securities as collateral for foreign institutional trades in cash market10
Reserve Bank of India (RBI) vide A. P. (DIR Series) Circular no. 47 dated April 12, 2010 has permitted FIIs to offer domestic Government Securities (acquired by the FIIs in accordance with the provisions of Schedule 5 to Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time and subject to the overall limits specified by the SEBI from time to time; the current limit being USD 5 billion), and foreign sovereign securities with AAA rating, as collateral to the recognized Stock Exchanges in India, in addition to cash, for their transactions in the cash segment of the market. However, cross-margining of Government Securities (placed as margins by the FIIs for their transactions in the cash segment of the market) shall not be allowed between the cash and the derivative segments of the market.
Corporate bonds as collateral in cash market11
Reserve Bank of India vide RBI/2012-13/439 A.P. (DIR Series) Circular No. 90 dated March 14, 2013 has permitted FIIs to use, in addition to already permitted collaterals, their investments in corporate bonds as collateral in the cash segment. FIIs are permitted to offer the following collaterals - government securities, corporate bonds, cash and foreign sovereign securities with AAA ratings, for their transactions in cash segment.
Clearing Corporations while enabling the framework for acceptance of corporate bonds as collateral for transactions of any entity in the cash segment shall ensure that:
a. The bonds shall have a rating of AA or above (or with similar rating nomenclature) by recognised credit rating agencies.
b. The bonds shall be in dematerialized form.
c. The bonds shall be treated as part of the non-cash component of the liquid assets of the clearing member and shall not exceed 10% of the total liquid assets of the clearing member.
d. The bonds shall have a fixed percentage based or VaR based haircut. A higher haircut may be considered to cover the expected time frame for liquidation. To begin with the haircut shall be a minimum of 10%.
10 Circular No. CIR/MRD/DP/15/2010 dated April 28, 2010
11 Circular No. CIR/MRD/DRMNP/9/2013 dated March 20, 2013
1.6 Pre-trade Risk Controls12
1. It has been decided to prescribe a framework of dynamic trade based price checks to prevent aberrant orders or uncontrolled trades. As an initial measure, it has been decided that stock exchanges shall implement the measures as given below.
Order-level checks
2. Minimum pre-trade risk controls for all categories of orders placed on Stocks, Exchange Traded Funds (ETFs), Index Futures and Stock futures shall be as follows:
2.1 Value/Quantity Limit per order:
a. Any order with value exceeding Rs. 10 crore per order shall not be accepted by the stock exchange for execution in the normal market.
b. In addition, stock exchange shall ensure that appropriate checks for value and / or quantity are implemented by the stock brokers based on the respective risk profile of their clients.
2.2 Cumulative limit on value of unexecuted orders of a stock broker:
a. Vide SEBI circular CIR/MRD/DP/09/2012 dated March 30, 2012, stock exchanges have been directed to ensure that the trading algorithms of the stock brokers have a ‘client level cumulative open order value check’.
b. In continuation to the above, stock exchange are directed to ensure that stock brokers put-in place a mechanism to limit the cumulative value of all unexecuted orders placed from their terminals to below a threshold limit set by the stock brokers. Stock exchanges shall ensure that such limits are effective.
2.3 Stock exchanges shall enhance monitoring of the operating controls of the stock brokers to ensure implementation of the checks mentioned at point 2.1(b) and 2.2(b) above; and levy deterrent penalty in case any failure is observed at the end of stockbroker in implementing such checks.
12 Circular No. CIR/MRD/DP/34/2012 dated December 13, 2012
Dynamic Price Bands (earlier called Dummy Filters or Operating Range)
3. Vide circular no. SMDRPD/Policy/Cir-37/2001 dated June 28, 2001, stock exchanges had been advised to implement appropriate individual scrip wise price bands in either direction, for all scrips in the compulsory rolling settlement except for the scrips on which derivatives products are available or scrips included in indices on which derivatives products are available.
For scrips excluded from the requirement of price bands, stock exchanges have implemented a mechanism of dynamic price bands (commonly known as dummy filters or operating range) which prevents acceptance of orders for execution that are placed beyond the price limits set by the stock exchanges. Such dynamic price bands are relaxed by the stock exchanges as and when a market-wide trend is observed in either direction.
3.1 It has been decided to tighten the initial price threshold of the dynamic price bands. Stock exchange shall set the dynamic price bands at 10% of the previous closing price for the following securities:
(a) Stocks on which derivatives products are available,
(b) Stocks included in indices on which derivatives products are available,
(c) Index futures,
(d) Stock futures.
3.2 Further, in the event of a market trend in either direction, the dynamic price bands shall be relaxed by the stock exchanges in increments of 5%. Stock exchanges shall frame suitable rules with mutual consultation for such relaxation of dynamic price bands and shall make it known to the market.
Risk Reduction Mode
4. Stock exchanges shall ensure that the stock brokers are mandatorily put in risk-reduction mode when 90% of the stock broker’s collateral available for adjustment against margins gets utilized on account of trades that fall under a margin system. Such risk reduction mode shall include the following:
a. All unexecuted orders shall be cancelled once stock broker breaches 90% collateral utilization level.
b. Only orders with Immediate or Cancel attribute shall be permitted in this mode.
c. All new orders shall be checked for sufficiency of margins.
d. Non-margined orders shall not be accepted from the stock broker in risk reduction mode.
e. The stock broker shall be moved back to the normal risk management mode as and when the collateral of the stock broker is lower than 90% utilization level.
5. Stock exchanges may prescribe more stringent norms based on their assessment, if desired.
REFERENCE - List of Circulars
1. Circular no. MRD/DoP/SE/Cir-07/2005 dated February 23, 2005.
2. Circular no. MRD/DoP/SE/Cir- 6 /2006 dated June 16, 2006.
3. Circular no. MRD/DoP/SE/Cir- 06 /2008 dated March 19 2008.
4. Circular no. MRD/DoP/SE/Cir-10/2008 dated April 17, 2008.
5. Circular No. MRD/DoP/SE/Cir- 11/2008 dated April 17, 2008.
6. Circular no. MRD/DoP/SE/Cir-13/2008 dated May 05, 2008.
7. Circular no. MRD/DoP/SE/Cir-18/2008 dated May 22, 2008.
8. Circular No. MRD/DoP/SE/Cir-08/2009 datad July 27, 2009.
9. Circular No. CIR/MRD/DP/15/2010 dated April 28, 2010.
10. Circular No CIR/MRD/DP/26/2012 dated September 26, 2012.
11. Circular No CIR/MRD/DP/34/2012 dated December 13, 2012.
12. Circular No. MRD/DRMNP/36/2012 dated December 19, 2012.
13. Circular No. CIR/MRD/DRMNP/9/2013 dated March 20, 2013.
*Circular No. MRD/DoP/SE/Cir-13/2008 dated May 05, 2008 on Cross margining across cash and derivatives market issued by MRD-DoP, a final circular on the same has been issued by DNPD vide Circular No. SEBI/DNPD/Cir- 44/2008 dated December 02, 2008.
MASTER CIRCULAR FOR STOCK EXCHANGES ANNEXURE 5
Establishment of Connectivity with both the Depositories NSDL and CDSL - Companies eligible for shifting from Trade for Trade to Rolling Settlement
This Master Circular includes circulars issued upto March 31, 2013.
Master Circular is a compilation of all the existing/applicable circulars issued by Market Regulation Department of SEBI to Stock Exchanges and shall be applicable from the date of its issue.
Establishment of Connectivity with both the Depositories NSDL and CDSL - Companies eligible for shifting from Trade for Trade to Rolling Settlement
Based on the information provided by the depositories for the companies that have established connectivity with both the depositories, stock exchanges are advised to consider shifting the trading in these securities to normal Rolling Settlement. List of companies which have established connectivity with both the Depositories is given in Annexure A.
With effect from January 13, 2006 the stock exchanges were further advised to consider shifting the trading in these securities to normal Rolling Settlement subject to the following:
At least 50% of other than promoter holdings as per clause 35 of Listing Agreement are in dematerialized mode before shifting the trading in the securities of the company from TFTS to normal Rolling Settlement. For this purpose, the listed companies shall obtain a certificate from its Registrar and Transfer Agent (RTA) and submit the same to the stock exchange/s. However, if an issuer-company does not have a separate RTA, it may obtain a certificate in this regard from a practicing company Secretary/Chartered Accountant and submit the same to the stock exchange/s.
There are no other grounds/reasons for continuation of the trading in TFTS.
Master Circular for Stock Exchange - Cash Market
Master Circular for Stock Exchange - Cash Market
Yes