MANAGEMENT OF FINANCIAL SERVICES
LESSON 38:
STOCK BROKING: AN INTRODUCTION AND SEBI GUIDELINES
Lesson Objectives
• To understand the stock broking activity,
• SEBI regulations related to stock broking activity.
Introduction
In India, stock exchanges were almost self regulatory till 1988,
supervised by Ministry of Finance under the Securities Con-
tracts Regulation Act (SCRA). However, the stock exchanges
were not discharging their self-regulatory role as well as a result
of which malpractices crept into trading, adversely affecting
investor’s interests. SEBI has been setup to ensure that the
stock exchanges discharge their self-regulatory role properly.
Ever since SEBI began to monitor brokers, stock broking is
emerging as a professional advisory service, in tune with the
requirements of a mature, sophisticated, screen based, ring-less,
automated stock exchanges in the country in sharp contrast to
traditional, closed character as inherited family business.
So we will discuss, the Indian Stock Broking system here. The
stock broking activity consists of various intermediaries. Let us
discuss them one by one.
Stock Brokers
Stockbroker is a member of a recognized stock exchange who
buys, sells or deals in securities. To work as a stockbroker
registration with SEBI is mandatory. SEBI is empowered to
impose conditions while granting the certificate of registration.
Registration : A broker seeking registration with SEBI, has to
apply through the stock exchange of which he is member. For
registering SEBI checks - eligibility of the applicant to become
the member of stock exchange, has the necessary infrastructure
to effectively discharge his duties, past experience etc.
Every registered stockbroker is required to pay annual fee @ Rs.
5,000 for turn over up to Rs. 1 crore and 0.01% of turnover
exceeding Rs. 1 crore. For calculating turnover underwriting and
collection of deposits are not taken into account for the
purpose of calculating the turnover. The authenticity of the
annual turnover is to be certified by the stock exchange con-
cerned.
Capital adequacy norms for brokers : An absolute minimum
of Rs. 5 lakh as a deposit with the exchange is to be maintained
by the members of the BSE & CSE and Rs. 3.5 lakh for DSE
and ASE irrespective of volume of business. In case of other
SE the minimum requirement is Rs. 2 lakhs. The security
deposit kept by the members in the SE forms part of the base
minimum capital; 25% of the base minimum capital is to be
maintained in case with the exchange. Another 25% remains in
the form of a long term fixed deposit with a bank on which the
SE is given free lien. The remaining requirement is being
maintained in the form of securities with a 30% margin. The
securities should be in the name of the member and are
pledged in favor of SE.
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Additional capital related to Volume of Business : The
additional or optional capital required from a member should,
at any point of time, be such that together with the base
minimum capital it is not less than 8% of the gross outstand-
ing business in the exchange defined as the aggregate of
up-to-date sales and purchases by a member broker in all the
securities put together.
Duty to the Investor : The duties of a broker to the investor
are
i. He should be faithful to the clients in his dealings with
them and execute orders as per the instructions.
ii. He should issue to his clients a contract note without any
delay for all transactions in the form specified by the SE.
iii. To avoid breach of trust, he should not disclose or discuss
with any other person details of investment and transaction
of clients.
iv. He should not mislead clients merely to generate business.
v. He should avoid dealing with a client who is a defaulter in
his dealings with other brokers.
vi. When dealing with a client, he is required to disclose
whether he is acting as a principal or as an agent.
vii. He should not give investment advice to any client unless
sought by him.
viii. A stockbroker should have adequately trained staff and
arrangements to render fair, prompt and competent services
to his clients.
ix. He should extend full cooperation to other brokers in
protecting the interest of his clients regarding their rights to
dividends, bonus shares, rights issues and any other rights
related to such securities.
Sub Brokers
A sub-broker acts on behalf of a stockbroker as an agent or
otherwise for assisting investors in buying, selling or dealing in
securities through such brokers but he is not a member of a
stock exchange. To act as a sub-broker, registration with SEBI is
required. It grants a certificate of registration to a sub-broker
subject to the conditions that (a) he has to pay the prescribed
fee, (b) he takes adequate steps for redressal of investor
grievances within one month of the receipt of the complaint
and keeps SEBI informed about the number, nature and other
particulars of the complaints (c) he is authorized in writing by a
broker for affiliation in buying, selling or dealing in securities.
Registration of Sub-brokers : According to SEBI regulations
currently in force, a sub-broker is required to submit along with
the application (a) recommendation from a stockbroker with
whom he will be affiliated and (b) two references, including one
from his banker. The individual applicant should not be less
than 21 years of age, has not been convicted in any offence
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 involving fraud or dishonesty and has passed the equivalent of
MANAGEMENT OF FINANCIAL SERVICES
at least 12th standard from a recognized institution.
The annual fee payable by a sub-broker is Rs. 1000 for an initial
period of five years. After the expiry of five years, an annual fee
of Rs. 500 is payable as long as the certificate remains in force.
Duty to the investors : A sub-broker, in his dealings with the
clients and the general investing public, should faithfully execute
the orders for buying and selling of securities at the best
available market price and promptly inform his clients about the
execution of an order and make payment in respect of securities
sold and arrange for prompt delivery of securities purchased.
He should issue promptly to his clients (a) purchase or sale
notes for all the transactions entered into by him with his
clients, or through the principal broker (b) scrip-wise details. He
should not furnish misleading information to his clients to
generate business. He should not recommend his clients any
scrip / security unless the client has asked for the advice.
Foreign Brokers
Foreign institutional investors (FIIs) now play a significant role
in the stock markets. With a view to helping the FIIs to follow
the procedures and encourage them to invest in India, SEBI has
issued a different set of guidelines:
Registration with SEBI : It is mandatory for a foreign broker
to get registered with SEBI in order to do business in India.
While applying for registration, a foreign broker has to disclose
to SEBI name(s) and registration number(s) of the stock
exchanges where he is registered in the capacity of a broker
dealer together with an undertaking that he would operate and
assist only on behalf of the registered FIIs and would not deal
in securities on his own account as principal in India. On advice
from SEBI, the RBI would accord approval to him to open (a)
a foreign currency denominated bank account and a rupee
account with a designated bank branch and (b) multiple
custodian accounts with the approved custodian of all regis-
tered FIIs whom he may be assisting or on whose behalf he
would be placing orders with a member of Indian stock
exchanges.
Transaction in Accounts : The foreign currency denominated
accounts of registered foreign brokers would be credited with
inward remittance brought in by him and inward remittance to
make initial payment against the purchase contracts on behalf
of registered FIIs. The rupee account will be credited with the
commissions / brokerages earned by him in India. Initial
payment on account of purchase contract on behalf of
registered FIIs would be made through Rupee account.
Reimbursement of this initial payment would be made by the
designated bank/custodian of the registered FII.
The brokers are allowed to freely repatriate commission/
brokerage earned in India after transferring them to the foreign
currency denominated account subject to payment of taxes on
the basis of conversion of rupees to foreign currency at the
prevailing market rates.
After discussing the intermediaries in the stock market, now let
us discuss the system of stock market trading in India.
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Stock Market Trading
We will discuss the stock trading activity with reference to
National Stock Exchange Ltd, in short NSE. Before setting up
NSE, Indian stock exchanges were operating only in cities in
which they were setup. The NSE represented an attempt to
overcome the fragmentation of regional markets by providing
screen-based system, which transcends geographical barriers.
The main objective has been to set up comprehensive facilities
for the entire range of securities under a single umbrella. We can
describe the main objective as
1. To set up a nationwide trading facility for equities, debt
instruments and hybrids.
2. To ensure equal access to investors across the country
through an appropriate communication network.
3. To provide a fair, efficient and transparent securities market
to investors using the electronic trading system.
4. To ensure shorter settlement cycle and book entry
settlement system and
5. To meet the current international standards prevalent in the
securities markets.
The NSE has two segments for trading in securities: Wholesale
Debt Market (WDM) and Capital Market (CM) segments.
Separate membership is required for the two segments.
Wholesale Debt Market (WDM) Segment : The WDM
segment provides a facility for institutions/ body corporate
(institutional investors) to enter into high value transactions in
instruments such as government securities, T-bills, public sector
undertaking bonds, units of mutual funds, certificates of
deposits, commercial papers etc. Only trading members can
transact in WDM segment.
Trading Members : Recognized members of NSE are called
trading members. Only body corporate, bank subsidiaries and
financial institutions can become Trading members. They must
possess a minimum net worth of Rs. 2 crore. The annual fee is
Rs. 30 Lakh and a TM cannot withdraw his membership before
five years. The applicant must be engaged solely in securities
business and not in any fund based activity. The minimum paid
up capital should be Rs. 30 lakh. TM can either trade on their
own or on behalf of their clients, including participants.
Participants : Are the organizations directly responsible for
settlement of trade. They are large players in the markets and as
such take direct settlement responsibility of their own trades
executed through TMs. The participants have access to the NSE
trading system to enable to see the breadth and dept of the
market through enquiry screens. They are able to monitor all
market movements.
Capital Market (CM) Segment : It covers trading in equities
and retail trade in debt instruments like non-convertible
debentures and hybrid instruments. Individuals, registered
firms, corporate bodies and institutional members are eligible
to become trading members in this segment. The minimum
networth requirements for members is (a) individuals and
registered firms Rs. 75 lakhs and (b) Corporate bodies Rs. 100
lakh.
Trading System : There are separate trading systems for both
WDM and CM segments. Let us discuss the two in detail.
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Capital Market Segment : The NSE market is fully automated objective behind the IL segment is to initiate an institutional

MANAGEMENT OF FINANCIAL SERVICES

screen-based trading system which adopts the principle of an market where large volume trades take place in institutional
order driven market. It provides complete flexibility to mem- board lots. Likewise, TT is meant to cater to institutions who
bers in the kinds of orders that can be placed by them. Orders, prefer trade for trade settlement as a means of minimizing
as and when they are received, are first time stamped and then exposure risks.
immediately processed for potential match. Settlement Features of WDM Segment : The primary
Order matching rules of NSE System : The best buy order responsibility of settling trades concluded in the WDM
match with the best sell order. Members can proactively enter segment rests directly with the participants and the exchange
orders in the system which is displayed in the system till monitors the settlements. These trades are settled in Mumbai as
another party expresses interest in that order and puts a counter per the defined procedure. NSE closely monitors the settlement
order, alternatively, members may be reactive and put in orders of transactions through the reporting of settlement details by
that match with existing orders on the system. members and participants. In case of deferment of settlement
Order types and conditions : The trading members can enter or cancellation of trade, participants are required to seek its prior
various types of orders depending upon his/her requirements. approval. For any dispute arising in respect of the trades or
These conditions are broadly of three categories: time-related, settlement, the NSE has established arbitration mechanism for
price-related and volume-related conditions. resolving the same.
Wholesale Debt Market Segment : The full computerized,
online trading system has changed the very manner in which
trading is perceived in the Indian Stock Market. Besides the fact,
that the system has increased trading velocities and cut
timeframes.
The trading system provides tremendous flexibility to the users
in terms of the type of orders that can be placed on the system.
Detailed information on the total order depth in a security, the
best buys and sells available in the market, the quantity traded in
that security, the high, the low and last traded price is available
through the various market screens at all point of time.
Clearing and Settlement System of NSE
Trading has grown rapidly at NSE, due to short and tight
settlement cycles which the NSE operates as per a well defined
schedule so that investors are assured of settlement.
Settlement Features of Capital Market Segment : The cycles
are short and announced well in advance by the NSE. All scrip
are handled by the Clearing House. The gap between fund pay-
in and pay-out is only one day. The NSE takes responsibility for
rectifying short or bad deliveries and objections by initiating
auction buy-in. It assures legal guarantee of transactions and
settlement of the NSE.
NSE operates on account period for a periodic settlement cycle.
Trading period starts on Wednesday and ends on Tuesday of
the next week. All trades concluded during a particular period
are settled during the next week. At the end of a trading period
of the NSE, it multilaterally net obligations and generates
delivery statements for members. Securities are paid in on the
Monday following the trading period. Funds are paid in on
Tuesday. The payout day for both funds and securities is
Wednesday. Thus, settlement is completed in eight days from
the end of the last day of the trading cycle.
The clearing system is automated. Settlement is on a physical
basis requiring the delivery and receipt of documents. The NSE
has set up a clearing house, namely, National Securities Clearing
Corporation Ltd. (NSCCL) for managing settlement of
securities.
Institutional Market Segment : Two additional market
segments have also been set up exclusively for institutions –
Institutional Lot (IL) and Trade for Trade (TT) segment. The

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