MANAGEMENT OF FINANCIAL SERVICES
LESSON 38: STOCK BROKING: AN INTRODUCTION AND SEBI GUIDELINES
To understand the stock broking activity, SEBI regulations related to stock broking activity.
In India, stock exchanges were almost self regulatory till 1988, supervised by Ministry of Finance under the Securities Contracts 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.
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 outstanding 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.
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 concerned. 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.
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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They must possess a minimum net worth of Rs. 500 is payable as long as the certificate remains in force. public sector undertaking bonds. The minimum networth requirements for members is (a) individuals and registered firms Rs. debt instruments and hybrids. They are able to monitor all market movements. which transcends geographical barriers.3
. To ensure shorter settlement cycle and book entry settlement system and 5. 1000 for an initial period of five years. We can describe the main objective as 1. 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.671.
MANAGEMENT OF FINANCIAL SERVICES
Foreign institutional investors (FIIs) now play a significant role in the stock markets. Individuals. 2 crore. 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. They are large players in the markets and as such take direct settlement responsibility of their own trades executed through TMs. Reimbursement of this initial payment would be made by the designated bank/custodian of the registered FII. Capital Market (CM) Segment : It covers trading in equities and retail trade in debt instruments like non-convertible debentures and hybrid instruments. Separate membership is required for the two segments. in his dealings with the clients and the general investing public. Duty to the investors : A sub-broker. To meet the current international standards prevalent in the securities markets. Trading Members : Recognized members of NSE are called trading members. registered firms.
Stock Market Trading
We will discuss the stock trading activity with reference to National Stock Exchange Ltd. To provide a fair. The rupee account will be credited with the commissions / brokerages earned by him in India. 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. an annual fee of Rs. TM can either trade on their own or on behalf of their clients. 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 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 registered FIIs whom he may be assisting or on whose behalf he would be placing orders with a member of Indian stock exchanges. 100 lakh.involving fraud or dishonesty and has passed the equivalent of at least 12th standard from a recognized institution. Trading System : There are separate trading systems for both WDM and CM segments. The applicant must be engaged solely in securities business and not in any fund based activity. The main objective has been to set up comprehensive facilities for the entire range of securities under a single umbrella. efficient and transparent securities market to investors using the electronic trading system.
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11. Initial payment on account of purchase contract on behalf of registered FIIs would be made through Rupee account. Before setting up NSE. Only trading members can transact in WDM segment. The minimum paid up capital should be Rs. Indian stock exchanges were operating only in cities in which they were setup. 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. in short NSE. 2. To ensure equal access to investors across the country through an appropriate communication network. With a view to helping the FIIs to follow the procedures and encourage them to invest in India. Participants : Are the organizations directly responsible for settlement of trade. T-bills. Only body corporate. The annual fee payable by a sub-broker is Rs. The participants have access to the NSE trading system to enable to see the breadth and dept of the market through enquiry screens. bank subsidiaries and financial institutions can become Trading members. 4. After discussing the intermediaries in the stock market. The NSE represented an attempt to overcome the fragmentation of regional markets by providing screen-based system. The annual fee is Rs. 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. commercial papers etc. The NSE has two segments for trading in securities: Wholesale Debt Market (WDM) and Capital Market (CM) segments. To set up a nationwide trading facility for equities. After the expiry of five years. 75 lakhs and (b) Corporate bodies Rs. He should not furnish misleading information to his clients to generate business. 3. 30 lakh. including participants. corporate bodies and institutional members are eligible to become trading members in this segment. now let us discuss the system of stock market trading in India. certificates of deposits. Let us discuss the two in detail. He should issue promptly to his clients (a) purchase or sale notes for all the transactions entered into by him with his clients. He should not recommend his clients any scrip / security unless the client has asked for the advice. units of mutual funds. or through the principal broker (b) scrip-wise details. On advice from SEBI. 30 Lakh and a TM cannot withdraw his membership before five years.
The clearing system is automated.Capital Market Segment : The NSE market is fully automated screen-based trading system which adopts the principle of an order driven market. the quantity traded in that security. as and when they are received.
MANAGEMENT OF FINANCIAL SERVICES
Clearing and Settlement System of NSE
Trading has grown rapidly at NSE. Settlement Features of WDM Segment : The primary responsibility of settling trades concluded in the WDM segment rests directly with the participants and the exchange monitors the settlements. Settlement Features of Capital Market Segment : The cycles are short and announced well in advance by the NSE. price-related and volume-related conditions. Trading period starts on Wednesday and ends on Tuesday of the next week. All scrip are handled by the Clearing House. It provides complete flexibility to members in the kinds of orders that can be placed by them. The gap between fund payin and pay-out is only one day. Thus. the best buys and sells available in the market. National Securities Clearing Corporation Ltd. (NSCCL) for managing settlement of securities. TT is meant to cater to institutions who prefer trade for trade settlement as a means of minimizing exposure risks. NSE closely monitors the settlement of transactions through the reporting of settlement details by members and participants. due to short and tight settlement cycles which the NSE operates as per a well defined schedule so that investors are assured of settlement.
objective behind the IL segment is to initiate an institutional market where large volume trades take place in institutional board lots. In case of deferment of settlement or cancellation of trade. The trading system provides tremendous flexibility to the users in terms of the type of orders that can be placed on the system. For any dispute arising in respect of the trades or settlement. participants are required to seek its prior approval. are first time stamped and then immediately processed for potential match. the low and last traded price is available through the various market screens at all point of time. Order matching rules of NSE System : The best buy order match with the best sell order. it multilaterally net obligations and generates delivery statements for members. settlement is completed in eight days from the end of the last day of the trading cycle. Securities are paid in on the Monday following the trading period. These conditions are broadly of three categories: time-related. Orders. Funds are paid in on Tuesday. Institutional Market Segment : Two additional market segments have also been set up exclusively for institutions – Institutional Lot (IL) and Trade for Trade (TT) segment. Likewise. Besides the fact. that the system has increased trading velocities and cut timeframes. Order types and conditions : The trading members can enter various types of orders depending upon his/her requirements. NSE operates on account period for a periodic settlement cycle. All trades concluded during a particular period are settled during the next week. alternatively. It assures legal guarantee of transactions and settlement of the NSE. members may be reactive and put in orders that match with existing orders on the system. The
11. namely. At the end of a trading period of the NSE. Wholesale Debt Market Segment : The full computerized. the NSE has established arbitration mechanism for resolving the same.3 © Copy Right: Rai University 283
. Detailed information on the total order depth in a security. Members can proactively enter orders in the system which is displayed in the system till another party expresses interest in that order and puts a counter order. The NSE takes responsibility for rectifying short or bad deliveries and objections by initiating auction buy-in. The NSE has set up a clearing house. The payout day for both funds and securities is Wednesday. online trading system has changed the very manner in which trading is perceived in the Indian Stock Market.671. Settlement is on a physical basis requiring the delivery and receipt of documents. the high. These trades are settled in Mumbai as per the defined procedure.