Investor Protection

and Empowerment

ACG Cross Training Seminar

May 29, 2012
 Functions of Securities Market
 Channelizing savings into financing for real
sector.
 To raise capital for new investment
 An alternative to bank finance (CM Model –
Issuer – investor structure vis-à-vis – saver –
borrower model)
 Means for transferring risk and diversifying risk
exposure
 Efficient Securities Market contributes to
economic growth.
 Evolution of Indian Capital Markets
 Long History – stock trading first started in
1830s
 BSE established in 1875 – oldest exchange in
Asia
 Ahmedabad SE formed in 1894, Calcutta SE
formed in 1908, Madras SE in 1920
 Bombay Securities Contracts (Control) Act,
1925
 Capital Issues (Control) Act, 1947
 Legal Framework
 Companies Act, 1956
 Securities Contracts (Regulation) Act, 1956
 Securities Contracts (Regulation) Rule, 1957
 Establishment of SEBI by Government ordinance in
1988
 SEBI Act 1992 – Creation of SEBI as statutory
independent & quasi-judicial regulatory body
 Depositories Act 1996
 SEBI & it’s mandate

 Established by Government ordinance in 1988

 Given statutory status on February 21, 1992

Preamble to SEBI Act, 1992

“An Act to provide for the establishment of a Board to

protect the interests of investors in securities and to
promote the development of, and to regulate the
securities market and for matters connected therewith or
incidental thereto”
 Regulatory Framework
 From control of capital to freedom to issue capital
 Merit to disclosure
 Giving market greater role in shaping resource
allocation
 Single & Independent Regulator.
 Regulation of product, market, institution /
intermediary
 Competitive neutrality
 Regulation & Development
 Quasi Judicial powers
 Accountability
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 Types of Instruments
 Equity Shares – buy and sale of shares on stock exchange or on spot
basis off-market. Transactions either as trader or investor.

 Debt securities – Govt securities, Corporate Bonds and Debentures

 Derivatives - are contracts which derive their value from the spot price
of a given “underlying”. which can include anything like currencies,
commodities, securities, index of the prices of securities, debt
instruments, interest rates etc.

 Futures - legally binding agreement to buy or sell the underlying at

a future date
 Options - gives the buyer/holder of the contract the right (but not
the obligation) to buy/sell the underlying at a predetermined price
within or at end of a specified period.
 Product Traded In Secondary Market
 Equity
 Debt
 Govt. Securities (non-repo)
 Derivatives
 Index Futures & Options
 Stock Futures & Options
 Exchange Traded Currency Futures
 Exchange Traded Interest Rate Futures
 Mutual Funds / ETFs
 Derivatives on Foreign Equity Indices
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 Indian Securities Markets
Secondary Market
NSE occupies 5th position in terms of notional turnover (US$ 455 Billion) and
2rd position in terms of total volume (91.39 million) among derivatives
exchanges globally (based on February 2012 trading data).
India stands 1st in Stock Futures, 13th in Index Futures, 5th in Stock Options and
4th in Index Options in World Derivatives Market (in terms of turnover)

Details NSE BSE

No. of Listed Companies (as on 1644 5122
Feb 29, 2012)
Market Capitalization (` crore) (as 62,33,250 63,56,697
on Feb 29, 2012)
Turnover (Cash) (Apr 11 – Feb12) 25,38,411 6,04,780
((` crore)
Turnover (F&O) (Apr 11 – Feb 12) 2,83,70,501 5,79,758
(` crore)
 Indian Securities Market
Market Participants
Merchant Bankers 200
Stock Exchanges 21
Brokers 10263
Sub Brokers 77626
Mutual Funds 49
Foreign Institutional Investors 1781
Venture Capital Funds 208
Depositories 2
Depository Participants 850
Portfolio Managers 249
As on Feb 29, 2012
 Mandate of SEBI
To protect interests of investors

To promote development of To regulate securities

securities market market
 Regulatory process
 Pro active as well as reactive approach
 Extensive consultation with market participants & other
regulators
 Clarification of policies through Informal Guidance Scheme
 Posting of all rules, regulations, circulars and data on the
SEBI web site
 Dissemination of orders passed by SEBI, Securities
Appellate Tribunal and the Supreme Court, through the
SEBI web-site
 Regulation of Intermediaries
 Licensing standard
 Certification of associated person
 Prudential regulation
 Internal controls and risk management
 Business conduct Rules
 Market conduct Rules
 Procedure for dealing with failure of market
intermediary
 Regulation of Market
 Efficiency and credibility of the markets
 Integrity of trading.
 Transparency of trading
 Proper management of large exposure, default risk and
market disruption.
 Risk Management
 Clearing and settlement – fair, effective and efficient.
 To detect and deter manipulation and unfair trade practices.

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 Regulatory Norms
 To ensure that investors get clear, accurate
information for their investment in financial products
(information asymmetry)

 Safeguarding & Maintenance of functioning of

competitive framework.

 Protect investors from hidden fees, abusive terms &

deceptive practices.
 Regulatory Norms
 Financial Literacy

 Suitability and appropriateness

 Investors responsible for risks & rewards

 Prevention of potential systemic risks.

 Regulatory Norms
 Effective Surveillance to ensure:
 transparency, fairness and integrity in the markets
 true and fair price discovery
 prompt detection of market manipulation and other market
abuses
 Prompt investigation and timely action
 Suitable policy intervention
 Regulatory Norms
 Monitoring / Surveillance
 Price volume movements
 Position / exposure / concentration monitoring
 Corporate developments
 Filings under Insider Trading & Takeover Regulations
 Rumour Verification

 Stock Watch System

 Online monitoring through alerts
 Offline monitoring through day-end and periodic reports
 Regulatory Norms
 Continuous Disclosure of all material news
 Corporate Governance
 Accounts
- Salient feature of B/S, P&L

- Quarterly Interim Financial Reports

- Consolidated Financial Statements, Cash flow Statement,

Related party transaction
 Minimum level of shareholding
 Disclosure of shareholding / ownership
 Utilization of Issue proceeds
 Responding to market rumours

 Disclosure of Bulk / Block deals

 Regulatory Norms
 Accounting Standards close to International Standards.
 Corporate Governance Guidelines made mandatory for listed
companies
 Issue of Capital and Disclosure Requirements (ICDR)
Regulations, replaced the previous Disclosure and Investor
Protection (DIP) guidelines .
 Automated Screen based Trading from 1994
 Moved from physical securities to dematerialisation in 1998 -
99.9% securities traded in demat form
 Regulatory Norms
 Account period settlement to Rolling settlements in 2000
 Introduction of derivatives trading in 2000 – now we have the
largest single stock futures market in the world
 Adequate risk containment measures in place - Real time VaR
based margining and strict exposure monitoring mechanism
 Efficient clearing and settlement mechanism
 Circuit filter for individual scrips and market wide index based
circuit breaker
 Enhanced Surveillance Standards - Integrated Market
Surveillance System (IMSS)
 International Scenario
 Protection at Trading Member Level

 Bankruptcy of a Major Global Financial

Broker MF Global

 Moving towards Client Level Protection

 Indian Risk Management Scenario
 Order has to be entered in specific client code which is mapped to
unique identification (Permanent Account Number – PAN)
 Margins- upfront client level portfolio based initial margins and
mark to market collected before start of next days trading
 Volatility parameters revised multiple times a day
 Online and real time monitoring of positions and margins.
 Minimum Liquid Networth to be maintained at any point of time
 Automatic deactivation of trading terminals
 Client level details & segregation at CC level being considered
 Regulatory Measures
 Protection incase of Public Issue of Securities

Issue of Capital and Disclosure Requirements (ICDR)

Regulations
- Eligibility Norms for Issuer
- Pricing Norms

- Disclosure Requirements (IPO/FPO)

 Regulatory Measures
 Protecting Investors Funds and Securities
 Client’s money in a separate account
 Restriction on use of funds from client’s account
 Restriction on use of constituent beneficiary account
 Provide statement of accounts for funds and securities to all
the clients
 Periodic reconciliation and settling of running accounts
 Penalty for violation of norms
 Regulatory Measures
 Protecting Investors Interest
 Disclosure of Proprietary trading / funding
 Maintenance of separate codes for each client and proprietary trades
 Timely issue of Contract Notes by brokers – exchange also sends to
select clients on random basis
 Facility of sms alerts
 Trade Verification facility on exchange website
 Facility to freeze demat account
 Regulatory Measures
 Administrative mechanism of Capital Cushions
 Protection in case of a Default-
 Settlement Guarantee Fund
 Investor Protection Fund
 Investor Complaint Resolution through
Conciliation and Arbitration Mechanisms
 Regulatory Measures
 Processing of Investor Complaints in SEBI Complaints Redress
System (SCORES)
 Centralized database of all complaints.

 Online movement of complaints to the concerned

intermediaries
 Online upload of Action Taken Reports (ATRs) by the

concerned entities
 Online viewing by investors of action on the complaints and

its current status.

 Regulatory Measures
 Investor Protection and Education Fund created for
the following purpose-
 Educational activities including seminars, training,

research and publications.

 Awareness programmes

 Aiding investors’ associations recognized by the

Board to undertake legal proceedings

 Investor Education and Awareness Programs
 Toll free help line
 Present Status
 India continues to be high growth economy in
a world beset with recession
 Large domestic market and strong internal
demand
 Securities market infrastructure and practices
among the best in the world
 High global interest in investing in India
 ROAD AHEAD
 Needs to be addressed
 Financial literacy
 Financial inclusion

 Reaching out to the retail investor

 Broadening and deepening the markets

 Better quality of intermediation