NISM-Series-VII-Securities Operations and Risk Management-July 2015

NISM Certification on Securities Operations and Risk Management Workbook
Workbook
for
NISMSeriesVII:SecuritiesOperationsandRiskManagement
CertificationExamination
National Institute of Securities Markets

www.nism.ac.in
This workbook has been developed to assist candidates in preparing for the National
InstituteofSecuritiesMarkets(NISM)CertificationExamination forSecuritiesOperations
andRiskManagement.
WorkbookVersion:July2015
Publishedby:
NationalInstituteofSecuritiesMarkets
NationalInstituteofSecuritiesMarkets,2015
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AboutNISM
InpursuanceoftheannouncementmadebytheFinanceMinisterinhisBudgetSpeechin
February2005,SecuritiesandExchangeBoardofIndia(SEBI)hasestablishedtheNational
InstituteofSecuritiesMarkets(NISM)inMumbai.
SEBI,byestablishingNISM,hasarticulatedthedesireexpressedbytheIndiangovernment
topromotesecuritiesmarketeducationandresearch.
Towards accomplishing the desire of Government of India and vision of SEBI, NISM has
launchedanefforttodeliverfinancialandsecuritieseducationatvariouslevelsandacross
varioussegmentsinIndiaandabroad.Toimplementitsobjectives,NISMhasestablishedsix
distinctschoolstocatertheeducationalneedsofvariousconstituenciessuchasinvestor,
issuers,intermediaries,regulatorystaff,policymakers,academiaandfutureprofessionals
ofsecuritiesmarkets.
NISM brings out various publications on securities markets with a view to enhance
knowledgelevelsofparticipantsinthesecuritiesindustry.
NISMismandatedtoimplementcertificationexaminationsforprofessionalsemployedin
varioussegmentsoftheIndiansecuritiesmarkets.
Acknowledgement
This workbook has been developed by NISM in cooperation with the Examination
Committee for Securities Operations and Risk Management Examination consisting of
representatives from the Indian Securities Market and Industry Experts. NISM gratefully
acknowledgesthecontributionofallthecommitteemembers.
AbouttheAuthor
ThisworkbookhasbeendevelopedbythecertificationteamofNISMincoordinationwith
Ms.SumithraRamesh,ResourcePersonengagedwithNISM.Thisversionoftheworkbook
hasbeenreviewedbyMs.T.S.Jagadharini,ResourcePersonempanelledwithNISM.
AbouttheCertificationExaminationonSecuritiesOperationsandRiskManagement
The examination seeks to create a common minimum knowledge benchmark as the

requisitestandardforassociatedpersonsofaregisteredstockbroker/tradingmember/
clearingmemberinrecognizedstockexchanges,involvedin(a)assetsorfundsofinvestor
orclients(b)redressalofinvestorgrievances,(c)internalcontrolorriskmanagementand
(d)activitieshavingabearingonoperationalrisk.
ExaminationObjectives
Onsuccessfulcompletionoftheexamination,thecandidateshould:
KnowthebasicsoftheIndiansecuritiesmarket,thedifferentproductstradedand
the various market participants and the respective roles they play in the Indian
securitiesmarket.
UnderstandtheregulatoryframeworkandtheroleoftheSecuritiesExchangeBoard
ofIndia.
Understandthetradelifecycle,thestepsandparticipantsinvolvedinthetradelife
cycle.
KnowthevariousfunctionsoftheFrontOffice,MiddleOfficeandBackOfficeina
SecuritiesBrokingFirm.
Understandhowtherisksaremanagedinasecuritiesbrokingfirm,theclearingand
settlementprocess.
Understandthevariousproceduresforredressofinvestorgrievances
AssessmentStructure
Theexaminationconsistsof100questionsof1markeachandshouldbecompletedin2
hours.Thepassingscoreontheexaminationis50%.Thereshallbenegativemarkingof25%
ofthemarksassignedtoaquestion.
ExaminationStructure
Theexamcoversknowledgecompetenciesrelatedtothebasicsofsecuritiesmarket,the
tradelifecycle,knowledgeaboutthefunctioningofthefrontoffice,middleofficeandback
office in a broking firm. The risk management practices and the clearing and settlement
processforatradeexecutedinthesecondarymarket.
Howtoregisterandtaketheexamination
Tofindoutmoreandregisterfortheexaminationpleasevisitwww.nism.ac.in
TABLEOFCONTENTS
CHAPTER1:INTRODUCTIONTOTHESECURITIESMARKET.........................................................................9
1.1INTRODUCTION..........................................................................................................................................9
1.2SECURITIESMARKET.................................................................................................................................10
1.3MONEYMARKETS....................................................................................................................................11
1.4PRODUCTSTRADEDINTHEINDIANSECURITIESMARKET....................................................................................12
CHAPTER2:MARKETPARTICIPANTSINTHESECURITIESMARKET............................................................17
2.1INTRODUCTION........................................................................................................................................17
2.2INVESTORS..............................................................................................................................................17
2.3ISSUERS..................................................................................................................................................18
2.4INTERMEDIARIES......................................................................................................................................19
2.5REGULATORS...........................................................................................................................................23
CHAPTER3:INTRODUCTIONTOSECURITIESBROKINGOPERATIONS........................................................35
3.1INTRODUCTIONTOTHETRADELIFECYCLE......................................................................................................35
3.2FRONTOFFICEOPERATIONS.......................................................................................................................40
3.3MIDDLEOFFICEOPERATIONS......................................................................................................................51
3.4BACKOFFICEOPERATIONS.........................................................................................................................53
CHAPTER4:RISKMANAGEMENT.............................................................................................................63
4.1RISKMANAGEMENT..................................................................................................................................63
4.2COMPLIANCESANDREGULATORYREPORTING.................................................................................................75
4.3CORESETTLEMENTGUARANTEEFUND..........................................................................................................79
CHAPTER5:CLEARINGPROCESS..............................................................................................................84
5.1INTRODUCTION........................................................................................................................................84
5.2ROLEOFTHECLEARINGAGENCY/CORPORATION/HOUSE.................................................................................84
5.3CLEARINGBANKSANDTHEIRFUNCTION.........................................................................................................86
5.4CLEARINGMEMBERS/CUSTODIANS..............................................................................................................86
5.5DEPOSITORIES&DEPOSITORYPARTICIPANTS..................................................................................................88
5.5CLEARINGPROCESS...................................................................................................................................89
CHAPTER6:SETTLEMENTPROCESS.........................................................................................................94
6.1INTRODUCTION........................................................................................................................................94
6.2DETERMINATIONOFSETTLEMENTOBLIGATIONSEQUITYSEGMENT......................................................................95
6.3SETTLEMENTOFFUNDS.............................................................................................................................96
6.4SETTLEMENTOFSECURITIES........................................................................................................................98
6.5CORPORATEACTIONSADJUSTMENT.............................................................................................................98
6.6AUCTIONOFSECURITIES..........................................................................................................................102
CHAPTER7:INVESTORGRIEVANCESANDARBITRATION.........................................................................106
7.1INTRODUCTION......................................................................................................................................106
7.2INVESTORGRIEVANCE.............................................................................................................................106
7.3ARBITRATION........................................................................................................................................108
CHAPTER8:OTHERSERVICESPROVIDEDBYBROKERS............................................................................114
8.1INTRODUCTION.......................................................................................................................................114
8.2IPOAPPLICATIONS.................................................................................................................................115
8.3TRADINGOFMUTUALFUNDUNITS............................................................................................................117
8.4PORTFOLIOMANAGEMENTSERVICE...........................................................................................................123
8.5RESEARCHREPORTS................................................................................................................................126
8.6DEPOSITORYSERVICES.............................................................................................................................126
8.7MARGINTRADING..................................................................................................................................127
8.8INTERNETBASEDTRADING(IBT)&SECURITIESTRADINGUSINGWIRELESSTECHNOLOGY(STWT)...........................128
CHAPTER1:INTRODUCTIONTOTHESECURITIESMARKET
LEARNINGOBJECTIVES:
Afterstudyingthischapter,youshouldknowabout:
MeaningofsecuritiesmarketanditsroleintheIndianEconomy
Twodifferentsegmentsofsecuritiesmarket
ProductstradedinIndiansecuritiesmarket
1.1Introduction
Thefinancialmarketsenableefficienttransferandallocationofresourcesforproductive
activitiesintheeconomy.Usersoffundsincludebusinesses,governmentsandhouseholds
whoseekfundstoruntheiractivities.Households,businessesandgovernmentsalsoactas
providersofsurplusfunds.Intermediariessuchasbanks,financialinstitutions,mutualfunds
and insurance companies, among others, channelize the available surplus funds from
lenderstotheusers.
The function of the financial markets is to ensure that economic activity is enabled by
providingaccessoffundstothosethatneeditforconsumptionorproductiveactivity.They
provide a way for aggregation of funds from a large number of investors and make it
available for productive economic activity. In the absence of financial markets such
aggregationmaynotbepossible.Anefficientfinancialmarketensuresthatthetransferof
fundshappensatacostthatmakesitattractiveforsaverstosaveandlendandforusersto
borrowfunds.Themarketsmustenablethedisseminationofrelevantinformationtoallthe
participantsinthemarketsothatthedecisiononpriceoffundsismadeafterintegratingall
availableinformation.Itmustalsoallowtheparticipantstoreviewtheirfundingdecisions
givennewinformationandtoreallocatetheresourcesaccordingly.Therefore,providing
liquidityandexitoptionsareanimportantfunctionoffinancialmarkets.Financialmarket
regulationsandregulatorsfocusonsettingupsystemsandprocessesinplacetostreamline
theactivitiesassociatedwiththetransferoffunds.
TheIndianfinancialmarketcanbebroadlydividedintomoneymarketandsecuritiesmarket
asillustratedinFigure1.1.
Figure1.1:FinancialMarketsinIndia
Financial Market
Securities
Market
Money Market
Organised
Money Market
Unorganised
Money Market
Short Term
Lending /
Borrowing
Money Lenders /
Indigenous
Bankers
Primary Market
Secondary
Market
In this book however, we are going to focus specifically on securities market. The term
securitymeansaninstrumentofclaim(returnorshareofprofits)fromtheuseroffunds.
Securitiesmarkethelpintransferof resourcesfromthosewithidleresources/surplusto
otherswhohaveaproductiveneedforthem.Tostateformally,securitiesmarketsprovide
channelsforallocationofsavingstoinvestmentsandtherebydecouplethesetwoactivities.
Asaresult,thesaversandinvestorsarenotconstrainedbytheirindividualabilities,butby
theeconomysabilitiestosaveandinvestrespectively,whichinevitablyenhancessavings
andinvestmentintheeconomy.
1.2SecuritiesMarket
The securities market has two interdependent and inseparable segments, viz., the new
issuers(theprimarymarket)andstock(secondary)market.
Theprimarymarketisusedbyissuersforraisingfreshcapitalfromtheinvestorsbymaking
initialpublicoffersorrightsissuesoroffersforsaleofequityordebt.Ontheotherhandthe
secondarymarketprovidesliquiditytotheseinstruments,throughtradingandsettlement
onthestockExchanges.Anactivesecondarymarketpromotesthegrowthoftheprimary
marketandcapitalformation,sincetheinvestorsintheprimarymarketareassuredofa
continuousmarketwheretheyhaveanoptiontoliquidatetheirinvestments.Thus,inthe
primary market, the issuer has direct contact with the investor, while in the secondary
10
market, the dealings are between two investors and the issuer does not come into the
picture.
Primary market is the market that ensures availability of adequate capital at reasonable
rates to finance expansion, diversification or consolidation of companies. A secondary
marketontheotherhandisthemarketwherethebuyerofsecuritiesintheprimarymarket
cantransfer/sellthesesecuritiestoanotherbuyer.
Theresourcesintheprimarymarketcanberaisedeitherthroughtheprivateplacement
routeorthroughthepublicissueroutebywayofInitialPublicOffer(IPO)orFollowonPublic
Offer(FPO).Itisapublicissue,ifanybodyandeverybodycansubscribeforit,whereas,if
theissueismadetoselectgroupofpeoplethenitistermedasprivateplacement.Incases,
where fresh sharesareissued to existingshareholders at a price, it is referredas Rights
Issue,whereassuchissueswithoutinvolvementofanycostisreferredtoasBonusissue/
stocksplit.
Thesecondarymarketontheotherhandoperatesthroughtwomediums,namely,theOver
TheCounter(OTC)marketandtheExchangeTradedMarket.
OTCmarketsaretheinformaltypeofmarketswheretradesarenegotiated.Inthistypeof
market,thesecuritiesaretradedandsettledbilaterallyoverthecounter.
The other option of trading is through the stock exchange route, where trading and
settlementisdonethroughtheStockExchangesandthebuyersandsellersdontknoweach
other.Thesettlementsoftradesarecarriedoutasperafixedtimeschedule.Thetrades
executed on the exchange are settled through the clearing corporation, who acts as a
counterpartyandguaranteessettlement.
Thereareseveralmajorplayersintheprimarymarket.Theseincludethemerchantbankers,
mutualfunds,financialinstitutions,foreigninstitutionalinvestors(FIIs),individualinvestors;
theissuersincludingcompanies,bodiescorporate,lawyers,bankerstotheissue,brokers,
anddepositoryparticipants.ThestockExchangesareinvolvedtotheextentoflistingofthe
securities.
Inthesecondarymarket,therearetheStockexchanges,stockbrokers(whoaremembers
ofthestockexchanges),themutualfunds/assetmanagementcompanies(AMCs),financial
institutions, foreign institutional investors (FIIs), investment companies, individual
investors,depositoryparticipantsandbanks.
The Registrars and Transfer Agents, Custodians and Depositories are capital market
intermediaries which provide important infrastructure services to both the primary and
secondary markets. These would be discussed in detail in the later sections of this
workbook.
1.3MoneyMarkets
Moneymarketisamarketforfinancialassetsthatareclosesubstitutesformoney.Such
financialinstrumentsarealsoknownascashequivalents.Itisamarketforshorttermfunds
and instruments having a maturity period of one or less than one year. Money market
providesshorttermdebtfinancingandinvestment.Themoneymarketdealsprimarilyin
11
shortterm debt securities and investments, such as bankers acceptances, negotiable

certificates of deposit (CDs), repos and treasury bills (Tbills), call/notice money market,
commercialpapers.Governmentsecuritiesarealsoapartofthemoneymarket.
1.4ProductsTradedintheIndianSecuritiesMarket
Investors in the Indian securities market have a wide choice of product base to choose
depending upon a persons risk appetite and needs. The different types of products
availableinequity,derivativesanddebtmarketsarediscussedbelow.
1.4.1EquityMarketsanditsProducts
Theequitysegmentofthestockexchangeallowstradinginshares,debentures,warrants,
mutualfundsandexchangetradedfunds(ETFs).
Equity Shares represents the form of fractional ownership in a business venture. Equity
shareholders collectivelyown thecompany.Theybeartheriskandenjoy the rewardsof
ownership.
Debentures are instruments for raising long term debt. Debentures in India are typically
secured by tangible assets. There are fully convertible, nonconvertible and partly
convertibledebentures.Fullyconvertibledebentureswillbeconvertedintoordinaryshares
ofthesamecompanyunderspecifiedtermsandconditions.Partlyconvertibledebentures
(PCDs)willbepartlyconvertedintoordinarysharesofthesamecompanyunderspecified
terms and conditions. Thus, it has features of both debenture as well as equity. Non
ConvertibleDebentures(NCDs)arepuredebtinstrumentswithoutafeatureofconversion.
The NCDs are repayable on maturity. Partly Convertible debentures have features of
convertibleandnonconvertibledebentures.Thus,debenturescanbepuredebtorquasi
equity,asthecasemaybe.
Warrantsentitleaninvestortobuyequitysharesafteraspecifiedtimeperiodatagiven
price.
Mutual Funds are investment vehicles where people with similar investment objective
cometogethertopooltheirmoneyandtheninvestaccordingly.Amutualfundcompany
pools money from many investors and invests the money in stocks, bonds, shortterm
moneymarket instruments, other securities or assets, or some combination of these
investments,dependingontheobjectivesofthefund.
Exchange Traded Fund is a fund that can invest in either all of the securities or a
representativesampleofsecuritiesincludedintheindex.Importantly,theETFsofferaone
stopexposuretoadiversifiedbasketofsecuritiesthatcanbetradedinrealtimelikean
individual stock. ETF units with underlying security of Gold are also traded on stock
Exchanges.
IndianDepositoryReceipt(IDR):Foreigncompaniesarenotallowedtodirectlylistonthe
Indian stock exchanges. However, they are allowed to raise capital in Indian currency
throughaninstrumentcalledIndianDepositoryReceipt(IDR).
12
IDRsareissuedbyforeigncompaniestoIndianinvestors.IDRsaredepositoryreceiptswhich
havetheequitysharesoftheissuingcompanyastheunderlyingsecurity.Theunderlying
sharesareheldbyaforeigncustodianandtheDRsareheldintheIndiandepository.IDRs
arelistedintheIndianstockexchanges.TheinvestorcaneitherholdtheIDR,tradeinthem
inthestockexchangeorrequestforredemptionintotheunderlyingshares.Redemptionis
permittedafter1yearfromthedateoflisting.TwowayfungibilityofIDRsispermittedi.e.
thedepositoryreceiptcanbeconvertedintounderlyingsharesandtheunderlyingshares
can be converted into depository receipt. However, the number of shares that can be
convertedintodepositoryreceiptshouldbewithintheheadroomavailablei.e.thenumber
ofIDRsissuedlessnumberofIDRsoutstandingandIDRsalreadyconvertedintounderlying
shares.
1.4.2DerivativeMarketanditsProducts
Derivativeisaproductwhosevalueisderivedfromthevalueofoneormorebasicvariables,
calledbases(underlyingasset,index,orreferencerate),inacontractualmanner.Derivative
productsareintheformofForwards,Futures,OptionsandSwaps.
Forwardcontractisapromisetodeliveranassetatapredetermineddateinfutureata
predeterminedprice.
Futureisanagreementbetweentwopartiestobuyorsellanassetatacertaintimeinthe
future at a certain price. These are basically Exchange traded, standardized contracts.
Futurescontractsarespecialtypesofforwardcontractsinthesensethattheformerare
standardizedExchangetradedcontracts.
Optionsgivethebuyer(holder)arightbutnotanobligationtobuyorsellanassetinfuture.
Options are of two types calls and puts. Calls give the buyer the right, but not the
obligation,tobuyagivenquantityoftheunderlyingasset,atagivenpriceonorbeforea
given future date. Puts give the buyer the right, but not the obligation, to sell a given
quantityoftheunderlyingassetatagivenpriceonorbeforeagivendate.
ThetwotypesofExchangederivativesinstrumentsarefuturesandoptions.InIndia,futures
andoptionsaretradedonequitystocks,equityindices,currencyandcommodities.
Apartfromtheseindices,tradingonVIX(VolatilityIndex)hasbeenintroducedintheyear
2014.Volatilityindicesindicateinvestorsperceptionofmarketsvolatilityinthenearterm.1
IndexFuturesandOptions:CurrentlyintheIndianmarkets,futureandoptionscontractare
availablefortradingonthebluechipindicessuchasBSEsSENSEXandNSEsCNXNIFTYand
sectoralindicesofbanks,PSUetc.

AhighVIXnumberwouldsuggestthatthemarketexpectssignificantchangeinthemarketindexandalow
VIXnumberwouldindicatethatthemarketexpectsminimalchange.TheVIXindexcontractscanbeusedby
investorshedgetheirportfoliosagainstchangingvolatilities.
13
Indexoptioncontractsareavailableforonemonth,twomonth,threemonth,threeyears
andfiveyearsexpirycycle.Thethreeyearandfiveyearoptionscontractsarereferredtoas
longtermoptioncontracts.
AlloptioncontractsexpireonthelastThursdayoftheexpirymonthandhavemaximumof
3monthexpirycycle.IncasethelastThursdayisatradingholiday,thecontractsexpireson
theprevioustradingday.Anewcontractisintroducedonthenexttradingdayfollowingthe
expiryofthenearmonthcontract.Allthederivativetradesaresettledincash.
StockFuturesandOptions:Individualstockoptionsandfuturesonspecificlistedstocksare
chosen by the stock Exchange based on the guidelines and criterion (such as market
capitalization,tradingvolume)definedbySEBI.
CurrencyDerivativestradingwasintroducedintheIndianfinancialmarketswiththelaunch
ofcurrencyfuturestradingintheUSDINRpairin2008.2InIndia,currencyfuturesaretraded
onfourcurrencypairsi.e.USDINR,GBPINR,EURINRandJPYINRattheNSE,MCXSXand
USEhowevercurrencyoptionscontractsareavailableonlyonUSdollars.
Incaseofcurrencyderivativessegmentforexample,theunderlyingforUSDINRpairwould
betherateofExchangebetweenoneUSDandINRandthecontractwillhaveamaximum
of12monthsoftradingcycle.Thenewcontractwouldbeintroducedfollowingtheexpiry
ofthecurrentcontract.Allcontractsexpireonthelastworkingday(excludingSaturdays)of
thecontractmonths.Thelastdayforthetradingofthecontractshallbetwoworkingdays
priortothefinalsettlement.Allthesecontractsarecashsettled.Thesettlementpricewould
betheReserveBankReferenceRateonthedateofexpiry.
DerivativesonForeignStockIndices:InJanuary2011,SEBIpermittedthestockExchanges
tointroducederivativecontracts(futuresandoptions)ontheforeignstockindicessubject
to certain eligibility criteria (like market capitalization, volume of turnover, minimum
number of constituent stocks and maximum weight of single constituent in the index)
mentionedbySEBI.Currently,derivativescontractsonglobalindicessuchasS&P500,Dow
JonesIndustrialAverage(DJIA)andFTSE100aretradedonIndianstockExchange.
Commodity Derivatives markets are markets where raw or primary products are
exchanged. These raw commodities are traded on regulated commodities exchanges, in
which they are bought and sold in standardized contracts for a specified future date.
Commoditymarketsfacilitatethetradingofcommoditiessuchasgold,silver,metal,energy
andagriculturalgoods.
InterestRateFutures/BondFutures.InIndia,interestratefutureorbondfuturesarebased
on10yearGovernmentofIndiaSecurityand91dayGovernmentofIndiaTreasuryBill.The
lotsize(i.e.theminimumamountthatcanbetradedontheExchange)is2000bondsatthe
rateofRs.100perbondi.e.withthetotalfacevalueofRs.2,00,000.Newcontractscanbe
introducedbytheExchangeonanydayofacalendarmonth.3serialmonthscontractsare

2
CurrencyfutureswerelaunchedattheNationalStockExchangeofIndiaonAugust29,2008andsubsequently
currencytradingatBSEwasintroducedonOctober1,2008,andMCXSXonOctober7,2008.
14
availablefortradingonthebondfuturesalongwithspreadcontractsofNearMid,NearFar
andMidFar.LasttradingdayisthelastThursdayoftheexpirymonth.IfthelastThursday
isaholiday,previoustradingdaywillbethelasttradingday.Thecontractarecashsettled.
DebtMarketanditsProducts
Debt market consists of bonds and debentures, which provide financing through the
issuanceofbonds,andenablethesubsequenttradingthereof.Theseinstrumentscanbe
tradedinOTCorExchangetradedmarkets.InIndia,thedebtmarketisbroadlydividedinto
twoparts:governmentsecurities(GSec)marketandthecorporatebondmarket.
Government Securities Market: The Government needs enormous amount of money to

perform various functions such as maintaining law and order, justice, national defence,
centralbanking,creationofphysicalinfrastructure.Forthis,itgeneratesrevenuebyvarious
waysincludingborrowingfrombanksandotherfinancialinstitutions.
Thegovernmentraisesshorttermandlongtermfundsbyissuingsecurities.Thesesecurities
donot carrydefaultriskasthegovernmentguaranteesthepaymentofinterestandthe
repaymentofprincipal.Theyarethereforereferredtoasgiltedgedsecurities.Government
securitiesareissuedbythecentralgovernment,stategovernmentandsemigovernment
authorities.Themajorinvestorsinthismarketarebanks,insurancecompanies,provident
funds,stategovernments,FIIs.Governmentsecuritiesareoftwotypestreasurybillsand
governmentdatedsecurities..
CorporateBondMarket:Thecorporatebondorcorporatedebtmarketisamarketwhere
debt securities of corporate such as corporate bonds, Tbills, commercial papers and
certificateofdepositsareissuedandtraded.Corporatesadopteitherthepublicoffering
routeortheprivateplacementrouteforissuingdebentures/bonds.Corporatebondsare
bonds issued by firms to meet their needs for expansion, modernization, restructuring
operations, mergers and acquisitions. The investors in this market are banks, financial
institutions,insurancecompanies,mutualfunds,FIIsetc.
15
ReviewQuestions
1. WhichofthefollowingbestdescribesthetermPrivatePlacement?
(a)IssuemadetoallinvestorsintheIndiansecuritiesmarket.
(b)Issuemadetoselectgroupofpeople.
(c)Issuemadetothoseinvestorswhoalreadyholdsharesofthecompany.
Ans:(b)
2.Statewhichofthesestatementsistrue?
(a)CallOptiongivesthebuyertherightbutnottheobligationtobuytheunderlyingasset.
(b)CallOptiongivesthebuyertherightbutnottheobligationtoselltheunderlyingasset.
(c)PutOptiongivesthebuyertherightbutnottheobligationtobuytheunderlyingasset.
Ans:(a)
3.Interestratefuturestradingisbasedon______________________.
(a)Notional12yearcouponbearingGOIsecurity.
(b)Notional10yearcouponbearingGOIsecurity.
(c)TreasuryBills.
Ans:(b)
4.Derivativecontractsexpireonthe___________________.
(a)LastFridayofthemonth
(b)LastThursdayoftheexpirymonth.
(c)Lasttradingdayofthemonth.
Ans:(b)
16
Chapter2:MarketParticipantsintheSecuritiesMarket
LEARNINGOBJECTIVES:
Differenttypesofsecuritiesmarketparticipants
Differenttypesofinvestorsbasedontheirinvestmentobjectives
Differenttypesofissuersandtheinstrumentsthroughwhichtheyraisemoneyin
securitiesmarket
Roleofdifferentkindsofintermediariesinthesecuritiesmarkets
Regulatoryframeworkofsecuritiesandsomekeyregulations
2.1Introduction
Asalreadydiscussedinthepreviouschapter,ineveryeconomicsystem,therearesavers
(whoaresurplusgenerators)andtherearespenders(deficitgenerators).Securitiesmarket
providesaplatformforsaverstoplacetheirsurplusfundsinfinancialclaimsorsecuritiesat
the disposal of the spenders and in turn get benefits such as interest, dividend, capital
appreciation,bonusetc.Theseinvestorsandissuersoffinancialsecuritiesconstitutetwo
importantelementsofthesecuritiesmarkets.
Another important element of the markets are the intermediaries who act as conduits
betweentheinvestorsandissuers.
Regulatory bodies, which regulate the functioning of the securities markets, constitute
anothersignificantelementofsecuritiesmarkets.Theprocessofmobilizationofresources
iscarriedoutunderthesupervisionandoverviewoftheregulators.Theregulatorsdevelop
fair market practices and regulate the conduct of issuers of securities and the
intermediaries. They are also incharge of protecting the interests of the investors. The
regulator ensures a high service standard from the intermediaries and supply of quality
securitiesandnonmanipulateddemandfortheminthemarket.
Thus,thefourimportantparticipantsofsecuritiesmarketsaretheinvestors,theissuers,the
intermediariesandregulators.Wenowdiscussthesedifferentparticipantsindetailinthe
followingsections.
2.2Investors
Aninvestoristhebackboneofthesecuritiesmarketinanyeconomy,asinvestoristheone
lendingsurplusresourcesforfundingtocompanies(fortheirsetuporforexpansionplans)
in return for financial gains. Investors in securities market can be broadly classified into
RetailInvestorsandInstitutionalInvestors.
17
RetailInvestorsarethoseindividualinvestorswhobuyandsellsecuritiesfortheirpersonal
account,andnotforanothercompanyororganization.3Thiscategoryalsoincludeshighnet
worth individuals (HNI) which comprises people who invest above rupees two lakh in a
singletransaction.
Institutional Investors comprises domestic financial institutions (DFIs), banks, insurance
companies,mutualfundsandFIIs(aForeignInstitutionalinvestorisanentityestablishedor
incorporatedoutsideIndiathatproposestomakeinvestmentsinIndia).
2.3Issuers
The public and private sector enterprises, banks and other financial institutions tap the
securitiesmarkettofinancetheircapitalexpansionandgrowthplans.Evenmutualfunds
which are an important investment intermediary mobilises the savings of the small
investors.Fundscanberaisedintheprimarymarketfromthedomesticmarketaswellas
frominternationalmarkets.
IndiancompaniescanalsoraiseresourcesfrominternationalcapitalmarketsthroughGlobal
Depository Receipts (GDRs)/American Depository Receipts (ADRs), Foreign Currency
Convertible bonds (FCCBs) and External Commercial Borrowings (ECBs).4 To learn more
about the different international market instruments for raising capital from overseas
marketpleaseseeBox2.1.
LatestdevelopmentonreformshasallowedforeigncompaniestoraisecapitalfromIndian
markets. They can issue IDR (Indian Depository Receipts). This will be in rupee terms.
StandardCharteredBankisthefirstentitytoraisecapitalthroughissuingIDR.
Source:http://www.investopedia.com/terms/r/retailinvestor.asp
The1991reformsallowedIndiancompaniestoraiseresourcesbywayofequityissuesintheinternational
markets.
4
18
Box2.1:Instrumentsforraisingcapitalfromoverseasmarkets
GlobalDepositoryReceipts(GDRs)areequityinstrumentsissuedabroadbyauthorized
overseas corporate bodies against the shares/bonds of Indian companies held with
nominateddomesticcustodianbanks.
American Depository Receipts (ADRs) are negotiable instruments, denominated in
dollarsandissuedbytheUSDepositoryBank.
ForeignCurrencyConvertibleBonds(FCCBs)arebondsissuedbyIndiancompaniesand
subscribed to by a nonresident in foreign currency. They carry a fixed interest or
couponrateandareconvertibleintoacertainnumberofordinarysharesatapreferred
price.
External Commercial Borrowings (ECBs) are commercial loans (in the form of bank
loans,buyerscredit,supplierscredit,securitizedinstruments,floatingratenotesand
fixed rate bonds) availed from any internationally recognized source such as bank,
export credit agencies, suppliers of equipment, foreign collaborators, foreign equity
holdersandinternationalcapitalmarket.Indiancompanieshavepreferredthisroute
toraisefundsasthecostofborrowingislowintheinternationalmarkets.
2.4Intermediaries
Intermediation is the process of enabling the saver or buyer of securities (through
informationandfacilitation)tobuyorsellthesecuritiesandhelpthemacquirealltherights
relatedtothesecurity.
Theintermediariesplayaveryimportantroleinthesecuritiesmarket;theyputtogetherthe
demandsofthebuyerswiththeoffersofthesecuritysellers.Alargevarietyandnumberof
intermediariesprovideintermediationservicesintheIndiansecuritiesmarkets.
2.4.1 StockExchanges
ThestockExchangesprovideatradingplatformwherethebuyersandsellers(investors)can
meet to transact in securities. In the olden days investors and stock brokers met in the
trading hall or the Ring of the Stock Exchanges to transact in stocks, whereas in the
modernworld,onlinetradingtakesthroughcomputersconnectedthroughVSATs,leased
linesandInternet.
TheSecuritiesContract(Regulation)Act,1956(SCRA)definesStockExchangeas(a)any
body of individuals, whether incorporated or not, constituted before corporatisation and
demutualisationundersections4Aand4B,or(b)abodycorporateincorporatedunderthe
Companies Act, 1956 (1 of 1956) whether under a scheme of corporatisation and
demutualisationorotherwise,forthepurposeofassisting,regulatingorcoordinatingthe
businessofbuying,sellingordealinginsecurities.
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2.4.2 ClearingCorporation/Agency/House
AClearingCorporation/AgencyisapartofanExchangeoraseparateentity,whichperforms
threemainfunctions,namely:clearingandsettlementofalltransactionsexecutedinthe
stock market (i.e. completes the process of receiving and delivering shares/funds to the
buyers and sellers in the market) and carrying out risk management. The Clearing
Corporation acts as a central counterparty i.e. it provides financial guarantee for all
transactionsexecutedontheExchange.Thisprocessiscallednovation.
ImportantTerminologiespertainingtoclearingcorporations
PayInisaprocesswherebyastockbrokerandCustodian(incaseofInstitutionaldeals)
bringinmoneyand/orsecuritiestotheClearingHouse/Corporation.Thisformsthefirst
phaseofthesettlementactivity.
PayOut is a process where Clearing House/ Corporation pays money or delivers
securities to the brokers and Custodians. This is the second phase of the settlement
activity.
The clearing agency determines fund/security obligations and arranges for payin of the
same.5Itcollectsandmaintainsmargins,processesforshortagesinfundsandsecurities.
For carrying out settlement of trades, the clearing corporation is helped by the clearing
members, clearing banks, custodians and depositories. Thus, these entities are also
importantintermediariesofsecuritiesmarket.
2.4.3 TradingMember/ClearingMember
Animportantconstituentofthesecuritiesmarketisatradingmember/stockbrokerwhois
amemberofthestockexchange.Atradingmemberisallowedtobuyandsellsecuritieson
stock exchanges on behalf of individuals and institutions. A trading member can be an
individual(soleproprietor),apartnershipfirm,corporateorabankwhoisamemberofa
StockExchange6.SubbrokerisnotamemberofaStockExchangebutactsonbehalfofa
trading member as an agent for assisting the investors in buying, selling or dealing in
securitiesthroughsuchtradingmembers.
ClearingMembershelpinclearingofthetrades.Therearethreekindsofclearingmember
Professional Clearing Members (PCM), Trading Cum Clearing Member (TCM) and Self
ClearingMember(SCM).

The process of delivering securities or funds by the trading member to the clearing house/corporation to effect
settlementofasale/purchasetransactionisknownaspayin.
Banksarepermittedtobecometradingandclearingmembersofthecurrencyfuturesmarketofrecognized
stockExchangessubjecttofulfillmentofminimumprudentialrequirements.
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ProfessionalClearingMembersandTradingcumClearingMembers
ProfessionalClearingMembers(PCM)havetherightonlytocleartrades.ThePCMdoesnot
haveanykindoftradingrights.Thesetypesofmemberscancleartradesofallmembers
associatedwithhim.SEBIregisteredCustodiansandBanksregisteredbytheExchangeare
eligibletobecomeProfessionalClearingMembers(PCMs).
TradingcumClearingmember(TCM)hasbothtradingandclearingrights.Hecanclearhis
own trades as well as the trades of others. Any member of the equity segment of the
ExchangeiseligibletobecometradingcumclearingmemberoftheDerivativesSegment.
Custodians
Custodians are also clearing members like PCMs but not trading members. They settle
tradesonbehalfoftheclientsofthetradingmembers,whenaparticulartradeisassigned
tothemforsettlement.Thecustodianisrequiredtoconfirmwhetherheisgoingtosettle
thattradeornot.
SelfClearingMembers(SCM)
As the name implies, selfclearing members can clear the trades done by him. The only
differencebetweenSCMandTCMisthatSCMdoesnothavetherightstoclearthetrades
ofothermembers;hecanonlyclearhisowntrades,whereasTCMcanclearthetradesof
anyothermember.
Any member of the cash segment of the Exchange is eligible to become SelfClearing
memberoftheDerivativesSegment.
2.4.3.1EligibilityCriteriaforaTradingMember
TheadmissionasatradingmemberontheStockExchangesisbasedonthevariouscriteria
likeage,capitaladequacy,financialtrackrecord,education,experienceandfulfillmentof
criteriaoffit&properpersonaslaiddownintheSEBI(Intermediaries)Regulations,2008.
TheExchangesmaystipulateadditionalrequirementsoverandabovetheSEBIprescribed
rules.
BaseMinimumCapital
BMCisthedepositgivenbythememberoftheexchange againstwhichnoexposurefortradesis
allowed.TheBaseMinimumCapitalisdiscussedindetailinSection4.1.1.4ofthisworkbook.
EligibilityCriteria
Forindividualtradingmembership,theeligibilityrequirementsareasfollows:
Criteria
Age
MinimumAge:21years
Status
IndianCitizen
21
Education
Experience
AtleastHSCorEquivalentqualification
Applicantshouldhaveanexperienceofnotlessthantwoyearsas
apartnerwith,oranauthorizedassistantorauthorizedremisieror
apprenticetoamember
AseparateeligibilitycriteriaisapplicableforothertypesofmemberslikePartnershipfirm,
corporations, companies, Institutions or subsidiaries of such corporations, companies or
Institutionssetupforprovidingfinancialservices.
FitandProperPerson
For the purpose of determining whether an applicant or the stock broker, subbroker,
tradingmemberandclearingmemberisafitandproperperson,theSEBIBoardmaytake
intoaccountthefollowingeligibilitycriteria(butnotlimititselfto):
(a)Integrity,reputationandcharacter
(b)Absenceofconvictionsandrestraintsorder
(c)Competenceincludingfinancialsolvencyandnetworthoftheapplicant.
2.4.4 DepositoryandDepositoryParticipants(DPs)
TherearetwoDepositoriesinIndia,CentralDepositoryServicesLimited(CDSL)andNational
SecuritiesDepositoryLimited(NSDL),whichwereestablishedundertheDepositoriesAct
1996,forthepurposeoffacilitatingdematerialisationofsecuritiesandassistingintrading
of securities in the dematerialised form. The Depository provides its services to clients
throughitsagentscalleddepositoryparticipants(DPs).
TheseagentsareappointedbythedepositorywiththeapprovalofSEBI.AccordingtoSEBI
regulations,amongstothers,threecategoriesofentities,i.e.Banks,FinancialInstitutions
andSEBIregisteredtradingmemberscanbecomeDPs.
Besides providing custodial facilities and dematerialisation, depositories offer various

transactionalservicestoitsclientstoeffectbuying,selling,transferofsharesetc.Through
a system of paperless securities, depositories have facilitated smooth securities market
operationsforStockExchanges,clearinghouses/corporations,stockbrokingfirms,equity
issuingcompanies,sharetransferagentsetc.
2.4.5 Custodian
A Custodian is an entity that is responsible for safeguarding the securities of its clients.
Besidessafeguardingsecurities,acustodianalsokeepstrackofcorporateactionsonbehalf
ofitsclients.Italsohelpsin:
Maintainingaclientssecuritiesaccount
Collectingthebenefitsorrightsaccruingtotheclientinrespectofsecurities
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Keeping the client informed of the actions taken or to be taken by the issuer of
securities,havingabearingonthebenefitsorrightsaccruingtotheclient.
Custodiansareclearingmembersbutnottradingmembers.Theysettletradesonbehalfof
the clients of the trading members, when a particular trade is assigned to them for
settlement.Thecustodianisrequiredtoconfirmwhetherheisgoingtosettlethattradeor
not.Incasethecustodianfailstoconfirmthentheonusofsettlingthetradefallsonthe
tradingmemberwhohasexecutedthetrade.
2.5Regulators
TheregulatorsintheIndiansecuritiesmarketensuresthatthemarketparticipantsbehave
in a desired manner so that securities market continue to be a major trusted source of
finance for corporates and Government and the interest of investors are protected. The
different regulators who regulate the activities of the different sectors in the financial
marketareasgivenbelow:
SecuritiesandExchangeBoardofIndia(SEBI)regulatesthesecuritiesmarket.
Reserve Bank of India (RBI) is the authority to regulate and monitor the banking
sector.
Insurance Regulatory and Development Authority of India (IRDAI) regulates the

insurancesector.
PensionFundRegulatoryandDevelopmentAuthority(PFRDA)regulatethepension
fundsector.
MinistryofFinance(MOF)
MinistryofCorporateAffairs(MCA)
We would be concerned about the role of SEBI as it is the regulatory authority for the
securities market in India. The orders of SEBI under the securities laws are appealable
beforeaSecuritiesAppellateTribunal(SAT).
MostofthepowersundertheSCRAareexercisablebytheDepartmentofEconomicAffairs
(DEA)ofMinistryofFinancewhileafewothersbySEBI.ThepowersoftheDEAunderthe
SCRAarealsoconcurrentlyexercisedbySEBI.
The powers in respect of the contracts for sale and purchase of securities, gold related
securities,moneymarketsecuritiesandsecuritiesderivedfromthesesecuritiesandready
forwardcontractsindebtsecuritiesareexercisedconcurrentlybyRBI.TheSEBIActandthe
DepositoriesActareprimarilyadministeredbySEBI.Therulesunderthesecuritieslawsare
framed by Government and regulations by SEBI. All these are administered by SEBI. The
powersundertheCompaniesActrelatingtotheissueandtransferofsecuritiesandnon
paymentofdividendareadministeredbySEBIincaseoflistedpubliccompaniesandpublic
companiesproposingtogettheirsecuritieslisted.TheSelfRegulatoryOrganizations(SROs)
ensurecompliancewiththeirownrulesaswellaswiththerulesrelevantforthemunder
thesecuritieslaws.
23
2.5.1RoleofSecuritiesExchangeBoardofIndia(SEBI)
The Securities and Exchange Board of India (SEBI) is the regulatory authority in India
establishedunderSection3ofSEBIAct,1992underanactofParliament.SEBIsprimaryrole
istoprotecttheinterestoftheinvestorsinsecuritiesandtopromotethedevelopmentof
securitiesmarketandregulatethesecuritiesmarket,bymeasuresitthinksfit.
RoleofSEBI:
Protectingtheinterestsofinvestorsinsecurities.
Promotingthedevelopmentofthesecuritiesmarket.
Regulatingthebusinessinstockexchangesandanyothersecuritiesmarkets.
Registeringandregulatingtheworkingofstockbrokers,subbrokersetc.
Promotingandregulatingselfregulatoryorganizations
Prohibitingfraudulentandunfairtradepractices
Callingforinformationfrom,undertakinginspection,conductinginquiriesandaudits
ofthestockexchanges,intermediaries,selfregulatoryorganizations,mutualfunds
andotherpersonsassociatedwiththesecuritiesmarket.
2.5.2 RegulatoryFrameworkforSecuritiesMarket
TheprocessofliberalizationoftheIndiansecuritiesmarketstartedin1992.Theaimwasto
liberalizethesecuritiesmarket,ensureprotectionoftheinterestsoftheinvestor,tohavea
regulatedmarketandtodevelopthesecuritiesmarket.VariousActswerepromulgatedand
legislationsamendedtowardsthisgoal.ThefourmainActsgoverningthesecuritiesmarket
are:
TheSEBIAct,1992
TheSC(R)A,1956
TheDepositoriesAct,1996
TheCompaniesAct,2013.
Apart from the four Acts the following Regulations are also of high importance in the
regulationofIndianSecuritiesMarkets:
SEBI(StockBrokerandSubBrokers)Regulation,1992
SEBI(PreventionofInsiderTrading)Regulations,1992
ThePreventionofMoneylaunderingAct,2002
SEBI(ProhibitionofFraudulentandUnfairTradePracticesrelatingtotheSecurities
Market)Regulations2003
SEBI(CustodianofSecurities)Regulation,1996
SEBI(SubstantialAcquisitionofSharesandTakeovers)Regulations,1997
SEBIAct,1992
TheSEBIAct,1992wasenactedtoempowerSEBIwithstatutorypowersfor
(a)Protectingtheinterestsofinvestorsinsecurities,
24
(b)Promotingthedevelopmentofthesecuritiesmarket,and
(c)Regulatingthesecuritiesmarket.
Its regulatory jurisdiction extends over corporates (who list or propose to list their
securities) in the issuance of capital and transfer of securities, in addition to all
intermediariesandpersonsassociatedwithsecurities(morespecificallythecapitalmarket)
market. It can conduct enquiries, audits and inspection of all concerned and adjudicate
offencesundertheAct.Ithaspowerstoregisterandregulateallmarketintermediariesand
alsotopenalisethemincaseofviolationsoftheprovisionsoftheAct,RulesandRegulations
madethereunder.SEBIhasfullautonomyandauthoritytoregulateanddevelopanorderly
securitiesmarket.
SecuritiesContracts(Regulation)Act,1956
Itprovidesfordirectandindirectcontrolofvirtuallyallaspectsofsecuritiestradingandthe
runningofStockExchangesandaimstopreventingundesirabletransactionsinsecurities.
ItgivesCentralGovernmenttheregulatoryjurisdictionover
(a)StockExchangesthroughaprocessofrecognitionandcontinuedsupervision
(b)Contractsinsecurities,and
(c)ListingofsecuritiesonStockExchanges
As a condition of recognition, a Stock Exchange complies with conditions prescribed by

Central Government. Organized trading activity in securities takes place on a specified
recognized stock Exchange. The Stock Exchanges determine their own listing regulations
whichhavetoconformtotheminimumlistingcriteriasetoutintheRules.
DepositoriesAct,1996
TheDepositoriesActpassedbyParliamentreceivedthePresident'sassentonAugust10,
1996.ItwasnotifiedinaGazetteonAugust12ofthesameyear.TheActenablesthesetting
upofmultipledepositoriesinthecountry.Thiswastoensurethatthereiscompetitionin
theserviceandmorethanonedepositoryinoperation.TheDepositoriesActfacilitatedthe
establishment of the two depositories in India viz., NSDL and CDSL. Only a company
registeredundertheCompaniesAct,2013or(hithertoCompaniesAct1956)andsponsored
bythespecifiedcategoryofinstitutionscansetupadepositoryinIndia.Beforecommencing
operations, depositories should obtain a certificate of registration and a certificate of
commencementofbusinessfromSEBI.AdepositoryestablishedundertheDepositoriesAct
canprovideanyserviceconnectedwithrecordingofallotmentofsecuritiesortransferof
ownershipofsecuritiesintherecordofadepository.Adepositoryhowever,cannotdirectly
openaccountsandprovideservicestoclients.Anypersonwillingtoavailoftheservicesof
thedepositorycandosobyenteringintoanagreementwiththedepositorythroughanyof
its Depository Participants. The rights and obligations of depositories, depository
participants,issuersandbeneficialownersarespeltoutclearlyinthisAct.
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CompaniesAct,2013
TheCompaniesActof2013dealswithissue,allotmentandtransferofsecuritiesandvarious
aspectsrelatingtocompanymanagement.Itprovidesforstandardofdisclosureinpublic
issues of capital, particularly in the fields of company management and projects,
informationaboutotherlistedcompaniesunderthesamemanagement,andmanagement
perceptionofriskfactors.Italsoregulatesunderwriting,theuseofpremiumanddiscounts
on issues, rights and bonus issues, payment of interest and dividends, providing annual
reportsandotherinformation.
SEBI(StockBrokerandSubBrokers)Regulation,1992
TheSEBI(StockBrokerandSubBroker)Regulation,1992laysdowntherulesandregulation
forregistrationofStockBrokerandSubbroker.Italsoprescribesthefeesapplicabletobe
paidtoSEBIongrantofregistrationcertificatefromSEBIandthegeneralcodeofconduct
bythestockbrokeranditssubbrokersholdingcertificateofmembership.ThescheduleII,
regulation7oftheSEBI(StockBrokerandSubbrokers)statesthatthestockbrokershall
Maintainhighstandardsofintegrity,promptitudeandfairnessintheconductofallhis
business.
Actwithdueskill,careanddiligenceintheconductofallhisbusiness.
Notindulgeinmanipulative,fraudulentordeceptivetransactionsorschemesorspread
rumorswithaviewtodistortingmarketequilibriumormakingpersonalgains.
Not create false market either singly or in concert with others or indulge in any act
detrimentaltotheinvestorsinterestorwhichleadstointerferencewiththefairand
smoothfunctioningofthemarket.
Initsdutytotheinvestor,thestockbroker,inhisdealingswiththeclientsandthegeneral
investingpublicshallfaithfullyexecutetheordersforbuyingandsellingofsecuritiesatthe
bestavailablemarketprice.Thebrokeraspertheregulationshallissuewithoutdelaytohis
clientacontractnoteforalltransactionsintheformspecifiedbytheexchanges.
Thisregulationalsoprescribesthebrokersandsubbrokerstomaintainthedifferentbooks
ofaccounts,recordsanddocuments.Thesehavebeendiscussedinthechapter3,under
section3.4.5.
PreventionofMoneyLaunderingAct,2002
Thetermmoneylaunderingisdefinedaswhoeveracquires,owns,possessortransfersany
proceedsofcrime;orknowinglyentersintoanytransactionwhichisrelatedtoproceedsof
crimeeitherdirectlyorindirectlyorconcealsoraidsintheconcealmentoftheproceedsor
gainsofcrimewithinIndiaoroutsideIndia...
The Prevention of MoneyLaundering Act, 2002 (PMLA), is an act to prevent money

launderingandtoprovideforconfiscationofpropertyderivedfrom,orinvolvedin,money
launderingandforrelatedmatters.
26
ChapterII,section3ofthisactdescribestheoffenceofmoneylaunderingthus:whoever
directlyorindirectlyattemptstoindulge,orknowinglyassistsorknowinglyisapartyoris
actuallyinvolved,inanyprocessoractivityconnectedwiththeproceedsofcrimeincluding
itsconcealment,possession,acquisitionoruseandprojectingorclaimingitasuntainted
propertyshallbeguiltyoftheoffenceofmoneylaundering.
TheoffencesareclassifiedunderPartA,PartBandPartCoftheScheduleoftheAct.Under
PartA,offencesincludecounterfeitingcurrencynotesundertheIndianPenalCode(IPC)to
punishment for unlawful activities under the Unlawful Activities (Prevention) Act, 1967.
Under Part B, offences are considered as money laundering if the total value of such
offencesisRs30lakhormore.Suchoffencesincludedishonestlyreceivingstolenproperty
under the Indian Penal Code to breaching of confidentiality and privacy under the
Information Technology Act, 2000. Part C includes all offences under Part A and Part B
(withoutthethreshold)thathascrossborderimplications.
Section 6 of the PMLA confers powers on the Central Government to appoint an

AdjudicatingAuthoritytoexercisejurisdiction,powersandauthorityconferredbyorunder
theAct.
According to section 9, in the event of an order of confiscation being made by an

AdjudicatingAuthority(AA)inrespectofanypropertyofaperson,alltherightsandtitlein
suchpropertyshallvestabsolutelyintheCentralGovernmentwithoutanyencumbrances.
Section 11 of the Actmakes it clear that the Adjudicating Authority shall have the same
powersasarevestedinacivilcourtundertheCodeofCivilProcedurewhiletryingasuit,
withregardtothefollowingmatters:
a) Discoveryandinspection
b) Enforcingtheattendanceofanyperson,includinganyofficerofabankingcompany
orafinancialinstitutionoracompanyandexamininghimonoath
c) Compellingtheproductionofrecords
d) Receivingevidenceonaffidavits
e) Issuingcommissionsforexaminationofwitnessesanddocuments
f) Anyothermatterwhichmaybeprescribed
Allthepersonssummonedasmentionedaboveshallbeboundtoattendtheproceedings
inpersonorthroughauthorizedagentsandshallbeboundtostatethetruthandproduce
suchdocumentsasmayberequired.Further,everyproceedingunderthesectionshallbe
deemedtobeajudicialproceedingwithinthemeaningofsections193and228oftheIndian
PenalCode(IPC).
Section 12 of PMLA stipulates that every banking company, financial institution and
intermediaryshallmaintainarecordofalltransactions,thenatureandvalueofwhichmay
be prescribed, whether such transactions comprise a single transaction or a series of
transactionsintegrallyconnectedtoeachother,andwheresuchseriesoftransactionstake
27
placewithinamonthandfurnishinformationoftransactionsandverifyandmaintainthe
recordsoftheidentityofallitsclients.Suchtransactionsinclude:
AllcashtransactionsofthevalueofmorethanRs.10lakhoritsequivalentinforeign
currency.
Allseriesofcashtransactionsintegrallyconnectedtoeachotherwhichhavebeen
valuedbelowRs.10lakhoritsequivalentinforeigncurrencywheresuchseriesof
transactionstakeplacewithinonecalendarmonthandtheaggregatevalueofsuch
transactionexceedsRs.10lakh.
All suspicious transactions whether or not made in cash and including inter alia
credits or debits into from any nonmonetary account such as demat account,
securityaccountmaintainedbytheregisteredintermediary.
Providedthatwheretheprincipalofficerofabankingcompanyorfinancialinstitutionor
intermediary,asthecasemaybe,hasreasontobelievethatasingletransactionorseriesof
transactions integrally connected to each other have been valued below the prescribed
valuesoastodefeattheprovisionsofthissection,suchofficershallfurnishinformationin
respectofsuchtransactionstotheDirectorwithintheprescribedtime.7
Theserecordswhichhavebeenreferredtointheaboveparagraphsshallbemaintainedfor
aperiodoftenyearsfromthedateofcessationofthetransactionsbetweentheclientsand
thebankingcompanyorfinancialinstitutionorintermediary,asthecasemaybe.
Sections16and17laydownthepowersoftheauthoritiestocarryoutsummon,searches
andseizures.
Section 24 makes it clear that when a person is accused of having engaged in money
laundering,theburdenofprovingthattheproceedsoftheallegedcrimeareuntaintedshall
beontheaccused.
Sections25and26relatetotheestablishmentofanAppellateTribunalandtheprocedures
forfilinganappealtothesame.
Section42dealswithappealsagainstanydecisionororderoftheAppellateTribunal.
Section43empowerstheCentralGovernmenttodesignateoneormoreCourtsofSessionas
SpecialCourtsforthetrialoftheoffenceofmoneylaundering.
Theoffenceofmoneylaunderingispunishablewithrigorousimprisonmentforatermwhich
shallnotbelessthan3yearsbutwhichmayextendto7yearsandshallalsobeliabletofine
whichmayextendtoRs.5lakh.
SEBIhasalsoissuedguidelinesandmastercircularspertainingtoPMLA.
Principal Officers are designated officers of the intermediaries, who would be responsible for ensuring
complianceoftheprovisionsofthePMLA.
28
SEBI(ProhibitionofInsiderTrading)Regulations,2015
Insider Trading is considered as an offence and is hence prohibited as per the SEBI
(ProhibitionofInsiderTrading)Regulations,2015.Theseregulationscameintoforcew.e.f
May2015.
Anydealing/tradingdonebyaninsiderbasedoninformationwhichisnotavailableinpublic
domain,givesanundueadvantagetoinsidersandaffectsmarketintegrity.Thisisnotinline
withtheprincipleoffairandequitablemarkets.Thus,inordertoprotectintegrityofthe
market,theSEBI(ProhibitionofInsiderTrading)Regulationshavebeenputinplace.The
RegulationslaydownthedefinitionofInsiders;restrictionsoncommunicationandtrading
byinsiders;disclosuresoftradingbythem;andthesystemicprovisionswhichneedtobe
laiddownandfollowedbylistedcompanyaswellasintermediaries.
Regulation2(g)oftheSEBIInsiderregulations,definesaninsideranypersonwhois:
i)aconnectedperson;or
ii)inpossessionoforhavingaccesstounpublishedpricesensitiveinformation;
Regulation2(n)definesunpublishedpricesensitiveinformationasanyinformation,relating
toacompany oritssecurities, directlyor indirectly,thatisnotgenerallyavailable which
uponbecominggenerallyavailable,islikelytomateriallyaffectthepriceofthesecurities
andshall,ordinarilyincludingbutnotrestrictedto,informationrelatingtothefollowing:
(i)financialresults;
(ii)dividends;
(iii)changeincapitalstructure;
(iv)mergers,demergers,acquisitions,delistings,disposalsandexpansionofbusinessand
suchothertransactions;
(v)changesinkeymanagerialpersonnel;and
(vi)materialeventsinaccordancewiththelistingagreement.
CodeofConduct
These regulations mention that (a) the board of directors of every listed company and
marketintermediary(b)everyotherpersonwhoisrequiredtohandleunpublishedprice
sensitiveinformationinthecourseofbusinessoperationsshallformulateacodeofconduct
to regulate, monitor and report trading by its employees and other connected persons
towardsachievingcompliancewiththeseregulations,adoptingtheminimumstandardsset
outinScheduleBtotheseregulations,withoutdilutingtheprovisionsoftheseregulations
inanymanner.
Also,thelistedcompanies,marketintermediaryandotherpersonsformulatingacodeof
conductshallidentifyanddesignateacomplianceofficertoadministerthecodeofconduct
andotherrequirementsundertheseregulations.
29
Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by
Insiders
Someofthesestandardsarementionedbelow:
Thecomplianceofficershallreporttotheboardofdirectorsandinparticular,shallprovide
reportstotheChairmanoftheAuditCommittee,ifany,ortotheChairmanoftheboardof
directorsatsuchfrequencyasmaybestipulatedbytheboardofdirectors.
Employees and connected persons designated on the basis of their functional role
(designatedpersons)intheorganisationshallbegovernedbyaninternalcodeofconduct
governing dealing in securities. The board of directors shall in consultation with the
complianceofficerspecifythedesignatedpersonstobecoveredbysuchcodeonthebasis
oftheirroleandfunctionintheorganisation.Dueregardshallbehadtotheaccessthatsuch
roleandfunctionwouldprovidetounpublishedpricesensitiveinformationinadditionto
seniorityandprofessionaldesignation.
Designated persons may execute trades subject to compliance with these regulations.
Towardsthisend,anotionaltradingwindowshallbeusedasaninstrumentofmonitoring
tradingbythedesignatedpersons.Thetradingwindowshallbeclosedwhenthecompliance
officerdeterminesthatadesignatedpersonorclassofdesignatedpersonscanreasonably
beexpected to have possession ofunpublished pricesensitive information. Such closure
shall be imposed in relation to such securities to which such unpublished price sensitive
information relates. Designated persons and their immediate relatives shall not trade in
securitieswhenthetradingwindowisclosed.
Allinformationshallbehandledwithintheorganisationonaneedtoknowbasisandno
unpublished price sensitive information shall be communicated to any person except in
furtheranceoftheinsiderslegitimatepurposes,performanceofdutiesordischargeofhis
legalobligations.ThecodeofconductshallcontainnormsforappropriateChineseWalls
procedures,andprocessesforpermittinganydesignatedpersontocrossthewall.
Priortoapprovinganytrades,thecomplianceofficershallbeentitledtoseekdeclarations
totheeffectthattheapplicantforpreclearanceisnotinpossessionofanyunpublished
pricesensitiveinformation. Heshall also have regard to whether any such declaration is
reasonablycapableofbeingrenderedinaccurate.
SEBI(Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities

Market)Regulations,2003
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities
Market)Regulations2003enableSEBItoinvestigateintocasesofmarketmanipulationand
fraudulentandunfairtradepractices.Regulation2(1)(c)definesfraudasinclusiveofany
act,expression,omissionorconcealmentcommittedtoinduceanotherpersonorhisagent
to deal in securities. There may or may not be wrongful gain or avoidance of any loss.
However,thatisinconsequentialindeterminingiffraudhasbeencommitted.Someofthe
instancescitedareasfollows:
30
a) Aknowingmisrepresentationofthetruthorconcealmentofmaterialfactinorder
thatanotherpersonmayact,tohisdetriment
b) Asuggestionastoafactwhichisnottrue,byonewhodoesnotbelieveittobetrue
c) Anactiveconcealmentofafactbyapersonhavingknowledgeorbeliefofthefact
d) Apromisemadewithoutanyintentionofperformingit
e) Arepresentation,whethertrueorfalse,madeinarecklessandcarelessmanner
Under Section 3, no person shall buy or sell securities in a fraudulent manner, use any
manipulativedeviceorschemetodefraudorengageinanypracticewhichwouldoperate
as a fraud upon any person dealing in listed securities or perform any act which is in
contraventiontotheseregulations.
Regulation4(2)describesinstancesofwhatwouldbedeemedasamanipulative,fraudulent
oranunfairtradepracticeandincludesthefollowing:
a) Indulginginanactwhichcreatesafalseormisleadingappearanceoftradinginthe
securitiesmarket
b) Dealinginasecuritynotintendedtoeffecttransferofbeneficialownershipbutonly
tooperateasadevicetoinflate,depressorcausefluctuationsinthepriceofthe
securityforwrongfulgainoravoidanceofloss
c) Advancingoragreeingtoadvanceanymoneytoanypersontherebyinducingany
other person to offer to buy any security in any issue only with the intention of
securingtheminimumsubscriptiontosuchissue
d) Paying,offeringoragreeingtopayoroffer,directlyorindirectlytoanypersonany
moneyormoneysworthforinducingsuchpersonfordealinginanysecuritywith
theobjectofinflating,depressing,maintainingorcausingfluctuationinthepriceof
suchsecurity
e) Anyactoromissionamountingtomanipulationofthepriceofasecurity
f) Publishingorcausingtopublishorreportingorcausingtoreportbyapersondealing
insecuritiesanyinformationwhichisnottrueorwhichhedoesnotbelievetobe
truepriortoorinthecourseofdealinginsecurities
g) Enteringintoatransactioninsecuritieswithoutintentiontoperformitorwithout
intentiontochangetheownershipofsuchsecurities
h) Selling,dealingorpledgingofstolenorcounterfeitsecuritywhetherinphysicalor
dematerializedform
i) Anintermediarypromisingacertainpriceinrespectofbuyingorsellingofasecurity
to a client and waiting till a discrepancy arises in the price of such security and
retainingthedifferenceinpricesasprofitforhimself
j) Anintermediaryprovidinghisclientswithsuchinformationrelatingtoasecurityas
cannotbeverifiedbytheclientsbeforetheirdealinginsuchsecurity
k) An advertisement that is misleading or that contains information in a distorted
mannerandwhichmayinfluencethedecisionoftheinvestors
l) Anintermediaryreportingtradingtransactionstohisclientsenteredintoontheir
behalfinaninflatedmannerinordertoincreasehiscommissionandbrokerage
m) Anintermediarynotdisclosingtohisclienttransactionsenteredintoonhisbehalf
includingtakinganoptionposition
31
n) Circulartransactionsinrespectofasecurityenteredintobetweenintermediariesin
order to increase commission to provide a false appearance of trading in such
securityortoinflate,depressorcausefluctuationsinthepriceofsuchsecurity
o) Encouragingtheclientsbyanintermediarytodealinsecuritiessolelywiththeobject
ofenhancinghisbrokerageorcommission
p) Anintermediarypredatingorotherwisefalsifyingrecordssuchascontractnotes
q) Anintermediarybuyingorsellingsecuritiesinadvanceofasubstantialclientorder
orwherebyafuturesoroptionpositionistakenaboutanimpendingtransactionin
thesameorrelatedfuturesoroptionscontract
r) Plantingfalseormisleadingnewswhichmayinducesaleorpurchaseofsecurities
s) Missellingofunitsofamutualfundscheme.
t) Illegalmobilizationoffundsbysponsoringorcausingtobesponsoredorcarryingon
orcausingtobecarriedonanycollectiveinvestmentschemebyanyperson.
Weheredescribetheactoffrontrunningasanexampleofunfairtradepractices.Front
running can be described as an illegal act on part of a dealer/stock broker in which the
brokerplaceshisown/firmsorderaheadofclientsorderorwhenclientsorderispending.
Thisactofdealer/brokergiveshim/heranunfairadvantageifpriceofasecurityislikelyto
beaffectedbyclientorder.Frontrunningcouldbeintheformofbuying/sellingaheadof
clientspurchaseorsaleorder.Suchactonpartofdealer/brokeramountstoviolationof
Section12A(a),(b)and(e)oftheSEBIAct,1992orRegulations3(a)to(d)andRegulation
4(q)oftheSEBI(ProhibitionofFraudulentandUnfairTradePracticesRelatingtoSecurities
Market)Regulations,2003.
WhenSEBIhasreasonablegroundstobelievethatthetransactioninsecuritiesarebeing
dealtwithinamannerdetrimentaltotheinvestororthesecuritiesmarketinviolationof
theseregulationsandwhenanyintermediaryhasviolatedtherulesandregulationsunder
theactthenitcanordertoinvestigatetheaffairsofsuchintermediaryorpersonsassociated
withthesecuritiesmarket.Basedonthereportoftheinvestigatingofficer,SEBIcaninitiate
actionforsuspensionorcancellationofregistrationofanintermediary.
SEBI(CustodianofSecurities)Regulation,1996
Thecustodiansareentitiesthatholdsecuritiesorgoldorgoldrelatedinstrumentsonbehalf
ofmainlylargeinvestors,e.g.,mutualfundsandinsurancecompanies.Custodiansmaintain
andreconciletherecordsrelatingtotheassetsheldandalsomonitorcorporateactionssuch
as dividend payments or rights issues on behalf of their clients. In short, custodians are
mainlyintotradesettlement,safekeeping,benefitcollection,reportingandaccounting.One
point of distinction is that a Depository has the right to effect transfer of beneficial
ownershipwhileacustodiandoesnot.
TheSEBI(CustodianofSecurities)Regulation1996,statesthatforthepurposeofgrantofa
certificateforactivitiesofacustodianofsecurities,theentityshouldhaveanetworthofa
minimumRs.50croresAsperChapterIII,everycustodianofsecuritiesshallenterintoan
agreementwitheachclientonwhosebehalfitisactingascustodianofsecuritiesandevery
suchagreementshallprovideforthecircumstancesunderwhichthecustodianofsecurities
32
will accept or release securities from the custody account, will accept or release monies
fromthecustodyaccount;timecircumstancesunderwhichthecustodianofsecuritieswill
receiverightsorentitlementsonthesecuritiesoftheclient.
Every custodian of securities shall have adequate internal controls to prevent any
manipulation of records and documents including audits for securities and rights or
entitlementsarisingfromthesecuritiesheldbyitonbehalfofitsclient.
33
ReviewQuestions
1. AmericanDepositoryReceipts(ADRs)are______________________.
a) NegotiableinstrumentsdenominatedindollarsandissuedbyUSdepositoryBanks.
b) BondsissuedbyIndiancompaniesabroad.
c) Depositoryreceiptsissuedabroadbyauthorizedoverseascorporatebodiesagainstshares
ofIndiancompaniesheldwithnominateddomesticcustodianbanks.
Ans:(a)
2. Whichofthefollowingstatementisfalse?
a) CustodiansareregisteredwithSEBIasprofessionalclearingmembers
b) Selfclearingmemberscancleartradesdonebythemonly.
c) Tradingcumclearingmemberscantradeandcleartradesdonebyhim,butcannottrade
andcleartradesdonebyothers.
Ans:(c)
3. StockbrokersneedtogetregisteredasstockbrokerswithSEBIasperwhichregulation?
a) SEBI(Intermediaries)Regulations,2008
b) SEBI(StockBrokersandSubBrokers)Regulations,1992
c) SEBIAct,1992
Ans:(b)
4. SecuritiesContracts(Regulation)Act,1956hasregulatoryjurisdictionover
(a) ListingofsecuritiesonStockExchanges
(b) RecognitionofintermediariesintheSecuritiesMarket
(c) InvestorProtection
Ans:(a)
34
Chapter3:IntroductiontoSecuritiesBrokingOperations
LEARNINGOBJECTIVES
Afterstudyingthischapteryoushouldknowabout:
ConceptofTradelifecycle
FrontOffice,MiddleOfficeandBackOfficeOperationsofastockbrokingfirm
InformationTechnologyandBusinessContinuityPlanofastockbrokingfirm
RegulatoryCompliances
3.1IntroductiontotheTradeLifeCycle
In financial market, trade means to buy and/or sell securities/financial products. To
explainitfurther,atradeistheconversionofanorderplacedontheExchangeintoapayin
andpayoutoffundsandsecurities.Tradeendswiththesettlementoftheorderplaced.
Everytradehasitsowncycleandcanbebrokendownintopretradeandposttradeevents.
Tradingofsecuritiesalsoinvolvesmanyparticipantsliketheinvestors,brokers,Exchange,
clearingagency/corporation,clearingbanks,depositoryparticipants,custodiansetc.
Thefollowingstepsareinvolvedinatradeslifecycle:
1. PlacinganOrder
2. Riskmanagementandroutingoforder
3. Ordermatchinganditsconversionintotrade
4. AffirmationandConfirmation(onlyforinstitutionaldeals)
5. ClearingandSettlement
Theabovementionedstepscaneasilybecategorizedintofrontoffice,middleofficeand
backofficeoperationsofbrokingfirms.However,thiscategorizationofthethreedifferent
officesismostlythesetupwithbigbrokinghouses.Points1and3aregenerallythefront
officefunctions;Riskmanagementpartofpoint2isthemiddleofficefunction,whereasthe
orderroutingpartofpoint2isagainafrontofficefunction.Points4and5aretheback
officefunctions.Inthischapterwediscussthesevariousstepsinvolvedinatradelifecycle.
Figure3.1givesapictorialrepresentationofthetradelifecycle.
35
Figure3.1:SecuritiesTradeLifeCycle
3.1.1 Placingoforder
The Broker accepts orders from the client and sends the same to the Exchange after
performing the risk management checks. Clients have the option of placing their orders
throughvariouschannelslikeinternet,phone,directmarketaccess(DMA)(forinstitutional
clients)etc.Box3.1givesdetailsofDMA.
Oncetheordersarereceivedbythebroker,itisconfirmedwiththeclientandthenentered
intothetradingsystemoftheExchange.TheExchangegivesconfirmationoftheorderand
timestampsit.Anordergenerallycomeswithcertainconditionswhichdeterminewhether
itisamarketorder,limitorderetc(discussedinsection3.2.2).Thesespecifythetermsand
conditionsatwhichtheclientwantshis/herordertogetexecuted.
Box3.1DirectMarketAccess
In the year 2008, SEBI permitted the facility of Direct Market Access for institutional
clients.DMAisafacilitywhichallowsbrokerstoofferitsinstitutionalclientsthedirect
accesstotheExchangetradingsystemthroughthebrokersinfrastructure.Thisdoesnot
involve any manual intervention of the broker. This facility can be extended to the
institutional clients provided the broker satisfies the operational specifications; risk
managementmeasureandotherdetailsasprescribedbySEBI.
3.1.2 RiskManagementandOrderRouting
Asound risk management is integral to anefficientsystem. A brokers risk management
worksonthefollowingconcepts:
Cash:Thebrokernormallyensuresthatthereisenoughbalanceintheclientsaccount
tohonourthetrade.
Incaseabuyorderisenteredbytheclientoronbehalfoftheclient,thebrokerssystem
runsaquerytofindtheavailablefundsintheclientsbankaccountandwhetheritis
36
sufficienttomeetthestipulatedmarginrequirements.Thisisaspertheagreedupon
terms and conditions of risk management with the client. If the available balance
satisfiestheriskmanagementparametersthentheorderisroutedtotheExchange.In
caseswherethebalanceisnotsufficienttheordergetsrejected.Arejectionmessageis
showninthesystem,whichthenisconveyedtotheclient.
Incasethereisnodirectinterfacetoabankingsystem,theclientisaskedtomaintain
cashandsecuritiesdepositinordertoensureadequacyofbalance.
Incaseaclientgivesasellorder,thebrokerensuresthattheclientscustody/demat
account has sufficient balance of securities to honour the sale transaction; this is
possibleonlyiftheclienthashis/herdemataccountwiththesamebroker.Inallother
cases,wherevertheclienthashisdemataccountwithanoutside/thirdpartyDP,its
the duty of the client to ensure that he has/ will have the required securities in the
demataccount,beforesellingthesame.
Dependinguponthetypeoforderandtheactualpricesprevailinginthemarket,the
ordergetsexecutedimmediatelyorremainspendingintheorderbookoftheExchange.
3.1.3 OrderMatchingandConversionintoTrade
All orders which are entered into the trading system of the Exchange are matched with
similarcounterordersandareexecuted.TheordermatchinginanExchangeisdoneona
pricetimeprioritybasis.Thebestpriceordersarematchedfirst.Ifmorethanoneorderis
availableatthesamepricethentheyarearrangedinascendingtimeorder.Bestbuyprice
isthehighestbuypriceamongstallordersandthebestsellpriceisthelowestpriceofall
sellorders.Thishasbeendiscussedindetailinsection3.2.2.3.
Oncetheorderismatched,itresultsintoatrade.Assoonasthetradeisexecuted,atrade
confirmationmessageissenttothebrokerwhohadenteredtheorder.Thebrokerinturn
letstheclientknowaboutthetradeconfirmationthroughacontractnote.(Tounderstand
aboutacontractnotereadBox3.2)
Allorderswhichhavenotbeenexecuted,partlyorfullycanbemodifiedorcancelledduring
thetradinghours.Tradesdoneduringthedaycanalsobecancelledbymutualconsentof
boththepartiessubjecttoapprovaloftheExchange.Thesegenerallyoccurduetoorder
entryerrorsandarenotacommonpractice.
37
Box3.2:WhatisaContractNote?
Acontractnoteisaconfirmationoftradedoneonaparticulardayforandonbehalf
ofaclient.Acontractnoteisissuedintheformatandmannerprescribedbythe
Exchanges. It establishes a legally enforceable relationship between the stock
brokerandtheclientinrespectofsettlementoftradesexecutedontheExchange
asstatedinthecontractnote.Everytradeexecutedbyastockbrokeronbehalfof
hisclientshouldbesupportedbyacontractnote.
Contract note should be issued within 24 hours and in the format prescribed by
Exchanges/SEBI. These should be issued in physical form or electronic form
dependingonthemodechosenbyclient.
Thecontractnotesshouldbeacknowledgedbytheclientsalongwithdateincase
of personal delivery. Stock brokers are required to maintain proof of dispatch of
contract notes in the case of delivery of physical contract notes through
post/courier.InthecaseofElectronicContractNote(ECN),logofsendingECNto
clientsemailidshouldbemaintained.
Thecontractnotesshouldbeseriallynumberedstartingfromthebeginningofthe
financialyear.Theyshouldbeissuedwiththeclientsnameandclientscodewritten
on them. It should also contain the exact order number, order entry time, trade
number, trade time, quantity of securities transacted, rates/price, etc. Contract
noteswithweightedaverageratesoftradeshouldcontainanannexurewiththe
detailsthereon.Electroniccontractnotesshouldbeissuedonlyiftheclienthaspre
authorizedthestockbroker.Thecontractnoteshouldbedigitallysigned,encrypted,
nontamperable,andinaccordancewiththeInformationTechnologyAct,2000.
Stockbrokersarerequiredtomaintainduplicatecopyorcounterfoilofthecontract
notes. The contract notes should be signed by stock broker or by an authorised
signatoryofthestockbroker.Acontractnotewithoutconsiderationisnullandvoid
under Indian Contracts Act and hence all contracts should mention the
considerationseparately.
Contractshouldalsomention allstatutorychargeslikeSecuritiesTransactionTax
(STT), Service Tax (ST), Education Cess, SEBI and Exchange charges, etc. Contract
notesshouldbeaffixedwiththebrokersnotestamps,asapercentageofthetotal
valueofthecontract,aspertherespectivestategovernmentstamp acts/rules.
Contractnotealsoshouldclearlyspecifythecompleteaddress,phonenumber,e
mailIDs,faxnumbers,DepositoryParticipantID(DPID),PoolA/Cdetails,etc.ofthe
brokeralongwiththePAN.
38
3.1.4 AffirmationandConfirmation(ForInstitutionalClients)
FIIstradingintheIndiansecuritiesmarketusetheservicesofacustodiantoassistthemin
the clearing and settlement of executed trades. Custodians are clearing members of the
Exchangeandnotbrokerswhotradeonbehalfofthem.Onbehalfoftheirclients,theysettle
thetradesthathavebeenexecutedthroughother brokers.Abrokerassignsaparticular
tradetoacustodianforsettlement.Thecustodianneedstoconfirmtothebrokerwhether
he is going to settle that trade. Upon confirmation by the custodian the broker
communicatesthesametotheclearingcorporationswhothenassignstheobligationtothe
custodian.Theoverallriskthatthecustodianisbearingbyacceptingthetradeisconstantly
measuredagainstthecollateralthattheinstitution(whotrades)submitstothecustodian
forprovidingthisservice.
This process gains more importance when while giving orders for purchase or sale of
security,thefundmanagerofamutualfundgivestheorderwithouthavinganyspecificfund
inmindforallocatingthosesharesforwhichorderhasbeengiven.Insuchcases,thebroker
acceptstheorder.Ontheorderbeingtraded,thebrokersendsthetradeconfirmationto
theMF.Thefundmanagerbeforetheendofdayhastoallocatethesharestotherespective
funds/schemesandsendthedetailstothebrokerforhimtoissuethecontractnotes.Using
theallocationdetailssentbytheMF,thebrokerissuesthecontractnote.
In2004,SEBIhadmandatedthatalltheinstitutionaltradesexecutedontheStockExchanges
should be processed through the Straight through Processing (STP) system.8 STP is a
mechanism that automates the endtoend processing of transactions of the financial
instruments.Itinvolvesuseofasinglesystemtoprocessorcontrolallelementsofthework
flowofafinancialtransaction,includingwhatiscommonlyknownastheFront,Middle,and
Back office, and General Ledger. In other words, STP can be defined as electronically
capturing and processing transactions in one pass, from the point of first deal to final
settlement.
3.1.5 ClearingandSettlement
Once the trade is executed on the Exchange, the details are passed on to the clearing
corporation,toinitiatetheclearingandsettlementofthoseexecutedtrades.Basedonthe
tradedetailsfromtheExchange,theClearingCorporationdeterminestheobligationsofthe
members. It then notifies the consummated trade details to the clearing
members/custodianswhoaffirmback.Basedontheaffirmation,theclearingcorporation
appliesmultilateralnettinganddeterminesobligations.Thesettlementprocessbeginsas
soonasmembersobligationsaredeterminedthroughtheclearingprocess.
Thesettlementprocessiscarriedoutbytheclearingcorporationwiththehelpofclearing
banks and the depositories. The clearing corporation provides a major link between the
clearingbanksandthedepositories.Thislinkensuresactualmovementoffundsaswellas
securitiesontheprescribedpayinandpayoutday.
VideSEBICircularno.DNPD/Cir22/04datedApril1,2004.
39
Instructionsaregiventothedepositoriesandtheclearingbanksforpayinofsecuritiesand
fundsandpayoutofsecuritiesandfunds.Theclearingmembershavetoensurethatthey
makeavailablethesecurities/fundstotheclearingcorporationbeforepayindayandtime.
Oncethepayinactivitiesarecarriedouttheclearingcorporationcarriesoutthepayoutof
fundsandsecurities.
In India, we follow the T+2 Rolling Settlement, which means that the brokers settle the
transactionsonthesecondworkingdayfromthetradeday.Togiveanexample,atrade
executed on Wednesday, has to be settled on Friday (provided Thursday and Friday are
workingdays),withpayinandpayoutoffundsandsecuritiesbeingcompletedonthatday.
3.2FrontOfficeOperations
The front office is responsible for trade capture and execution. This is where the trade
originatesandtheclientrelationshipismaintained.Thefrontofficemakes/takesordersand
executesthem.Tradersandsalesstaffareconsideredfrontofficestaff.
Tobetterunderstandthesubsequentsectionsweneedtokeepinmindthetradelifecycle
(figure3.1)discussedearlier.ItcanbeclearlyseenfromtheFigure3.1thatthemaintask
ofthefrontofficestaffistogenerateordersandexecutethem.Thedealersarethefaceof
thebrokers,wholiaisewiththeclientsandacceptorders.Discussedbelowarethevarious
frontofficerelatedactivities.
3.2.1ClientOnBoardingandRegistration
Animportantpartofabroker'sjobisfindingclientsandbuildingacustomerbase.Thus,
securities sales agents spend time searching for clients. Some agents network by joining
civic organizations or social groups, while others may rely on referrals from satisfied
customers.
3.2.1.1Sales
Tradersbuyandsellfinancialproductswiththegoalofmakinganincrementalamountof
money on each trade. The sales force, whose primary job is to call on clients to suggest
tradingideasandtakeordersandthencommunicatetheirclients'orderstotheappropriate
tradingdesks,whocanpriceandexecutetrades.Thejobofthesalesteamalsoincludes
gettingnewclientstothebrokeragefirm.
3.2.1.2Accountopening
Thisrefersonlytotheopeningofaccountsfornewclients.Therearecertainproceduresto
befollowedbeforetheaccountcanbeopenedandthebrokercanexecutetheordersofthe
client.
40
Tosimplifyandrationalizethetradingaccountopeningprocedure,SEBIhasdeviseduniform
documentationtobefollowedbyallthestockbrokers/tradingmembersandprovidinga
copyofthosedocumentstotheclients.9
By uniform documentation, it is meant that a list of six documents that are required for
accountopeningprocess.(Thesampleofthesedocumentsareprovidedasannexuretothis
workbook). An index of documents listing the following documents required for client
accountopeningprocessisprovidedtotheclients.
1) ClientAccountOpeningFormwhichisintwoparts.a)KnowYourClient(KYC)
formcapturingthebasicinformationabouttheclientandinstruction/checklist
tofilluptheformandb)AdditionalDocumentcapturingadditionalinformation
abouttheclientrelatedtotradingaccount.
2) Document stating the Rights & Obligations of stock broker, subbroker and
clientfortradingonExchanges(includingadditionalrights&obligationsincase
ofinternet/wirelesstechnologybasedtrading).
3) UniformRiskDisclosureDocuments(RDD)forallsegments/Exchanges.
4) GuidanceNotedetailingDosandDontsfortradingonExchanges.
5) DocumentdescribingthePoliciesandProceduresofthestockbroker
6) A tariff sheet specifying various charges, including brokerage, payable by the
clienttoavoidanydisputesatalaterdate.
Inadditiontotheabovedocuments,theclientsshouldalsobeprovidedwiththecontact
detailsofseniorofficialswithinthestockbrokingfirmandinvestorgrievancecellinthestock
Exchange,sothattheclientcanapproachthemincaseofanygrievance.
Detailsofcertaindocumentstobesubmittedbytheclientareenumeratedinthefollowing
section.
KYCandOtherDocuments
KYC is an acronym for Know your Client, a term commonly used for Customer
IdentificationProcess.SEBIhasprescribedcertainrequirementsrelatingtoKYCnormsfor
FinancialInstitutionsandFinancialIntermediariesincludingMutualFundsandStockBrokers
to know their clients. This entails verification of identity and address, financial status,
occupationandsuchotherpersonalinformationasmaybeprescribedbyguidelines,rules
andregulation.
SEBIinconsultationwithUniqueIdentificationAuthorityofIndia(UIDAI)nowallowsbrokers
toaccepteKYCserviceprovidedbyUIDAIasavalidprocessforKYCverification.

9
VideSEBICircularno.CIR/MIRSD/16/2011datedAugust22,2011
41
ThebrokermustensurethattheclientsfilluptheKYCformandsubmitittothem.There
areseparateformsforindividualsandnonindividuals.Brokersmustalsoensurethatthe
followingdocumentsaresubmittedalongwiththeKYCformsbytheclients.
PANCard:ThePANcardalongwithitsphotocopyisrequiredforidentityverification
ofanindividual.TheoriginalPANcardisforverificationonlyandwillbereturnedto
theclientimmediately.
Certainentitiesorindividuals(asmentionedbelow)areexemptbySEBItoproduce
theirPANprovidedtheyhavesufficientdocumentaryevidenceinsupportofsuch
claimsarecollected.
o IncaseoftransactionsundertakenonbehalfofCentralGovernmentand/or
State Government and by Officials appointed by Courts e.g. Official
Liquidator,Courtreceiveretc.
o InvestorsresidinginthestateofSikkim.
o UN entities / multilateral agencies exempt from paying taxes / filing tax
returnsinIndia.
o SIPofMutualFundsuptoRs.50,000perannum.
o In case of institutional clients, namely, FIIs, MFs, VCFs, FVCIs, Scheduled
Commercial Banks, Multilateral and Bilateral Development Financial
Institutions, State Industrial Development Corporations, Insurance
CompaniesregisteredwithIRDAandPublicFinancialInstitutionsasdefined
undertheCompaniesAct,2013,CustodiansshallverifythePANcarddetails
withtheoriginalPANcardandprovidedulycertifiedcopiesofsuchverified
PANdetailstotheintermediary.
ProofofAddressDocument:ListofdocumentsadmissibleforProofofAddressare
givenbelow,howeverthesedocumentshavinganexpirydateshouldbevalidonthe
dateofsubmission:
o Passport/Voters Identity Card/Ration Card/Registered Lease or Sale
agreement of Residence /Driving license/Flat Maintenance Bill /Insurance
Copy.
o AadhaarletterissuedbyUIDAI
o UtilitybillslikeTelephonebill(onlylandline),ElectricitybillorGasbillNot
morethan3monthsold.
o Bankaccountstatement/PassbookNotmorethan3monthsold.
o Self Declaration by High Court and Supreme Court judges, giving the new
addressinrespectoftheirownaccounts.
o Proofofaddressissuedbyanyofthefollowing:BankmanagersofScheduled
commercial Banks/Scheduled Cooperative Bank/Multinational Foreign
Banks/Gazetted Officer/Notary public/Elected representatives to the
legislative assembly/Parliament/Documents issued by any Government or
statutoryAuthority.
42
o Identity card /document with address. Issued by any of the following:

Central/State Government and its departments, statutory/Regulatory
authorities,PublicSectorUndertakings,scheduledCommercialBanks,Public
Financial Institutions, Colleges affiliated to universities and Professional
BodiessuchasICAI,ICWAI,ICSI,BarCounciletc.totheirmembers.
o For FII / Sub account,Power of attorneygiven by FII / Subaccountto the
custodians(whicharedulynotarizedand/orapostiledorconsularised)that
givestheregisteredaddressshouldbetaken.
o Theproofofaddressinthenameofthespousemayalsobeaccepted.
ProofofIdentity:Thefollowingdocumentsareconsideredadmissibleasproofof
Identity:
i.
Unique Identification Number (UID) (Aadhaar)/Passport/Voter ID

Card/DrivingLicense.
ii.
PANcardwithphotograph
iii.
Identity card /documents with applicants photo, issued by any of the

following: Central/State Government and its departments,
Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled
Commercial Banks, Public Financial Institutions, Colleges Affiliated to
Universities,ProfessionalBodiessuchasICAI,ICWAI,ICSI,Barcounciletc.,to
theirMembers;andcreditcards/debitcardsissuedbybanks.
Iftheproofofidentityoraddressisinaforeignlanguage,thentranslation
intoEnglishisrequired.Inpersonverificationisalsorequiredtobemadeby
thebrokerorbythepersonauthorisedbyhimofeachnewclientaddedon
thebooks.
Bankaccountdetails:Theclientmustalsohaveavalidbankaccountfromwhich
transactionscanbemadeforpayin/outoffunds.Thedetailsaretobegivenwith
theKYC.Acancelledchequeleafletwithacopyofthebankaccountstatement/pass
bookshouldalsobesubmittedatthetimeofopeningthetradingaccount.Thisbank
account will be mapped to the clients trading account and thereafter, generally,
paymentwillbeacceptedonlyfromthisaccount.Aclientcanmapmorethanone
bankaccountalso,butshouldprovidetheproofofthesame.
TheclientmusthavealsoopenedademataccountwithaDPforpayinorpayout
of securities. A copy of theclient mastergiven by therespective DP to the client
shouldbesubmittedtobrokeratthetimeofopeningthetradingA/C.
Normallytheclientpreferstoopenbothtradinganddemataccountwiththesame
broker.InthatcasetheclientiswillingtogivePowerofAttorney(POA)infavourof
brokerforsmoothfunctioning.SEBIhasstipulatedcertainformatsandstipulations
withrespecttoPOAtobefollowedbythebroker.
43
Authority Letter for settle account: The retail clients normally do not wish to
exchangechequestoandfroforeverycontract.Theyprefertosettletheaccount
withthebrokeratperiodicinterval.TofacilitatethisSEBIhasapprovedbrokersto
collect running authority letter from the client. In spite of this letter the broker
should settle the accounts at least once a quarter or earlier as per the client
preference.
3.2.1.3KRAAgency(KnowYourClientRegistrationAgency)
SEBI simplified the account opening process for investors and made it uniform across
intermediaries in the securities markets as already mentioned above. Further, to avoid
duplicationoftheKYCprocesswitheveryintermediary,intheyear2011SEBIdevisedthe
KRAsystemforcentralizationoftheKYCrecordsinthesecuritiesmarkets.TheKRAsystem
wasmadeapplicableforthoseclientswhoopenedaccountswiththeintermediariesfrom
January1,2012onwards.
Thebrokersortradingmembers,aftercompletingtheclientaccountopeningprocedures,
are required to upload the KYC details to the KRA agencies registered with SEBI.10 The
membersmayuploadtheKYCdataontheKRAsystemandsendtherelevantKYCdocuments
toKRAwithin10workingdays.
3.2.1.4UniqueClientCode(UCC)
In2001,SEBImadeitmandatoryforbrokerstouseuniqueclientcodesforallclients.11Once
the formalities of KYC and other details thereon are complete, each client is assigned a
uniqueclientcode(UCC)bythebroker.Thisactsasanidentityfortheclientwithrespectto
thebroker.SEBIhasmadeitmandatoryforallthebrokers/subbrokerstouseuniqueclient
codesforallclientswhileenteringordersontheirbehalf.ItisalsomandatedbySEBI,that
theuniqueclientcodebemappedwiththePANnumberoftheclient.
ThebrokerhastoprovidetheStockExchange(s)withtheUCCandthePANdetailsofthe
client(s)beforeenteringintoanytradefortheclient.TheStockExchangesprovideanupload
facilitytothebrokersthroughwhichtheUCCandotherclientdetailsareuploadedonthe
stockexchangeplatformonaperiodicbasis.Ifthebrokerfailstoregistertheuniqueclient
codewiththeExchange,heisliabletobepenalized.
3.2.1.5Brokerage
Brokerage firms have elaborate commission module (brokerage) to attract and retain
clients.Givenbelowaretherulesforchargingbrokerage.

10
SEBICircularNo.MIRSD/Cir23/2011datedDecember2,2011.TheguidelinesonKRAuploadareprovidedinSEBICircular
No.MIRSD/Cir26/2011datedDecember23,2011.
11
SEBICircularno:SMDRP/Policy/CIR39/2001datedJuly18,2001
44
Brokerageruleforequitysegment:
o Maximumbrokeragethatbrokerscanchangeis2.5%ofthetradevalue.
o IfthevalueofshareisRs.10/orless,amaximumbrokerageof25paiseper
sharecanbecollected.
o Thereisnominimumbrokeragerequirementspecified.
BrokerageruleforF&Osegment:
o BrokerageruleforF&Osegmentissimilartotheequitysegmentexceptfor
optionscontract
o Inthecaseofoptionscontracts,maximumbrokeragecanbe2.5%ofthe
optionpremiumorRs.100/percontractwhicheverishigher.
Trading member can be a full service broker, discount broker or an online broker.
Commissionchargedcanbedifferentfordifferenttypesofbrokers.
Fullservicebrokerchargeshighercommission
Discountbrokerschargeamuchlowercommission
o Theyalsodontofferanyotherfacilityothertrading
Onlinebrokerscatertonichesegmentofretailclients.
o Commissionchargedislesserthanwhatwouldbechargedforaclient
placingordersthroughabroker.
Brokersalsousemultiplecommissionschemessuchas
o Volumebasedcommission
o Slabwisecommissionor
o Scripwisecommission.
Commissionchargesmaydifferfordaytradesversusdeliverytransactions.
3.2.2OrderManagement
Ordermanagementconsistsofenteringorders,ordermodification,ordercancellationand
ordermatching.Themaincomponentsofanorderare:
Price
Time
Quantity
Security(Whattobuyandwhattosell))
Action(Buy/Sell)
Clientidentity(UCC)
3.2.2.1Typesoforder
Price,timeandquantityarethreemajorcomponentsofanorder.Therearegenerallythree
typesofordersthatcanbeusedwhenplacingtrades.Thesearemarketorders,stoporders
45
andlimitorders.Therearevariationsoneachtowhichtradersshouldbeawareof.These
variationsarepresentforsecurityandprecisionandthereareoccasionswheremorethan
oneorderisrequired.Thesevariationsarebecauseofdifferentconditions/preferencesof
price,timeandquantity.
MarketOrderBasicTrade
Amarketorderiswhereatraderpurchasesorsellstheirsecurityatthebestmarketprice
available.Inthemarketorderthereisnoneedtospecifythepriceatwhichatraderwants
topurchaseorsell.Therearetwovariationsonthemarketordermarketorderwithout
protectionandMarketwithprotectionorder.
The market order without protection means that the trades are executed at the best
availablepriceinthemarketatthatpointintime.
Thesecondtypeofmarketorderi.e.marketwithprotectionorderislikeaLimitOrder.The
risk of an order getting executed at any price is protected by using such order. The
protectionpercentageisappliedontheLTP(lasttradedprice)toarriveatapricebeyond
whichtheorderwillnotgetexecuted.
Example3.1:Illustrationofatypicalmarketorder
Order is placed to buy 100 shares of ABC Industries Ltd. at Market. The order book
snapshotlookslikeasbelow:
BuyQty.
BuyPrice
SellPrice
SellQty.
1,606
807.55
807.60
100
13
807.50
807.65
119
383
807.45
807.70
184
78
807.40
807.75
42
807.35
807.85
86
1,86,054
TotalQuantity
1,30,050
Inthiscurrentscenario,theincomingmarketorderwillgetmatchedwiththebestsellorder
inthebookwhichis100shares@Rs.807.60andatradewilltakeplacefor100sharesat
Rs.807.60.
LimitOrderBuyingataLowerPrice/SellingataHigherPrice
Limitordersinvolvesettingtheentryorexitpriceandthenaimingtobuyatorbelowthe
marketpriceorsellatoraboveit.Unlikemarketorder,thetraderhereneedstospecifyat
46
leastoneprice.Theyofcoursecanbechangedanytimebeforeexecution.Reachingthese
limits/targets is not always possible and sometimes the orders do not go through. Limit
ordersareverycommonforonlinetraders.
Example3.2:Illustrationofatypicallimitorder
Order is placed to buy 200 shares of ABC Industries Ltd at Rs. 807.65. The order book
snapshotlookslikeasbelow:
BuyQty.
BuyPrice
SellPrice
SellQty.
1,606
807.55
807.60
100
13
807.50
807.75
119
383
807.45
807.80
184
78
807.40
807.85
42
807.35
807.90
86
1,86,054
TotalQuantity
1,30,050
Inthiscurrentscenario,theincominglimitorderwillgetmatchedwiththebestsellorderin
the book which is 100 shares @ Rs.807.60 and a trade will take place for 100 shares at
Rs.807.60.Itshouldbenotedthattheorderisalwaysmatchedwiththepassiveorderprice,
inthiscaseasthesellorderisthepassiveorder,matchingtakesplaceatRs.807.60.The
balancebuyorderfor100shares@Rs.807.65willsitintheorderbookonthebuysideas
the best buy order. The revised order book snapshot after the trade match will look as
follows:
BuyQty.
BuyPrice
SellPrice
SellQty.
100
807.65
807.75
119
1,606
807.55
807.80
184
13
807.50
807.85
42
383
807.45
807.90
86
78
807.40
807.95
12
1,86,153
TotalQuantity
1,29,062
47
ThereisonemorevariationinLimitordercalledIOC(immediateorcancel).Inthiscasethe
traderputsthecurrentmarketrateaslimitandtheordergetsexecutedtotheextentof
availablequantityatthatrate.Thebalanceunexecutedquantityifanyiscancelledinstead
ofkeepingpendingattheorderbook.
Example3.3:IllustrationofatypicalIOCorder
Orderisplacedtobuy200sharesofABCIndustriesLtd.atRs.807.65immediateorcancel.
Theorderbooksnapshotlookslikeasbelow:
BuyQty.
BuyPrice
SellPrice
SellQty.
1,606
807.55
807.60
100
13
807.50
807.75
119
383
807.45
807.80
184
78
807.40
807.85
42
807.35
807.90
86
1,86,054
TotalQuantity
1,30,050
Inthiscurrentscenario,theincominglimitorderwillgetmatchedwiththebestsellorderin
thebookwhichis100shares@Rs.807.60andatradewilltakeplacefor100sharesatRs.
807.60.Itshouldbenotedthattheorderisalwaysmatchedwiththepassiveorderprice,in
this case as the sell order is the passive order, matching takes place at Rs. 807.60. The
balancebuyorderfor100shares@Rs.807.65willbecancelledasitisanIOCorderand
thereisnomatchfortheremaining100shares.
StopOrders(orderswithstoplosstriggers)
Instoporder,thecliententerstwoprices:oneistriggerpriceandtheotherislimitprice.A
stopordercanbestbeexplainedwithanexample.Supposeatraderhasashortterm(say,
foraday),bullishviewonastock,hemaybuythestockatsayRs.100/pershareinthe
earlyhoursoftradingsession.Ifthestockpricemovesupwardsasperhisexpectation,he
maysellthestock,sayatRs.110/andclosehisposition.
Thestockpricecanalsomovedownwardsmuchagainstexpectationsofthetrader.Itmay
sohappenthatthetradermayhavelimitedriskappetiteanddoesnotwanttoincurlossof
morethanRs.5/pershare.Insuchascenario,tradercangivestoplossorderwithtrigger
priceofRs.96/andlimitpriceofRs.95/.Whenthestockpricestartsmovingdownwards,
assoonasithitspriceofRs.96/,thesellorderofRs.95/willautomaticallygettriggered.
Anyfurtherdownwardmovementinpricewillnotaffectthetraderashehasalreadylimited
hislossontheposition.
48
Astopordercanalsobeusedwithsimilarlogicifatraderhasbearishviewonastock.
Atypicalsellstoplossorderexample:
OriginaltransactionBought400sharesofABCIndustriesLtd.(ABC)atRs.830.
Ifthepricefallsbelowthepurchaseprice,theinvestorwillstartclockingaloss.
InvestormayplaceasellstoplossorderatatriggerpriceofRs.800.Whentheprice
ofABCdropstoRs.800,sellstoplossorderwillgettriggered.
Orderisthenplacedinthemarkettosell400sharesofABC.
Itcanbetriggeredasamarketorder,orasalimitorder
Iftheinvestorhadspecifiedalimitprice,forexampleinthiscase,Rs.790
Inthecaseofstoplosslimitorder,oncetriggered,theorderwillbeplacedinthe
marketforsellABC400sharesatRs.790.
ItwillmatchonlyifacorrespondingbuyorderexistsforRs.790/orbetter.
Ifitisstoplossmarketorder,oncetriggereditwillmatchwiththebestcounterorder
available.
Atypicalbuystoplossorderexample:
OriginaltransactionSell400sharesofABCIndustriesLtd(ABC)atRs.830.
Ifthepricegoesabovethesellingprice,theinvestorwillstartclockingaloss.
Buystoplossorderisusedtoanticipatepotentialloss.Investormayplaceabuystop
lossorderatatriggerpriceofsayRs.880.
WhenABCpricereachesRs.880,thebuystoplossorderwillgettriggered.
Anorderwillbeplacedinthemarkettobuy400sharesofABC.
Itcanbetriggeredasamarketorder,orasalimitorder.
If the investor hadspecified a limitprice, forexample in this case, thelimit price
couldbeRs.890.
Inthecaseofstoplosslimitorder,whenthestoplossorderistriggered,theorder
willbeplacedinthemarketforselling400ABCsharesatRs.890/.Itwillmatchonly
ifacorrespondingbuyorderexistsforRs.890/orbetter.
Ifstoplossmarketorder,itwillbereleasedtothemarketwhenthetriggerpriceis
reached.Itcouldpotentiallytradeatanypriceatwhichthebestorderinthemarket
isavailable.
Thevariationsinthethreeordersrequiretraderstobewellawareoftheoptionswhen
trading.Studyingthestockandpredictingthetrendaccuratelyisveryimportant.
3.2.2.2PlacingofordersthroughtheInternet/Phone
Placingofordersthroughtheinternet/phonemeansthefacilityprovidedbystockbrokers,
wherebytheclientcanplaceorder(s)overthephone/internetfortransactionsinsecurities,
tobeexecutedonbehalfofclientsbythebroker.
Here,thedealershallrefertotheDealingDeskExecutiveappointedbythecallcentre(s)for
thepurposeofprovidingthisfacility.
49
Forthepurposeofavailingofthisservice,theClientisrequiredtocallonthespecific
numbersintimatedornotifiedfromtimetotimebythestockbrokerforthesaidpurpose
bymeansofanemailand/orbyputtingupsuchnumbersonthewebsiteorotherwise.
IncasetheClientoptsforthisservice,hemayberequiredtoprovideaccurateanswers
tothequestionsaskedbytheDealingDeskExecutive,includingtheClientsuseridand
TPIN,forascertainingthegenuinenessofthecaller.Oncethisisdone,theordercanbe
placedandwillbeprocessedinthenormalcourse.
3.2.2.3ProcessoforderroutingthroughtheExchanges
Oncetheorderisenteredandconfirmedbytheclient/dealerathistradingterminaland
verifiedbythebrokersoftware,theorderisroutedtotheExchangeforitsexecution.The
Exchangesystemallotsauniqueordernumberforallordersreceivedinthesystem.Thisis
givenasorderconfirmationalongwiththetimestamptothebroker.
TheordergetsexecutedattheExchangedependinguponthetypeoforder.Iftheorderis
amarketorderitgetsexecutedimmediately.Ifitisalimitorderitisstoredintheorder
bookandmatchedagainstappropriatecounterorders.Oncetheorderismatched,atrade
issaidtobeexecuted.Assoonasatradeisexecutedthetradeconfirmationmessagewill
beautomaticallyavailableonthetradingterminalofbrokerandclientwhichinturninforms
theclientthroughamessageonthetradingterminal(onlyiftheclientistradingoninternet
platform).
Allorderscanbemodifiedorcancelledduringthetradinghoursandpreopenmarketstage
providedtheyarenotfullyexecuted.Fortheorders,whicharepartiallyexecuted,onlythe
openorunexecutedpartoftheordercanbecancelled/modified.
The order matching in an Exchange is done based on pricetime priority. The best price
ordersarematchedfirst.Ifmorethanoneorderarrivesatthesamepricetheyarearranged
in ascending time order. Best buy price is the highest buy price amongst all orders and
similarlybestsellpriceisthelowestpriceofallsellorders.Letustakeanexamplehereto
betterunderstandthis.Asampleoftheorderbookisgivenbelowforunderstanding.
BuyQuantity
BuyPrice
Sellquantity
SellPrice
50
121.20
50
121.50
100
121.10
200
121.80
25
120.90
3000
122.10
500
120.00
1000
122.20
5000
120.00
200
122.60
Thesequotesgiveninthetableabovearevisibletoclients.Nowifabuymarketorder
comeswithanorderquantityof50itgetsexecutedforapriceofRs.121.50andthe
orderbookentriesonthesellsidemovesupbyonenotchi.e.theRs.121.80ordercomes
50
totop.OntheotherhandifalimitorderwithasellpriceofRs.121.20foraquantityof
500comes50sharesgetexecutedandtheorderforremaining450staysatthetopon
thesellside.
Allorderscomeasactiveordersintotheorderbook.Iftheygetamatchtheywillbe
executedimmediately,elsetheywillbeenteredintotheorderbookaccordingtoprice
andtimeaspassiveorders.
Tradesdoneduringthedaycanbecancelledwithmutualconsentofboththeparties
subject to approval of an Exchange. This is mostly due to the punching errors in the
system.Tradecancellations,howeverarerareinanExchangetradedmarket.
3.2.3Tradeexecution
Executionoftradeoccurswhenabuyerandsellerreachanagreementpertainingtothe
termsandpriceofatrade,andtheordertobuyorsellasecurityiscompletedafterthe
sameismatchedontheExchangeplatform.
3.3MiddleOfficeOperations
The middleoffice,as the name implies, is a hybrid function between the front and back
office.Themiddleofficehandlesvalidations,bookingsandconfirmations.RiskManagement
andSurveillancetypicallyformsthemainfunctionofthemiddleoffice.
3.3.1RiskManagement&Surveillance
Anytransactionorbehaviour,whetheritisbuying,sellingorinstigatingtowillfullyproduce
anabnormaleffectonpricesand/orvolumes,goesagainstthefundamentalobjectiveofthe
protectingtheinterestoftheinvestorsofthesecuritiesmarkets.Heretheriskmanagement
systemplaysacrucialrole.Anefficientriskmanagementsystemisintegraltoanefficient
settlementsystem.
Thegoalofabrokingfirmsriskmanagementsystemistomeasureandmanageitsownand
its clients exposure to various risks identified as central to its operations. For each risk
category, the broking firm must employ procedures to measure and manage firmlevel
exposure.Theseare:
a) EstablishingStandardsandReports
Every broking firm is mandated to define a set of risk management standards. They
themselvesadheretothesestandardsandalsomeasuretheriskappetiteoftheirclients
(individualsandcompanies).Thesestandardshelpthebrokersintheirclientprofilingand
determining the risk monitoring strategy for safeguarding the interest of the clients
(investors). These details are then developed in forms of reports and submitted to the
managementofthebrokinghousesfortheirperusalandaction.
b) ImposingPositionLimits
51
Akeyelementinfinancialriskmanagementisidentifyingthetypeofrisk(s)andtheextent
towhichthoserisk(s)canbeborne.Fordiscussiononvarioustypesofrisks,seeBox3.1.A
brokingfirmimposeslimitstocoverexposures,andoverallpositionconcentrationsrelative
to the potential systematic risks. From time to time, SEBI and Exchanges prescribe open
position limits for various categories of investors in the equity and currency derivative
segments.
c) SetInvestmentGuidelinesandStrategies
Thebrokingfirmshouldoutlineinvestmentguidelinesandstrategiesforrisktakinginthe
immediate future in terms of commitments to a particular market area, extent of asset
liabilitymismatching,ortheneedtohedgeagainstsystematicriskataparticulartime.Risk
management involves determining what risks the firms financial activities generate and
avoidingunprofitableriskpositions.Guidelinescanadviseontheappropriatelevelofactive
management,giventhestateofthemarketandseniormanagement'swillingnesstoabsorb
therisksimpliedbytheaggregateportfolioofthebrokingfirm(comprisingitsownaccount
anditsclientsaccount).
Box3.3TypesofRisk
Operationalriskistheriskofmonetary lossresultingfrominadequateorfailedinternal
processes,manualandsystemserrororexternalevents.Forthestockbroker,operations
risksareessentiallyriskssuchasnonpaymentforbuyingorsellingascrip,nondeliveryof
scrip(s), denial of matched order by clients, trading errors, and sudden closure of banks
wherefundsaredeposited.
Market risk refers to the possibility of incurring large losses from adverse changes in
financialassetpricessuchasstockpricesorinterestrates.Thisriskentailstheerosionof
valueofmarketablesecuritiesandassets,duetofactorsbeyondanenterprisescontrol.
Marketriskisusuallyaffectedbyeconomicdevelopmentsandpoliticaldestabilizationsuch
as a, rising fiscal gap, national debt, terrorism, energy price shocks, increase in interest
rates,allresultinginadropinequityprices.
Regulatoryriskoccurswhentherulesgoverningthesecuritiesindustryarechanged,giving
risetoapotentialloss.Forexample,thecustomerfirstpolicymakesitdifficulttotrade
house accounts (in other words proprietary accounts i.e. accounts of the trading
member)andthereforeabrokermaynotbeabletoliquidateitsowntradeposition(buyor
sell)immediately,leadingtopotentialoractualloss.
Astockbrokingfirmmustidentifyfactorsthatcantriggeroperational,market,creditand
regulatory risks.It needstoestablish proceduressothatriskmanagementbeginsatthe
point nearest to the assumption of risks. This means adapting tradeentry procedures,
customer documentation, client engagement methods, trading limits, and other normal
activities to maintain management control, generate consistent data, and eliminate
needlessexposuretorisk.
52
3.4BackOfficeOperations
The back office exists for three reasons: confirmation, payments, settlements and
accounting. In other words, the back office monitors the postmarket processing of
transactions.Thebackofficeiswherethetradeends.
3.4.1.TradeEnrichment
TradeEnrichmentisperformedautomaticallyaftereach tradeexecution.Inthisstep,all
necessarydetailsfortheclearingoffuturesandoptioncontracts,orthesettlementofcash
securitiesareadded.
Tradeenrichmentisdefinedasprocessofincludingadditionalinformationinoneinstruction
inatradewhichisalreadybeingexecuted.
Forthepurposeofbackofficeoperations,thebackofficesystemsmaintainmastersrelating
tobrokeragerateclientwise,servicetax,turnovertax,stampdutyandSTTchargetables.
Whenthetradedataisuploadedintothebackoffice, theaboveinformationisappendedto
eachandeverytrade.Postuploadofdatawithalltherelevantinformation,thebackofficeprocess
iscarriedouttoarriveat:
Clientwisebrokerage
Clientwiseobligationforsecuritiesandfunds
Alltherelevanttaxamountstobecollectedandpaid
Back office systems generate obligations towards exchange settlements as well as client
wisecontractnotes,settlementsandtaxobligations.
3.4.2TradeAllocation
Inthecaseofinstitutionaltrades,thefrontofficemayenterasingleorderforaparticular
clientandsubsequentlydistributeitacrossvarioussubschemesoftheclientattheback
officeend.
Forexample,hedgefundmakesatrade,andmanagesseveralportfolios.Often,theywill
choosetoallocatetheirtradetovariousportfoliosforanumberofreasons.Tradeallocation
specificallyreferstothisprocess,ormorespecifically,howthetradeisallocated(prorata,
allornothing,etc).
Oncethetradedataisreceivedatthebackoffice,theuserwillalsoreceivedealsheetsfrom
thefrontofficeteamintermsofdetailsofallocationtoindividualschemes.Basedonthese
instructions,thebackofficeuserwillthenallocatethetradetoindividualschemeswithin
theparentfundandgenerateappropriatecontractnote.
53
3.4.3OrderModification/Cancellation
Some times in a moving market, orders need to be changed in terms of the price and
quantityaspertheclientsrequirement.Alltheorderscanbemodifiedtillthetimetheyare
notfullyexecuted.
Due to some problems in the moving market or when one does not want to buy or sell
shares,thenordersneedtobecancelled.Inthiscaseonlythoseorderscanbecancelled
whichhavenotbeenfullyorpartiallyexecutedandonlyduringmarkethours.
3.4.4ClearingandSettlementProcess
ClearingandSettlementisaposttradingactivitythatconstitutesthecorepartofequity
tradelifecycles.Afteranysecuritydealisconfirmed(whensecuritiesareobligedtochange
hands)thebrokerwhoisinvolvedinthetransactionissuesacontractnoteattheendofthe
tradeday.Thecontractnoteissuedbybroker,informstheclientofhisobligations.
Clearinghouse/corporationisanentitythroughwhichsettlementofsecuritiestakesplace.
ThedetailsofalltransactionsperformedbythebrokersaremadeavailabletotheClearing
House/Corporation by the Stock Exchange. The Clearing House/Corporation gives an
obligation report to the brokers and custodians who are required to settle their
money/securities obligations within the stipulated time period, failing which they are
required to pay penalties. This obligation report serves as statement of mutual
contentment.
InIndia,thepayinofsecuritiesandfundshappensonT+2dayby10.30a.m.,andpayout
ofsecuritiesandfundshappenonT+2by1.30p.m.Thepayinandpayoutdaysforfunds
andsecuritiesareprescribedasperthesettlementCycle.Atypicalnormalsettlementcycle
isgiveninTable3.1:
Table3.1NormalSettlementCycle:
Activity
Day
Trading
RollingSettlementTrading
Clearing
CustodialConfirmation
T+1workingdays
DeliveryGeneration
T+1workingdays
Settlement
SecuritiesandFundspayin
T+2workingdays
SecuritiesandFundspayout
T+2workingdays
PostSettlement
ValuationDebit
Auctiononorby12
T+2workingdays
T+2workingdays
Auctionsettlement onorby
T+3workingdays
BadDeliveryReporting
T+4workingdays

12
SEBICircularRef.No.Cir/MRD/DRMNP/8/2015DatedMay14,2015.
54
Rectified bad delivery payin and pay T+6workingdays

out
Rebaddeliveryreportingandpickup
T+8workingdays
Closeoutofrebaddelivery
T+9workingdays
3.4.5Accounting
ThestockbrokersarerequiredtomaintainbooksofaccountasprescribedbytheSecurities
Contracts (Regulation) Rules, SEBI (Stock brokers and Subbrokers) Regulations and
requirementsofStockExchanges.Thesearetobemaintainedforaminimumperiodof5
years.
3.4.5.1Differenttypesofaccounts
ThebrokerhastomaintaintherequiredbooksofaccountsasperRule15ofSC(R)Rules
1957andRegulation17ofSEBI(StockBrokerandSubBrokers)Regulations,1992.Stock
brokers are required to maintain separate books for each Stock Exchange in which they
operate.Further,foranyStockExchange,aseparatesetofledgeraccountsofclientshasto
be maintained for each particular segment of the Exchange in which the stock broker
operates.
The books that shall be maintained by a broker include, register of transactions (sauda
book),clientsledger,generalledger,journals,cashbook,bankpassbook,securitiesregister,
counterfoilsorduplicatesofcontractnotes,margindepositbook,registerofaccountsof
subbrokers,KYC,agreementswithclientsandtripartiteagreementswithclientandsub
brokers,clientaccountopeningform.Someofthesebooks/transactionrecordsarebriefly
discussedbelow.
Theregisteroftransactions(saudabook)istoincludeeachtransactioneffected.
Thiswouldshowthenameofthesecurity,itsvalue,ratesgrossandnetofbrokerage
andnamesoftheclients.
The clients ledger, as the name suggests, has the details of all clients, and their
transactionsthroughthebroker.
The general ledger accounts for all general transactions including expenses,
overheadssalaries,pettycash,etc.
Thejournalistheaccountingbookofthegeneralledger.Anyadjustmententriesfor
e.g.,interestreceivable,etc.,areaccountedhere.
Thecashandbankbookcontainrecordsofallcashandchequetransactionsandare
normallybalanceddaily.
55
Thesecuritiesregisterisrequiredtobemaintainedclientwiseandscripwise.The
details provided would include date of receipt/delivery of the security, quantity
received/delivered,partyfromwhomdelivered/towhomdelivered,thepurposeof
receipt/deliveryandthebalancequantity.
Acontractnoteisaconfirmationoftradedoneonaparticulardayforandonbehalf
of a client. A contract note issued in the format and manner prescribed by the
Exchangesestablishesalegallyenforceablerelationshipbetweenthestockbroker
andtheclientinrespectofsettlementoftradesexecutedontheExchangeasstated
inthecontractnote.Thecopiesoftheoriginalcontractnotesissuedtotheclientare
tobemaintainedbythebroker.
Themargindepositbookcontainsdetailsofmarginspaidandcollectedandpayable
andcollectable.
Thebrokerhasalsotomaintainseparateaccountsforeachsubbrokerandalltransactions
enteredintobyhim.ThebrokeralsohastokeepcopiesofKYCforms,agreementwithclients
andsubbrokers,aspartofhisrecords.
Stock brokers shall also maintain separate ledgers reflecting the customers' transactions
whichshallinclude,chronologicalandcustomerwiserecordofmoneyreceivedandpaid,
chronological and customerwise record of securities received and delivered specifically,
chronologicalrecordoftransactionsmadeinaconsolidatedcustomers'accountandrecord
ofthecustomeraccountinformation.
3.4.6InformationTechnology(IT)
Anystockbrokingofficeneedstohaveacompleteintegratedsystemthatoptimizescurrent
businessprocessesandprovidesasingleintegratedsolutionthatcoversalltheaspectsof
thestockbrokeringindustry.Thesystemshouldcoverallareasofbrokerageoperationsand
management,including,butnotlimitedto,backofficemanagement,ordermanagement,
customer accounting, general accounting, branches management and control, accounts
managers,onlinetradingsystem,commissionsbuilder,archivingsystem,auditingsystem,
invoicing,riskmanagementandcontrol.Asummaryoftheoperationsisgivenbelow:
Business Functions include customer database and document archiving including

customersignature,customeraccounting,portfoliomanagement,riskmanagement,
auditingsystem,onlinetradingsystem,generalaccountingsystem,etc.
Technical Functions include, support and standby database function, disaster

recovery,customerdatabase,customerdata,etc.
Trades functions include, automatic entry of daily executions, automatic

identificationofnewcustomers,automaticlinkofexecutionstoorders,etc.
TheITwillalsoincludeanordermanagementsystemwithissueofsellorders,buy
orders,orderexecution,logoforders,ordersconfirmation,etc.
56
SEBIhasmandatedthatthereshouldbecomprehensivetestingofsoftwaredeployedbythe
brokersbeforereleasetomarket.Thesetestswillincludeuseracceptancetestingonthe
testenvironmentoftheexchangeandmocktesting.MocktestingandUATtestreportsare
requiredtobeverifiedandcertifiedbysystemauditorsappointedbythebrokers.
SEBI has also advised the stock brokers to implement the following measures to protect
againsttradingdisruptionduetoanykindoffailureonpartofthesoftwarevendor:13
(a) explore the possibility of establishing a 'software escrow arrangement' with their
existingsoftwarevendors.Thisarrangementwouldenablethebrokerstotransitto
anothersoftwarevendorinthosecircumstanceswhentheexistingvendorisunable
toprovidesoftwareandotherservicesinatimelymanner.
(b) Incaseoflargestockbrokers,considerengagingmorethanonevendortoreduce
dependency.
(c) Certainconditionsshouldbeincludedintheagreementwiththesoftwarevendor.
These conditions relate to access to design documents; training of its staff with
regardtosoftwareusageandmaintenance;appropriatepenaltyclausesforcasesof
disruptionstothetradingsystemofthebrokerandcooperationincaseofsoftware
auditincludingforensicaudit(whenrequired).
3.4.6.1BusinessContinuityPlan/DisasterRecoveryManagement
Itisdesirablethatallstockbrokershavebusinesscontinuityplans.Ideally,thebrokermust
createandmaintainawrittenbusinesscontinuityplan(BCP)identifyingproceduresrelating
to an emergency orsignificant business disruption. Such procedures must be reasonably
designedtoenablethebrokertomeetitsexistingobligationstocustomers.Inaddition,such
proceduresmustaddressthemembersexistingrelationshipswithotherbrokerdealersand
counterparties.
3.4.7SecuritiesTransactionTax
Securities Transaction Tax (STT) was introduced in India to stop tax avoidance of capital
gainstax.AspertheFinanceAct2004,andmodifiedbytheFinanceAct2008,STTislevied
oneverypurchaseorsaleofsecuritiesthatarelistedontheIndianStockExchanges.This
includesshares,derivativesorequityorientedmutualfundsunits.STTisdeductedatsource
bythebrokerorAMCanditiscollectedandremittedbytheStockExchanges.
The Following STT rates are applicable for trades executed in the Equity segment of the
StockExchange:

13
VideSEBIcircularno:CIR/MRD/DP/07/2014datedFebruary11,2014.
57
Sr.
No.
1.
2.
Taxablesecuritiestransaction
New
rate
from
01.06.2013
Payableby
Purchase of an equity share in a company or a

unitofabusinesstrust,wherethetransactionof
such purchase is entered into in a recognised
stockexchangeandthecontractforthepurchase
of such share or unit is settled by the actual
deliveryortransferofsuchshareorunit.
Purchaser on
the value of
taxable
securities
transaction
based on the
volume
weighted
0.100percent averageprice.
Saleofanequityshareinacompanyoraunitof
a business trust, where the transaction of such
saleisenteredintoinrecognisedstockexchange
andthecontractforthesaleofsuchshareorunit
issettledbytheactualdeliveryortransferofsuch
shareorunit.
Seller on the
valueoftaxable
securities
transaction
based on the
volume
weighted
Saleofaunitofanequityorientedfund,where
the transaction of such sale is entered into in
recognisedstock exchangeand thecontract for
such unit is settled by the actual delivery or
transferofsuchshareorunit
Seller on the
valueoftaxable
securities
transaction
based on the
volume
weighted
Saleofanequityshareinacompanyoraunitof
an equity oriented fund or a unit of a business
trust, where the transaction of such sale is
enteredintoinarecognisedstockexchangeand
such contract is settled otherwise than by the
actualdeliveryortransferofsuchshareorunit.
Seller on the
valueoftaxable
securities
transaction
based on the
volume
weighted
ThefollowingratesareapplicablefortransactionsexecutedintheDerivativesSegment:
Sr.No. Taxablesecuritiestransaction
Newratefrom
01.06.2013
Payableby
0.017percent Seller
Saleofanoptioninsecurities
58
Sale of an option in securities, where option is

exercised
0.125percent Purchaser
Saleofafuturesinsecurities
0.01percent
Seller
StockExchangesprovideareporttothebrokers/membersattheendofeachtradingday.
ThereportcontainsinformationonthetotalSTTliability,tradingmemberwiseSTTliability,
clientwiseSTTliabilityandalsothedetailedcomputationsfordeterminingtheclientwise
STTliability.
3.4.8BulkDeals&BlockDeals
BulkDeals
Withaviewtoimpartingtransparencyinbulkdealsandtopreventrumours/speculation
aboutsuchdealscausingvolatilityinthescripprice,itwasdecidedbySEBItobringabout
greaterdisclosureofsuchbulkdeals.14
BulkDealisdefinedasalltransactionsinascrip(onanExchange)wherethetotalquantity
ofsharesbought/soldismorethan0.5%ofthenumberofequitysharesofthecompany
listed on the Exchange. However, the quantitative limit of 0.5% could be reached
throughoneormoretransactionsexecutedduringthedayinthenormalmarketsegment.
Thesedealsaresubjecttofollowingconditions:
ThebrokersshalldisclosetotheStockExchangethenameofthescrip,nameofthe
client,quantityofsharesbought/soldandthetradedprice.
The disclosure shall be made by the brokers immediately upon execution of the
trade.
TheStockExchangesshalldisseminatetheaforesaidinformationonthesameday
aftermarkethourstothegeneralpublic.
BlockDeals
InSeptember2005,SEBIpermittedtheStockExchangestosetupaseparatetradingwindow
called block window.15 This window allows large value transactions to be executed as a
singletransactionwithoutputtingthebuyerorselleratadisadvantageousposition.Atrade,
with a minimum quantity of 5,00,000 shares or minimum value of Rs. 5 crore executed
through a single transaction on this separate window of the stock Exchange constitutes
ablockdealasdistinguishedfrombulkdeal.
BlockDealsaresubjecttothefollowingconditions:

14
15
VideSEBICircularSEBI/MRD/SE/Cir7/2004)datedJanuary14,2004
VideSEBIcircularnumber:MRD/DoP/SE/Cir19/05datedSeptember2,2005
59
BlockDealwindowisopenforaperiodof35minutesfromthebeginningoftrading
hoursi.e.thetradingwindowremainsopenfrom9.15amto9.50am.
The orders may be placed in this window at a price not exceeding +1% from the
rulingmarketprice/previousdayclosingprice,asapplicable.
An order may be placed for a minimum quantity of 5,00,000 shares or minimum

valueofRs.5crore.
Everytradeexecutedinthiswindowmustresultindeliveryandshallnotbesquared
offorreversed.
ThestockExchangesshalldisseminatetheinformationonblockdealssuchasthe
nameofthescrip,nameoftheclient,quantityofsharesbought/sold,tradedprice,
etc.tothegeneralpubliconthesameday,afterthemarkethours.
3.4.9RegulatoryCompliances
Thestockbrokerhastofollowcertainregulatorycompliancesunderthelaw,rulesandbye
lawsofSEBIandtheExchanges.Thesearemandatoryandnoncompliancetotheserules,
lawsattractspenalaction.However,themaincompliancesinclude:
Maintain or furnish documents as prescribed under the various subsections of
section15ofSEBIAct
MaintenanceofdifferenttypesofBooksasprescribedunderSC(R)R1957(e.gSauda
booketc.)
Sendingaccountstatementstoclients
SubmissionofvariousperiodicreportstothestockExchanges.
Thesearecoveredindetailinsection4.2underRegulatoryCompliancesandReporting.
60
ReviewQuestions
Questionstoassessyourlearning:
1. DirectMarketAccessfacilityisintroducedfor__________________.
a. RetailInvestors.
b. InstitutionalClientsonly.
c. SpecificInternationalBrokingFirms.
Ans:(b)
2. Whichofthestatementisfalse?
a. OnreceiptoftheorderattheExchangesystem,anorderconfirmationissenttothebroker.
b. Dependingupontheordertermsandconditionsandtheactualprevailingmarketprices,the
ordermaygetexecutedimmediately,partiallyorfully.
c. Theordercanbeenteredforbuyorsellirrespectiveofwhethertheclienthas sufficient
balanceoffundsorsecuritiesinhisaccount.
Ans:(c)
3. Acontractnoteis__________________________.
a. Alegaldocumentwhichisentereduponbytheclientwithhisbrokerbeforeenteringinto
anytransaction.
b. Confirmationoftradedoneduringtheparticulardaywithalldetailsofwhichsecuritieshave
beenboughtorsold,atpriceetc.
c. Anotewhichholdsmargindetails.
Ans:(b)
61
THISPAGEHASBEENLEFT
BLANKINTENTIONALLY
62
Chapter4:RiskManagement
LEARNINGOBJECTIVES:

Riskmanagementframeworkforcashandfuturesandoptionssegment
CompliancesandRegulatoryReportingbythestockbrokers
CoreSettlementGuaranteeFund
4.1RiskManagement
4.1.1RiskManagementFrameworkforCashSegment
A comprehensive Risk Management framework is the backbone of the Clearing

Agency/Corporation/house. A clearing corporation/house provides settlement guarantee
i.e.,thesettlementofsecuritiesandfundswilltakeplaceevenifthereisafailurebyabroker
tofulfilltheirobligation.Inordertosafeguardagainstsuchfailures,theclearingagencyis
requiredtocarryoutthefollowingriskmanagementmeasuresasspecifiedbySEBIthrough
itsvariouscirculars.
RiskManagementframeworkconsistsofthefollowingcomponents:
Margin
LiquidAsset
Baseminimumcapital
Pretraderiskcontrol
RiskReductionmode
4.1.1.1Margin
Marginingisaprocessbywhichaclearingcorporationcomputesthepotentiallossthatcan
occur to the open positions (both buy and sell) held by the members. Based on the
computation,theclearingagencywillensurethattheliquidassetsdepositedbymembers
issufficienttocoverthepotentialloss.
Theclearingcorporationcomputesandcollectsthreekindsofmarginsnamely:
ValueatRiskMargin(VaR)tocoverpotentiallossesfor99%ofthedays.
MarktoMarketLossMargin:Marktomarketlossesonoutstandingsettlement
obligationsofthemember.
Extremelossmargin:Marginstocoverthelossinsituationsthatlieoutsidethe
computationoftheVaRmargin.
63
VaRMargin
TheVaRMarginisamarginintendedtocoverthelargestlossthatcanbeencounteredon
99% of thedays(99% Value at Risk). For liquidstocks, themargincovers oneday losses
whileforilliquidstocks,itcoversthreedaylossessoastoallowtheclearingcorporationto
liquidatethepositionoverthreedays.
Forliquidstocks,theVaRmarginsarebasedonlyonthevolatilityofthestockwhileforother
stocks,thevolatilityofthemarketindexisalsousedinthecomputation.Computationof
theVaRmarginrequiresthefollowingdefinitions:
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
appliedtodailyreturnsinthesamemannerasinthederivativesmarket.
ScripVaRmeansthehigherof7.5percentor3.5scripsigmas.
Indexsigmameansthedailyvolatilityofthemarketindex(CNXNiftyorS&PBSESensex)
computedasattheendoftheprevioustradingday.Thecomputationusestheexponentially
weightedmovingaveragemethodappliedtodailyreturns.IndexVaRmeansthehigherof
5percentor3indexsigmas.ThehigheroftheSensexVaRorNiftyVaRwouldbeusedfor
thispurpose.TheVaRMarginsarespecifiedasfollowsfordifferentgroupsofstocks:
Table4.1:VaRMarginsfordifferentgroupofstocks
Liquidity
OneDay
Scaling factor
VaRMargin
Categorization
VaR
forilliquidity
ScripVaR
1.0
ScripVaR
Liquid
Securities
(GroupI)
1.73 (square
Higher of 1.73
Higher of
Less
Liquid
rootof3.00)
times Scrip VaR
Scrip VaR
Securities
and 5.20 times
and three
(GroupII)
IndexVaR
times Index
VaR
8.66 times Index
Five times
1.73
Illiquid
VaR
IndexVaR
(square root
Securities
of3.00)
(GroupIII)
Collection
VaRmarginiscollectedonanupfrontbasisbyadjustingagainstthetotalliquidassets
ofthememberatthetimeoftrade.
VaRmarginiscollectedonthegrossopenpositionofthemember.Thegrossopen
position for this purpose would mean the gross of all net positions across all the
clientsofamemberincludinghisproprietaryposition.Forthispurpose,therewould
benonettingofpositionsacrossdifferentsettlements.
64
TheVaRmarginsocollectedshallbereleasedalongwiththepayin,includingearly
payinofsecurities.
TheapplicableVaRmarginratesshallbeupdatedatleast5timesinaday,whichmaybe
carriedoutbytakingtheclosingpriceofthepreviousdayatthestartoftradingandthe
pricesat11:00a.m.,12:30p.m.,2:00p.m.andattheendofthetradingsession.
MarktoMarketMargin
Marktomarketlossiscalculatedbymarkingeachtransactioninsecuritytotheclosingprice
ofthesecurityattheendoftrading.Incasethesecurityhasnotbeentradedonaparticular
day, the latest available closing price is considered as the closing price. In case the net
outstandingpositioninanysecurityisnil,thedifferencebetweenthebuyandsellvaluesis
considered as notional loss for the purpose of calculating the mark to market margin
payable.
MarktoMarketmarginiscollectedinthefollowingmanner:
Theclearingcorporationcollectsmarktomarketmargin(MTM)fromthe
member/brokerbeforethestartofthetradingofthenextday.
The MTM margin is collected or adjusted against the cash/cash equivalent
componentoftheliquidnetworthdepositedwiththeExchange.
TheMTMmarginiscollectedonthegrossopenpositionofthemember.
Thegrossopenpositionmeansgrossofallnetpositionsacrossalltheclientsofa
memberincludinghisproprietaryposition.
Therewouldbenonettingacrosstwodifferentsettlements.
MTMlossesforthedaycanbesetoffagainstMTMprofits.
Themarginsocollectedshallbereleasedalongwiththepayin,includingearlypay
inofsecurities.
ExtremeLossMargin
Extremelossmargincoverstheexpectedlossinsituationsthatgobeyondthoseenvisaged
inthe99%valueatriskestimatesusedintheVaRmargin.
TheExtremeLossMarginforanystockshallbehigherof:
o 5%,and
o 1.5timesthestandarddeviationofdailylogarithmicreturnsofthestockpricein
thelastsixmonths.
Thiscomputationiscarriedoutattheendofeachmonthbytakingthepricedataon
arollingbasisforthepastsixmonthsandtheresultingvalueshallbeapplicablefor
thenextmonth.
65
TheExtremeLossMarginiscollected/adjustedagainstthetotalliquidassetsofthe
memberonarealtimebasis.
The Extreme Loss Margin shall be collected on the gross open position of the
member.Thegrossopenpositionforthispurposewouldmeanthegrossofallnet
positionsacrossalltheclientsofamemberincludinghisproprietaryposition.
TheExtremeLossMarginsocollectedshallbereleasedalongwiththepayin.
Marginsnottoexceedthepurchasevalueofabuytransaction
Incaseofabuytransactionincashmarket,VaRmargins,extremelossmarginsandmarkto
marketlossestogethershallnotexceedthepurchasevalueofthetransaction.Further,in
case of a sale transaction in cash market, the existing practice shall continue viz., VaR
marginsandextremelossmarginstogethershallnotexceedthesalevalueofthetransaction
andmarktomarketlossesshallalsobelevied.
4.1.1.2LiquidAssets
TheacceptableliquidassetsandtheapplicablehaircutsarelistedinTable4.2.
Table4.2:AcceptableLiquidassetsalongwithhaircutsandlimits
Item
Haircut
Limits
CashEquivalents
Cash
Bankfixeddeposits
Bankguarantees
SecuritiesoftheCentral
Government
Units of liquid mutual
funds or government
securitiesmutualfunds
Otherliquidassets
Liquid (Group I) Equity
Shares
0
10percent
Nolimit
Nolimit
Limit on Exchanges
exposuretoasinglebank
Nolimit
10percent
Nolimit
Same as the VaR Limit on Exchanges

margin for the exposuretoasingleissuer
respectiveshares
Mutualfundunitsother Same as the VaR
thanthose listed under margin for the units
orelse,usingtheNAV
cashequivalents
oftheunit
66
Card value of eligible 50 percent if the last

Exchanges
saleorauctionofcard
in the Exchange took
place during the last
sixmonths.
75 percent if the last
saleorauctionofcard
in the Exchange took
place during the last
twelve months but
notwithinthelastsix
months.
100percentifnosale
or auction of card in
the Exchange has
taken place during
the last twelve
months.
CorporateBonds
Fixed
percentage
based or VaR based
Haircut. A higher
haircut may be
considered to cover
the expected time
frameforliquidation.
To begin with the
haircut shall be a
minimum of 10
percent.
Eligible only for Extreme

LossMargin
Not to exceed 10 percent

ofthetotalliquidassetsof
theclearingmember.
LiquidityCategorizationofSecurities
Thesecuritiesshallbeclassifiedintothreegroupsbasedontheirliquidity:
Group
TradingFrequency
ImpactCost
Liquid
Securities
(GroupI)
Less
Liquid
Securities(GroupII)
Illiquid Securities
(GroupIII)
Atleast80percentofthe
days
Atleast80percentofthe
days
Less than 80 percent of
thedays
Less than or equal to 1

percent
Morethan1percent
N/A
Forsecuritiesthathavebeenlistedforlessthansixmonths,thetradingfrequencyandthe
impactcostshallbecomputedusingtheentiretradinghistoryofthescrip.
67
Thetradingfrequencyandimpactcostshallbecalculatedonthe15thofeachmonthona
rollingbasisandthecategorisationshallberevisedbasedonthenewvalue.Forthefirst
month, till the time of monthly review, a newly listed stock shall be categorised in that
Group where the market capitalization of the newly listed stock exceeds or equals the
marketcapitalizationof80percentofthestocksinthatparticulargroup.
Calculationofmeanimpactcost
Themeanimpactcostshallbecalculatedinthefollowingmanner:
a) Impactcostshallbecalculatedbytakingfoursnapshotsinadayfromtheorderbook
inthepastsixmonths.Thesefoursnapshotsshallberandomlychosenfromwithin
fourfixedtenminuteswindowsspreadthroughtheday.
b) Theimpactcostshallbethepercentagepricemovementcausedbyanordersizeof
Rs.1lakhfromtheaverageofthebestbidandofferpriceintheorderbooksnapshot.
Theimpactcostshallbecalculatedforboth,thebuyandthesellsideineachorder
booksnapshot.
MarginingofInstitutionalTradesinCashMarket
All Institutional trades in the cash market would be subject to payment of margins as
applicabletotransactionsofotherinvestors.InstitutionaltradesshallbemarginedonaT+1
basiswiththemarginbeingcollectedfromthecustodianuponconfirmationoftrade.
4.1.1.3ShortfallofMargins/Payinoffunds
In case of any shortfall in margin, the terminals of the broker shall be immediately
deactivated.
Incaseofpayinshortfall,tradingfacilityofthetradingmembershallbewithdrawnand
securitypayoutwouldbewithheldif:
shortfallisinexcessofthebaseminimumcapital(BMC),
Ifamountofshortageexceeds20percentoftheBMCbutlessthantheBMConsix
occasionswithinaperiodofthreemonths,
Uponrecoveryofthecompleteshortages,themembershallbepermittedtotradesubject
tohisprovidingadepositequivalenttohiscumulativefundsshortageasthe'fundsshortage
collateral' for a period of ten rolling settlements which shall not be usable for margin
liabilities.
TheExchangemaylevyapenalinterestofnotlessthan0.07percentperdayonthepayin
shortageofthemember.
4.1.1.4BaseMinimumCapital
Thebaseminimumcapitalfortradingmembersincashandderivativessegment(basedon
theirriskprofiles)isshowninTable4.3below.
68
Table4.3:BaseMinimumCapitalRequirementofMembers
Categories
Only Proprietary trading without
Algorithmictrading(Algo)
TradingonlyonbehalfofClient(without
proprietarytrading)andwithoutAlgo
Proprietarytradingandtradingonbehalf
ofClientwithoutAlgo
AllTradingMembers/BrokerswithAlgo
BMCDeposit
Rs10Lacs
Rs15Lacs
Rs25Lacs
Rs50Lacs
For stock brokers/trading members of Exchanges not having nationwide trading

terminals, the deposit requirement shall be 40 percent of the above stated BMC
depositrequirements.
TheBMCdepositismeanttomeetcontingenciesinanysegmentoftheExchange.
FormemberswhoareregisteredonmorethanonesegmentofthesameExchange,
thehighestBMCdepositacrossvarioussegmentsisapplicable.
NoexposureisgrantedagainstBMCdeposit.
TheStockExchangesshallbepermittedtoprescribesuitabledepositrequirements,
overandabovetheSEBIprescribednorms,basedontheirperceptionandevaluation
ofrisksinvolved.
Minimum50percentofthedepositshallbeintheformofcashandcashequivalents.
4.1.1.5AdditionalMargins
Exchanges/clearing corporations have the right to impose additional risk containment
measuresoverandabovetheriskcontainmentsystemmandatedbySEBI.However,those
additionalriskcontainmentmeasuresshouldbebasedonobjectivecriteriaandshouldnot
discriminatebetweenmembers.
4.1.1.6MarginsfromtheClient
Brokers/Trading Members should have a prudent risk management system to protect

themselves against the default made by their clients. Margins constitute an important
elementofriskmanagementsystemsandarerequiredtobewelldocumentedandmade
accessibletotheclientsandtheStockExchanges.However,thequantumofthesemargins,
theformandmodeofcollectionarelefttothediscretionofthemembers.
4.1.1.7Provisionofearlypayin
Necessarysystemsarerequiredtobeputinplacebyclearingcorporationstoenableearly
payinoffundsbythetradingmembers.Incaseswhereearlypayinoffundsismadebythe
members,theoutstandingpositiontothatextentofearlypayinshallnotbeconsideredfor
computingthemarginobligations.Incaseswhereearlypayinofsecuritiesismadepriorto
69
thesecurities payin,suchpositionsforwhichearlypayin(EPI)ofsecurities is made are

exemptfrommargins.
4.1.1.8PretradeRiskControls
Pretraderiskcontrolhelpstopreventaberrantordersoruncontrolledtrades.
Orderlevelchecks
Value/QuantityLimitperorder:
Any order with value exceeding Rs. 10 crore per order cannot be accepted by the Stock
Exchangeforexecutioninthenormalmarket.TheStockExchange(s)arealsorequiredto
ensure that appropriate checks for value and/or quantity are implemented by the stock
brokersbasedontherespectiveriskprofileoftheirclients.
Cumulativelimitonvalueofunexecutedordersofastockbroker
Stock Exchanges have been directed to ensure that the trading algorithms of the stock
brokershaveaclientlevelcumulativeopenordervaluecheck.16Thismeansthatthestock
brokersshouldputinplaceamechanismtolimitthecumulativevalueofallunexecuted
ordersplacedfromtheirterminalstobelowathresholdlimitsetbythestockbrokers.
DynamicPriceBands
In2001,SEBIhadadvisedtheStockExchangestoimplementappropriateindividualscrip
wisepricebands(ineitherdirectionupwardordownward),forallscripsinthecompulsory
rolling settlement. The concept of price band was not applicable to (a) scrips on which
derivativesproductsareavailableand(b)scripswhichwerepartofthoseindicesonwhich
derivativesproductsareavailable.17
However, for scrips on which no price bands are applicable, Stock Exchanges have
implemented a mechanism of dynamic price bands. This mechanism prevents the
acceptanceofordersforexecutionthatareplacedbeyondthepricelimitssetbytheStock
Exchanges.
StockExchangeshallsetthedynamicpricebandsat10percentofthepreviousclosingprice
forthefollowingsecurities:
Stocksonwhichderivativesproductsareavailable
Stocksincludedinindicesonwhichderivativesproductsareavailable
Indexfutures
Stockfutures

16
17
VideSEBIcircularCIR/MRD/DP/09/2012datedMarch30,2012
Videcircularno.SMDRPD/Policy/Cir37/2001datedJune28,2001.
70
Intheeventofamarkettrendineitherdirection,thedynamicpricebandsshallberelaxed
bytheStockExchangesinincrementsof5percent.
4.1.1.9RiskReductionMode
StockExchangesshallensurethatthestockbrokersaremandatorilyputinriskreduction
mode when 90 percent of the stock brokers collateral available for adjustment against
margins gets utilized on account of trades that fall under a margin system. Such risk
reductionmodeshallincludethefollowing:
All unexecuted orders shall be cancelled once stock broker breaches 90 percent
collateralutilizationlevel.
OnlyorderswithImmediateorCancelattributeshallbepermittedinthismode.
Allnewordersshallbecheckedforsufficiencyofmargins.
Nonmarginedordersshallnotbeacceptedfromthestockbrokerinriskreduction
mode.
Thestockbrokershallbemovedbacktothenormalriskmanagementmodeasand
whenthecollateralofthestockbrokerislowerthan90percentutilizationlevel.
4.1.2RiskManagementFrameworkforF&OSegment
RiskManagementframeworkforF&Owillconsistofthefollowing:
Margins
LiquidNetworth
Liquidassets
4.1.2.1TypesofMargins
Inthefuturesandoptionssegment,thefollowingtypesofmarginsarelevied:
Initialmargin
Exposuremargin
Premiummargin
Assignmentmargin
InitialMarginComputation
Initialmarginispayableonallopenpositionsofclearingmembers,uptoclientlevel.Initial
marginforF&Osegmentiscalculatedonthebasisofaportfolio(acollectionoffuturesand
option positions) based approach. The margin calculation is carried out using software
calledSPAN(StandardPortfolioAnalysisofRisk).18

ItisaproductdevelopedbyChicagoMercantileExchange(CME)andisextensivelyusedbyleadingstockExchangesofthe
18
world.SPANusesscenariobasedapproachtoarriveatmargins.Itgeneratesarangeofscenariosandhighestlossscenariois
usedtocalculatetheinitialmargin.Themarginismonitoredandcollectedatthetimeofplacingthebuy/sellorder.TheSPAN
71
Initialmarginrequirementsshallbebasedon99%ValueatRisk(VaR)overaonedaytime
horizon.However,inthecaseoffuturescontracts,whereitmaynotbepossibletocollect
marktomarketsettlement,beforethecommencementoftradingonthenextday,theinitial
marginmaybecomputedoveratwodaytimehorizonbyapplyinganappropriatestatistical
formula.Incaseof memberswho have optedforpaymentofMTMsettlementonaT+0
basis,theinitialmarginmaybecomputedoveraonedaytimehorizon.
CalendarSpreadCharge:Inthecaseoffuturesandoptionscontractsonindexandindividual
securities,themarginoncalendarspreadpositionsshallbecalculatedonthebasisofdelta
oftheportfolioconsistingoffuturesandoptionscontractsineachmonth.Acalendarspread
position shall be granted calendar spread treatment till the expiry of the near month
contract.
The calendarspread margin shall be charged in addition to worstscenario loss of the

portfolio. Thespread chargeshallbe 0.5 percent per month ofspread on the far month
contractsubjecttoaminimummarginof1percentandamaximummarginof3percenton
thefarsideofthespreadwithlegsupto1yearapart.
Exposuremargins
Membersshallbesubjecttoexposuremarginsinadditiontoinitialmargins.Theapplicable
exposuremarginshallbe:
IndexFuturescontracts:Theexposuremarginshallbe3percentofthenotionalvalueof
thefuturespositions,basedonthelastavailabletradingprice.
ShortIndexOptionscontracts:Theexposuremarginshallbe3percentofthenotionalvalue
oftheshortopenpositionsinoptionsonindex,basedonthelastavailableclosingpriceof
theunderlyingindex.
Futures contracts on individual Securities: The exposure margins shall be higher of 5

percentor1.5standarddeviationofthenotionalvalueofgrossopenpositioninfutureson
individualsecuritiesinaparticularunderlying.
ShortOptioncontractsonindividualSecurities:Theexposuremarginsshallbehigherof5
percentor1.5standarddeviationofthenotionalvalueofshortopenpositionsinoptions
onindividualsecuritiesbasedonthelastavailableclosingpriceoftheunderlyingsecurity.

marginsarerevised6timesinadayonceatthebeginningoftheday,4timesduringmarkethoursandfinallyattheend
oftheday.
72
For this purpose, the standard deviation of daily logarithmic returns of prices of the
underlyingsecurityinthenormalmarketofcapitalmarketsegmentoftheExchangeinthe
lastsixmonthsshallbecomputedonarollingandmonthlybasisattheendofeachmonth.
CalendarSpread:Incaseofcalendarspreadpositionsinfuturescontracts,exposuremargin
shall be levied on one third of the value of the open position of the far month futures
contract. A calendar spread position shall be granted calendar spread treatment till the
expiryofthenearmonthcontract
ShortOptionMinimumCharge
IndexOptions:Shortoptionminimumchargeshallbeequalto3percentofthenotional
value of all short positions in index options. Notional value, with respect to an option
contract,shallbecomputedastheproductoftheshortopenpositioninthatoptioncontract
multipliedbythepreviousday'sclosingpriceoftheindexfuturescontract,orsuchother
priceasmaybespecifiedbytheClearingCorporationfromtimetotime.
Optionsonindividualsecurities:Shortoptionminimumchargeshallbeequalto7.5percent
ofthenotionalvalueofallshortpositionsinoptionsonindividualstocks.Notionalvalue,
with respect to an option contract, shall be computed as the product of the short open
position in that option contract multiplied by the previous day's closing price of the
underlyingsecurityinthenormalmarketofCapitalMarketSegmentoftheExchange,or
suchotherpriceasmaybespecifiedbytheClearingCorporationfromtimetotime.
MinimumPercentageforMarginsonFuturesContracts:
Theminimummarginpercentageonindexfuturesshallbe5percentwhichshallbescaled
up by look ahead period. The minimum margin percentage on stock futures shall be 7.5
percentwhichshallbescaledupbylookaheadperiod.Additionally,ifthemeanimpactcost
ofasecurityexceeds1percent,theminimummarginpercentageinsuchunderlyingshall
bescaledbysquarerootofthree.
PremiumMargin
Inadditiontoinitialmargin,premiummarginischargedinthecaseofoptionscontracts.
PremiumMarginshallmeanandincludepremiumamountduetobepaidtotheClearing
Corporation towards premium settlement, at the client level. Premium margin shall be
leviedtillthecompletionofpayintowardsthepremiumsettlement.Thepremiummargin
is paid by the buyers of the Options contracts and is equal to the value of the options
premiummultipliedbythequantityofOptionspurchased.
AssignmentMargin
AssignmentMarginshallbeleviedonassignedpositionsofthemembers(sellers)towards
finalexercisesettlementobligationsforoptioncontractsonindexandindividualsecurities.
Assignmentmarginshallbethenetexercisesettlementvaluepayablebyamembertowards
73
finalexercisesettlement. Assignment marginshall be levied till the completion of payin

towardstheexercisesettlement.
4.1.2.2LiquidNetWorthandExposureLimitsofaClearingMember
TheLiquidNetWorthisdefinedasunder:
Total liquid assets deposited with the Exchange/clearing corporation/clearing house
towardsinitialmarginandcapitaladequacy,LESSinitialmarginapplicabletothetotalgross
openpositionsatanygivenpointoftimeonalltradestobeclearedthroughtheclearing
member.
Theclearingmembersliquidnetworthmustsatisfyboththeconditionsgivenbelowona
realtimebasis:
Condition1:LiquidNetWorthshallnotbelessthanRs50lacsatanypointoftime.
Condition2:Themarktomarketvalueofgrossopenpositionsatanypointoftimeofall
tradesclearedthroughtheclearingmembershallnotexceed331/3(thirtythreeoneby
three)timeshisliquidnetworth.
ThenotionalvalueofgrossopenpositionsatanypointintimeinthecaseofIndexFutures
shallnotexceed331/3(thirtythreeonebythree)timestheliquidnetworthofamember.
Exposurelimitsareinadditiontotheinitialmarginrequirements.
LiquidAssets
Atleast50percentofthetotalliquidassetsshallbeintheformofcashequivalentsviz.cash,
bankguarantee,fixeddeposits,Tbillsanddatedgovernmentsecurities.LiquidAssetsfor
thepurposesofinitialmarginsaswellasliquidnetworthwouldincludecash,fixeddeposits,
bank guarantees, treasury bills, government securities or dematerialized securities (with
prescribed haircuts) pledged in favour of the Exchange/clearing corporation or bank
guarantees as defined hereunder. Units of money market mutual funds and units of gilt
fundsmaybeacceptedtowardscashequivalentcomponentoftheliquidassetsofaclearing
member.TheunitshallbevaluedonthebasisofitsNetAssetValueafterapplyingahaircut
of10percentontheNAVandanyexitloadchargedbythemutualfund.Thevaluationor
themarkingtomarketofsuchunitsshallbecarriedoutonadailybasis.
BankGuarantees
The clearing corporation/house would set an exposure limit for each bank, taking into
accountallrelevantfactorsincludingthefollowing:
TheGoverningCouncilorotherequivalentbodyoftheclearingcorporation/houseshalllay
downexposurelimitseitherinrupeetermsoraspercentageofthetradeguaranteefund
thatcanbeexposedtoasinglebankdirectlyorindirectly.Thetotalexposurewouldinclude
guaranteesprovidedbythebankforitselforforothersaswellasdebtorequitysecurities
74
ofthebankwhichhavebeendepositedbymembersasliquidassetsformarginsornetworth
requirement.
Notmorethan5percentofthetradeguaranteefundor1percentofthetotalliquidassets
depositedwiththeclearinghouse,whicheverislower,shallbeexposedtoanysinglebank
whichisnotratedP1(orP1+)orequivalent,byaRBIrecognisedcreditratingagencyorby
areputedforeigncreditratingagency,andnotmorethan50percentofthetradeguarantee
fundor10percentofthetotalliquidassetsdepositedwiththeclearinghouse,whicheveris
lower,shallbeexposedtoallsuchbanksputtogether.
TheexposurelimitsandanychangestheretoshallbepromptlycommunicatedtoSEBI.The
clearing corporation shall also periodically disclose to SEBI its actual exposure to various
banks.
Securities
EquitysecuritiesclassifiedunderGroupIintheunderlyingcashmarketmaybeaccepted
towardsliquidassetsinthederivativemarkets.SecuritiesclassifiedunderGroupIshallbe
thoseasdefinedbySEBIfromtimetotime.Theequitysecuritiesshallbevalued/markedto
marketonadailybasisafterapplyingahaircutequivalenttotherespectiveVaRoftheequity
security.Thelistofacceptableequitysecuritiesshallbeupdatedonthebasisoftradingand
meanimpactcostonthe15thofeachmonth.Debtsecuritiesshallbeacceptableonlyifthey
areinvestmentgrade.Haircutsshallbeatleast10percentwithdailymarktomarket.
The total exposure of the clearing corporation to the debt or equity securities of any
companyshallnotexceed75percentofthetradeguaranteefundor15percentofthetotal
liquid assets of the clearing corporation / house whichever is lower. Exposure for this
purposemeansthemarktomarketvalueofthesecuritieslesstheapplicablehaircuts.All
securitiesdepositedforliquidassetsshallbepledgedinfavouroftheclearingcorporation.
4.2CompliancesandRegulatoryReporting
SEBI and the Stock Exchanges issued directives to be followed by stock brokers. These
includedirectivesonmarginrequirements,smoothfunctioningofpayin/payout,trading
restrictions, base minimum capital, etc. Other requirements include submission of audit
reportsalongwiththeannualreportstotheExchangesandpaymentsofturnoverfeesto
SEBI.
It is the duty of the stock brokers to inform the Exchanges of any defaulting clients or
defaultingsubbrokers.Thestockbrokerhasalsotoinformthepublic/clientsthathissub
brokersregistrationhasbeencancelledandnodealingshouldbedonewithhim.
ThestockbrokershallobtainSEBIspermissiontocontinuedealinginsecuritiesincasethere
hasbeenanychangeinhisfirmsconstitutionorstatus.Thestockbrokersshallnotenter
orders into the systems of the Exchange in order to lower or raise prices or manipulate
markets.
75
4.2.1 Failure to maintain or furnish documents as prescribed under the various sub
sectionsofSection15
Section 15A of the SEBI Act, 1992, prescribes penalty for failure to furnish information,
return,etc.Itreadsasunder:
Ifanyperson,whoisrequiredunderthisActoranyrulesorregulationsmadethereunder,
(a) tofurnishanydocument,returnorreporttotheBoard,failstofurnishthesame,he
shallbeliabletoapenaltyofonelakhrupeesforeachsuchdayduringwhichsuch
failurecontinuesoronecrorerupees,whicheverisless;
(b) tofileanyreturnorfurnishanyinformation,booksorotherdocumentswithinthe
timespecifiedthereforeintheregulations,failstofilereturnorfurnishthesame
withinthetimespecifiedthereforeintheregulations,heshallbeliabletoapenalty
ofonelakhrupeesforeachdayduringwhichsuchfailurecontinuesoronecrore
rupees,whicheverisless;
(c) to maintain books of accounts or records, fails to maintain the same, he shall be
liable to a a penalty of one lakh rupees for each day during which such failure
continuesoronecrorerupeeswhicheverisless.
4.2.2MaintenanceofdifferenttypesofBooksasprescribedunderSC(R)R1957
Rule 15 of the SC(R)R states that every member of a recognised stock Exchange should
maintainandpreservethefollowingbooksofaccountanddocumentsforaperiodoffive
years:
(a)Registeroftransactions(Saudabook).
(b)Clients'ledger.
(c)Generalledger.
(d)Journals.
(e)Cashbook.
(f)Bankpassbook.
(g) Documents register showing full particulars of shares and securities received and
delivered.
Rule 15 of thesaid Rules also states that everymember ofa recognised Stock Exchange
shouldmaintainandpreservethefollowingdocumentsforaperiodoftwoyears:
(a)Members'contractbooksshowingdetailsofallcontractsenteredintobyhimwith
other members of the same Exchange or counterfoils or duplicates of memos of
confirmationissuedtosuchothermembers.
(b)Counterfoilsorduplicatesofcontractnotesissuedtoclients.
(c)Writtenconsentofclientsinrespectofcontractsenteredintoasprincipals.
76
4.2.3Submissionofvariousperiodicreports
The stock Exchanges have prescribed certain periodic reports to be submitted by the
brokersintheircompliancecalendars.Theseinclude:
Bombay Stock
Sr.
Reports
National Stock Metropolitan
No.
Exchange
Stock Exchange Exchange
ofIndiaLtd.
Once a Year, Or Preliminary
1
System Audit Report Preliminary
2
Half yearly, annual or report:1month once in six report:
months from
once in 2 years from the end of months
depending upon theendofaudit
depending on the auditperiod
nature of business Corrective action the technology period
carried out by the report: 1 month that the trading Corrective
action report: 3
from the due memberuses
broker
months from
date
for
due date for
preliminary
preliminary
report
report
Followonreport:
Follow
on
1monthfromthe
report:
due date for
3
corrective action
months from
report
due date for
corrective
actionreport
2
AnnualReturns
Within 6 months Within6months Within6months
from the end of from the end of from the end of
accountingyear accountingyear accountingyear
eight
3
Client wise Funding Within
seven Within fifteen Within
Report
days from the days from the days from the
endofthemonth endofthemonth end of the
month
4
Internal Audit Report Within 3 months Within3months Within3months
Halfyearlybasis
from half year from half year from half year
March ended March
endedMarchand ended
andSeptember andSeptember
September
5
Net worth certificate Within 3 months Within3months Within3months
Halfyearlybasis
from half year from half year from half year
ended
March ending
ending
andSeptember
Within 1 month
one
6
Networth certificate in Within
from the end of
MarginTradingforCM month from the
halfyear
end of half year
Segment

7
Proof of Insurance By July 31 yearly Yearlybasis
By July 31st
cover

yearly
77
Client details for Before 9:00 pm

MarginTradingfacility on the trade
day19
Before 12 noon
followingday
4.2.4Settlementofaccounts(fundsandsecurities)&Statementofaccounts20
It is mandatory for stock brokers to do the actual settlement of funds and securities of
clients,atleastonceinacalendarquarterormonth,dependingonthepreferenceofthe
client.
Whilesettlingtheaccount,themembershouldsendtotheclientastatementofaccounts
containinganextractfromtheclientledgerforfundsandanextractfromtheregisterof
securitiesdisplayingallreceipts/deliveriesoffunds/securities.Thestatementshouldalso
explain the retention of funds/securities and the details of the pledge, if any. For the
purposeofquarterly/monthlysettlementtradingmembermaysettleacrosssegmentsof
thesameExchangeforaparticularclient.
4.2.5Sendingaccountstatementstoclients
Eachstockbrokerisrequiredtosendastatementofaccountforbothfundsandsecurities
at least on a quarterly basis, within a month from the end of the period, to each client.
However,thisisapplicabletoonlythosememberswhodonotmaintainclientaccountona
runningbasisandsettlebillsonadaytodaybasis.
Thestockbrokerisalsorequiredtosenddailymargininformationtoalltheclients.Thesaid
informationshallcontainClientCodeandName,ScripwiseDetailsofcollateralsreceived
/returned from/to clients, Status of Collaterals held, Breakup of Margins held by the
memberviz.valueofCollaterals,BankGuarantees,FixedDepositReceipts(FDRs)heldand
Cashbalanceavailable,Detailsofamountutilizedtowardsmarginsetc.

19
20
CalendarforComplianceReporting,NSEwebsite(www.nseindia.com/content/members/mem_tmcc.xls).
ReferSEBIcircularno.MIRSD/SE/Cir19/2009datedDecember03,2009.
78
4.3CoreSettlementGuaranteeFund
The Clearing Corporation (CC) of the Stock Exchange should create a fund called Core
SettlementGuaranteeFund(SGF)foreachsegmentoftheExchange.Thisfundissetupto
provide settlement guarantee in the event of a clearing member failing to fulfill their
settlementcommitments.ThecoreSGFshouldbeusedtofulfillobligationsofthatfailing
memberandcompletesettlementwithoutdisruptingthenormalsettlementprocess.
4.3.1Corpus
WhiledecidingonthefairquantumofthecorpusoftheSGF,theCCshouldconsiderthe
followingfactors:
Riskmanagementsysteminforce
Current and projected volume/turnover to becleared andsettled by the CC on a
guaranteedbasis.
Trackrecordofdefaultsofmembers(numberofdefaults,amountindefault)
A Minimum Required Corpus (MRC) of the core SGF should be created subject to the
followingconditions:
TheMRCshallbefixedforamonth.
By 15th of every month, CC shall review and determine the MRC for next month
basedontheresultsofdailystresstestsoftheprecedingmonth.
CC shall also review and determine by 15th of every month the adequacy of
contributions made by various contributors and any further contributions to the
CoreSGFrequiredtobemadebyvariouscontributorsforthenextmonth.
Foreverydayoftheprecedingmonth,uncoveredlossnumbersshallbeestimated
bythevariousstresstestsforcreditriskconductedbytheCCforthesegmentand
thehighestofsuchnumbersshallbetakenasworstcaselossnumberfortheday.
Averageofallthedailyworstcaselossnumbersdeterminedshallbecalculated.
TheMRCfornextmonthshallbehigheroftheaveragearrivedatasaboveandthe
segmentMRCasperpreviousreview
4.3.2ContributiontoCoreSGF
ContributionsofvariouscontributorstoCoreSGFofanysegmentshallbeasfollows:
a) ClearingCorporationContribution:CCcontributiontoCoreSGFshallbeatleast50
percentoftheMRCwhichshouldbefromitsownfunds.CCcontributiontocoreSGF
shallbeconsideredaspartofitsnetworth.
b) StockExchangeContribution:StockExchangecontributiontoCoreSGFshallbeat
least25percentoftheMRC
c) Clearing Member Primary Contribution: If the CC wishes, it can seek risk based
contribution from Clearing Members (CMs) of the segment (including custodial
clearingmembers)totheCoreSGFsubjecttothefollowingconditionsthat:
totalcontributionfromCMsshallnotbemorethan25%oftheMRC,
79
noexposureshallbeavailableonCoreSGFcontributionofanyCM(exposurefree
collateralofCMavailablewithCCcanbeconsideredtowardsCoreSGFcontribution
ofCM),and
requiredcontributionsofindividualCMsshallbeproratabasedontheriskthey
bringtothesystem.
CC shall have the flexibility to collect CM primary contribution either upfront or
staggeredoveraperiodof time.Incaseofstaggeredcontribution,theremaining
balanceshallbemetbyCCtoensureadequacyoftotalCoreSGFcorpusatalltimes.
SuchCCcontributionshallbeavailabletoCCfor withdrawal as and whenfurther
contributionsfromCMsarereceived.
d) AnypenaltiesleviedbyCCshallbecreditedtoCoreSGFcorpus.
e) InterestoncashcontributiontoCoreSGFshallalsoaccruetotheCoreSGFandpro
rataattributedtothecontributorsinproportiontotheircashcontribution
f) CCshallordinarilyacceptcashcollateralforCoreSGFcontribution.However,CCmay
accept CM contribution in the form of bank FDs too. CC shall adhere to specific
guidancewhichmaybeissuedbySEBIfromtimetotimeinthisregard.
CCmayutilisetheCoreSGFintheeventofafailureofmember(s)tohonoursettlement
commitment.
4.3.2Defaultwaterfall
Intheeventofadefault,theutilisationoftheSettlementGuaranteeFundshallbeasper
thefollowingorder:
a) Moniesofdefaultingmember(includingdefaultingmember'sprimarycontribution
toCoreSGF(s)andexcessmoniesofdefaulterinothersegments).
b) Insurance,ifany.
c) CCresources(equalto5%ofthesegmentMRC).
d) CoreSGFofthesegmentinthefollowingorder:
I.
Penalties
II.
CCcontributiontotheextentofatleast25%ofthesegmentMRC
III.
RemainingCoreSGF:CCcontribution,StockExchangecontributionandnon
defaultingmembersprimarycontributiontoCoreSGFonproratabasis.
IV. Proportion of remaining CC resources (excluding CC contribution to core
SGFsofothersegmentsandINR100Crore)equaltoratioofsegmentMRCto
sum of MRCs of all segments. INR 100 Crore to be excluded only when
remaining CC resources (excluding CC contribution to core SGFs of other
segments)aremorethanINR100Crore.
V. CC/SEcontributiontoCoreSGFsofothersegments(aftermeetingobligations
ofthosesegments)andremainingCCresourcestothatextentasapproved
bySEBI.
VI. Cappedadditionalcontributionbynondefaultingmembersofthesegment.
Theadditionalcontributionbynondefaultingmembersshallbelimitedtoa
multipleoftheirprimarycontributiontotheSGF.
VII.
Anyremaininglosstobecoveredbywayofproratahaircuttopayouts.
80
4.3.3Stresstestingandbacktesting
CCshouldeffectivelymeasure,monitor,andmanageitscreditexposurestoitsparticipants
andthosearisingfromitspayment,clearing,andsettlementprocessesbystresstestingand
backtesting.
CCshouldcarryoutdailystresstestingforcreditriskusingatleastthestandardizedstress
testing methodology prescribed for each segment by SEBI. CCs shall also develop own
scenarios for a variety of extreme but plausible market conditions (in terms of both
defaulterspositionsandpossiblepricechangesinliquidationperiods,includingtheriskthat
liquidatingsuchpositionscouldhaveanimpactonthemarket)andcarryoutstresstesting
usingselfdevelopedscenarios.
81
ReviewQuestions
1. Riskcontainmentmeasuresincludeswhichofthefollowing:
(a) CheckingMarginrequirements
(b) Checkingnetworthoftheclient/investor
(c) Checkingwhethertheorderplacedisgenuine
Ans:(a)
2. SPAN method of calculating margin requirement is for trades done

_________________.
(a) OntheEquitiesSegment
(b) OntheFuturesandOptionsSegment
(c) OnGovernmentSecurities
Ans:(b)
3. Statewhichofthefollowingistrue.
(a) Failuretomaintainandfurnishdocumentsasprescribedundervariousrulesand
regulationmayattractpenaltyuptoRs.1crore.
(b) Thesaudabookoftheregisteroftransactionsneedstobemaintainedbythe
brokerforaperiodof2years.
(c) MembersContractbooksshowingdetailsofallcontractsenteredbythebroker
needstobemaintainedfor10yearsaspertheRule15ofSCRR
Ans:(a)
82
THISPAGEHASBEENLEFTBLANK
INTENTIONALLY
83
Chapter5:ClearingProcess
LEARNINGOBJECTIVES:
RoleofClearingCorporation
RoleofClearingMembersandCustodians
RoleofDepositoriesandDepositoryParticipant
ClearingProcess
5.1Introduction
Theclearingprocessfollowsthetradingprocess.
1. At the end of the days trade, all details about the trades are sent by the stock
Exchangestotheclearinghouse/corporation.
2. Theclearingcorporation/housethengroupsthetradesunderthevariousclearing
membersandinformsthemaboutthetransactionsoftheirrespectiveclients.
3. The clearing members/custodians then confirm back institutional trades by 1.00
p.m.thenextday.
4. Theclearinghouse/corporationthenperformsmultilateralnettinganddetermines
the final obligations of all clearing members. These details are then sent to the
clearingmembersby2.30p.m.
5.2RoleoftheClearingAgency/Corporation/House
WhenatradeoccursontheStockExchangeitisalegalcontractbetweenthebuyerand
seller.Ifthereisadefaultbyeitherthebuyerorthesellerthecounterpartytothetrade
will have tobeartheloss.Ina multilateralnettingscenario,whenadefault occurs,itis
difficulttounwindthetradetofindtheoriginalcounterpartywhowillhavetobeartheloss.
Theprocessofnovation21addressesthisrisk.
ClearingCorporation/Houseensurethatmembersmeettheirfund/securityobligations.It
actsasalegalcounterpartytoalltradesthroughtheprocesscallednovation.ThusClearing
Corporation/ClearingHousebecomesthebuyertoeverysellerandsellertoeverybuyer.
Ifthereisadefaultinthisscenario,ClearingCorporation/ClearingHousebeingcounter
party, is responsible for ensuring the settlement, thus managing risk and guaranteeing
settlementtoboththeparties.

21
As per the definition given in the SEBI Securities Contracts (Regulation) (Stock Exchanges and Clearing
Corporations)Regulations,2012"novation"meanstheactofaclearingcorporationinterposingitselfbetween
bothpartiesofeverytrade,beingthelegalcounterpartytoboth.
84
Toprovidesuchaguarantee,robustriskmanagementpracticesareputinplaceincluding
efficientmarginingsystemsothatintheeventofdefault,ClearingCorporation/Clearing
Househassufficientfundsfromthedefaultertocovertheloss.
TheClearingCorporation/ClearingHousealsoprovidescoresettlementservicesapartfrom
settlementguarantee.Itdeterminesfund/securityobligationsandarrangesforpayinofthe
same.Itcollectsandmaintainsmargins,processesforshortagesinfundsandsecurities.It
takeshelpofclearingmembers,clearingbanks,custodiansanddepositoriestosettlethe
trades.
ThesettlementcycleinIndiaisT+2days(i.e.tradeday+2days).T+2meansthetransactions
done(formoneyandsecurities)onthetradedaywillbesettledbytheStockExchangeon
the second business day (excluding Saturday, Sundays, Bank and Exchange Trading
Holidays).PayinandPayoutforsecuritiessettlementisdoneonT+2basis.
Thus, the clearing agency is the main entity managing the clearing and settlements of
transactionsdoneonaStockExchange.ItinteractswiththeStockExchange,clearingbanks,
clearingmembersanddepositoriesthroughanelectronicconnection.
TheNationalSecuritiesClearingCorporationLimited(NSCCL)takescareoftheclearingand
settlement on NSE. It is a fully owned subsidiary of NSE and is called the clearing
corporation.
TheBankofIndiaShareHoldingLimited(BOISL)takescareoftheclearingandsettlement
onBSE.ItisasubsidiaryofBSEandBankofIndiaandiscalledtheclearinghouse.MCXSX
ClearingCorporationLtd.(MCXSXCCL)istheclearingcorporationforallthetradesexecuted
on the Metropolitan Stock Exchange of India Limited (MSXI) formerly known as MCXSX
StockExchange.
Asacentralcounterparty,theclearingagency:
Participatesascounterpartyineverytransaction,whichiscommonlyreferredtoasa
counterpartyundertaking.
Monitorsthemarketandmarketparticipants.
Providesstructuredprocedures,aswellasresourcesfordisputeresolution.Buyersand
sellers are not forced to take legal action against one another, as the clearing
organizationoffersindependentlegalenforcementofcontracts.
Reducesthenumberofpaymentsduetonettingandhandlesallpaymentsnotrelating
todeliveriesonbehalfofmembers.
Providespossibilitiestonetdeliveriesofunderlyingstocksonamemberlevelcompared
withnettingofpayments,whicharealwaysnetted.
Providessecureandstandardizedtransactionprocessing.
Enablesaclearingmembertoreplacethecounterpartyriskbetweendifferentmarket
participants with the counterparty risk towards the clearing organization even for
instrumentstradedoutsidetheExchange.
Calculatesandcontrolspledgedcollateral
85
5.3ClearingBanksandtheirfunction
ClearingBank(s)actsasanimportantintermediarybetweenaclearingmember(s)andthe
clearingcorporation.Everyclearingmemberneedstomaintainanaccountwithaclearing
bank.Itsthefunctionoftheclearingmemberstoensurethatthefundsareavailableinhis
accountwithclearingbankonthedayofpayintomeettheobligations.Incaseofapayout
clearingmemberreceivestheamountonpayoutday.
All transactions of payin/payout of funds are carried out by these clearing banks. The
obligationdetailsarepassedontotheclearingbanks,whothencarryoutthepayin/pay
outoffundsbasedonthenetobligations.ThishappensonT+2day.Normally,thedemat
accountsofclientshavetobelinkedtotheirbankaccountstofacilitatefundstransfer.
5.4Clearingmembers/Custodians
As already discussed in chapter 2 of this workbook, there are three types of clearing
memberswhohelpinclearingoftradesprofessionalclearingmember(PCM),tradingcum
clearing member (TCM) and selfclearing member (SCM). The clearing members need to
takemembershipoftheclearingagencies.TheythengetauniquememberIDnumberfrom
theagency.
Toperformitsclearingandsettlementfunctions,itismandatoryforclearingmembersto
open demat accounts with both the depositories, i.e., the Central Depository Services
Limited(CDSL)andtheNationalSecuritiesDepositoriesLimited(NSDL).Theseaccountsare
knownasclearingmemberaccount.Clearingmembersneedtoopenseparateaccountsfor
different Stock Exchanges. It should be noted that unlike the usual demat accounts, the
clearingmemberdoesnotgetanyownershiporbeneficiaryrightsoverthesharedheldin
theseaccounts.Therearethreekindsofclearingmemberaccountspoolaccount,delivery
accountandreceiptaccounts.FordetailsseeBox5.1
Box5.1:Differenttypesofclearingmemberaccounts

Poolaccountisusedtoreceivesharesfromsellingclientsandtosendsharestobuying
clients.

Deliveryaccountisusedtotransfersecuritiesfrompoolaccountstoclearingagencys
account.

Receiptaccountisusedtotransfersecuritiesfromclearingagencysaccounttothe
poolaccount.

Theclearingagencygivesalistofthetradingtransactionsmadebytherespectivemembers,
which have to be confirmed by the clearing members (about the genuineness of the
86
transactions).Oncethisisdone,theclearingagencythendeterminesthenetobligationsof
theclearingmembersthroughmultilateralnetting.Anexampleofmultilateralnettingis
givenbelowforbetterunderstanding.
Saytradetakesplacebetween3partiesonSecurityABConaparticulartradedaycalledT.
ThepartiesinvolvedareBrokerX,BrokerYandBrokerZ.Thefollowingarethetrades
thattookplaceonthesecurityABC:
Trade
Buyer
Seller
Quantity of Price
TradeValue
Shares
1
X
Y
200
10
2000
2
Y
Z
50
10.50
525
3
X
Z
100
10.50
1050
4
Y
X
300
11
3300
BrokerX
Buy
Sell
Price
TradedValue
200
10
2000
100
10.5
1050
300
11
3300
300
300
250
NetQuantitytodeliver/receive=300300=0
NetValuetoreceivepay=250(toreceive)
BrokerY
Buy
Sell
Price
200
10
50
10.5
300
11
350
200
NetQuantitytodeliver/receive=350200=150(toreceive)
NetValuetoreceivepay=1825(topay)
BrokerZ
Buy
Sell
Price
50
10.5
100
10.5
0
150
NetQuantitytodeliver/receive=0150=150(todeliver)
87
TradedValue
2000
525
3300
1825
TradedValue
525
1050
1575
NetValuetoreceivepay=1575(toreceive)
QntytoDeliver Qntytoreceive
BrokerX
0
0
BrokerY
0
150
BrokerZ
150
0
Total
150
150
FundstoPay
0
1825
0
1825
Fundstoreceive
250
0
1575
1825
5.5Depositories&DepositoryParticipants
A depository can be defined as an institution where the clients/investors can keep their
financialassetssuchasequities,bonds,mutualfundunitsetc.inthedematerialisedform
andtransactionscouldbeeffectedonit.Inclearingandsettlementprocess,thedepositories
facilitatetransferofsecuritiesfromoneaccounttoanotherattheinstructionoftheaccount
holder.
In the depository system both transferor and transferee have to give instructions to its
depository participants (DPs) for delivering (transferring out) and receiving of securities.
However,transfereecangive'StandingInstructions'(SI)toitsDPforreceivinginsecurities.
If SI is not given then the transferee has to give separate instructions each time for
receivingthesecurities.
Transferofsecuritiesfromoneaccounttoanothermaybedoneforanyofthefollowing
purposes:
a. Transfer due to a transaction done on a person to person basis i.e. 'offmarket'
transaction.
b.TransferarisingoutofatransactiondoneonaStockExchange.
c.Transferarisingoutoftransmissionofsecuritiesandaccountclosure.
A beneficiary account can be debited only if the beneficial owner has given 'Delivery
Instruction'(DI)intheprescribedform.
TheDIforanoffmarkettradeorforamarkettradehastobeclearlyindicatedintheform
bymarkingappropriately.Theformshouldbecompleteinallrespects.Alltheholder(s)of
theaccounthavetosigntheform.Ifthedebithastobeeffectedonaparticulardatein
future,accountholdermaymentionsuchdateinthespaceprovidedfor'executiondate'in
theform.
Anytradethatisclearedandsettledwithouttheparticipationofaclearingcorporationis
called offmarket trade, i.e., transfer from one beneficiary account to another due to a
trade between them. Large deals between institution, trades among private parties,
transferofsecuritiesbetweenaclientandasubbroker,largetradesindebtinstruments
are normally settled through offmarket route. The transferor will submit a DI with 'off
markettrade'tickedofftoinitiateanoffmarketdebit.Theaccountholderisrequiredto
specifythedateonwhichinstructionshouldbeexecutedbymentioningtheexecutiondate
88
on the instruction. The debit will be effected on the execution date. DP will enter the
instruction in the system of the depository participant (which links the DP with its
depository)iftheinstructionformiscompleteinallrespectsandisfoundtobeinorder.
Thissystemwillgeneratean'instructionnumber'foreachinstructionentered.DPwillwrite
theinstructionnumberontheinstructionslipforfuturereference.Theinstructionwillbe
triggeredontheexecutiondate.Ifthereisadequatebalanceintheaccount,suchquantity
willbedebitedontheexecutiondate.Ifadequatebalancesdonotexistintheaccount,then
instructionwillwaitforadequatebalancestilltheendoftheexecutionday.Theaccount
willbedebitedimmediatelyonreceiptofadequatebalancesintheaccount.Ifadequate
balancesarenotreceivedtilltheendofthedayoftheexecutiondate,theinstructionwill
fail.TransfereewillreceivesecuritiesintotheaccountautomaticallyifSIweregiventothe
DPatthetimeofaccountopening.IfSIisnotgiven,transfereehastosubmitdulyfilledin
'ReceiptInstruction'[RI]formforeveryexpectedreceipt.Exchangeofmoneyfortheoff
markettransactionsarehandledoutsidethedepositorysystem.
Amarkettrade isone thatissettledthroughparticipationofaClearing Agency.Inthe
depositoryenvironment,thesecuritiesmovethroughanaccounttransfer.Itisexplained
below:
After the trade is executed by the broker on the stock exchange, the seller gives
deliveryinstructionstohisDPtomovesecuritiesfromhisaccounttohisbroker's
account.
Securitiesaretransferredfrombroker'saccounttoClearingAgencyonthebasisof
adeliveryoutinstruction.
Onpayout,securitiesaremovedfromClearingCorporationtothebuyingbroker's
account.
Buyingbrokergivesinstructionsandsecuritiesmovetothebuyer'saccount.
5.5ClearingProcess
As explained before, at the end of the trading day, the transactions entered into by the
brokersaretalliedtodeterminethetotalamountoffundsand/orsecuritiesthatthestock
brokerneedseithertoreceiveortopay.Thisprocessiscalledclearing.
Inthestockexchangesthisisdonebyaprocesscalledmultilateralnetting.Thisprocessis
performedbytheclearingagency(clearingcorporation/clearinghouse).Theclearingagency
guaranteesthatallcontractswhicharetradedwillbehonoured.
Generally, the clearing and settlement process can be classified into: matching, central
counterpartyclearing,cashsettlementanddelivery.
Matchingmeansthatthepartiesagreeupontheconditionsofthetransaction,i.e.whathas
beenboughtorsold,price,quantity,etc.
Central counterparty clearing is when the clearing organization becomes the legal
counterpartyinatransaction.
Cashsettlementreferstosettlementofpremiums,fees,marktomarket andothercash
settlements.
89
Delivery of the underlying instrument or cash settlement occurs after expiration or

prematureexercise.
ThefollowingisthesummaryClearingandSettlementprocessinIndiaforequities:
TradedetailsareavailabletoClearingCorporationfromtheExchange.
Afterthecustodialconfirmation,ClearingCorporationdeterminesobligations.
Download of obligation and payin advice of funds/securities by Clearing
Corporation.
ClearingCorporationgivesinstructionstoclearingbankstomakefundsavailableby
payintime.
ClearingCorporationgivesinstructionstodepositoriestomakesecuritiesavailable
bypayintime.
Payinofsecurities:ClearingCorporationadvisesdepositorytodebitpoolaccount
ofcustodians/Clearingmembersandcreditits(ClearingCorporations)accountand
depositorydoesthesame.
Payin of funds: Clearing Corporation advises Clearing Banks to debit account of
Custodians/Clearing members and credit its account and clearing bank does the
same.
Payout of securities: Clearing Corporation advises depository to credit pool
accountsofcustodians/Clearingmembersanddebititsaccountanddepositorydoes
thesame.
Payoutoffunds:ClearingCorporationadvisesClearingBankstocreditaccountof
custodians/ Clearing members and debit its account and clearing bank does the
same.
Note: Clearing members for buy order and sell order are different and Clearing
Corporationactsasalinkhere.
Thetimelinefollowedforthecustodiansettledtradeforinstitutionalclientsisasfollows:
Tistradedatebybroker
By T+1 morning trade confirmation to broker ( Exchange obligations move from
brokertocustodian)
OnT+1eveningpaymentofmarginsorearlypayinofsecuritiesand/orfunds.
OnT+2/T+3creditofshares/fundstoclientaccount
Incaseoftradesbymutualfundsthecustodiansactasclearingmembers.
Pleasenotethataclearingmemberisthebrokeragefirmwhichactsasatradingmember
and clearing member of clearing agency whereas custodians are only clearing members.
Eveniftheclientsdontmeettheirobligationsclearingmembersarerequiredtomeettheir
obligationstotheclearingcorporations.
ClearingProcessforDerivatives
90
Theclearingmechanismessentiallyinvolvesworkingoutopenpositionsandobligationsof
clearingmembers.Thispositionisconsideredforexposureanddailymarginpurposes.The
openpositionsofclearingmembersarearrivedatbyaggregatingtheopenpositionsofall
thebrokers/tradingmembersandallcustodialparticipantsclearingthroughthem.Atrading
members open position is arrived at by summing up his proprietary and clients open
positions.22Allderivativescontractsirrespectiveofwhetheritisindexfutures,stockfutures,
index options, stock options or currency futures and options are cash settled. The
settlementamountforaclearingmemberisnettedacrossalltheirTMs/Clientswithrespect
to their obligations on MarktoMarket settlement. The settlement process would be
discussedindetailinchapter6ofthisworkbook.
5.5.2DeterminationofObligationofClients
Animportantstepisdeterminationofwhatcounterpartiesowe,andwhatcounterparties
areduetoreceiveonthesettlementdate.Thesettlementprocessbeginsassoonasclients
obligationsaredeterminedthroughtheclearingprocess.Thesettlementprocessiscarried
outbytheClearingAgencywiththehelpofclearingbanksanddepositories.
5.5.3Balancing/NettingofClientsaccountswithinthebrokersfirm
Thestockbrokersareallowedtonettheclientaccountwithinthefirm.Attheendofthe
day,thepositionofeachclientisnettedagainstallhistransactionsandthefinalpayin/pay
outofsecurities/fundsiscarriedoutthroughclearingbanksanddepositoryparticipants.
5.5.4BrokernettingwithintheExchange
Every day, the clearing corporation sends the clearing member a list of all trading
transactionsmadebyhimandhisclientsfortheday.Afterthis,clearingisperformedby
multilateral netting. Then the members are informed by the clearing corporation of the
amount/securitiestobereceived/paidbythemtotheothermembers.

22
Whileenteringordersonthetradingsystem,TMsarerequiredtoidentifytheorders,whetherproprietaryorclient
throughthepro/cliindicatorintheorderentryscreen.
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ReviewQuestions
1. The process of original trade being cancelled and the clearing agency taking over as
counterpartytoalltradesiscalled____________________
(a) Execution
(b) Novation
(c) Determination
(d) Guaranteeing
Ans:(b)
2. Clearingmembersneedtotakemembershipwiththe___________________.
(a) ClearingAgencies
(b) Exchanges
(c) Brokers
(d) Depositories
Ans:(a)
3. Whatkindofaccountsisusedtoreceivesharesfromsellingclientsandtosendshares
tobuyingclients?
(a) Delivery
(b) Pool
(c) Receipt
(d) Common
Ans:(b)
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THISPAGEHASBEENLEFT
BLANKINTENTIONALLY
93
Chapter6:SettlementProcess
LEARNINGOBJECTIVES:

DeterminingofSettlementofobligationsforsettlementinequitysegment
SettlementofFunds
SettlementofSecurities
CorporateActionsadjustment
MethodologyforadjustmentinEquityF&O
Auctionofsecurities
6.1Introduction
RollingSettlementisamechanismofsettlingtradesdoneonastockexchangeonTi.e.trade
day plus "X" trading days, where "X" could be 1,2,3,4 or 5 days. For example, in T+5
environment,atradedoneonTdayissettledonthe5thworkingdayexcludingtheTday.
Hence the entire transaction, where the buyer has to make payments for securities
purchasedandsellerhastodeliverthesecuritiessold,havetobecompletedwiththatX
day.
T+2 settlement cycle is followed in the Indian equities market, i.e. which means that a
transactionenteredintoonDay1hastobesettledontheDayT+2workingdays,when
fundspayinorsecuritiespayouttakesplace.T+2here,referstoTradeday+2working
days.
Forinstance,tradestakingplaceonMondayaresettledonWednesday,Tuesday'strades
settled on Thursday andso on. Hence, asettlement cycle is theperiod within which the
settlement is made. For arriving at the settlement day, all intervening holidays bank
holidays,Exchangeholidays,SaturdaysandSundaysareexcluded.Fromasettlementcycle
takingaweek,theExchangeshavenowmovedtoafasterandefficientmodeofsettling
tradeswithinT+2Days.
ThesettlementofderivativetradesisdoneeitheronT+0oronT+1workingdaybasisexcept
final settlement in currency derivatives segment which takes place on a T+2 basis. The
ClearingCorporationsannouncesthesettlementscheduleforvarioussegments/products
onaperiodicbasis.
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SettlementPriceforderivativesisgiveninthefollowingtable:
Product
Settlement
Price
FuturesContractsonIndexor DailySettlement
IndividualSecurity
Closing price of the futures

contracts on the trading day
(closing price for a futures
contractshallbecalculatedon
the basis of the last half an
hour weighted average price
ofsuchcontract).
Unexpired illiquid futures DailySettlement

contracts
Theoretical Price computed

asperformula
FuturesContractsonIndexor FinalSettlement
IndividualSecurities
Options
Contracts
IndividualSecurities
on InterimExerciseSettlement
Options Contracts on Index FinalExerciseSettlement

andIndividualSecurities
CurrencyDerivatives
DailySettlement
FinalSettlementPrice
F=S*ert
Closing price of the relevant
underlying index / security in
the Capital Market segment,
on the last trading day of the
futurescontracts.
Closing price of such
underlyingsecurityontheday
of exercise of the options
contract.
Closing price of such
underlying security (or index)
on the last trading day of the
optionscontract.
Closing price of the futures
contractsforthetradingday.
The reference rate fixed by
RBI.
6.2DeterminationofsettlementobligationsEquitysegment
ClearingCorporationreceivesthedetailsoftradesandpricesfromtheExchange.Settlement
obligations are computed using predefined methodology specified for the
segment/product.Someofthemethodsofdeterminingobligationsarelistedbelow:
a) Nettedobligation:Allpurchaseandselltransactionswillbenettedtodeterminethe
obligations.Member will have the obligation todeliver a security in a settlement
onlyifthesellquantityismorethanbuyquantity.Similarly,incasethebuyquantity
ismorethansellquantity,thememberwillreceiveapayoutofthesecurity.Fund
obligationswillalsobecomputedonanettedbasisacrossallsecuritiesundernetted
settlement.
b) TradetotradeorGrossobligations:Transactionswillnotbenettedtodetermine
obligations.Memberssecuritypayinobligationwillbeequivalenttocumulativesell
quantityandsecuritypayoutwillbeequivalenttocumulativebuyquantity.Funds
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payinwillbeequivalenttocumulativevalueofbuytransactionsandfundspayout
willbeequivalenttocumulativesellvalue.
c) Dailymarktomarketsettlementoffuturescontract:Dailysettlementpriceswillbe
computedforfuturescontractsbasedonspecifiedmethodology.Allopenpositions
will be marked to market at the settlement prices to determine mark to market
obligationstobesettledincash.Allopenpositionswillbecarriedforwardatthe
latestdailysettlementprices.
6.3SettlementofFunds
TheClearingBankdebitsthesettlementaccountsofthetradingmembersmaintainedwith
thebankby10.30a.m.onthelastdateofsettlementperiod.Thisappearsinthetrading
membersbalancesheet.
The Clearing Bank credits the settlement accounts of the members maintained with the
bankby1:30p.m.onthelastdateofthesettlementperiod.Thisappearsasnetreceivable
inthetradingmembersbalancesheet.
6.3.1InformingobligationstoClientsandcustodians
Unlessotherwisespecificallyagreedtobyaclient,thesettlementoffunds/securitiesshall
bedonewithin24hoursofthepayout.However,aclientmayspecificallyauthorizethe
stockbrokertomaintainarunningaccountsubjecttothefollowingconditions:
a. Theauthorizationshallberenewedatleastonceayearandshallbedated.
b. Theauthorizationshallbesignedbytheclientonlyandnotbyanyauthorisedperson
onhisbehalforanyholderofthePowerofAttorney.
c. Theauthorizationshallcontainaclausethattheclientmayrevoketheauthorization
atanytime.
d. Fortheclientshavinganoutstandingobligationsonthesettlementdate,thestock
brokermayretaintherequisitesecurities/fundstowardssuchobligationsandmay
alsoretainthefundsexpectedtoberequiredtomeetmarginobligationsfornext5
tradingdays,calculatedinthemannerspecifiedbytheExchanges.
e. Theactualsettlementoffundsandsecuritiesshallbedonebythebroker,atleast
once in a calendar quarter or month, depending on the preference of the client.
While settling the account, the broker shall send to the client a statement of
accountscontaininganextractfromtheclientledgerforfundsandanextractfrom
the register of securities displaying all receipts/deliveries of funds/securities. The
statementshallalsoexplaintheretentionoffunds/securitiesandthedetailsofthe
pledge,ifany.
f. The client shall bring any dispute arising from the statement of account or
settlementso made tothe notice of the broker preferablywithin 7 working days
fromthedateofreceiptoffunds/securitiesorstatement,asthecasemaybe.
96
g. Suchperiodicsettlementofrunningaccountmaynotbenecessary:
i. forclientsavailingmargintradingfacilityasperSEBIcircular
ii. for funds received from the clients towards collaterals/margin in the form of
bankguarantee(BG)/fixeddepositreceipts(FDR).
h. Thestockbrokershalltransferthefunds/securitieslyinginthecreditoftheclient
withinoneworkingdayoftherequestifthesamearelyingwithhimandwithinthree
working days from the request if the same are lying with the Clearing
Member/ClearingCorporation.
i.
There shall be no interclient adjustments for the purpose of settlement of the

runningaccount.
j.
These conditions shall not apply to institutional clients settling trades through
custodians.Theexistingpracticemaycontinueforthem.
6.3.2MarginPayment
Theinitialandexposuremarginispayableupfrontbyclearingmembers.Initialmarginscan
be paid by members in the form of cash, bank guarantee, fixed deposit receipts and
approvedsecurities.
Clearingmemberswhoareclearingandsettlingforothertradingmemberscanspecifythe
maximumcollateral limittowardsinitial margins, foreachtradingmemberandcustodial
participantclearingandsettlingthroughthem.
Such limits can be set up by the clearing member, through the facility provided on the
trading system upto the time specified in this regard. Such collateral limits once set are
applicable to the trading members/custodial participants for that day, unless otherwise
modifiedbyclearingmember.
Nonfulfillmentofeitherwholeorpartofthemarginobligationswillbetreatedasaviolation
oftherules,byelawsandregulationsoftheclearingagencyandwillattractpenalty.
Inaddition,theclearingagencymayatitsdiscretionandwithoutanyfurthernoticetothe
clearing member, initiate other disciplinary action, interalia including, withdrawal of
trading facilities and/or clearing facility, close out of outstanding positions, imposing
penalties,collectingappropriatedeposits,invokingbankguarantees/fixeddepositreceipts,
etc.
The clearing members and custodians, if required, shall pay to the Clearing Agency the
marginmoneyspayablebythemandtheClearingAgencyshallreleasethemarginmoneys
duetotheclearingmembersandcustodiansbasedontheinformationprovidedbythestock
97
exchange or clearing agency, as may be specified by the clearing agency in the relevant
regulationsfromtimetotime.
6.3.3Settlementdues
Theclearingmembersandcustodiansshallpaytotheclearingagencywhateverisdueto
themforsettlementoftheirclearedpositions.Inturn,theclearingagencyshallpaytothe
clearingmembersandcustodiansmoneyspayabletothemforeverysettlementfortheir
clearedpositions.ThisisbasedontheinformationprovidedbytheExchangeorClearing
Agency.
Aclearingmember,failingtodischargehisfundsobligationsrelatingtosettlementdues,
margin money or nonsettlement dues at the notified time, shall render him liable for
withdrawaloftradingfacilityorsuchotheractionsincludingdisciplinaryactions,asmaybe
decidedbytheRelevantAuthority.
6.4SettlementofSecurities
Incaseofsaleofsecurities,immediatelyonreceiptofintimationofexecutionoftradefrom
broker, the seller should issue debit instructions to the DP with whom he maintains his
demat account. Securities can be transferred either directly to the Clearing
Corporation/ClearingHouseortothebrokersclearingaccount,asadvisedbyhisbroker.
A purchaser of securities can give onetime standing instruction to his DP for receiving
securitiesinhisaccount.Thisstandinginstructioncanbegivenatthetimeofopeningof
accountorlater.Alternatively,hemaychoosetoissueseparatereceiptinstructiontohisDP
everytimehemakesanypurchaseofsecurities.
Thesecuritieswhichtheclienthaspurchasedwillbefirstdeliveredinhisbrokersdemat
accountbytheClearingCorporation/Clearinghouse.Thebrokerwillsubsequentlytransfer
thesecuritiesinhisdemataccount.ThebrokermaygiverequesttotheClearingCorporation
/Clearinghousetodeliverthesecuritiesdirectlyinthepurchasersaccount.
6.4.1SettlementthroughtheDepositoryClearingSystem
ThesecuritiespayintakesplaceontheT+2dayafterthetradedate(T).Tradingmembers
have to deliver the shares by 10.30 a.m. on the payin date through their depository
participant.Thesecuritiespayintakesplacethroughbothdepositoriessimultaneously.
Thesecuritiespayouttakesplaceonthesamedateasthesecuritiespayindatei.e.inthe
T+2 working days after the trade date. The securities payout is done simultaneously
throughbothdepositoriesandtheprocessisusuallycompletedby1.30p.m.
6.5.CorporateActionsAdjustment
98
Settlements also involve adjustments for corporate actions. Adjustments are called for
actionslikesplittingofshares,ordeclaringofdividendsetc.Clearingandsettlementshould
capture all these actions and provide for adjustments accordingly. The following section
enumeratessomeofthis.
ThebasisforanyadjustmentforcorporateactionsintheequityF&Osegmentshallbesuch
thatthevalueofthepositionofthemarketparticipants,onthecumandexdatesforthe
corporateaction,shallcontinuetoremainthesameasfaraspossible.Thiswillfacilitatein
retainingtherelativestatusofpositionsviz.inthemoney,atthemoneyandoutofmoney.
Thiswillalsoaddressissuesrelatedtoexerciseandassignments.
6.5.1CorporateActionstobeadjusted
Thecorporateactionsmaybebroadlyclassifiedunderstockbenefitsandcashbenefits.The
variousstockbenefitsdeclaredbytheissuerofcapitalare:
Bonus
Rights
Merger/Demerger
Amalgamation
Splits
Consolidations
Hiveoff
Warrants,and
SecuredPremiumNotes(SPNs)amongothers.
Thecashbenefitdeclaredbytheissuerofcapitaliscashdividend.
6.5.2TimeofAdjustment
Any adjustment for corporate actions would be carried out on the last day on which a
securityistradedonacumbasisintheunderlyingequitiesmarketafterthecloseoftrading
hours.
6.5.3AdjustmentinEquityF&Osegment
Adjustmentsmayentailmodificationstopositionsand/orcontractspecificationsaslisted
below,suchthatthebasicpremiseofadjustmentlaiddownaboveissatisfied:
a)StrikePrice
b)Position
c)MarketLot/Multiplier
99
Theadjustmentswouldbecarriedoutonanyoralloftheabove,basedonthenatureofthe
corporateaction.Theadjustmentsforcorporateactionswouldbecarriedoutonallopen
positions.
6.5.4MethodologyforadjustmentinEquityF&O
Themethodologytobefollowedforadjustmentofvariouscorporateactionstobecarried
outareasfollows:
6.5.4.1Bonus,StockSplitsandConsolidations
StrikePrice:
Thenewstrikepriceshallbearrivedatbydividingtheoldstrikepricebytheadjustment
factorasunder.
MarketLot/Multiplier:
Thenewmarketlot/multipliershallbearrivedatbymultiplyingtheoldmarketlotbythe
adjustmentfactorasunder.
Position:
Thenewpositionshallbearrivedatbymultiplyingtheoldpositionbytheadjustmentfactor
asunder.
Adjustmentfactor:
BonusRatioA:B
Adjustmentfactor:(A+B)/B
Stock
Splits
and
ConsolidationsRatioA:B
Adjustmentfactor:A/B
Theabovemethodologymayresultinfractionsduetothecorporateactione.g.abonus
ratioof3:7.Withaviewtominimisingfractionsettlements,thefollowingmethodologyis
adopted:
1.Computevalueofthepositionbeforeadjustment
2.Computevalueofthepositiontakingintoaccounttheexactadjustmentfactor
3.CarryoutroundingofffortheStrikePriceandMarketLot
4.Computevalueofthepositionbasedontherevisedstrikepriceandmarketlot
Thedifferencebetween1and4above,ifany,isdecidedinthemannerlaiddownbythe
relevantauthoritybyadjustingStrikePriceorMarketlot,sothatnoforcedclosureofopen
positionismandated.
6.5.4.2Dividends
100
Dividendswhicharebelow10percentofthemarketvalueoftheunderlyingstock,would
bedeemedtobeordinarydividendsandnoadjustmentinEquityF&OfortheStrikePrice
wouldbemadeforordinarydividends.Forextraordinarydividends,above10percentof
themarketvalueoftheunderlyingsecurity,theStrikePricewouldbeadjusted.
Todecidewhetherthedividendis"extraordinary"(i.e.over10percentofthemarketprice
oftheunderlyingstock.),themarketpricewouldmeantheclosingpriceofthescriponthe
day previous to the date on which the announcement of the dividend is made by the
Company after the meeting of the Board of Directors. However, in cases where the
announcementofdividendismadeafterthecloseofmarkethours,thesameday'sclosing
pricewouldbetakenasthemarketprice.Further,iftheshareholdersofthecompanyinthe
AGMchangetherateofdividenddeclaredbytheBoardofDirectors,thentodecidewhether
thedividendisextraordinaryornotwouldbebasedontherateofdividendcommunicated
totheExchangeafterAGMandtheclosingpriceofthescriponthedayprevioustothedate
oftheAGM.
In case of declaration of "extraordinary" dividend by any company, the total dividend

amount(specialand/orordinary)wouldbereducedfromallthestrikepricesoftheoption
contractsonthatstock.
The revised strike prices would be applicable from the exdividend datespecifiedby the
Exchange.
6.5.4.3Mergers
Ontheannouncementoftherecorddateforthemerger,theexactdateofexpiration(last
cumdate)wouldbeinformedtomembers.
AftertheannouncementoftheRecordDate,nofreshcontractsonfuturesandoptionsin
equityderivatives(futuresandoptions)wouldbeintroducedontheunderlying,thatwill
ceasetoexistsubsequenttothemerger.
Unexpiredcontractsoutstandingasonthelastcumdatewouldbecompulsorilysettledat
thesettlementprice.Thesettlementpriceshallbetheclosingpriceoftheunderlyingonthe
lastcumdate.
6.5.4.4Rights
Rights
Ratio
A
:
B,
Benefit per right entitlement ( C) : P S
Benefit per share (E) : (P S) / A+B
Underlyingclosepriceonthelastcumdate(P)
Issuepriceoftherights(S)
101
Adjustment
factor
=
(PE)/P
To be multiplied by old strike price &
dividedintooldlotsizetoarriveatthenewstrike
priceandlotsize
The relevant authority may, on a case by case basis, carry out adjustments for other
corporateactionsinconformitywiththeaboveguidelines,includingcompulsoryclosingout,
whereitdeemsnecessary.
6.6AuctionofSecurities
Anauctionisresortedtowhenthereisadefaultindeliverybyabroker.Anauctionisthe
stockexchangesmechanismthroughwhich,inasettlement,abuyerbrokergetssharesin
theeventualityofdefaultbythesellingbroker.Thisdefaultoccurswhenashortsellerfails
to square up the position, or a seller fails to deliver shares on time, or a seller delivers
bad/wrongshares.
Thewholeprocessofthisauctioneventcanbeillustratedasunder:
An auction is a mechanism utilised by the Exchange to fulfill its obligation towards the
buyingtradingmembers.Thus,whenthesellingbrokerfailstodelivertheshares,thestock
exchangeconductsanopenmarketpurchasebywayofanopenauctionandthesharesso
boughtthroughtheauctionaredeliveredtothebuyingbroker.
6.6.1AuctionofsecuritiesontheBSE
AnauctiontendernoticeisissuedbyBSEtothetradingmembersinformingthemaboutthe
a)namesofthescripswhichareshortorhavenotbeendelivered,b)quantityslatedfor
auctionandc)thedateandtimeoftheauctionsessionontheBOLT.
The auction for the undelivered quantities is conducted by T+2 day (i.e. auction can be
conducted on or before T+2) between 2:00 p.m. and 2.45 p.m for all the scrips under
compulsoryrollingsettlementsexceptthosein"Z"group23andscripson"tradefortrade"
basiswhicharedirectlyclosedout.
Atradingmemberwhohasfailedtodeliverthesecuritiesofaparticularcompanyonthe
payin day is not allowed to offer the securities (of that company) in an auction. The
membersparticipatingintheauctionsession,candownloadthedeliveryordersinrespect
oftheauctionobligationsonthesameday,iftheiroffersareaccepted.Themembersare
requiredtodeliverthesharestotheclearingcorporationonorbeforetheauctionpayin
day,i.e.,T+3.Payoutofauctionsharesandfundsisalsodoneonthesameday,i.e.,T+3.
6.6.1.1SelfAuction

23
The'Z'groupwasintroducedbyBSEinJuly1999andincludescompanieswhichhavefailedtocomplywith
itslistingrequirementsand/orhavefailedtoresolveinvestorcomplaintsand/orhavenotmadetherequired
arrangements with both the depositories, viz., Central Depository Services (I) Ltd. (CDSL) and National
SecuritiesDepositoryLtd.(NSDL)fordematerializationoftheirsecurities.
102
Thedeliveryandreceiveorders(i.e.thesharestobedeliveredandtobereceivedbythe
clearinghouse)areissuedbytheBSEtoitstradingmembersafternettingofftheirbuyand
selltransactionsinscrips(wheresuchnettingispermitted).
Tounderstandthisbetter,assumethataclienthassoldthesharesofaCompanyXbutfails
todeliverthosesharestoitstradingmember.Thisdoesnotnecessarilyresultinthefailure
ofthetradingmembertodeliverthesharesofthatcompanytotheclearinghouse/clearing
corporation.Thisisbecausethetradingmembercannetoffthosesharesagainsttheshares
ofthesamecompanyboughtbyhisotherclientresultinginnodeliveryobligationtothe
ClearingCorporation/ClearingHouse.Thisiscalledinternalnetting.
Insuchacase,thetradingmemberwouldrequiresharessothathecandeliverthesameto
hisbuyingclient,whichotherwisewouldhavetakenplacefromthedeliveryofsharesbyhis
sellingclient.Toprovidesharestothetradingmembersinsuchcases,theyhavebeengiven
an option to submit the details of such internal shortages on floppies on payin day for
conductingselfauction(i.e.,asiftheyhavedefaultedindeliveryofsharestotheClearing
House).Theseshortagesareclubbedwiththenormalshortagesinasettlementarrivedat
by the clearing house/clearing corporation and the auction is conducted by the clearing
corporation/clearinghouseforthecombinedshortages.
6.6.2AuctionofSecuritiesontheNSE
The auction process at NSE is similar to BSE. However for internal shortages instead of
resortingtoselfauction,membersarerequiredtohaveaconsistentupfrontdeclaredpolicy
onsettlementofthesetrades.
6.6.3CloseOutofSecurities
Whenever there is short delivery of securities, Clearing Corporation/ Clearing House will
conductauctiontobuythesharesfromthemarketparticipants.Ifontheauctionday,there
arenosellersforaparticularshortdelivery,theClearingCorporation/ClearingHousewill
thencarryoutaprocesscalledCloseout.Inthisprocess,thebuyeriscompensatedby
payingthevalueoftheshortdeliveredsecurityatthehighestpriceprevailinginthestock
exchangefromthedayoftradingtilltheauctiondayor20%abovetheofficialclosingprice
ontheauctionday,whicheverishigher.
Forallshortdeliveriesfora)companieslistedintheZgroupofBSEandb)tradefortrade
securities at both Exchanges, the trades are compulsorily closed out. During the auction
process if there are no bids received from the trading members then also close out is
resortedto.
Whentheauctionsellerfailstodeliverthesecurities(partlyorfully)ontheauctionpayin
day,thedealwillbeclosedoutatthehighestpriceprevailingontheExchangefromtheday
onwhichthetradewasoriginallyexecutedtillthedayofclosingoutor20percentoverthe
103
official closing price onthe close out day whichever is higher and will be charged to the
auctionsellerunlessotherwisespecified.
104
ReviewQuestions
1. Incaseofsaleofsecurities,whatinstructionshouldbegiventotheDP,uponreceipt
ofintimationofexecutionoftradefrombrokerwithwhomhemaintainsthedemat
account.
(a) Credit
(b) Debit
(c) Hold
(d) Noactiontobetaken.
Ans:(b)
2. Corporateactionadjustmentsaredoneonall_____________positions.
(a)Open
(b)Closed
(c)Past
(d)Executed
Ans:(a)
3. Whatistheactiontakenwhenthereisafailureonpartofthebrokertodeliverthe
securities?
(a) Sale
(b) Auction
(c) TradeCancelled
Ans:(b)
105
Chapter7:InvestorGrievancesandArbitration
LEARNINGOBJECTIVES:
InvestorGrievanceRedressproceduresattradingmembers,stockexchangeandthe
regulatorylevel.
Arbitrationprocess
7.1Introduction
Investorsarethebackboneofthesecuritiesmarket.Protectionoftheinterestsofinvestors
is of paramount importance for the intermediaries, stock exchanges and the regulators
associatedwiththemarkets.Regulationsandcomplianceeffortshavebeenputinplaceto
protecttheinvestorsagainstanyintentionalorunintentionalwrongdoingoractivitiesof
anyoftheparticipantsinthemarket.
However, there may be occasions when the investors have grievances against (a) the a)
intermediary/broking firm through which it is carrying out the transactions or/and (b)
againstthecompanyofwhichitisashareholder.
Intheeventofanygrievance(s),theinvestorisfirstrequiredtoapproachtheconcerned
intermediary/trading firm/company for settling his/her grievance. If the investor is not
satisfied then he/she can approach the stock exchange(s) of which the broking firm is a
memberand/ortheinvestorcanapproachthesecuritiesmarketregulatorSEBI.Thestock
exchange(s) and SEBI then independently takes up the grievances against its registered
intermediariesandadvisestheregisteredtradingmembertoredresstheinvestorgrievance.
7.2InvestorGrievance
Inthefollowingsectionsofthischapter,wewouldexplaintheproceduresfollowedinthe
Indianmarketforredressofinvestorgrievances.Investorgrievanceishandledatthetrading
member level, stock exchange level and the regulator level, each of which have been
explainedbelow.
7.2.1InvestorGrievancehandlingatthetradingmemberlevel
Generally all the trading firms have a designated cell/person for redressing investor
grievances.Whenacomplaintisfiledbytheinvestor,effortsaretakentoresolvethematter
atthebranchlevelorthefirmleveldependinguponthenatureofthecomplaint.
106
SEBI hasalsomandatedthestockbrokerstolettheirinvestorsknowthatincaseofany
grievance,theinvestorshouldcontactthecomplianceofficerofthestockbroker,depository
participant, CEO/Partner/Proprietor. The trading members are mandated to prominently
displaythisinformationattheirofficesandalsoprovidethetelephonenumbersandemail
idsoftheconcernedofficers(complianceofficerofthestockbroker,depositoryparticipant,
CEO/Partner/Proprietor).
InvestorGrievancehandlingattheStockExchangesandSEBI
Incasethecomplainantortheaggrievedinvestorisunsatisfiedwiththeredressprocessof
thetradingmemberthentheinvestorcantakehisgrievancetothestockexchangeorSEBI.
SEBIComplaintsRedressalSystem(SCORES)
SEBI handles the investor grievances through a system called SEBI Complaints Redressal
System(SCORES).SCORESisawebbasedcentralisedsystemtocaptureinvestorcomplaints
andisavailable24x7.Itallowstheinvestorstolodgetheircomplaintsandtrackthestatus
online.WhenacomplaintislodgedonSCORES,anemailacknowledgementisgeneratedfor
referenceandtracking.Thesystemalsoallowsmarketintermediariesandlistedcompanies
toreceivecomplaintslodgedagainstthemelectronically.Ifaninvestorsubmitsamanual
complaint,thesameisscannedandcapturedonSCORES.
StockExchangesandDepositoriesdesignateapersontoresolvethecomplaintsreported
through SCORES within fifteen days from the date of receipt on SCORES. If additional
informationisrequired,thenitismandatedtobesoughtwithinsevendaysofreceiptof
complaint.Ifadditionalinformationissought,thenfifteendayswillbecountedfromthe
dateofreceiptofinformation.Thestockexchangesarerequiredtomaintainarecordof
complaints which are not addressed within fifteen days from the date of receipt of the
complaintalongwithreasonforsuchdelay.
Aninvestorwhohaslodgedthecomplaintcanverifythestatusbylogginginusingunique
complaintregistrationnumber.Everycomplainthasanaudittrailandsavedinacentral
database. If the complaint is successfully resolved the entity is advised to send reply to
complainant.
InvestorRedressatStockExchanges
Stock exchanges have an investor grievance department which looks into all the
complaints/mattersagainstthetradingmembersregisteredwiththeExchange.
The exchange usually has an investor grievance redress committee which is generally
mannedbyateamofindustryprofessionalspossessingrelevantexperienceintheareaof
securities markets, company and legal affairs and specially trained to identify problems
facedbytheinvestorandtofindandeffectasolution.
107
Anissuegenerallyarises,whenthecomplainantputsaclaimforthelossesincurredbyany
actofthetradingmember.Inthatcase,thecommitteegenerallytriestoseekaconsensus
oramidpath onhearingboththepartiesi.e.thecomplainantandthetradingmember.
BoththepartiescanalsoseektosettlethematteroutsidethepurviewoftheExchangeand
thenreportittotheExchange.Thetradingmemberhastotakeasatisfactionletterfrom
the investor stating that the grievance has been redressed and submit the same to the
Exchange.Thematteristhensupposedtobeclosed.
Incertaincases,howeverthematterdoesnotgetsresolvedbythecommitteeandthecase
goestoarbitration.
Investorcomplaintsshouldberesolvedbythetradingmemberswithinfifteendays.Ifitis
not resolved, the Exchanges Investor Grievance Redressal Committee (IGRC) will try to
resolvethematteramicablywithin15days.Ifnotresolved,IGRCwilldeterminetheclaim
valueandtheExchangewillblocktheamountfromthemembersdeposit.Ifthetrading
memberdoesntinformtheintentiontopursuearbitrationwithinsevendays,theblocked
amountwillbereleasedtotheinvestor.
Incase,thememberdecidestopursuearbitrationandtheclaimamountislessthanRs.10
lakhs,theExchangewillberequiredtoreleasethestaggeredamounttotheinvestorfrom
InvestorProtectionfundtillcompletionofthearbitration.Appropriateindemnity willbe
obtainedfrominvestortoreturntheamountdispersediftheawardisnotinfavourofthe
investor. If the investor fails to return the amount, investor will not be allowed to trade
furtherandtheirdemataccountwillbefrozen.
7.3Arbitration
Arbitration,whichisaquasijudicialprocess,isanalternatedisputeresolutionmechanism
prescribedundertheArbitrationandConciliationAct,1996.TheExchangesprescribethe
provisionsinrespectofarbitrationandtheprocedurethereinhasbeenprescribedinthe
Regulations.Arbitrationaimsatquickerlegalresolutionforthedisputes.Whenoneofthe
partiesfeelsthatthecomplainthasnotbeenresolvedsatisfactorilyeitherbytheotherparty
orthroughthecomplaintresolutionprocessoftheExchangeattheInvestorServicesCellor
theIGRC,thepartiesmaychoosetherouteofarbitration.Arbitrationfacilityisprovidedat
allcenterswhicharespecifiedbySEBIfromtimetotime.SEBIhasnowidentified16such
centers where investor services as well arbitration facility are to be provided by stock
Exchanges.
TheExchangeshaveapanelofarbitratorswhoaretypicallyretiredjudgesfromHighCourts,
CharteredAccountants,AdvocatesandotherProfessionalshavingknowledgerelatedtothe
capitalmarkets.
The list of arbitrators across all stock Exchanges are pooled together and is called the
Common Pool. This list which is grouped centre wise (centres as identified by SEBI), is
madeavailabletotheinvestorsonthestockExchangeswebsites.Theapplicantscanchoose
anyarbitratorfortherequiredcentrefromtheCommonPool.Iftheyfailtodoso,the
108
arbitrator will be chosen by an automatic process which is a randomised computer

generatedselectionprocess.
Theclaimanthastosubmitthefollowingforfilinganarbitrationapplication:
Statementexplainingthedisputeandthenatureoftransactions,separatingdelivery
basedtransactionandsquaredofftransactions.
ContractNotespertainingtothetransactionindispute.
Billsissued/receivedbytheapplicant.
Copyoftheaccountsstatementgivenbybroker.
Documentspertainingtoreceipt/deliveryofshares.
Anyotherdocumentsinsupportoftheclaim.
Anaccuratelistofthedocumentsproduced.
PAN/GIRNo.oftheapplicant.
CertifiedcopyoftheBalanceSheetoftheapplicantshowingthedues.
CopyofacknowledgementofthelatestIncomeTaxReturn.
ArbitrationforclaimsuptoRs.25lakhisdecidedbyasolearbitratorwhileaclaimofabove
Rs.25lakhisdealtbyapanelofthreearbitrators.Thestockexchangehastoensurethat
theprocessofappointmentofarbitrator(s)iscompletedwithin30daysfromthedateof
receiptofapplicationfromtheapplicant.
After hearing both the parties and after examining all the relevant documents and the
submissionsgivenbytheparties,thearbitratorsclosethearbitrationreference.Then,the
arbitratorsgivetheaward.TheAwardhastobeaSpeakingAward.24ExparteAwardsare
also given. The Final Award is taken on stamp paper of Rs. 100 (or such other higher
denomination as specified by the Stamp Act of the relevant State Government) and
arbitrator(s) signatures are obtained on Final Award. The award is forwarded to the
applicantaswellasrespondent.
Incasethearbitral/appellateawardisinfavouroftheclient,thestockexchangeshall,on
receiptofthesame,debittheamountoftheawardfromthesecuritydepositofthemember
(againstwhomanawardhasbeenpassed)andkeepitinaseparateescrowaccount.The
stockexchangeshallimplementthearbitralaward,bymakingpaymenttotheclient,along
with interest earned on the amount that has been set aside, as soon as the time for
preferringanappealbeforetheappellatepanelofarbitratorshasexpiredandnoappealhas
beenpreferred.
Thearbitrationreferenceshallbeconcludedbywayofissueofanarbitralawardwithinfour
months from the date of appointment of arbitrator(s). However, the Managing
Director/ExecutiveDirectorofthestockexchangemayforsufficientcauseextendthetime

24
Speakingawardsarethoseawardswhicharepasseduponhearingboththepartiesi.e.thecomplainantand
therespondent.ThisisunliketheExparteaward,whereinonepartydoesnotattendtheproceedingseven
uponbeingservedthenoticeandthearbitratorshavetopassadecisionbasedonadocumentsandarguments
givenbyoneparty.
109
for issue of arbitral award by not more than two months on a case to case basis after
recordingthereasonsforthesame.
ArbitrationFees
Eachofthepartiestoarbitrationmustdepositanamount(asprescribedbytheExchanges)
atthetimeofmakinganarbitrationreference.Thedepositsmaynotexceedtheamountas
indicatedunder.
Table7.1:ArbitrationFees
Amount of claim /counter If claim is filed within six If claim is filed after six
claim(whicheverishigher) months
months
Rs.10,00,000
1.3%subjecttoaminimum 3.9%subjecttoaminimum
ofRs.10,000
ofRs.30,000
> Rs.10,00,000 Rs. Rs. 13,000 plus 0.3% Rs. 39,000 plus 0.9%
25,00,000
amountaboveRs.10lakh
amountaboveRs.10lakh
Rs.25,00,000
Rs. 17,500 plus 0.2% Rs. 52,500 plus 0.6%
amount above Rs. 25 lakh amount above Rs. 25 lakh
subjecttoamaximumofRs. subject to maximum of Rs.
90,000
30,000
A client, who is a party to the arbitration for a claim/counter claim upto Rs. 10 lakh, is
exemptfromthedepositprovidedthearbitrationreferenceforthesameisfiledwithinsix
monthsfromtheendofthequarterduringwhichthedisputedtransactionwereexecuted
/settled.Expensesthusarisingwithregardtosuchapplicationsshallbebornebythestock
exchanges.
Onissueofthearbitralaward,thestockexchangeneedstorefundthedeposit,ifany,to
thepartyinwhosefavourtheawardispassedandappropriatethedeposit,ifany,madeby
theparty,againstwhomtheawardhasbeenpassed,towardsarbitrationfees.Apartyfiling
anappealbeforetheappellatepanelpaysaprescribedfee,inadditiontostatutorydues
alongwiththeappeal.
AppellateArbitration
Apartyaggrievedbyanarbitralawardmayappealtotheappellatepanelofarbitratorsof
the stock exchange against such an award. An appeal before the appellate panel of
arbitratorsmaybefiledwithinonemonthfromthedateofreceiptofarbitralaward.The
appellatepanelconsistsofthreearbitratorswhoaredifferentfromtheoneswhopassed
thearbitralawardappealedagainst.Thestockexchangeshallensurethattheprocessof
appointmentofappellatepanelofarbitratorsiscompletedwithin30daysfromthedateof
receipt of application for appellate arbitration. The appeal should be disposed of within
threemonthsfromthedateofappointmentofappellatepanelofsuchappealbywayof
issueofanappellatearbitralaward.TheManagingDirector/ExecutiveDirectorofthestock
exchangemayforsufficientcauseextendthetimeforissueofappellatearbitralawardby
110
notmorethantwomonthsonacasetocasebasisafterrecordingthereasonsforthesame.
ApartyaggrievedbytheappellatearbitralawardmayfileanapplicationtotheCourtof
competentjurisdictioninaccordancewithSection34oftheArbitrationandConciliationAct,
1996.
Apartyfilinganappealbeforetheappellatepanelisrequiredtopayafeenotexceeding
Rs.30,000,asmaybeprescribedbythestockexchange,inadditiontostatutorydues(stamp
duty,servicetax,etc)alongwiththeappeal.HoweverifaclientsappealisuptoRs.10lakhs,
thefeecannotexceedRs.10,000/
111
ReviewQuestions
1. Whoisthebackboneofthesecuritiesmarket?
(a) StockExchanges
(b) TradingMembers
(c) Investors
(d) Regulators
Ans:(c)
2. Arbitrationaimsat________legalresolutionforthedisputes.
(a) Slower
(b) Quicker
(c) Routine
Ans:(b)
3. ArbitrationforclaimsuptoRs.___lakhisdecidedbyasolearbitrator.
(a) 25
(b) 50
(c) 90
(d) 45
Ans:(a)
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THISPAGEHASBEENLEFT
BLANKINTENTIONALLY
113
Chapter8:OtherServicesprovidedbyBrokers
LEARNINGOBJECTIVES:
Afterstudyingthischapter,youshouldknowabouttheservicesprovidedbythetrading
members:
IPOapplications
Tradingofmutualfundunits
Portfoliomanagementservice
ResearchReports
DepositoryServices
MarginTrading
8.1Introduction
Stockbrokerstypicallydonotstoponlyatbrokingortrading.Inviewoftheirexpertise,they
provide a number of other services to their clients, like, facilitating application in Initial
PublicOfferings(IPO),tradingofMutualFundUnits,PortfolioManagementServices,etc.
Someoftheotherservicesprovidedbythemareenumeratedhere.
Typically,bigstockbrokershaveconvertedthemselvesintofinancialservicescompanies.
Theyprovideinvestmentoptionsinequities,derivatives,commodities,IPO,mutualfunds,
depositoryservices,portfoliomanagementservicesandinsurance.Theyalsoofferwealth
managementservicesforhighnetworthindividuals(HNIs).Theyalsohavebranchesallover
thecountryandprovideservicesviainternetortelephone.Licensesandcertificationshave
tobeobtainedforeachoftheservicesofferedbythestockbrokers.
Theyoffervarioustypesofinvestmentproductslikedifferentschemesofinvestmentsand
differenttypesofportfolios.
Normally,astockbrokersoutletoffersthesefacilities:
OnlineBSEandNSEexecutionsthroughterminals
Investmentadvice
Researchreportsandmarketreview
Personalisedadvice
Livemarketinformation
Depositoryservices
114
DirectMarketAccess(DMA)
Mobiletrading
SmartOrderRouting(SOR)
Algorithmictrading
Commoditiestrading
IPOs&MutualFundsDistribution
InternetbasedOnlineTrading(IBT)
Specialisedresearchforinvestors
Marginfunding
Inthesubsequentsectionswetrytobrieflydiscussinbrieftheotherservicesasprovided
bythebrokers.
8.2IPOApplications
AnIPOistheprocessbywhichacompanygoespublici.e.offersitssharestothepublicfor
saleforthefirsttime.ElectronictradingthroughbrokingfirmshavemadeinvestinginIPOs
verysimple.Oncetheaccountisopenedwiththebroker,theinvestorhastocallorlogin
andapplyfortheIPO.TheIPOprocessisfacilitatedbybrokersastheirsystemisconnected
with the stock Exchanges main IPO system and online uploading of forms is carried out.
Thus,atanygiventime,theonlinestatusisavailableonthestockExchanges.Thisprocess
isfacilitatedbythestockbrokers.
TheBookRunningLeadManagerwillgivethelistoftradingmemberswhoareeligibleto
participateinthebookbuildingprocesstotheExchange.25Eligibletradingmembersasper
theprescribedformathavetogivethedetailsoftheuserIDstheywoulduseforthepurpose
ofbookbuildingtotheExchange.OncethisisapprovedbytheExchanges,thestockbroker
iseligibletoacceptapplicationsforIPOsandsubmitthemonlinethroughitsterminals.
AsandwhenvalidoffersarereceivedbythesystemofthestockExchange,theyarefirst
numbered,timestamped,andstoredinthebook.Eachofferhasadistinctiveoffernumber
andauniquetimestamponit.Alltheoffersplacedinthesystemwillremainoutstanding
tillthelastdayofthebookbuildingprocess.TradingMemberscanmodify/cancelallthe
offersplacedinthesystemfromthestarttillthelastdayofthebookbuildingprocess.
SEBIhasintroducedafacilitycalledApplicationSupportedbyBlockedAmount(ASBA)in
thePrimarymarketforinvestor.ASBAprovidesanalternativemodeofpaymentinissues
wherebytheapplicationmoneyremainsintheinvestorsaccounttillfinalizationofbasisof

25
TheleadmerchantbankersappointedbytheIssuerCompanyarereferredtoastheBookRunningLeadManagers.The
namesoftheBookRunningLeadManagersarementionedintheofferdocumentoftheIssuerCompany.
115
allotment in the issue, or in other words, if an investor is applying through ASBA, his
application money is debited from the bank account only if the investors application is
selected for allotment after the basis of allotment is finalized, or the issue is
withdrawn/failed.
ASBAprocessfacilitatesretailindividualinvestorsbiddingatthecutoffprice,withasingle
optiontoapplythroughSelfCertifiedSyndicateBanks(SCSBs),inwhichtheinvestorshave
bankaccounts.SCSBsarethosebankswhichsatisfytheconditionslaidbySEBI.SCSBsaccept
theapplications,verifytheapplication,blockthefundtotheextentofbidpaymentamount,
uploadthedetailsinthewebbasedbiddingsystemoftheExchange,unblockoncebasisof
allotmentisfinalizedandtransfertheamountforallottedshares,totheissuer.
This would coexist with the current procedure of investors applying through sub
syndicate/syndicatemembers,withchequeasapaymentinstrument.
Thebackofficemusthaveasysteminplacethatallowsefficienthandlingoflargeamounts
ofdata.ThesystemmustfacilitatetheIPOprocessbycarryingoutthefollowing:
Collectingbidsfromclientsalongwiththeircashdepositthatshouldcovertheirbids.
ThisisthentobesavedintheclientsIPOform.
Allocatingthepropernumberofstocksforeachcustomeraccordingtothedeclared
ratiofromtheissuer.
Affectingtheclientsportfolioandcashbalancesaccordingtothepreviouslyapplied
allocation.
InOctober2012,SEBIhadintroducedthefollowingchangestothepublicissueinelectronic
form:26
Investorscansubmitpublicissueapplicationformthroughstockbrokers,whomay
notbesyndicatemembersintheissue.
ThismechanismwillbeavailableforbothASBAaswellasnonASBAapplications.
ApplicationformsshallbeavailableonthewebsiteofStockExchangesandbrokers.
Theseformsshouldbeprefilledwithpricebandinformation.
The ASBA facility will be available in more than 1000 locations where there is
presenceofbrokersterminal.
StockExchangesshallpublishthedetailsofthesebrokercentresontheirwebsites.
TheSelfCertifiedSyndicateBanks(SCSB)whoprovideASBAfacilityshouldnameat
least one branch where the syndicate/ sub syndicate members and brokers can
submittheASBAform.
Procedure
Investor can submit the application form to any of the registered broker for
uploadingonthestockexchangeplatform.
Broker shall stamp and acknowledge receipt of the application and capture the
detailsonthestockexchangeplatform

26
SEBIvideitscircularno:CIR/CFD/14/2012datedOctober04,2012
116
IftheapplicationisnonASBA
o broker shall bank the cheques with any of the branches identified by the
bankerstotheissue,alongwiththeelectronicscheduledownloadedfrom
theexchangesystem.
o BrokershallretainthephysicalapplicationformandsendittoRegistrarto
issue(RTA)after6months.
In case of ASBA application, the application form along with schedule which is
basicallyadocumentpreparedbythebankerslistingoutdetailsoftheapplication
receivedbythem,shouldbeforwardedtothebranchnamedforASBAbythebroker.
Thelocalbranchshallupdatetheschedulebasedonchequeclearance(nonASBA)
andfundblocking(ASBA)andforwardthescheduletothecontrollingbranch.
ControllingbranchshallinturnconsolidatetheschedulesandforwardittoRTA
AllotherprocessesatRTAforissueprocesswillremainthesame.
8.3TradingofMutualFundUnits
Theclientcaninvestindifferentmutualfundschemesonlineorthroughphone,availingof
the teleservices offered by the trading members. The trading members who are AMFI
RegistrationNumber(ARN)holdersandhavepassedtheNISMcertificationexaminationare
permitted to participate in the trading of the mutual funds units through the exchange
tradingplatform.Further,eligiblememberswouldhavetoregisterasdistributorwiththe
mutualfundcompany.Apartfrombrokers,mutualfunddistributorsregisteredwithAMFI
who are permitted by the stock exchanges can also participate in this process. Hence,
eligiblememberswouldbeabletoplaceordersonlyinrespectofMutualFundCompanies
where they have registered as distributor. These members/brokers have to apply to the
stockexchangeandcomplywiththevariousSEBIandtheExchangeregulationsasnotified
fromtimetotime.TheNSEandBSEhavethefollowingdesignatedtradingplatformsfor
mutualfundviz.,theMutualFundsServiceSystem(MFSS)andtheBSEStarMFrespectively.
Thefacilityisavailabletothestockbrokertosetupthemutualfundschemesonthemarket
watchscreen.ThestockbrokercansetuptheschemeindividuallyorthroughSecurityList.
Theschemessetupallowtheuserto:
ViewtheindicativeNAV(i.e.NAVofpreviousday)forthescheme.
Default the scheme descriptor while entering subscription/ redemption request
therebyreducingdataentry.
ViewschemedetailslikeISIN,limitsetc.bydoubleclickonthescheme.
Asset Management Companies (AMC) desirous of providing this alternate mechanism to

their potential customers shall enter into an agreement with the Exchange/Clearing
Corporation. AMC shall notify schemes which they wish to permit on the Mutual Fund
platform.
Thestockbrokershallnotbeallowedtoplaceanorderfortheclientifregistrationdetails
of the client are not maintained. The user can modify/ delete client registration already
117
maintainedsubjecttocertainrestrictions.Abulkuploadfacilityisalsoavailabletosetup
clientregistration.
Aclientisregisteredasanindividualclientinclientregistrationprocessdescribedabove.
However,depositoryaccountscanbemaintainedinjointaccounts.
Firstlythestockbrokerisrequiredtoregisteralljointholdersforthedepositoryaccountif
subscription/ redemption request is to be entered with depository settlement. Then the
stockbrokerisrequiredtomaintainDPmasterforsuchclients.Thestockbrokerisrequired
toprovidedepositoryIDandclientbeneficiaryIDalongwithclientcodes.Thesequencein
whichclientcodesareenteredshallbethesameasavailablefordepositoryIDandclient
beneficiaryIDcombination.
ThisonetimesetupofDPmasterismandatoryiftheuserwishestoentersubscription/
redemptionrequestfortheclientwithdepositorysettlement.
Thestockbrokercanrequestfollowingtypesofsubscription/redemptionrequests:
PhysicalSubscriptionFresh(firsttime)
PhysicalSubscriptionAdditional
DepositorySubscriptionFresh(firsttime)
DepositorySubscriptionAdditional
PhysicalRedemption
DepositoryRedemption
Thestockbrokercandeclareupfrontwhetherthesubscription/redemptionrequestwould
besettledinphysicalmodeordepositorymode.Thestockbrokercanrequestforfreshor
additionalsubscription.Foradditionalsubscriptioninphysicalmodethefolionumberwould
bemandatory.Thisfieldisnotapplicableforredemptionrequests.
IftheDPSettlementisindepositorymode,itismandatoryforthestockbrokertoenter
depositorydetails.TheusermustenterdepositoryIDandclientbeneficiaryIDavailablein
DPmaster.TheclientcodeslinkedtothecombinationarepickedupfromDPmasterand
relevant details for such clients are picked up from the client registration. If the DP
settlement is in physical mode, it is mandatory to enter the folio number for additional
subscriptionsandredemptionrequests.
Theuserisallowedtoplaceorderamountinmultiplesofrupees.Minimumamountsare
specifiedattheschemelevelforfreshandadditionalsubscription.Thesubscriptionorder
wouldberejectediftheorderamountisnotgreaterthanorequaltotheamountspecified.
Similarly, maximum amount is specified at the scheme level for physical redemption.
Physicalredemptionorderwouldberejectediftheorderamountisequaltoorgreaterthan
theamountspecified.Nosubscription/redemptionordershouldbeenteredwithamount
equal to or greater than Rs. 1 crore. For depository redemption order amount is not
applicable.
118
The user is allowed to place order quantity only for redemption requests. Maximum
quantityisspecifiedattheschemelevelforphysicalredemption.Physicalredemptionorder
wouldberejectediftheorderquantityisequaltoorgreaterthantheamountspecified.
Forphysicalsubscriptionandredemptionorderstheuserwouldentertheclientcodeand
modeofholding.ThemodeofholdingcanbeSingle(SI)/Joint(JO)/AnyoneorSurvivor
(AS). For depository subscription and redemption orders the client codes would be
defaultedfromthedepositorymasterforthegivenDPIDBeneficiaryIDcombination.The
stockbrokerwouldnotbeallowedtochangethedefaultclientcodes.
Fortheclientcodeenteredclientname,PANandKYCinformationshallbedisplayedfrom
Client Registration. The user would not be allowed to change this information. For
subscription request above Rs. 50,000/ KYC must be completed (Y) for all the clients
enteredfortheorder.
Followingadditionalfacilitiesareprovidedbythestockexchangestothebrokersalongwith
orderentry:
Thefacilitytosubmitthebulkordersusingofflineorderentryfacility.
Thefacilitytotakeonlinebackupsofordersenteredbytheuserfortheday.
Thefacilitytoprinttheconfirmationslipseitheronlineoroffline.
The facility is available to the stock brokers to view the outstanding orders in particular
scheme.Thisinformationisavailableonlyforthecurrentday.Subscriptionandredemption
orderswouldbepresentedseparately.Afacilityisavailabletomodifyorcancelparticular
orderdisplayedinthelist.Thisisavailableonlyduringthemarkethours.Theuserwould
notbeallowedtomodifysymbol,series,schemenameanddepositorysettlement.
Inthecaseofmutualfunddistributorswhoarenotstockbrokers,theywillbepermittedto
purchaseandredeemmutualfundsthroughthisplatformfortheirclients.However,the
payin and payout of funds and units will take place directly between the clearing
corporationandtheinvestor.
RiskManagement
The corporate managercanset thelimit on the total valueof orders that can be
enteredbythespecificbranchwithinthetradingmembersfirmbyspecifyingthe
branchordervaluelimit27.

27
TheCorporateManagerofthestockbrokeristheuserplacedatthehighestlevel.Suchausercanperform
allofferrelatedactivitiesandreceivethereportsforallbranchesofthetradingmember.Additionally,the
CorporateManagercandefinetheoffervaluelimitsforthebranchesandindividualdealersofhisfirm.The
Corporate Manager can modify his own offer or offers of all dealers and branch managers of his trading
memberfirm.
119
Thecorporatemanagerorbranchmanagercansetthedaylimitonthetotalvalue
oftheordersthatcanbeenteredbythespecificuserwithinthetradingmembers
firmbyspecifyingtheuserordervaluelimit28.
Thedealercansetquantity/amountlimitsforindividualordersenteredbyselfby
specifyingtheorderlimit.29
SettlementProcedure
Withrespecttofundssettlement,thepayinforfundsforsubscriptionshallbeonlythrough
thedesignatedbankaccountsofthestockexchangesandthesubscriptiontransactionsshall
besettledonaT+1basisasperthetimelineasspecifiedbytheclearingcorporationofthe
Exchanges. Payout of funds for redemption transactions shall be directly made to the
investorsfromtheRegistrarandTransferAgents(RTAs)forbothphysicalmodeaswellas
Dematmode.
SecuritiessettlementcanbedoneeitherthroughtheRTA(ifphysicalmode)orthroughthe
Depository(ifdematmode).Weherenowdiscussthetwomodesseparately.
SubscriptionPhysicalMode:
TDay Activities: Investor who chooses physical mode has to submit the following
documents/detailsalongwiththeclearfundstothetradingmember/brokerwhoiseligible
asaparticipanttotradeinmutualfundsontheExchangeplatform.
o Completedandsignedrespectiveschemeapplicationform.
o CopyofthePancardoffirstholderorthecopyofthePancardofeachindividual
holderincaseofjointinvestment.
o CopyoftheKYCacknowledgementform.
o Folionumberincasethesubscriptionisanadditionalpurchase.
Thetradingmember/brokerafterverifyingtheapplicationoftheinvestorforthemandatory
details which includes PAN details and KYC compliant acknowledgment shall enter the
subscription order in the trading system of the Exchange with the option of physical
settlement. For physical order, thefolio number is also capturedat the frontend of the
system.Oncetheorderiscreated,thesystemgeneratesauniqueconfirmationnumberfor
theorder.Theinvestorthenreceivesfromthetradingmember/brokeraconfirmationslip.
Thisslipserves asaproofoftransactiontillthetimetheinvestorreceives theallotment
detailsfromthetradingmember/broker.Inadditiontothis,theinvestoralsoreceivesa
statementofaccountfromtheRTAdirectly.Thebroker/tradingmemberneedstosubmit

28
TheBranchManageristheuserwhoisplacedundertheCorporateManager.Suchusercanperformand
viewBidrelatedactivitiesforalldealersunderthatbranch.TheBranchManagercanmodifyhisownofferor
offersofanydealerunderhisbranch.
29
Dealersareusersatthelowermostlevelofhierarchy.ADealercanperformandviewofferrelatedactivities
andinformationonlyforoneselfanddoesnothaveaccesstoinformationonotherdealersundereither,the
samebranchorotherbranches.ADealercanmodifyonlytheOffersenteredbyhim.Additionally,Syndicate
memberscanview,modifyandcancelbidsplacedbyothermembers.
120
thephysicaldocumentssuperscribingitwiththeuniqueconfirmationnumbertotheRTAor
AMCoffices.Incaseofanydiscrepancy,thestockexchangeinformsthetradingmembers.
Theclearingcorporationprovidestheparticipantswiththefundsobligationreportendof
thedayforallvalidtransactions.
T+1 Day Activities: The Clearing Corporation of the Exchange shall debit the designated
clearingbankaccountofthebroker/tradingmemberfortherequiredfundsobligationon
T+1 morning. In case of any shortage the concerned trading member / broker will be
providedanopportunitytoidentifytransactionsandprovidedetailsofthetransactionsfor
which payments have beenreceived and transactions for which payment have not been
received.
Thefundscollectedfromthebankaccountofthetradingmember/brokershallbecompared
withthedetailsprovidedbythetradingmember/brokeronthepaymentreceivedstatusas
per above. If the funds collected from the bank account of the trading member/broker
coversthedetailsofthepaymentsreceivedasprovidedbythetradingmember/broker,the
sameshallbefurtherprocessed.Whereverthefundscollectedfromthebankaccountfalls
shortoftheamountindicatedinthedetailsprovidedbythetradingmember/broker,the
detailsshallbeconsidereddefectiveandshallnotbefurtherprocessed.Insuchcases,the
funds collected, if any, shall be returned to the designated bank account of the trading
member/broker.
ThestockexchangewillnotifyRTAforallthedefectivetransactionsandrejectionsdueto
non payment of funds. The RTA will reverse such transactions for respective trading
member/brokerandtransactionsforothertradingmember/brokerwhohavefulfilledtheir
fundsobligationswillbeprocessedbytheRTA.TheRTAwillintimatetheallotmentdetails
for the accepted transactions including folio numbers. Allotment information shall be
providedtothetradingmember/brokersothattheycanprovideallotmentdetailstothe
investor.
RedemptionPhysicalMode:
In case of redemption of MF units in physical mode the procedure followed under

SubscriptionPhysicalmodeforTdayactivitiesremainthesame.OnT+1daytheRTAwill
carryouttheredemptionprocessingatitsendandprovidefinalredemptioninformationto
theExchange.Thefilewillcontaininformationaboutvalidandrejectedredemptionorders.
For successful redemptions, the file will contain the redemption NAV, units redeemed,
redemption amount, securities transaction tax (STT) (if any). The payouts however will
happenaspertheschemeprovisionsandwithinthetimelinesasperSEBIregulationsas
applicablefromtimetotime.Redemptioninformationshallbeprovidedtotheparticipants
throughfilessothattheycanprovideredemptiondetailstotheinvestor.Theredemption
proceeds will be directly sent by RTA throughappropriate payment mode such as direct
credit,nationalelectronicfundstransfer(NEFT)orchequeasdecidedbyAMCfromtimeto
time,asperthebankaccountdetailsrecordedwiththeRTA.
121
It would be the primary responsibility of the trading member/broker to ensure

completeness of the documents including ensuring filling up of the all key fields by the
investorbeforeacceptingthesameforprocessing.Itwouldalsotheresponsibilityofthe
tradingmember/brokertoensureidentityandauthenticationofsignatureaffixedbasedon
theoriginalPANshownatthetimeofacceptingtheredemptionapplicationform.Acopyof
thePANwillbesentalongwiththeredemptionrequest.Incaseofjointholding,thiswillbe
ensuredbythetradingmember/brokerforallholders.Incasethesubscriptionapplication
formhasnotbeenreachedtotheRTA,theredemptionrequestforsuchsubscriptionwill
notbetakenbytheRTAandshallberejected.
SubscriptionDepositoryMode:
TDayActivities:Investorwhochoosesdepositorymodecanplaceorderforsubscriptionas
currently followed for secondary market activities. The investor should provide their
depositoryaccountdetailsalongwithPANdetailstothetradingmembers/brokers.When
investor desires to hold units in dematerialised form, KYC performed by DP will be
consideredcompliantwithapplicablerequirementsspecifiedinthisregardintermsofSEBI
circular ISD/AML/CIR1/2008. This is in accordance with SEBI circular no SEBI/IMD/CIR
No.11/183204/2009datedNovember13,2009.
Tradingmember/brokershallenterthesubscriptionorderonthestockexchangesfront
endsystemwiththeoptionofDepositorysettlement.TheExchangesystemwillidentify
eachschemeuniquelyintermsofSymbol&Series.Subscriptionorderswouldbecreatedin
termsofamount.Oncetheorderiscreated,systemwillgenerateauniqueconfirmation
number for the order. The investor will receive from the trading member/broker a
confirmationslip(whichwillcontainuniqueconfirmationnumberanddateandtimestamp
of order entry) generated from the stock exchange MF system. Till the trading
member/brokerprovideallotmentdetailstotheinvestor,theorderconfirmationslipwould
be the proof of the transaction. In the case of demat mode, demat statement given by
depositoryparticipantwouldbedeemedtobeadequatecomplianceoftherequirementof
Statement of Account as specified in SEBI circular number SEBI/IMD/CIR
No.11/183204/2009.
ThestockexchangevalidatesthesetransactionsintheeveningoftheTdayeveningwith
theRTAaswellasthedepositoryandincaseofanydiscrepancy,thetransactiondetailswill
be informed to the trading member/broker on the same day evening. The Clearing
Corporationshallalsoprovidethe tradingmember/brokerwithfundsobligationreportat
theendofdayforallthevalidtransactions.
T+1 Day Activities: The Clearing Corporation of the Exchange shall debit the designated
clearingbankaccountofthetradingmembers/brokersfortherequiredfundsobligationon
T+1 morning. In case of any shortage, the concerned trading member/broker will be
providedanopportunitytoidentifytransactionsandprovidedetailsofthetransactionsfor
which payments have beenreceived and transactions for which payment have not been
received.Thefundscollectedfromthebankaccountofthetradingmember/brokershall
be compared with the details provided by the trading member /broker on the payment
122
receivedstatusasperabove.Ifthefundscollectedfromthebankaccountofthetrading
member/broker covers the details of the payments received as provided by the trading
member/broker,thesameshallbefurtherprocessed.Whereverthefundscollectedfrom
thebankaccountfallsshortoftheamountindicatedinthedetailsprovidedbythetrading
member/broker, the details shall be considered defective and shall not be further
processed.Insuchcases,thefundscollected,ifany,shallbereturnedtothedesignated
bankaccountofthetradingmember/broker.
TheExchangewillnotifyRTAforallsuchdefectivetransactionsandrejectionsduetonon
paymentoffunds.TheRTAwillreversesuchtransactionsforrespectivetradingmember
/brokerandtransactionsforothertradingmember/brokerwhohavefulfilledtheirfunds
obligationswillbeprocessedbytheRTA.TheRTAwillintimatetheallotmentdetailsforthe
acceptedtransactions.
Allotmentinformationshallbeprovidedtothetradingmember/brokersothattheycan
provideallotmentdetailstotheinvestor.Inthecaseofdemattransaction,dematstatement
given by depository participant shall be considered as fulfilling the requirement of
StatementofAccount.RTAwillalsocreditthedepositoryaccountoftheinvestordirectlyat
theendofdaythroughcreditcorporateactionprocess.
RedemptionDepositoryMode:
TDayActivities:TheTdayactivitiesremainthesameasunderSubscriptionDepository
modefortheinvestorswhochoosetoredeemtheirMFunitsthroughthestockexchange
tradingroute.ForT+1dayactivity,theRTAwillcarryouttheredemptionprocessingatits
end and provide final redemption information to the Exchange. The file will contain
informationaboutvalidandrejectedredemptionorders.Forsuccessfulredemptions,the
filewillcontaintheredemptionNAV,unitsredeemed,redemptionamount,STT(ifany).The
payoutshoweverwillhappenaspertheschemeprovisionsandwithinthetimelinesasper
the SEBI regulations as applicable from time to time. Redemption information shall be
providedtothetradingmembersthroughfilessothattheycanprovideredemptiondetails
to the investor. The redemption proceeds will then be directly sent by RTA through
appropriatepaymentmodesuchasdirectcredit,NEFTorchequeasdecidedbytheAMC
fromtimetotime,asperthebankaccountdetailsrecordedwiththedepository.Theunits
willbeextinguishedbytheRTAfromthebeneficiaryaccountoftheAMC(s).
8.4PortfolioManagementService
ManystockbrokersalsoofferPortfolioManagementServices(PMS)totheirclients.Forthis,
aPMSlicensehastobeobtainedbythem.ThisisnormallyofferedtotheHighNetworth
Individuals(HNIs).Inthiskindofservice,thestockbrokermakestheinvestmentdecisionon
behalfoftheclientandmanageshisportfolio.Theportfoliomanagerdecidesthemixof
securitiesthattheinvestorwillinvestin.Portfolioisupdatedwiththenewstocksreplacing
existingstocksasandwhenrequiredtooptimizeperformance.
123
Apart from portfolio management, the stock brokers also offer advice on managing the
clients portfolio depending upon the clients needs. Based on this advice, the client can
maketheinvestmentdecisions.
AsperSEBI,anypersonwhopursuanttoacontractorarrangementwithaclient,advisesor
directsorundertakesonbehalfoftheclient(whetherasadiscretionaryportfoliomanager
orotherwise)themanagementoradministrationofaportfolioofsecuritiesorthefundsof
theclient,asthecasemaybeisaportfoliomanager.
Portfolio manager can be discretionary or nondiscretionary. The discretionary portfolio

manager individually and independently manages the funds of each client in accordance
withtheneedsoftheclientinamannerwhichdoesnotpartakecharacterofamutualfund,
whereasthenondiscretionaryportfoliomanagermanagesthefundsinaccordancewiththe
directionsoftheclient.
Anapplicantforregistrationorrenewalofregistrationasaportfoliomanagerisrequiredto
payanonrefundableapplicationfeeofRs.1,00,000(Rupeesonelakhonly)toSEBI.Every
portfoliomanagerisrequiredtopayasumofRs.10lakhasregistrationfeesatthetimeof
grantofcertificateofregistrationbySEBI.
SEBI takes into account all matters which it deems relevant to the activities relating to
portfoliomanagement.Theapplicanthastobeabodycorporateandmusthavenecessary
infrastructure like adequate office space, equipments and the manpower to effectively
dischargetheactivitiesofaportfoliomanager.
Theapplicantshouldhaveinitsemploymentminimumoftwopersonswho,betweenthem,
haveatleastfiveyearsofexperienceasportfoliomanagerorstockbrokerorinvestment
managerorintheareasrelatedtofundmanagement.Theapplicantalsohastofulfillthe
capitaladequacyrequirements,etc.
Theprincipalofficeroftheportfoliomanageristohave:
(i)aprofessionalqualificationinfinance,law,accountancyorbusinessmanagement
from a university or aninstitutionrecognised by the Central Government or any
StateGovernmentoraforeignuniversity;
OR
(ii)anexperienceofatleasttenyearsinrelatedactivitiesinthesecuritiesmarket
includinginaportfoliomanager,stockbrokerorasafundmanager
TheportfoliomanagerisrequiredtohaveanetworthofnotlessthanRs.2crores.Every
portfoliomanagerwhohastotalassetsundermanagementofvaluemorethanRs.500crore
shall appoint a custodian. This condition will not be applicable to portfolio managers
offeringpurelyadvisoryservices.
124
Theportfoliomanager,beforetakingupanassignmentofmanagementoffundsorportfolio
of securities on behalf of the client, enters into an agreement in writing with the client
clearlydefiningtheinterserelationshipandsettingouttheirmutualrights,liabilitiesand
obligationsrelating to themanagementoffunds orportfolio ofsecuritiescontainingthe
detailsasspecifiedinScheduleIVoftheSEBI(PortfolioManagers)Regulations,1993.
TheSEBI(PortfolioManagers)Regulations,1993,havenotprescribedanyscaleoffeetobe
chargedbytheportfoliomanagertoitsclients.However,theregulationsprovidethatthe
portfolio manager shall charge a fee as per the agreement with the client for rendering
portfoliomanagementservices.Thefeesochargedmaybeafixedamountorareturnbased
feeoracombinationofboth.Theportfoliomanagershalltakespecificpriorpermissionfrom
the client for charging such fees for each activity for which service is rendered by the
portfoliomanagerdirectlyorindirectly(wheresuchserviceisoutsourced).
Theportfoliomanagershallnotacceptfromtheclients,fundsorsecuritiesworthlessthan
Rs.25 lakh only. A portfolio manager is permitted to invest in derivatives, including
transactions for the purpose of hedging and portfolio rebalancing, through a recognized
stockexchange.However,leveragingofportfolioisnotpermittedinrespectofinvestment
inderivatives.Thetotalexposureoftheportfolioclientinderivativesshouldnotexceedhis
portfolio funds placed with the portfolio manager and the portfolio manager should
basicallyinvestandnotborrowonbehalfofhisclients.
TheportfoliomanagerprovidestotheclienttheDisclosureDocumentwhichcontainsthe
following:
thequantumandmannerofpaymentoffeespayablebytheclientforeachactivity
forwhichserviceisrenderedbytheportfoliomanagerdirectlyorindirectly(where
suchserviceisoutsourced),
portfoliorisks,
complete disclosures in respect of transactions with related parties as per the

accountingstandardsspecifiedbytheInstituteofCharteredAccountantsofIndiain
thisregard,
theperformanceoftheportfoliomanagerand
the audited financial statements of the portfolio manager for the immediately
precedingthreeyears.
ThebackofficemusthaveclearagreementswithclientstowhomPMSisbeingoffered.The
backofficesystemmusthaveprovisionfordistinguishingtheaccountsofsuchclientsand
thetransactionsmadeontheirbehalfmustbeclearlyearmarkedassuch.Thefeesonsuch
accountsmustbedistinguishedandaccountedforseparately.
125
8.5ResearchReports
Stockbrokersalsobringoutregularresearchreportsforusebytheirclients.Thesecould
include:
FundamentalResearch
StockResearch
Daily/weekly/fortnightly/monthlynewsletters
SpecialReportstocatertoneedsofsomeinvestors
SectorReports
Research reports normally educate investors about the industry trends, sectors, which
companyscripstobuy,sellorholdetc.Thesereportsareaimedathelpingtheinvestormake
informedinvestmentdecisions.
Sectorresearchincludesdetailsonhowanindustryisfaring,whethercurrentpoliciesfavour
the industry, etc., so that the choice of investing in a particular industry rests with the
investor. Further, these advice and recommendations can be obtained as SMS on to the
mobilephone.Soitismoreonlinenow.
SEBI however, has issued stringent rules and regulations pertaining to research based
advisoryservicesprovidedbythebrokinghouses.
8.6DepositoryServices
Thebrokersalsoprovidedepositoryservicestoinvestorsamongstotherservices.Toprovide
these services, the broker or the trading member has to get registered as a depository
participantofadepositoryaspertheSEBIAct1992andtheDepositoriesActof1996.The
relationship between the DPs and the depositories is governed by an agreement made
betweenthetwoundertheDepositoriesAct.Theformoftheagreementisspecifiedinthe
byelawsofthedepository.
UndertheDepositoriesAct,1996,aDPisdescribedasanagentofthedepository.TheSEBI
(Depository&Participants) Regulations, 1996andthebyelawsofdepositoriesprescribe
theeligibilitycriteriatobecomeaDP.
OnsatisfyingtheconditionsaslaiddownbytheSEBIandthedepositories,thecertificateof
registrationisgiventotheDPforcommencementofDPrelatedactivities.Themainactivity
being the settlement and transfer of securities from one beneficiary account to another
pursuant a trading activity of an investor. There are other services also which a DP can
engageintosuchas:
Dematerialisation:Dematerialisationistheprocessofconvertingsecuritiesheldin
physicalformintoholdingsinbookentryform.
126
TransferandRegistration:Atransferisthelegalchangeofownershipofasecurityin
therecordsoftheissuer.Foreffectingatransfer,certainlegalstepshavetobetaken
likeendorsement,executionofatransferinstrumentandpaymentofstampduty,
whichtheDPhelpstheinvestorsin.
CorporateActions:DPshandlecorporateactionsonbehalfoftheirdepositories.In
thefirstcase,itmerelyprovidesinformationtotheissueraboutthepersonsentitled
toreceivecorporatebenefits.Intheothercase,theDPsondepositoryinstructions
takestheresponsibilityofdistributionofcorporatebenefits.
8.7MarginTrading
Margin Trading is trading with borrowed funds/securities. It is essentially a leveraging
mechanismwhichenablesinvestorstotakeexposureinthemarketoverandabovewhatis
possible with their own resources. SEBI has been prescribing eligibility conditions and
proceduraldetailsforallowingthemargintradingfacilityfromtimetotime.
OnlycorporatebrokerswithnetworthofatleastRs.3croreareeligibleforprovidingmargin
tradingfacilitytotheirclientssubjecttotheirenteringintoanagreement to thateffect.
Beforeprovidingmargintradingfacilitytoaclient,thememberandtheclienthavebeen
mandatedtosignanagreementforthispurposeintheformatspecifiedbySEBI.Ithasalso
beenspecifiedthattheclientshallnotavailthefacilityfrommorethanonebrokeratany
time.
ThefacilityofmargintradingisavailableforGroup1securitiesandthosesecuritieswhich
areofferedintheinitialpublicoffersandmeettheconditionsforinclusioninthederivatives
segmentofthestockexchanges.
Forprovidingthemargintradingfacility,abrokermayusehisownfundsorborrowfrom
scheduled commercial banks or NBFCs regulated by the RBI. A broker is not allowed to
borrowfundsfromanyothersource.
The"totalexposure"ofthebrokertowardsthemargintradingfacilityshouldnotexceed
theborrowedfundsand50percentofhis"networth".Whileprovidingthemargintrading
facility,thebrokerhastoensurethattheexposuretoasingleclientdoesnotexceed10
percentofthe"totalexposure"ofthebroker.
Initial margin has been prescribed as 50 percent and the maintenance margin has been
prescribed as 40 percent. When the balance deposit in the clients margin account falls
below the required maintenance margin, the broker shall promptly make margin calls.
However,nofurtherexposurecanbegrantedtotheclientonthebasisofanyincreasein
themarketvalueofthesecurities.
The Exchange/broker shall have the discretion to increase the margins (as mentioned
above)andinsuchacase,themargincallshallbemade,asandwhenrequired.
127
8.7.1Functionsandimportanceofthemargindepartment
SEBI has been prescribing eligibility conditions and procedural details for allowing the
margintradingfacilityfromtimetotime.Thefunctionofamargindepartment,whichis
criticaltoastockbroker,istoensurethatthemargintradingofeachandeveryclientisin
linewiththeseconditionsandprocedure.Themargindepartmentmustensurethatallthe
proceduresgiveninthefollowingparagraphsarecompliedwith.
Before providing margin trading facility to a client, the broker and the client have been
mandatedtosignanagreementforthispurposeintheformatspecifiedbySEBI.Ithasalso
beenspecifiedthattheclientshallnotavailthefacilityfrommorethanonebrokeratany
time.
Thebrokermayliquidatethesecuritiesiftheclientfailstomeetthemargincallmadeby
thebrokerorfailstodepositthechequesonthedayfollowingthedayonwhichthemargin
callhasbeenmadeorwherethechequedepositedbytheclienthasbeendishonoured.
Thebrokermayalsoliquidatethesecuritiesincasetheclientsdepositinthemarginaccount
(afteradjustmentformarktomarketlosses)fallsto30percentorlessofthelatestmarket
valueofthesecurities,intheinterregnumbetweenmakingofthemargincallandreceiptof
paymentfromtheclient.However,thebrokershallnotliquidateoruseinanymannerthe
securitiesoftheclientinanysituationotherthantheonesmentionedabove.
In addition, a broker has to disclose to the stock exchange details on gross exposure
includingnameoftheclient,uniqueidentificationnumberundertheSEBI(CentralDatabase
ofMarketParticipants)Regulations,2003,andnameofthescrip.
Ifthebrokerhasborrowedfundsforthepurposeofprovidingmargintradingfacility,the
nameofthelenderandtheamountborrowedshouldbedisclosedlatestbythenextday.
The stock exchange, in turn, has to disclose the scripwise gross outstanding in margin
accountswithallbrokerstothemarket.Suchdisclosureregardingmargintradingdoneon
anydayshallbemadeavailableafterthetradinghoursonthefollowingday.
The arbitration mechanism of the exchange would not be available for settlement of
disputes,ifany,betweentheclientandbroker,arisingoutofthemargintradingfacility.
However,alltransactionsdoneonthestockexchange,whethernormalorthroughmargin
tradingfacility,shallbecoveredunderthearbitrationmechanismofthestockexchange.
8.8 Internet Based Trading (IBT) & Securities Trading Using Wireless Technology
(StWT)
128
Investormayalsoplaceorderusinganinternettradingterminalormobilephones.Orders
placedthroughtheIBTsystemgothroughautomatedriskmanagementvalidations,before
being transmitted to the Stock Exchange systems. Once the order is accepted/trade
executed,theinvestorgetsnotificationontheirIBTterminals.30
Thecorerequirementsareasfollows:
StockBrokerswishingtoofferIBTneedtoseekstockexchangeapprovalandshould
haveaminimumnetworthofRs.50lakhs.
ThebrokershallcapturetheIP(InternetProtocol)address(fromwheretheorders
areoriginating)
Thebrokerssystemshouldhavebuiltinhighsystemavailabilitytoaddressanysingle
pointfailure.
Thereshouldbesecureendtoendencryptionforalldatatransmissionbetweenthe
clientandthebrokerthroughaSecureStandardizedProtocol.
A procedure of mutual authentication between the client and the broker server
shouldbeimplemented.
The broker system should have adequate safety features to ensure it is not
susceptibletointernal/externalattacks.
IncaseoffailureofIBT/STWT,thealternatechannelofcommunicationshallhave
adequatecapabilitiesforclientidentificationandauthentication.
Incaseofnoactivitybytheclient,thesystemshouldprovideforautomatictrading
sessionlogout
ThefollowingsecurityfeaturesaremandatoryforallInternetbasedtradingsystems:
a) UserId
b) FirstLevelpassword
c) Automaticexpiryofpasswordsattheendofareasonableduration.Reinitialize
accessonenteringfreshpasswords
d) Alltransactionlogswithproperauditfacilitiestobemaintainedinthesystem.
e) SecuredSocketLevelSecurityforserveraccessthroughInternet
f) SuitableFirewallsbetweentradingsetupdirectlyconnectedtoanExchange
tradingsystemandtheInternettradingsetup.

30
SEBIvidescircularno:SMDRP/Policy/CIR06/2000datedJanuary31,2000hadspecifiedtherulesrelatingtoIBTand
videcircularno:CIR/MRD/DP/25/2010datedAugust27,2010forSTWT.
129
ReviewQuestions
1. ________isaprocessbywhichacompanyofferssharesforsaletopublicforthefirsttime.
(a) FPO
(b) IPO
(c) PrivatePlacement
(d) QIP
Ans:(b)
2. ASBAistheacronymfor________________.
(a) ApplicationSupportedbyBlockedAmount
(b) ApplyingSponsoringBrokersAmounts
(c) ApplicationSupportsforBrokersAmount
Ans:(a)
3. Thefacilityformodificationofmutualfundorderdoesnotinclude_______________
(a) Schemename
(b) Depositorysettlement
(c) Symbolandseries
(d) Alloftheabove
Ans:(d)
130
ABBREVIATIONS
AA
ADRs
AMC
AMFI
AML
ARN
ASBA
BG
BOISL
BSE
CDD
CDs
CDSL
CSC
DEA
DI
DPM
DPs
ECBs
ECN
EFT
ETFs
FATF
FCCBs
FIIs
FIUIND
FPO
GDRs
GOI
GSec
HNIs
ID
INR
IPL
IPO
ISIN
IT
KYC
MCA
MCX
AdjudicatingAuthority
AmericanDepositoryReceipts
AssetManagementCompany
AssociationofMutualFundsofIndia
AntiMoneyLaundering
AMFIRegistrationNumber
ApplicationSupportedbyBlockedAmount
BankGuarantee
BankofIndiaShareholdingLimited
TheStockExchange,Mumbai
CustomerDueDiligence
CertificatesofDeposit
CentralDepositoryServicesLimited
ClientsofSpecialCategory
DepartmentofEconomicAffairs
DeliveryInstruction
DepositoryParticipantManagement
DepositoryParticipants
ExternalCommercialBorrowings
ElectronicContractNote
ElectronicFundTransfer
ExchangeTradedFunds
FinancialActionTaskForce
ForeignCurrencyConvertibleBonds
ForeignInstitutionalInvestors
FinancialIntelligenceUnitIndia
FollowonPublicOffering
GlobalDepositoryReceipts
GovernmentofIndia
GovernmentSecurities
HighNetworthIndividuals
Identification
IndianNationalRupees
IndianPenalCode
InitialPublicOffering
InternationalSecuritiesIdentificationNumber
InformationTechnology
KnowYourCustomer
MinistryofCorporateAffairs
MultiCommodityExchangeofIndia
131
MF
MFSS
MTM
NAV
NBFCs
NCDs
NEFT
NSCCL
NSDL
NSE
OTC
PAN
PCM
PML
PMLA
PMS
PSUs
RBI
RTA
SC(R)R
SCM
SCRA
SCSBs
SEBI
SI
SPAN
SPNs
SROs
STT
T+1Day
T+2Day
T+3Day
TBills
TCM
TDay
TGF
USD
VaR
MutualFund
MutualFundServiceSystem
MarkToMarket
NetAssetValue
NonBankingFinancialCompanies
NonConvertibleDebentures
NationalElectronicFundTransfer
NationalSecuritiesClearingCorporationLimited
NationalSecuritiesDepositoryLimited
NationalStockExchange
OverTheCounter
PermanentAccountNumber
ProfessionalClearingMembers
PreventionofMoneyLaundering
PreventionofMoneyLaunderingAct,2002
PortfolioManagementServices
PublicSectorUndertakings
ReserveBankofIndia
RegistrarandTransferAgent
SecuritiesContracts(Regulation)Rules,1957
SelfClearingMember
SecuritiesContracts(Regulation)Act,1956
SelfCertifiedSyndicateBanks
SecuritiesandExchangeBoardofIndia
StandingInstruction
StandardPortfolioAnalysisofRisk
SecuredPremiumNotes
SelfRegulatoryOrganisations
SecuritiesTransactionTax
Trade+1Day
Trade+2Day
Trade+3Day
TreasuryBills
TradingCumClearingMember
TradeDay
TradeGuaranteeFund
U.S.Dollars
ValueAtRisk
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NISM-Series-VII-Securities Operations and Risk Management-July 2015

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NISM-Series-VII-Securities Operations and Risk Management-July 2015

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NISM Certification on Securities Operations and Risk Management Workbook

National Institute of Securities Markets

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

The examination seeks to create a common minimum knowledge benchmark as the

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

shortterm debt securities and investments, such as bankers acceptances, negotiable

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

Government Securities Market: The Government needs enormous amount of money to

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

PayOut is a process where Clearing House/ Corporation pays money or delivers

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

Besides providing custodial facilities and dematerialisation, depositories offer various

NISM Certification on Securities Operations and Risk Management Workbook

Insurance Regulatory and Development Authority of India (IRDAI) regulates the

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

As a condition of recognition, a Stock Exchange complies with conditions prescribed by

NISM Certification on Securities Operations and Risk Management Workbook

The Prevention of MoneyLaundering Act, 2002 (PMLA), is an act to prevent money

NISM Certification on Securities Operations and Risk Management Workbook

Section 6 of the PMLA confers powers on the Central Government to appoint an

According to section 9, in the event of an order of confiscation being made by an

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

SEBI(Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

o Identity card /document with address. Issued by any of the following:

Unique Identification Number (UID) (Aadhaar)/Passport/Voter ID

Identity card /documents with applicants photo, issued by any of the

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook

NISM Certification on Securities Operations and Risk Management Workbook