FAQs on Secondary Market
Disclaimer: These FAQs are
not the interpretation of law but provide only a simplistic explanation of
terms / concepts related to Secondary market. All information has been updated
till September 30, 2008. For full particulars of laws governing the secondary
market, please refer to the Acts/Regulations/Guidelines/Circulars appearing
under the Legal Framework Section.
Some of the Questions for FAQs may be as follows:
1. Understanding “Financial Markets”
2. Understanding “Role of SEBI in the secondary market”
3. Who is a broker and sub-broker?
4. What is MAPIN?
5. What is margin trading facility?
6. What is securities lending and borrowing scheme?
Understanding
Financial Markets
1. What are the various types of financial markets?
The financial
markets can broadly be divided into money and capital market.
Money Market: Money market is
a market for debt securities that pay off in the short term usually less than
one year, for example the market for 90-days treasury bills. This market
encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial
papers, bankers acceptance, certificates of deposits, etc.
Capital Market: Capital market
is a market for long-term debt and equity shares. In this market, the capital
funds comprising of both equity and debt are issued and traded. This also
includes private placement sources of debt and equity as well as organized
markets like stock exchanges. Capital market can be further divided into
primary and secondary markets.
2. What is meant by Secondary Market?
Secondary Market
refers to a market where securities are traded after being initially offered to
the public in the primary market and/or listed on the Stock Exchange. Majority
of the trading is done in the secondary market. Secondary market comprises of
equity markets and the debt markets.
For the general
investor, the secondary market provides an efficient platform for trading of
his securities. For the management of the company, Secondary equity markets
serve as a monitoring and control conduit—by facilitating value-enhancing
control activities, enabling implementation of incentive-based management
contracts, and aggregating information (via price discovery) that guides management
decisions.
3. What is the
difference between the primary market and the secondary market?
In the primary
market, securities are offered to public for subscription for the purpose of
raising capital or fund. Secondary market is an equity trading avenue in which
already existing/pre- issued securities are traded amongst investors. Secondary
market could be either auction or dealer market. While stock exchange is the
part of an auction market, Over-the-Counter (OTC) is a part of the dealer
market.
SEBI
and its Role in the Secondary Market
4. What is SEBI and what is its role?
The SEBI is the
regulatory authority established under Section 3 of SEBI Act 1992 to protect
the interests of the investors in securities and to promote the development of,
and to regulate, the securities market and for matters connected therewith and
incidental thereto.
5. What are the various departments of SEBI regulating
trading in the secondary market?
The following
departments of SEBI take care of the activities in the secondary market.
|
Sr.No. |
Name of the Department |
Major Activities |
|
1. |
Market Intermediaries
Registration and Supervision department (MIRSD) |
Registration, supervision,
compliance monitoring and inspections of all market intermediaries in respect
of all segments of the markets viz. equity, equity derivatives, debt and debt
related derivatives. |
|
2. |
Market Regulation
Department (MRD) |
Formulating new policies
and supervising the functioning and operations (except relating to
derivatives) of securities exchanges, their subsidiaries, and market
institutions such as Clearing and settlement organizations and Depositories
(Collectively referred to as ‘Market SROs’.)
|
|
3. |
Derivatives and New
Products Departments (DNPD) |
Supervising trading at
derivatives segments of stock exchanges, introducing new products to be
traded, and consequent policy changes |
Products
available in the Secondary Market
6. What are the products dealt
in the secondary markets?
Following are the
main financial products/instruments dealt in the secondary market:
Equity: The ownership interest in a company of
holders of its common and preferred stock. The various kinds of equity shares
are as follows:-
Equity Shares:
An equity share,
commonly referred to as ordinary share also represents the form of fractional
ownership in which a shareholder, as a fractional owner, undertakes the maximum
entrepreneurial risk associated with a business venture. The holders of such
shares are members of the company and have voting rights.
Ø
Zero Coupon Bond:
Bond issued at a discount and repaid at a face value. No periodic
interest is paid. The difference between the issue price and redemption price
represents the return to the holder. The buyer of these bonds receives only one
payment, at the maturity of the bond.
Ø
Convertible Bond: A bond giving the investor the option
to convert the bond into equity at a fixed conversion price.
7. What are the regulatory requirements specified by SEBI
for corporate debt securities?
The term Corporate Bonds referred here includes all
debt securities issued by institutions such as Banks, Public Sector
Undertakings, Municipal Corporations, bodies corporate and companies having a
tenure of more than 365 days. Such an issue of bonds, if offered to the public
shall be required to comply with the SEBI (Disclosure and Investor Protection
Guidelines), 2000. Also, a private placement of corporate bonds made by a
listed company shall be required to comply with provisions contained in SEBI
Circulars in this regard.
The SEBI Circulars dated September 30, 2003 and
December 22, 2003 have laid out norms pertaining to the disclosure norms on
issuance of such securities, which include compliance with Chapter VI of the
SEBI (Disclosure and Investor Protection) Guidelines, 2000, Companies Act,
1956, listing agreement for debentures with the stock exchanges, rating to be
obtained from a Credit Rating Agency registered with SEBI, requirement for
appointing a debenture trustee registered with SEBI, mandatory trading in
dematerialized form, etc.
In order to develop an exchange traded market for
corporate bonds SEBI vide circulars dated December 12, 2006 and March 01, 2007
has authorized BSE and NSE to set up and maintain corporate bond reporting
platforms to capture all information related to trading in corporate bonds as
accurately and as close to execution as possible. Subsequently, FIMMDA has also
been permitted to operate a reporting platform. As per the circulars, all
issuers, intermediaries and contracting parties are granted access to the
reporting platform for the purpose and transactions shall be reported within 30
minutes of closing the deal. The data reported on the platform is disseminated
on websites of BSE, NSE and FIMMDA.
As a second phase of development, SEBI vide Circular
dated April 13, 2007 has permitted BSE and NSE to have in place corporate bond
trading platforms to enable efficient price discovery and reliable clearing and
settlement in a gradual manner. To begin with, BSE and NSE have launched an
order driven trade matching platform which retains essential features of OTC
market where trades are executed through brokers. OTC trades however continue
to be reported on the exchange reporting platforms. In order to encourage wider
participation, the lot size for trading in bonds has been reduced to Rs.1lakh.
Subsequently BSE and NSE may move towards anonymous order matching with
clearing and settlement.
.
Role of Broker and Sub-broker in the Secondary
Market
8. Whom
should I contact for my Stock Market related transactions?
You can contact a
broker or a sub broker registered with SEBI for carrying out your transactions
pertaining to the capital market.
9. Who is a broker?
A broker is a
member of a recognized stock exchange, who is permitted to do trades on the
screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned
exchange and is registered with SEBI.
10.
Who is a sub broker?
A sub broker is a
person who is registered with SEBI as such and is affiliated to a member of a
recognized stock exchange.
11.
How do I know if the broker or
sub broker is registered?
You can confirm it
by verifying the registration certificate issued by SEBI. A broker's registration number begins with
the letters "INB" and that of a sub broker with the letters
“INS". For the brokers of derivatives segment, the registration number
begins with the letters “INF”. There is no sub-broker in the derivatives
segment.
12. Am I required to
sign any agreement with the broker or sub-broker?
Yes. For the
purpose of engaging a broker to execute trades on your behalf from time to time
and furnish details relating to yourself for enabling the broker to maintain
client registration form you have to sign the “Member - Client agreement” if
you are dealing directly with a broker. In case you are dealing through a
sub-broker then you have to sign a ”Broker - Sub
broker - Client Tripartite Agreement”. Model Tripartite Agreement between
Broker-Sub broker and Clients is applicable only for the cash segment. The
Model Agreement has to be executed on the non-judicial stamp paper. The
Agreement contains clauses defining the rights and responsibility of Client
vis-à-vis broker/ sub broker. The documents prescribed are model formats. The
stock exchanges/stock broker may incorporate any additional clauses in these
documents provided these are not in conflict with any of the clauses in the
model document, as also the Rules, Regulations, Articles, Byelaws, circulars,
directives and guidelines.
13.
What is Member –Client
Agreement Form?
This form is an
agreement entered between client and broker in the presence of witness where
the client agrees (is desirous) to trade/invest in the securities listed on the
concerned Exchange through the broker
after being satisfied of brokers capabilities to deal in securities. The
member, on the other hand agrees to be satisfied by the genuineness and
financial soundness of the client and making client aware of his (broker’s)
liability for the business to be conducted.
14. What kind of
details do I have to provide in Client Registration form?
The brokers have
to maintain a database of their clients, for which you have to fill client
registration form. In case of individual client registration, you have to
broadly provide following information:
·
Permanent Account Number (PAN), which has been made
mandatory for all the investors participating in the securities market.
For proof of
address (any one of the following):
Each client has to
use one registration form. In case of joint names /family members, a separate
form has to be submitted for each person.
In case of
Corporate Client, following information has to be provided:
·
Name, address of the Company/Firm
15. What is meant by Unique
Client Code?
In order to facilitate maintaining database of their clients and to
strengthen the know your client (KYC) norms; all brokers have been mandated to
use unique client code linked to the PAN details of the respective client which
will act as an exclusive identification for the client.
16.
What is MAPIN?
MAPIN
(Market Participant Identification Number) is the Market Participants and
Investors Integrated Database. The SEBI (Central Database of Market
Participants) Regulations, 2003 were notified on November 20, 2003 under which,
all the participants in the Indian Securities Market viz., SEBI registered
intermediaries, listed companies and their associates and the investors were
required to obtain a Unique Identification Number
(UIN) in order to enable the regulator to establish the identity of person(s).
In
the light of SEBI’s order of making PAN
the sole identification number for all participants transacting in the
securities market, irrespective of the amount of transaction, it has
been decided to discontinue with the requirement of Unique Identification
Number (UIN) under the SEBI (Central Database of market Participants
Regulations), 2005 (MAPIN regulations)/circulars. Accordingly, acceptance of MAPIN card as one of the documents for the
purpose of Proof of Identity (POI) has been withdrawn.
17. What is a risk disclosure document?
In order to
acquaint the investors in the markets of the various risks involved in trading
in the stock market, the members of the exchange have been required to sign a
risk disclosure document with their clients, informing them of the various
risks like risk of volatility, risks of lower liquidity, risks of higher
spreads, risks of new announcements, risks of rumours etc.
18. How do I place my orders with
the broker or sub broker?
You can either go
to the broker’s / sub broker’s office or place an order over the phone / internet
or as defined in the Model Agreement given above.
19.
How do I know whether my
order is placed?
The Stock
Exchanges assign a Unique Order Code Number to each transaction, which is
intimated by broker to his client and once the order is executed, this order
code number is printed on the contract note. The broker member has also to
maintain the record of time when the client has placed order and reflect the
same in the contract note along with the time of execution of the order.
20. What documents should be obtained from broker on
execution of trade?
You have to ensure
receipt of the following documents for any trade executed on the Exchange:
a. Contract note in Form A to be given within
stipulated time.
b. In the case of electronic issuance of contract
notes by the brokers, the clients shall ensure that the same is digitally
signed and in case of inability to view the same, shall communicate the same to
the broker, upon which the broker shall ensure that the physical contract note
reaches the client within the stipulated time.
It is the contract
note that gives rise to contractual rights and obligations of parties of the
trade. Hence, you should insist on
contract note from stock broker.
21. What details are
required to be mentioned on the Contract note issued by the Stock Broker?
A broker has to
issue a contract note to clients for all transactions in the form specified by
the stock exchange. The contract note inter-alia
should have following:
·
Name, address and SEBI Registration number of the
Member broker.
Contract note
provides for the recourse to the system of arbitrators for settlement of
disputes arising out of transactions.
Only the broker can issue contract notes.
22. What is the maximum brokerage
that a broker can charge?
The maximum
brokerage that can be charged by a broker has been specified in the Stock
Exchange Regulations and hence, it may differ from across various exchanges. As
per the BSE & NSE Bye Laws, a broker cannot charge more than 2.5% brokerage
from his clients.
23. What are the
charges that can be levied on the investor by a stock broker?
The trading member
can charge:
1. Brokerage
charged by member broker.
2. Penalties
arising on specific default on behalf of client (investor)
3. Service tax as
stipulated.
4. Securities
Transaction Tax (STT) as applicable.
The brokerage,
service tax and STT are indicated separately in the contract note.
24. What is STT?
Securities
Transaction Tax (STT) is a tax being levied on all transactions done on the
stock exchanges at rates prescribed by the Central Government from time to
time. Pursuant to the enactment of the Finance (No.2) Act, 2004, the Government
of India notified the Securities Transaction Tax Rules, 2004 and STT came into
effect from October 1, 2004.
25.
What is an Account Period
Settlement?
An account period settlement is a settlement where
the trades pertaining to a period stretching over more than one day are
settled. For example, trades for the period Monday to Friday are settled
together. The obligations for the account period are settled on a net basis.
Account period settlement has been discontinued since January 1, 2002, pursuant
to SEBI directives.
26. What is a Rolling
Settlement?
In a Rolling Settlement, trades executed during the
day are settled based on the net obligations for the day.
Presently the trades pertaining to the rolling
settlement are settled on a T+2 day basis where T stands for the trade day.
Hence, trades executed on a Monday are typically settled on the following
Wednesday (considering 2 working days from the trade day).
The funds and securities pay-in and pay-out are
carried out on T+2 day.
27. What is the pay-in
day and pay- out day?
Pay in day is the
day when the brokers shall make payment or delivery of securities to the
exchange. Pay out day is the day when the exchange makes payment or delivery of
securities to the broker. Settlement cycle
is on T+2 rolling settlement basis w.e.f. April 01, 2003. The exchanges have to
ensure that the pay out of funds and securities to the clients is done by the
broker within 24 hours of the payout. The Exchanges will have to issue press
release immediately after pay out.
28. What are the
prescribed pay-in and pay-out days for funds and securities for Normal
Settlement?
The pay-in and pay-out days for funds and securities
are prescribed as per the Settlement Cycle. A typical Settlement Cycle of
Normal Settlement is given below:
|
|
Activity |
Day |
|
Trading |
Rolling
Settlement Trading |
T |
|
Clearing |
Custodial
Confirmation |
T+1
working days |
|
|
Delivery
Generation |
T+1
working days |
|
Settlement |
Securities
and Funds pay in |
T+2
working days |
|
|
Securities
and Funds pay out |
T+2
working days |
|
Post
Settlement |
Valuation
Debit |
T+2
working days |
|
|
Auction |
T+3
working days |
|
|
Bad
Delivery Reporting |
T+4
working days |
|
|
Auction
settlement |
T+5
working days |
|
|
Close
out |
T+5
working days |
|
|
Rectified
bad delivery pay-in and pay-out |
T+6
working days |
|
|
Re-bad
delivery reporting and pickup |
T+8
working days |
|
|
Close
out of re-bad delivery |
T+9
working days |
Note: The above is a typical
settlement cycle for normal (regular) market segment. The days prescribed for
the above activities may change in case of factors like holidays, bank closing
etc. You may refer to scheduled dates of pay-in/pay-out notified by the
Exchange for each settlement from time-to-time.
29. In case of purchase of shares, when do I make payment
to the broker?
The payment for
the shares purchased is required to be done prior to the pay in date for the
relevant settlement or as otherwise provided in the Rules and Regulations of
the Exchange.
30. In case of sale of
shares, when should the shares be given to the broker?
The delivery of
shares has to be done prior to the pay in date for the relevant settlement or as
otherwise provided in the Rules and Regulations of the Exchange and agreed with
the broker/sub broker in writing.
31. How long it takes
to receive my money for a sale transaction and my shares for a buy transaction?
Brokers were
required to make payment or give delivery within two working days of the pay -
out day. However, as settlement cycle has been reduced fromT+3 rolling
settlement to T+2 w.e.f. April 01, 2003, the pay out of funds and securities to
the clients by the broker will be within 24 hours of the payout.
32. Is there any
provision where I can get faster delivery of shares in my account?
The
investors/clients can get direct delivery of shares in their beneficial owner accounts.
To avail this facility, you have to give details of your beneficial owner
account and the DP-ID of your DP to your broker along with the Standing
Instructions for ‘Delivery-In’ to your Depository Participant for accepting
shares in your beneficial owner account. Given these details, the Clearing
Corporation/Clearing House shall send pay out instructions to the depositories
so that you receive pay out of securities directly into your beneficial owner
account.
33.
What is an Auction?
The Exchange
purchases the requisite quantity in the Auction Market and gives them to the
buying trading member. The shortages
are met through auction process and the difference in price indicated in
contract note and price received through auction is paid by member to the
Exchange, which is then liable to be recovered from the client.
34.
What happens if the shares
are not bought in the auction?
If the shares
could not be bought in the auction i.e. if shares are not offered for sale in
the auction, the transactions are closed out as per SEBI guidelines.
The guidelines
stipulate that “the close out Price will be the highest price recorded in that
scrip on the exchange in the settlement in which the concerned contract was
entered into and up to the date of auction/close out OR 20% above the official closing price on
the exchange on the day on which auction offers are called for (and in the
event of there being no such closing price on that day, then the official
closing price on the immediately preceding trading day on which there was an
official closing price), whichever is higher.
Since,
in the rolling settlement the auction and the close out takes place during
trading hours, the reference price in the rolling settlement for close out
procedures would be taken as the previous day’s closing price.
35. What is Margin Trading
Facility?
Margin Trading is
trading with borrowed funds/securities. It is essentially a leveraging
mechanism which enables investors to take exposure in the market over and above
what is possible with their own resources. SEBI has been prescribing eligibility conditions and procedural details
for allowing the Margin Trading Facility from time to time.
Corporate brokers
with net worth of at least Rs.3 crore are eligible for providing Margin trading
facility to their clients subject to their entering into an agreement to that
effect. Before providing margin trading facility to a client, the member and
the client have been mandated to sign an agreement for this purpose in the
format specified by SEBI. It has also
been specified that the client shall not avail the facility from more than one
broker at any time.
The facility of
margin trading is available for Group 1 securities and those securities which
are offered in the initial public offers and meet the conditions for inclusion
in the derivatives segment of the stock exchanges.
For providing the
margin trading facility, a broker may use his own funds or borrow from
scheduled commercial banks or NBFCs regulated by the RBI. A broker is not
allowed to borrow funds from any other source.
The "total
exposure" of the broker towards the margin trading facility should not
exceed the borrowed funds and 50 per cent of his "net worth". While
providing the margin trading facility, the broker has to ensure that the
exposure to a single client does not exceed 10 per cent of the "total
exposure" of the broker.
Initial margin has
been prescribed as 50% and the maintenance margin has been prescribed as 40%.
In addition, a
broker has to disclose to the stock exchange details on gross exposure
including name of the client, unique identification number under the SEBI
(Central Database of Market Participants) Regulations, 2003, and name of the
scrip.
If the broker has
borrowed funds for the purpose of providing margin trading facility, the name
of the lender and amount borrowed should be disclosed latest by the next day.
The stock
exchange, in turn, has to disclose the scrip-wise gross outstanding in margin
accounts with all brokers to the market. Such disclosure regarding
margin-trading done on any day shall be made available after the trading hours
on the following day.
The arbitration
mechanism of the exchange would not be available for settlement of disputes, if
any, between the client and broker, arising out of the margin trading facility.
However, all transactions done on the exchange, whether normal or through
margin trading facility, shall be covered under the arbitration mechanism of
the exchange.
36.
What is SEBI Risk Management
System?
The primary focus of risk management by SEBI has been
to address the market risks, operational risks and systemic risks. To this
effect, SEBI has been continuously reviewing its policies and drafting risk
management policies to mitigate these risks, thereby enhancing the level of
investor protection and catalyzing market development. The key risk management
measures initiated by SEBI include:-
Ø
Categorization
of securities into groups 1, 2 and 3 for imposition of margins based on their
liquidity and volatility.
Ø
VaR based
margining system.
Ø
Specification of
mark to Market margins
Ø
Specification of
Intra-day trading limits and Gross Exposure Limits
Ø
Real time
monitoring of the Intra-day trading limits and Gross Exposure Limits by the
Stock Exchanges
Ø
Specification of
time limits of payment of margins
Ø
Collection of
margins on upfront basis
Ø
Index based
market wide circuit breakers
Ø
Automatic
de-activation of trading terminals in case of breach of exposure limits
Ø
VaR based
margining system has been put in place based on the categorization of stocks
based on the liquidity of stocks depending on its impact cost and volatility.
It addresses 99% of the risks in the market.
Ø
Additional
margins have also been specified to address the balance 1% cases.
Ø
Collection of
margins from institutional clients on T+1 basis
The liquid assets deposited by the broker with the
exchange should be sufficient to cover upfront VaR margins, Extreme Loss
Margin, MTM (Mark to Market Losses) and the prescribed BMC. The Mark to Market
margin would be payable before the start of the next day’s trading. The Margin
would be calculated based on gross open position of the member. The gross open
position for this purpose would mean the gross of all net positions across all
the clients of a member including his proprietary position. The exchanges would
monitor the position of the brokers’ online real time basis and there would be
automatic deactivation of terminal on any shortfall of margin.
37. What is Short Selling and
Securities Lending & Borrowing?
Short Selling means
selling of a stock that the seller does not own at the time of trade. Short
selling can be done by borrowing the stock through Clearing
Corporation/Clearing House of a stock exchange which is registered as Approved
Intermediaries (AIs). Short selling can be done by retail as well as
institutional investors. Naked short sale is not permitted in India, all short
sales must result in delivery, and information on short sale has to be disclosed
to the exchange by end of day by retail investors, and at the time of trade for
institutional investors. The Securities Lending and Borrowing mechanism allows
short sellers to borrow securities for making delivery. Securities in the
F&O segment are eligible for short selling.
Securities Lending and Borrowing (SLB) is a scheme that has been
launched to enable settlement of securities sold short. SLB enables lending of
idle securities by the investors through the clearing corporation/clearing
house of stock exchanges to earn a return through the same. For securities lending
and borrowing system, clearing corporations/clearing house of the stock
exchange would be the nodal agency and would be registered as the “Approved
Intermediaries”(AIs) under the Securities Lending
Scheme, 1997.
Under SLB, securities
can be borrowed for a period of 7 days through a screen based order matching mechanism.
Securities in the F&O segment are eligible for SLB.
38.
What happens if I do not get
my money or share on the due date?
In case a broker
fails to deliver the securities or make payment on time, or if you have
complaint against conduct of the stock broker, you can file a complaint with
the respective stock exchange. The exchange is required to resolve all the
complaints. To resolve the dispute, the complainant can also resort to
arbitration as provided on the reverse of contract note /purchase or sale
note. However, if the complaint is not
addressed by the Stock Exchanges or is unduly delayed, then the complaints
along with supporting documents may be forwarded to SEBI. Your complaint would
be followed up with the exchanges for expeditious redressal.
In case of
complaint against a sub broker, the complaint may be forwarded to the concerned
broker with whom the sub broker is affiliated for redressal.
39.What recourses are
available to me for redressing my grievances?
You have following
recourses available:
·
Office of Investor Assistance and Education (OIAE) :
You can lodge a complaint with OIAE Department of SEBI against companies for
delay, non-receipt of shares, refund orders, etc., and with Stock Exchanges against brokers on certain trade
disputes or non receipt of payment/securities.
·
Arbitration: If no amicable settlement could be
reached, then you can make application for reference to Arbitration under the
Bye Laws of concerned Stock Exchange.
·
Court of Law
40.
What is Arbitration?
Arbitration is an
alternative dispute resolution mechanism provided by a stock exchange for
resolving disputes between the trading members and their clients in respect of
trades done on the exchange.
41. What is the process for
preferring arbitration?
The byelaws of the
exchange provide the procedure for Arbitration. You can procure a form for
filing arbitration from the concerned stock exchange. The arbitral tribunal has to make the
arbitral award within 3 months from the date of entering upon the reference.
The time taken to make an award cannot be extended beyond a maximum period of 6
months from the date of entering upon the reference.
42.
Who appoints the arbitrators?
Every exchange
maintains a panel of arbitrators. Investors may choose the arbitrator of their
choice from the panel. The broker also has an option to choose an arbitrator.
The name(s) would be forwarded to the member for acceptance. In case of disagreement, the exchange shall
decide upon the name of arbitrators.
43.
What happens if I am
aggrieved by the award of the arbitrator?
In case you are
aggrieved by the arbitration award, you can take recourse to the appeal
provisions as given in the bye-laws of the Exchange.
44. What is Investor
Protection Fund (IPF) / Customer Protection Fund (CPF) at Stock Exchanges?
Investor
Protection Fund is the fund set up by the Stock Exchanges to meet the
legitimate investment claims of the clients of the defaulting members that are
not of speculative nature. SEBI has prescribed guidelines for utilisation of
IPF at the Stock Exchanges. The Stock Exchanges have been permitted to fix
suitable compensation limits, in consultation with the IPF/CPF Trust. It has
been provided that the amount of compensation available against a single
claim of an investor arising out of default by a member broker of a Stock
Exchange shall not be less than Rs. 1 lakh in case of major Stock Exchanges
viz., BSE and NSE, and Rs. 50,000/- in
case of other Stock Exchanges.
45.
What is BSE IndoNext?
Regional stock
exchanges (RSEs) have registered negligible business during the last few years
and thus small and medium-sized companies (SMEs) listed there find it difficult
to raise fresh resources in the absence of price discovery of their securities
in the secondary market. As a result, investors also do not find exit
opportunity in case of such companies.
BSE IndoNext has been formed to benefit such
small and medium size companies (SMEs), the investors in these companies and
capital markets at large. It has
been set up as a separate trading platform under the present BSE Online Trading
(BOLT) system of the BSE. It is a joint initiative of BSE and the Federation of
Indian Stock Exchanges (FISE).
Corporatisation
and Demutualisation
46.
What is the structure of the
stock exchanges in India?
There are 19
recognised stock exchanges in India. Mangalore Stock Exchange, Saurashtra Kutch
Stock Exchange, Magadh Stock Exchange and Hyderabad Stock Exchange have been
derecognised by SEBI.
In terms of legal structure, the stock exchanges in
India could be segregated into two broad groups – 16 stock exchanges which were
set up as companies, either limited by guarantees or by shares, and 3 stock
exchanges which were set up as association of persons and later converted into
companies, viz. BSE, ASE and Madhya Pradesh Stock Exchange. Apart from NSE, all
stock exchanges whether established as corporate bodies or Association of
Persons, were earlier non-profit making organizations. As per the
demutualisation scheme mandated by SEBI, all stock exchanges other than
Coimbatore stock exchange have completed their corporatisation and
demutualisation process. Accordingly, out
of 19 stock exchanges 18 are corporatised and demutualised and are functioning
as for-profit companies, limited by shares.
47.
What is meant by
corporatisation of stock exchanges?
Corporatisation is
the process of converting the organizational structure of the stock exchange
from a non-corporate structure to a corporate structure.
Traditionally,
some of the stock exchanges in India were established as “Association of
persons”, e.g. the Stock Exchange, Mumbai (BSE), Ahmedabad Stock Exchange (ASE)
and Madhya Pradesh Stock Exchange (MPSE). Corporatisation of such exchanges is
the process of converting them into incorporated Companies.
48.
What is demutualisation of
stock exchanges?
Demutualisation
refers to the transition process of an exchange from a “mutually-owned”
association to a company “owned by shareholders”. In other words, transforming
the legal structure of an exchange from a mutual form to a business corporation
form is referred to as demutualisation. The above, in effect means that after
demutualisation, the ownership, the management and the trading rights at the
exchange are segregated from one another.
49.How is a
demutualised exchange different from a mutual exchange?
In a mutual
exchange, the three functions of ownership, management and trading are
intervened into a single Group. Here, the broker members of the exchange are
both the owners and the traders on the exchange and they further manage the
exchange as well. A demutualised exchange, on the other hand, has all these
three functions clearly segregated, i.e. the ownership, management and trading
are in separate hands.
50. Currently are there any demutualised stock exchanges
in India?
18 stock Currently
exchanges are demutualised in India, viz. BSE, NSE, Ahmedabad Stock Exchange,
Madhya Pradesh Stock Exchange, Madras Stock Exchange, Cochin Stock Exchange,
Bhubhaneshwar Stock Exchange, Bangalore Stock Exchange, OTCEI, Inter-connected
Stock Exchange, Ludhiana Stock Exchange, Guwahati Stock Exchange, Vadodara
Stock Exchange, Delhi Stock Exchange, Calcutta Stock Exchange, Pune Stock
Exchange, Jaipur Stock Exchange and Uttarpradesh Stock Exchange.
General
Questions
51. What are the
relevant Rules and Regulations and where can I find them?
You can browse
through the “Legal Framework” section on the SEBI website http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=1
for complete information relating to acts, rules, regulations, circulars, and
guidelines relating to securities market.
52. What is day trading?
Day
trading refers to buying and selling of securities within the same trading day
such that all positions will be closed before the market close of the trading
day. In the Indian securities market only retail investors are allowed to day
trade.
53. What are the main things an investor should be aware of
while dealing with a broker/sub-broker?
Good
understanding of investment opportunities alone may not help the investor in
the securities market to trade. It is also important that the investor
understands the process of investing, such as finding an appropriate broker,
handling buying and selling of securities and maintaining records.
Before
choosing a broker/sub-broker the investor should be aware of the following
things:-
Ø
From where the
broker/sub-broker has learnt the business?
Ø
How long has he
been serving the securities industry?
Ø
Whether he
has eligible qualifications as a broker?
Ø
How many
clients does he serve?
Ø
What fees and
expenses does he charge?
54. What are the major obligations and responsibilities of
a broker?
a) Entering into an agreement with his client or with
sub broker and client
b) Maintenance of separate books of accounts and records
for clients
c) Maintenance of money of clients in a separate account
and their own money in a separate account.
d) Issue of daily statement of collateral utilization to
clients
e) Appointment of compliance officer
f)
Issue of
contract note to his client within 24hrs of the execution of the contract.
g) Delivery / Payment to be made to the client within 24
hrs of pay–out.
h) Other duties as specified in the SEBI (Stock Brokers
and Sub-Brokers) Rules, 1992.
55. What are the major rights and obligations of an investor?
a) Before entering into a contract with the broker,
ensure that he is registered with SEBI.
b) Satisfy yourself about the credentials of the broker
by asking for information/documents supporting his claims.
c) Keep a documentary proof of having made deposit of
money or securities with the broker.
d) Before activating your trading account, obtain clear
idea from your broker about all brokerage, commissions, fees and other charges
which will be levied on your trades.
e) Furnish details in full as are required by the broker
as required in “know your client” (KYC) norms.
f)
Ensure that a
contract note is issued by the broker which contains complete records of every
transaction within 24hrs of the execution of the contract.
g) In case pay-out of money and / or securities is not
received on the next working day after date of pay-out, follow up with the
concerned broker for its release. If it is not released within five working
days, ensure to lodge a complaint immediately with the Investors’ Grievance
Cell of the exchange.
h) Ensure to receive a complete ‘Statement of Accounts’
for both funds and securities settlement every quarter.
56.
What
are the various accounts an investor should have for trading in securities market?
Beneficial
owner Account (B.O. account) / Demat Account: It is an account opened with a depository participant
in the name of client for the purpose of holding and transferring securities.
Trading
Account: An account which is opened
by the broker in the name of the respective investor for the maintenance of
transactions executed while buying and selling of securities.
Client
Account / Bank Account: A bank account which is in the name of the
respective client and is used for debiting or crediting money for trading in
the securities market.
57. With whom should the investor file his complaint
against an intermediary?
In case an
investor feels that his issue/problem/grievance is not being sorted out by
concerned intermediary then he may take up the matter with the immediate/next
higher level authority/SRO for the concerned intermediary. If the investor is
not satisfied with the resolution of his complaint then he can escalate the
matter to SEBI. Example: for complaint against sub-broker/broker you may
approach stock exchange. For complaints against DPs, you may approach
Depository.
In order to
expedite the process of redressel of complaints and to make the process of
lodging a complaint easier for the complainants, all SEBI registered intermediaries
have been mandated to designate an
e-mail ID of the grievance redressel division/compliance officer exclusively
for the purpose of registering complaints. The intermediaries have also been
advised to display the email ID and other relevant details prominently on their
websites.
58. Are all the investors mandated to comply with PAN
requirement?
Yes.
With effect from July 02, 2007, PAN has been made mandatory for all the investors
participating in the securities market. In order to strengthen the Know Your Client (KYC) norms and identify every
participant in the securities market with their respective PAN to ensure sound
audit trail of all the transactions, SEBI has mandated PAN as the sole
identification number for all persons transacting in the securities market,
irrespective of the amount of transaction.
59. What is Trade for Trade Segment?
In a
Trade for Trade segment, settlement of trades is done on the basis of gross
obligations for the day. No netting is allowed and every trade is being settled
separately.
60. How trading takes place and what is the process of
trading?
The
normal course of online trading in the Indian market context is placed below:
Step
1. Investor
/ trader decides to trade
Step 2. Places order with a broker to buy / sell the
required quantity of respective securities
Step
3. Best
priced order matches based on price-time priority
Step 4. Order execution is electronically communicated
to the broker’s terminal
Step 5. Trade confirmation slip issued to the
investor / trader by the broker
Step 6. Within 24 hours of trade execution, contract
note is issued to the investor / trader by the broker
Step 7 Pay-in of funds and securities before T+2 day
Step 8. Pay-out of funds and securities on T+2 day
In
case of short or bad delivery of funds / securities, the exchange orders for an
auction to settle the delivery. If the shares could not be bought in the auction,
the transaction is closed out as per SEBI guidelines.
61. What is
Direct Market Access (DMA)?
Direct Market Access
(DMA) is a facility which allows brokers to offer clients direct access to the
exchange trading system through the broker’s infrastructure without manual
intervention by the broker. Some of the advantages offered by DMA are direct control
of clients over orders, faster execution of client orders, reduced risk of
errors associated with manual order entry, greater transparency, increased
liquidity, lower impact costs for large orders, better audit trails and better
use of hedging and arbitrage opportunities through the use of decision support
tools / algorithms for trading. Presently,
DMA facility is available for institutional investors.