Broking and Sub Broking

8/3/2019 Broking and Sub Broking

1/23

Broking

The process of investing in the share market, either individually or through a

broker is known as stock broking, in simple terms. This is primarily done by

opening a demat account. If done through a broker, he opens an account,

helping you to operate through online stock broking facility. Going ahead thebroker suggests investment ideas and strategies suiting individual

requirements and based on his objective of investment. Tenure of

investment, the selected financial instruments and their respective

companies, the schemes, the risk taking ability, the sum available for

investment, all are considered while forming investment choices. After the

amount is invested, the broker tracks and monitors the investments,

changes or reinvests depending on the performance and generates reports

for them. This entire process is known as stock broking.

A broker is a person who buys and sells shares and other securities through

market makers or agency only firms on behalf of investors.

Types of Brokers:

Aircraft broker Broker-dealer Brokerage firm Business broker Commodity broker

Customs broker Information broker Insurance broker Investment broker Joint venture broker Leasing broker List broker

Marriage broker Mortgage broker Options broker Power broker (term) Prime broker

Real estate broker Retail broker Ship broker Sponsorship broker Stock broker Office broker Serviced office broker

Need for a broker:

A transaction on a stock exchange must be made between two members of

the exchangean ordinary person may not walk into the New York StockExchange (for example), and ask to trade stock. Such an exchange must bedone through a broker.

A stockbroker is a person who invests in the stock market forindividuals or corporations. Only members of the stock exchange canconduct transactions, so whenever individuals or corporations want tobuy or sell stocks they must go through a brokerage house.

1


2/23

Stockbrokers often advice and counsel their clients on appropriateinvestments.

Brokers explain the workings of the stock exchange to their clients andgather information from them about their needs and financial ability,and then determine the best investments for them.

The broker then sends the order out to the floor of the securitiesexchange by computer or by phone. When the transaction has beenmade, the broker supplies the client with the price.

The buyer pays for the stock and the broker transfers the title of thestock to the client and performs clearing and settlement procedures.

Who can be a broker

Stockbrokers must pass two licensing examinations, called the Series 7 and

Series 63. Successfully completing these exams allows the broker to advise

you, to solicit business from you, and to execute transactions on your behalf.

A stock broker must possess the following qualifications to register as abroker:

I. He must be a citizen with 21 years of age.

ii. He should neither e a bankrupt not compounded with creditors.

iii. He should not have been convicted for any offence, fraud.

iv. He should not have engaged in any other business other than thatof a broker in securities.

v. He should not be a defaulter of any stock exchange.

vi. He should have completed 12th standard examination.

Apart from individuals, corporate and institutional members can also becomebrokers. Brokers will be selected by the selection committee of the stockexchange on the basis of their qualifications, experience, financial status,their performance in the written test, interview etc.

2


3/23

SEBI Guidelines for Broker

SECURITIES CONTRACTS (REGULATION) RULES, 1957 [NOTIFICATION

NO.SRO 576, DATED 21-2-1957]In exercise of the powers conferred by section 30 of the Securities Contracts(Regulation) Act, 1956 (42 of 1956), the Central Government hereby makesthe following rules, the same having been previously published as requiredby sub-section (3) of the said section, namely:

Short title:

1. These rules may be called the Securities Contracts (Regulation) Rules,1957.

Definition:

2. In these rules, unless the context otherwise requires,(a) form means a form appended to these rules;(b) the Act means the Securities Contracts (Regulation) Act, 1956 (42 of1956);(c) Government company means a company in which not less than fifty-one per centof the share capital is held by the Central Government or by any StateGovernmentor Governments or partly by the Central Government and partly by one or

moreState Governments.

Application for recognition:

3. An application under section 3 of the Act for recognition of a stockexchange shall be made to the 1[Securities and Exchange Board of India] inForm A.

Fees for application:

4. (1) There shall be paid in respect of every application under rule 3 a fee ofrupees five hundred.(2) The amount of the fee shall be deposited in the nearest Governmenttreasury or the nearest branch of the State Bank of India:Provided that at Bombay, Calcutta, Madras, Delhi and Kanpur, the amountshall be deposited in the Reserve Bank of India.(3) The amount of the fee so deposited shall be credited to the receipt headXLVI Miscellaneous Other fees, fines and forfeitures.

3


4/23

(4A) A Company as defined in the Companies Act, 1956 (1 of 1956) shall alsobe eligible to be elected as a member of Stock Exchange if(i) such company is formed in compliance with the provisions of section 12 ofthe said Act;1 Substituted for Central Government by Amendment Rules, 1996. w.e.f

23.12.1996(ii) such company undertakes to comply with such financial requirement andnorms as may be specified by the Securities and Exchange Board of India forthe registration of such company under sub-section (1) of section12 of theSecurities and ExchangeBoard of India Act, 1992 (15 of 1992);(iii) majority of the directors of such company are shareholders of thecompany and not less than 40% of the paid-up equity capital of the companyis held by these directors themselves or by the body corporate appointingthem as directors on the board of such company;(iv) the directors of the company are not disqualified for being members of a

stock exchange under clause (1) [except sub-clause (f) thereof] or clause (3)[except subclause (f) thereof] and the directors of the company had not heldthe offices of the directors in any company which had been a member of thestock exchange and had been declared defaulted or expelled by the stockexchange; and(v) not less than two directors of the company are persons who possess aminimum two years experience:(a) in dealing in securities; or(b) as portfolio managers; or(c) as investment consultants.

Documents to be filed along with the application and particulars itshould contain:

5. Every application shall be accompanied by four copies of the rules(including the memorandum and articles of association where the applicantstock exchange is an incorporated body) and bye-laws of the stock exchangeapplying for recognition as specified in section 3 of the Act and the receiptgranted by the Government treasury, or as the case may be, the State Bankof India or the Reserve Bank of India, in respect of the amount of the feedeposited and shall contain clear particulars as to the matters specified inthe Annexure to Form A.

Qualifications for membership of a recognised stock exchange.

8. The rules relating to admission of members of a stock exchange seekingrecognitionshall inter alia provide that:(1) No person shall be eligible to be elected as a member if(a) he is less than twenty-one years of age;

4


5/23

(b) he is not a citizen of India; provided that the governing body may insuitable cases relax this condition with the prior approval of the 4[Securitiesand Exchange Board of India];(c) he has been adjudged bankrupt or a receiving order in bankruptcy hasbeen made against him or he has been proved to be insolvent even though

he has obtained his final discharge;(d) he has compounded with his creditors unless he has paid sixteen annasin the rupee;(e) he has been convicted of an offence involving fraud or dishonesty;(f) he is engaged as principal or employee in any business other than that ofsecurities 5[or commodity derivatives] except as a broker or agent notinvolving any personal financial liability unless he undertakes on admissionto sever his connection with such business:

Provided that no member may conduct business in commodity derivatives,except by setting up a separate company which shall comply with the

regulatory requirements, such as, networth, capital adequacy, margins and 3Substituted for Central Government by Amendment Rules, 1996. w.e.f23.12.19964 ibid5 Inserted by Amendment Rules 2003, w.e.f 28.8.20036 Substituted by the amendment Rules, 2003 w.e.f 28.8.2003, Earlier, it wasamended by the Amendment Rules, 1996, w.e.f.12.1996. Prior to thesubstitution it reads as under; Provided that the Securities and ExchangeBoard of India may, for reasons sufficient in the opinion of thesaid Board, permit a recognized stock exchange to suspend the enforcementof this clause for a specified period on condition that the applicant is not

associated with or is a member of or subscriber to or shareholder ordebenture holder in or connected through a partner or employee with anyother organization, institution, association, company, or corporation in Indiawhere forward business of any kind whether in goods or commodities orotherwise is carried on or is not engaged as a principal or employee in anysuch business; exposure norms as may be specified by the Forward MarketCommission, from time to time:

Provided further that nothing herein shall be applicable to anycorporations, bodies corporate, companies or institutions referred to in items(a) to (k) of the proviso to sub-rule (4).];

(g) [***](h) he has been at any time expelled or declared a defaulter by any otherstock exchange;(i) he has been previously refused admission to membership unless a periodof one year has elapsed since the date of such rejection.(2) No person eligible for admission as a member under sub-rule (1) shall beadmitted as a member unless:

5


6/23

(a) he has worked for not less than two years as a partner with, or anauthorised assistant or authorised clerk or remisier or apprentice to, amember; or(b) he agrees to work for a minimum period of two years as a partner orrepresentative member with another member and to enter into bargains on

the floor of the stock exchange and not in his own name but in the name ofsuch other member; or(c) he succeeds to the established business of a deceased or retiringmember who is his father, uncle, brother or any other person who is, in theopinion of the governing body, a close relative:

Provided that the rules of the stock exchange may authorise the governingbody to waive compliance with any of the foregoing conditions if the personseeking admission is in respect of means, position, integrity, knowledge andexperience of business in securities, considered by the governing body to beotherwise qualified for membership.

(3) No person who is a member at the time of application for recognition orsubsequently admitted as a member shall continue as such if(a) he ceases to be a citizen of India:

Provided that nothing herein shall affect those who are not citizens of Indiabut who were members at the time of such application or were admittedsubsequently under the provisions of clause (b) of sub-rule (1) of this rule,subject to their complying with all other requirements of this rule;(b) he is adjudged bankrupt or a receiving order in bankruptcy is madeagainst him or he is proved to be insolvent;(c) he is convicted of an offence involving fraud or dishonesty;

(d) [* * *](e) [* * *](f) he engages either as principal or employee in any business other thanthat of securities 7[or commodity derivatives] except as a broker or agentnot involving any personal financial liability, provided that(i) the governing body may, for reasons, to be recorded in writing, permit a 7Inserted by the Amendment Rules, 2003, w.e.f. 28.8.2003. member toengage himself as principal or employee in any such business, if the memberin question ceases to carry on business on the stock exchange either as anindividual or as a partner in a firm,(ii) in the case of those members who were under the rules in force at the

time of such application permitted to engage in any such business and wereactually so engaged on the date of such application, a period of three yearsfrom the date of the grant of recognition shall be allowed for severing theirconnection with any such business,8(iii) nothing herein shall affect members of a recognised stock exchangewhich are corporations, bodies corporate, companies or institutions referredto in items (a) to (k) of the proviso to sub-rule (4).]

6


7/23

(4) A company as defined in the Companies Act, 1956 (1 of 1956), shall beeligible to be elected as a member of a stock exchange if(i) such company is formed in compliance with the provisions of section 322of the said Act;(ii) a majority of the directors of such company are shareholders of such

company and also members of that stock exchange; and(iii) the directors of such company, who are members of that stockexchange, have ultimate liability in such company:

Provided that where the 9[Securities and Exchange Board of India] makes arecommendation in this regard, the governing body of a stock exchangeshall, in relaxation of the requirements of this clause, admit as member thefollowing corporations 10[,bodies corporate], companies or institutions,namely:(a) the Industrial Finance Corporation, established under the IndustrialFinance Corporation Act, 1948 (15 of 1948);

(b) the Industrial Development Bank of India, established under the IndustrialDevelopment Bank Act, 1964 (18 of 1964);(c) the Life Insurance Corporation of India, established under the LifeInsurance Corporation Act, 1956 (31 of 1956);(d) the General Insurance Corporation of India constituted under the GeneralInsurance Corporation (Nationalisation) Act, 1972 (57 of 1972);(e) the Unit Trust of India, established under the Unit Trust of India Act, 1963(52 of 1963); 8 Substituted, ibid. Prior to its substitution, clause (iii) read asunder :(iii) nothing herein shall affect members of a recognized stock exchangepermitted under the proviso to clause (f) of sub-rule (1) to suspend the

enforcement of the aforesaid clause, for so long as such suspension iseffective, except that no member of such exchange shall engage in forwardbusiness of any kind whether in goods or commodities or otherwise and, ifactually so engaged on the date of such application, he shall sever hisconnection with any such business within a period of three years from thedate of the grant of recognition. 9 Substituted for Central Government bythe Amendment Rules, 1996, w.e.f 23.12.1996.10 Inserted by the Amendment Rules, 2003, w.e.f. 28.8.2003.(f) the Industrial Credit and Investment Corporation of India, a companyregistered under the Companies Act, 1956 (1 of 1956);(g) the subsidiaries of any of the corporations or companies specified in (a)

to (f) and any subsidiary of the State Bank of India or any nationalised bankset up for providing merchant banking services, buying and selling securitiesand other similar activities.11[(h) any bank included in the Second Schedule to the Reserve Bank ofIndia Act, 1934 (2 of 1934);(i) the Export Import Bank of India, established under the Export Import Bankof India Act, 1981 (28 of 1981);

7


8/23

(j) the National Bank for Agriculture and Rural Development, establishedunder the National Bank for Agriculture and Rural Development Act, 1981(61 of 1981); and(k) the National Housing Bank, established under the National Housing BankAct, 1987 (53 of 1987).]

(4A) A company as defined in the Companies Act, 1956 (1 of 1956), shall alsobe eligible to be elected as a member of a stock exchange if(i) such company is formed in compliance with the provisions of section 12 ofthe said Act;(ii) such company undertakes to comply with such financial requirementsand norms as may be specified by the Securities and Exchange Board ofIndia for the registration of such company under sub-section (1) of section 12of the Securities and Exchange Board of India Act, 1992 (15 of 1992);(iii) 12(iv) the directors of the company are not disqualified from being members ofa stock exchange under 13[clause (1) [except sub-clause (b) and sub-clause

(f) thereof] or clause (3) [except sub-clause (a) and sub-clause (f) thereof]]and the Directors of the company had not held the offices of the Directors inany company which had been a member of the stock exchange and hadbeendeclared defaulter or expelled by the stock exchange; and(v) not less than two directors of the company are persons who possess aminimum two years experience:(a) in dealing in securities; or(b) as portfolio managers; or(c) as investment consultants.(5) Where any member of a stock exchange is a firm, the provisions of sub-

rules (1), (3) and (4), shall, so far as they can, apply to the admission orcontinuation of any partner in such firm.11 Inserted by the Amendment Rules, 2003, w.e.f. 28.8.200312 Omitted by the Second Amendment Rules, 1994, w.e.f. 12.10.1994.13 Substituted for clause (1) {except sub-clause (f) thereof} or clause (3)[except sub-clause (f) thereof] by the Fourth Amendment Rules, 1994, w.e.f07.11.1994.

Contracts between members of recognised stock exchange:

9. All contracts between the members of a recognised stock exchange shall

be confirmedin writing and shall be enforced in accordance with the rules and bye-laws ofthe stockexchange of which they are members.

14[Nominees of the Securities and Exchange Board of India] on thegoverning bodiesof recognised stock exchanges.

8


9/23

10. The 15[Securities and Exchange Board of India] may nominate one ormore personsnot exceeding three in number, as member or members of the governingbody of every

recognised stock exchange. Such member or members shall enjoy the samestatus andpowers as other members of the governing body.

Obligation of the governing body to take disciplinary action againsta member if sodirected by the 16[Securities and Exchange Board of India].

11. After receiving the report of the result of an enquiry made under clause(b) of subsection (3) of section 6 of the Act, the 16[Securities and ExchangeBoard of India] may take such action as they deem proper and, in particular,

may direct the governing body of the stock exchange to take suchdisciplinary action against the offending member, including fine, expulsion,suspension or any other penalty of a like nature not involving the payment ofmoney, as may be specified by the 16[Securities and Exchange Board ofIndia]; notwithstanding anything to the contrary contained in the rules orbye-laws of the stock exchange concerned, the governing body shall giveeffect to the directions of the 16[Securities and Exchange Board of India] inthis behalf and shall not in any manner commute, revoke or modify theaction taken in pursuance of such directions, without the prior approval ofthe 16[Securities and Exchange Board of India]. The 16[Securities andExchange Board of India] may, however, either of its own motion or on the

representation of the member concerned, modify or withdraw its direction tothe governing body.

Audit of accounts of members.

12. Every member shall get his accounts audited by a chartered accountantwheneversuch audit is required by the 16[Securities and Exchange Board of India].

Withdrawal of recognition.

13.The written notice referred to in section 5 of the Act shall be in Form C.

Books of account and other documents to be maintained andpreserved by everyrecognised stock exchange.

14. Every recognised stock exchange shall maintain and preserve thefollowing books of account and documents for a period of five years:

9


10/23

14 Substituted for Government nominees by the Third Amendment Rules,1994, w.e.f. 26.10.1994.15 Substituted for Central Government, ibid.16 Substituted for Central Government by the Amendment Rules, 1996,w.e.f. 23.12.1996.

(1) Minute books of the meetings of(a) members;(b) governing body;(c) any standing committee or committees of the governing body or of thegeneral body of members.(2) Register of members showing their full names and addresses. Where anymember of the stock exchange is a firm, full names and addresses of allpartners shall beshown.(3) Register of authorised clerks.(4) Register of remisiers of authorised assistants.

(5) Record of security deposits.(6) Margin deposits book.(7) Ledgers.(8) Journals.(9) Cash book.(10) Bank pass-book.

Books of account and other documents to be maintained andpreserved by everymember of a recognised stock exchange.15. (1) Every member of a recognised stock exchange shall maintain and

preserve thefollowing books of account and documents for a period of five years:(a) Register of transactions (Sauda book).(b) Clients ledger.(c) General ledger.(d) Journals.(e) Cash book.(f) Bank pass-book.(g) Documents register showing full particulars of shares and securitiesreceived and delivered.(2) Every member of a recognised stock exchange shall maintain and

preserve the following documents for a period of two years:(a) Members contract books showing details of all contracts entered into byhim with other members of the same exchange or counterfoils or duplicatesof memos of confirmation issued to such other members.(b) Counterfoils or duplicates of contract notes issued to clients.(c) Written consent of clients in respect of contracts entered into asprincipals.

10


11/23

Eligibility in terms of capital adequacy

A stock broker is required to pay to SEBI a registration fee of Rs.5,000for every financial year, if his annual turnover exceeds Rs.1 crore. Ifthis is so, he has to pay Rs.5,000 plus one-hundredth of 1% of theturnover in excess of Rs.1 crore. After the expiry of 5 years from thedate of initial registration as a broker, he has to pay Rs.5,000 for ablock of 5 financial years.

The a trading member can levy a maximum brokerage in respect ofsecurities transactions is 2.5% of the contract price, exclusive of

statutory levies like SEBI fee, service tax and stamp duty. Brokeragecharges can be as low as 0.15% and maximum brokerage is inclusiveof brokerage charged by the sub broker which shall not exceed 1.5% ofthe contract price.

The brokers of the various stock exchanges filed writ petitions invarious High Courts challenging the imposition of fees on turnover tobe paid by the brokers under the Securities and Exchange Board ofIndia (Stock Brokers and Sub-Brokers) Regulations, 1990, which weresubsequently transferred to the Supreme Court. The petitions werefiled on the ground that it is a tax on the guise of the fee and isexcessive or arbitrary. One of the case filed was of SEBI v. BSE Brokers

Forum in which the validity of the Securities and Exchange Board ofIndia (Stock Brokers and Sub-Brokers) Regulation, 1992 waschallenged. Supreme Court directed SEBI to amend the regulationsfollowing the recommendations of R. S. Bhatt Committee, which hadgiven recommendations in respect of the computation of turnover ofbrokers under the regulations.

Duties and obligations of brokers

Fair dealing: A stockbroker has a fundamental responsibility for fair dealing. The rules and regulations of the securities industry require astockbroker to treat his customer in a fair manner characterized byhigh standards of honesty and integrity. Besides being governed bysecurities laws and commercial regulations, stockbrokers are subjectto the rules of self-regulatory organizations such as the FinancialIndustry Regulatory Authority (FINRA). FINRA Rules of Fair Practiceimpose the following standard upon members of the securitiesindustry: "A member, in the conduct of his business, shall observe

11


12/23

high standards of commercial honor and just and equitable principlesof trade." This standard (along with other FINRA rules) is enforceableas the standard to which public customers are entitled to depend.

Duty of Loyalty: Since stockbrokers are compensated throughcommissions on the transactions which they execute, there is some

inherent tension between the broker's interests and the interests of thecustomer. It is the broker's responsibility to always place the interestsof the customer first. The broker's obligations and duty to the customermust be paramount, and for a broker conducting himself properly thiswill not present a conflict.

A prime example of the broker's obligation to keep the customers interestsfirst is the question of trading frequency in the account. The broker isobligated to recommend trades which meet the needs of the customer, not

merely to generate commissions for him. Excessive trading by a brokerinvolving purchasing and selling securities for the purpose of increasingcommissions is known as "churning", and it is prohibited.

Obligation of Disclosure

A broker also has a duty to disclose all material information in connectionwith an investment recommendation. In general, the broker has an obligationto disclose all information which may be reasonably relevant to an investorto take into consideration in making an informed investment decision. Inparticular, a broker has an obligation to disclose the various risks and level of

risk of an investment recommendation.

Brokers have a duty to be truthful in all communications with customers.Brokers are held to a standard that their communications should provide asound basis for evaluating any securities being recommended. In particular,exaggerated, false or misleading statements are prohibited in astockbroker's communications with the public.

Authorization for Trading

A broker may not execute trades in a customer's account unless the

customer has approved and authorized the trade in advance, or has giventhe broker discretionary trading authority (the power for the broker to maketrading decisions in the account). A broker may not engage in unauthorizedtrading. On the other hand, a broker has an obligation to carry out theinstructions of the customer.

Requirement of Suitable Recommendations

12


13/23

Perhaps one of the most important and least known obligations of astockbroker is the requirement for all investment recommendations to beconsistent with the customer's financial status, investment objectives, levelof understanding and risk tolerance. According to this suitability rule and therequirement of the "know your customer" rule, a broker must have

reasonable grounds for believing that the recommendation is suitable andappropriate for that particular customer based upon his individual financialsituation, understanding and needs.

It is the responsibility of the stockbroker to make reasonable efforts to obtainthe relevant information regarding the customer and recommendedinvestments. The "know your customer" rule requires that the broker obtaina customer profile so that the broker will be able to properly match theneeds of the customer with appropriate investments. The broker is alsorequired to use care in connection with knowing the investments which arerecommended.

Special Situations

Certain forms of investments pose particular problems, and therefore,brokers have additional duties in connection with such activity. For example,trading with money borrowed from the brokerage firm, known as trading onmargin, is a carefully regulated activity. Brokers also have specialresponsibilities in connection with options trading and private placementlimited partnerships among other forms of investments.

Supervisory Responsibility and Duty of Good Faith

A brokerage firm has a responsibility to supervise the activities of its brokers.The firm must maintain a system to enforce compliance with rules and toprevent violations of securities laws and regulations. The responsibility of thebrokerage firm to supervise its agents is especially important since manycustomers maintain their account with a particular firm and follow the adviceof their broker based upon the name of the firm standing behind the broker.

A stockbroker and brokerage firm has the responsibility to conduct

themselves with good faith in their interaction with customers. Customersplace their trust and reliance in the broker and brokerage firm to treat themin accordance with the high standards imposed upon the securitiesprofession. The fact that many customers place their total faith and reliancein the broker viewing him as a trusted advisor and putting their financialaffairs in his hands, certainly should heighten the broker's responsibilitiesand duty of good faith.

13


14/23

Activities in terms of dos and donts for brokers

DOS

Recruit New Clients

One of the main responsibilities of a stock broker is to recruit newclients. Brokers use several tactics to attain new clients. They cold callprospects, introduce themselves and offer a free consultation. Brokerscontact the people they know such as family members, friends andpast co-workers. They ask their current clients to refer their friends andfamily to them. Brokers also hold free seminars in their communitywhere they offer advice on a financial topic such as planning forretirement. The broker's hope when holding these seminars is thatsome attendees will become clients.

Build Relationships with Clients

A major attribute of good stock brokers is that they know how to buildrelationships with their clients. After a broker gets a new client he mustlearn about the client's financial situation and goals. He also mustunderstand the client's tolerance for risk. Brokers need to get to knowtheir clients in order to be able to give them appropriate advice andplan long term investment strategies that will meet their financialgoals. Brokers should build a trusting relationship with their clients sothat they remain clients for a long time.

Advise Clients

After a broker understands a client's financial situation and the goalsthey are striving for she will make recommendations regarding theclient's investment portfolio. The broker will use her knowledge andtraining to advise the client about portfolio changes and newinvestment opportunities. Brokers must always have the client's bestinterest in mind when making recommendations. Also, they arerequired to only give advise that is suitable for the client's goals,financial situation and risk tolerance.

Execute Trades

When a client decides to buy or sell an investment, the broker fills outthe appropriate forms and executes the trade. It is the broker'sresponsibility to ensure that the trade was filled properly.

14


15/23

Monitor Clients' Portfolios

It is the broker's duty to keep watch over his clients' investments. Ifmarket conditions shift or a client's financial situation changes thebroker must recommend the appropriate course of action. As a result,

it is important for a broker to keep in close communication with hisclients. The broker also must have a deep understanding of themarkets and watch the market action on a daily basis.

DONTS

A stock broker should not deal with any outside party which has failedto honour its business obligations with any other stock broker of anyother stock exchange. So, the names of the defaulting clients shouldbe reported by the member of the stock exchange authorities.

A stock broker should not get involved into any fraudulent activities

with an intention to cheat the customers.

Sub Broking

Sub Broker is any person, not being a member of a stock exchange. He actson behalf of a stock broker as an agent or otherwise for assisting theinvestors in buying, selling or dealing in securities through such stockbrokers. He is further an agent of the broker and carries out actualtransactions for the broker. He is one who has either made an application forregistration or is registered as a sub broker under SEBI Act, 1992.

The members of the stock exchange who execute transactions of theirclients through the members of other stock exchanges are treated as SubBrokers. Any person who not being a member of a stock exchange, acts onbehalf of a stock broker as an agent for assisting the investors in buying,selling or dealing in securities through such stock brokers is called as a subbroker. He is associated with securities market and should not buy, sell ordeal in securities unless he has complied with the conditions of thecertificate of registration obtained from SEBI issued in accordance with Rules

15


16/23

and Regulations. If he is associated with securities market before theestablishment of the SEBI, then he may continue to do business but upon anapplication made for registration within a period of 3 months from theestablishment of SEBI, till the disposal of such application.

There are certain conditions provided in Rule 5 of SEBI (Stock Brokers andSub-Brokers) Rules, 1992, which are to be fulfilled before the grant of acertificate to a sub-broker. If the stock broker/sub broker fails to comply withthe conditions subject to which he is been granted registration, then hewould be penalized and his registration would be suspended or cancelled.

A sub broker should co-operate with his broker in the transactions. He shouldnot knowingly and willfully deliver documents which constitute bad delivery.He should also co-operate with other contracting party for promptreplacement of the documents which are declared as bad delivery. Further,he should extend his full co-operation to his stock broker in protecting the

interests of his clients regarding their rights to dividends, bonus rights, rightsshares and any other right relatable to such securities.

Further, sub brokers, who act on behalf of their principal broker, are requiredto issue to their clients purchase or sale notes for all the transactionsentered into by them on behalf of their clients. While performing thisfunction, the sub brokers act as an agent of the principal broker.

He is also required to be registered with the concerned stock exchange. The

business of the stock brokers and sub brokers is too much interlinked, so, for

properly monitoring their activities separate registration procedure is

provided. The sub broker owes obligations not only to the client but also to

the stock broker. The sub broker enters into a tripartite agreement with the

main broker and his client. He assists his clients in obtaining the contract

note from the main broker. But he cannot issue the note or make payments

through cheques directly, as that has to be done by the main broker. These

activities of sub-broker are known as sub broking.

Need for Sub Broker

Sub brokers are also called as investment broker. The sub brokers

(investment brokers) are individuals who bring together buyers and sellers of

investments. They need a license to operate. They act on behalf of buyers

and sellers of stock. They charge a commission on trades that they execute

on such instructions from buyers and sellers.

16


17/23

Sub brokers are required so the individuals who trade in the stock market

can get associated with the broking firm. The retail investors with the help of

sub brokers can trade easily and can also get guidance from the sub brokers.

Who can be a sub broker

(i) In the case of a sub-broker, an applicant would be considered for

registration only if e fulfills the eligibility criteria specified by the MSE,

MSEFSL,BSE, and SEBI.

(ii) The sole proprietor, designated partners or designated directors also

have to submit xperience certificate, indicating that they have adequate

knowledge about the functioning of a stock exchange, stock broking firm or

capital market. In the case of an individual trading member, minimum

experience of three years is insisted upon, while n the case of partnership

firm or company, each one of the designated partners or designateddirectors has to posses a minimum of two years experience.

The trading member of MSE who can become a sub-broker of MSEFSL is also

required to comply with the solvency requirement specified by MSE, which is

as follows: (a) Individual: networth of Rs.4 lakh, (b) partnership firm:

networth of Rs.8 lakh and (c) company: paid-up capital of Rs.20 lakh and

networth to be maintained above this figure at all times. Any trading

member of MSE who can become a sub-broker of MSEFSL is also required to

maintain base minimum capital of atleast Rs.2 lakh in the form of cash.

(iii) In the case of a client wishing to open his trading account through a sub-

broker of MSEFSL, introduction by the sub-broker is mandatory and the

details of the introducer should be completely filled in the Client Registration

Document.

(iv) Where it is found that the information submitted by the sub-broker or the

client is false, MSEFSL would forthwith stop the processing of the application

for registration as a sub-broker or client of MSEFSL. In case the applicant has

already been registered as a sub-broker by SEBI, then the regulator would be

informed immediately about the same, with a request to cancel theregistration and in case of a client, the transactions shall be stopped

immediately.

SEBI Guidelines for Sub Broker

17


18/23

S O 627 (E) in exercise of the powers conferred by section 29 of theSecurities and Exchange Board of India Act, 1992 (15 of 1992), the CentralGovernment hereby makes the following rules, namely:-

Short title and commencement

1. (1) These rules may be called the Securities and Exchange Board of India(Stock Brokers and Sub-Brokers) Rules, 1992.

(2) They shall come into force on the date of their publication in the OfficialGazette.

Definitions

2. In these rules, unless the context otherwise requires -

(a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of1992);

(b) "Certificate" means a certificate of registration issued by the Board;

(c) "Rules" means the Securities and Exchange Board of India (Stock Brokersand Sub-Brokers) Rules, 1992;

(d) "stock exchange" means a stock exchange which is for the time beingrecognised by the Central Government under Section 4 of the SecuritiesContracts (Regulation) Act, 1956 (42 of 1956);

(e) "Stock broker" means a member of a stock exchange;

(f) "Sub-broker" means any person not being a member of a stock exchangewho acts on behalf of a stock-broker as an agent or otherwise for assistingthe investors in buying, selling or dealing in securities through such stock-brokers;

(g) "Regulations" means the Securities and Exchange Board of India (StockBrokers and Sub- Brokers) Regulations, 1992.

Not to act as stock-broker or sub-broker without registration.

3. No stock-broker or sub-broker shall buy, sell, and deal in securities, unlesshe holds a certificate granted by the Board under the Regulations:

Provided that such person may continue to buy, sell or deal in securities if hehas made an application for such registration till the disposal of suchapplication.

18


19/23

Conditions for grant of certificate to stock-broker

4. The Board may grant a certificate to a stock-broker subject to thefollowing conditions namely:

(a) He holds the membership of any stock exchange;

(b) He shall abide by the rules, regulations and bye-laws of the stockexchange or stock exchanges of which he is a member;

(c) In case of any change in the status and constitution, the stock brokershall obtain prior permission of the Board to continue to buy, sell or deal insecurities in any stock exchange;

(d) He shall pay the amount of fees for registration in the manner provided inthe regulations; and

(e) he shall take adequate steps for redressal of grievances of the investorswithin one month of the date of the receipt of the complaint and keep theBoard informed about the number, nature and other particulars of thecomplaints received from such investors.

Conditions of grant of certificate to sub-broker

5. (1) The Board may grant a certificate to a sub-broker subject to thefollowing conditions, namely:

(a) He shall pay the fees in the manner provided in the regulations;

(b) He shall take adequate steps for redressal of grievances of the investorswithin one month of the date of the receipt of the complaint and keep theBoard informed about the number, nature and other particulars of thecomplaints received;

(c) In case of any change in the status and constitution, the sub- broker shallobtain prior permission of the Board to continue to buy, sell or deal insecurities in any stock exchange; and

(d) He is authorised in writing by a stock-broker being a member of a stockexchange for affiliating himself in buying, selling or dealing in securities:

19


20/23

Eligibility in terms of Capital Adequacy

The sub broker is an employee of the brokerage firm so there is no capital

adequacy. He is salaried person and also gets commission from thetransaction he performs.

Obligations:

Whenever the customer contacts the sub-broker for the transaction, the sub-

broker has to perform the transactions on behalf of the brokerage firm. He is

basically a mediator between the brokerage firm and the client. He has to fill

forms on the customers behalf and process them. Moreover, it is the

responsibility of the sub-broker to send regular statements to the customer

with accurate data.

Activities in terms of Dos and dont

The terms and conditions for the sub-broker are all similar to that of the

broker because they come directly under the preview of SEBI. Moreover, it is

also dependent on the brokerage firm as to what level of strictness has to be

followed with the employees.

Corporate Brokers

The corporate brokers are individuals that are knowledgeable about the share andother financial markets. They advise companies on fund raising (e.g. new issues of

shares). They try to generate interest among investors for the companies

securities. They are prepared to buy and sell companies shares

They are retained by listed companies to provide strategic advice, liaise with

shareholders, drum up support for transactions and generally keep them

updated about the market developments.

Most of the corporate brokers are unpaid.

Functions of Corporate Broker

The importance of networking

The importance of market making

The importance of sales

20


21/23

The importance of research

The importance of corporate advice to the board

The role of the investment manager

The formal corporate brokerage agreement

Typically an agreement between a broker and a trust board will beformalized in a document which sets out both the terms under which thebroker will provide corporate services and financial advice and the level ofremuneration for their provision. It is likely that the agreement will have aclause, which will state that the annual fee will be offset against anysignificant corporate fees that the trust incurs in the financial year. Inaddition if a brokerage charge is deducted on any buy-backs, thiscommission may also be offset against the annual retainer. Some brokerswill expect to be reimbursed for any travel and out of pocket expenses in

relation to any of the services provided to the trust.

A typical agreement is likely to describe the provision of the followingservices:

Provide a point of contact at a senior level on the corporate financeside to maintain contact with the board. Points of contact will also beprovided for the board and manager who should monitor activity, on aday-to-day or regular basis, in the shares and feed back commentsfrom shareholders.

Provide advice and comments on statutory announcements includingannual and interim statements and any other types of shareholderannouncements and documents.

Arrange meetings for the board with major shareholders if appropriate.

Attend board meetings at least once a year and update directors ondevelopments in the market in general and any points which arespecific to the trust.

Attend the AGM.

Liaise with major shareholders if appropriate in relation to anycorporate activity.

Make a market in the shares.

Help to market the shares to existing and potential shareholders. Provide research for publication on the trust in relation to performance,

comparisons with peer groups funds, strategy and objectives.

Provide a regular health check on all aspects of the trust includingperformance, capital structure, buy-backs (including Treasury Shares),corporate governance, composition of the board, changes to the shareregister, and views of shareholders, gearing, and any otherdevelopments which are likely to have an impact on the trust.

21


22/23

Provide technical advice in relation to the share listings

A companys corporate broker is likely to benefit from a higher proportion ofequity trading in that companys stock. Certainly, working as a broker to acompany is no guarantee of future business. Indeed, several companies in

the FTSE 100 operate a policy of keeping separate M&A advisers andcorporate brokers, which diminishes the relative value of having thatcompany as a client.

The heads of corporate broking have said that the investment bankingrevenues are not the only consideration when choosing whether to pitch forbusiness. Some companies, like Rolls-Royce or Burberry, have done little butcarry considerable cachet, which has an inherent value to the banks. Thereare also relationships to consider.

Some of the Brokers on NSE/BSE are as follows:

Sharekhan

Angel Broking

Motilal Oswal Securities

Karvy Stock Broking

Kunvarji Finstock Pvt. Ltd

SmcIndiaOnline

Religare Online stock and

Trading

Edelweiss

Broker on NSE/BSE

Marwadi Shares : "Marwadi is a Gujarat based financial service group dealing in

equities / commodities broking and portfolio management services.

Products and Services: Equities & Derivatives, Commodity, Internet Trading,

Depository Participant, IPO, Mutual Funds, PMS, Research, Insurance, New

Pension Scheme and Client Attention

The clients approach to this broker by the way of the market research/survey

conducted and also through word of mouth.

Security is taken from the clients in the form of deposit from the clients sincethe time they open an account with them. Identification proofs from the

customers is taken to verify the credentials of the person opening an

account. The customer has to self attest the documents that they submit to

the sub broker and it turns the broker.

The broker and the sub broker jointly are involved in maintaining the

relationship with the customers so that they are satisfied and do not switch

22


23/23

over. They also advise their customers on regular basis so that the

customers remain updated about the market trends. They also give gifts to

their clients on the special occasion. They do arrange for meetings with their

clients so that there grievances are addressed. Internet facilities are

provided by the broker.

On every transaction the broker and the sub broker gets stipulated

commission.

Brokers like Angel Broking also provide their customers with a software that

gives the customer complete insight about the entire transaction.

Brokers like Kunvarji also provide regular statements of their transactions on

a weekly and monthly basis. They also actively participate on regular basis

with the Non Resident Indians and maintain cordial relations so that the

customers are maintained.

Bibliography

http://www.nseindia.com/

http://www.marwadionline.com/

www.bseindia.com

www.sebi.gov.in

www.wikipedia.com

www.sharekhan.com/

www.edelweiss.in/
http://www.nseindia.com/http://www.marwadionline.com/http://www.bseindia.com/http://www.sebi.gov.in/http://www.wikipedia.com/http://www.sharekhan.com/http://www.sharekhan.com/http://www.sharekhan.com/http://www.sharekhan.com/http://www.edelweiss.in/http://www.edelweiss.in/http://www.edelweiss.in/http://www.edelweiss.in/http://www.nseindia.com/http://www.marwadionline.com/http://www.bseindia.com/http://www.sebi.gov.in/http://www.wikipedia.com/http://www.sharekhan.com/http://www.edelweiss.in/