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Chapter 8Chapter 8

Secondary/Stock Market Secondary/Stock Market OrganisationOrganisation

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STOCK MARKET STOCK MARKET ORGANISATION IN INDIAORGANISATION IN INDIA

Stock BrokingStock Broking

Custodial ServicesCustodial Services

Depository SystemDepository System

Short Selling and Securities LendingShort Selling and Securities Lending and Borrowing Scheme, 2008and Borrowing Scheme, 2008

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Stock BrokerStock BrokerA stockbroker is a member of a recognised stock A stockbroker is a member of a recognised stock exchange, who buys/sells/deals in securities. He exchange, who buys/sells/deals in securities. He must be registered with the SEBI to carry on his must be registered with the SEBI to carry on his activities. He should abide by the code of activities. He should abide by the code of conduct in terms of the general requirements, conduct in terms of the general requirements,

STOCK BROKINGSTOCK BROKING

The organisation of stock broking in India The organisation of stock broking in India comprises of brokers, sub-brokers, trading and comprises of brokers, sub-brokers, trading and clearing members and foreign brokers.clearing members and foreign brokers.

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duty to investors and relationship with other duty to investors and relationship with other stockbrokers. The SEBI can conduct an stockbrokers. The SEBI can conduct an inspection/ investigation into the records of the inspection/ investigation into the records of the brokers. Any broker who contravenes any of thebrokers. Any broker who contravenes any of theprovisions of the SEBI Act/rules/regulations provisions of the SEBI Act/rules/regulations would be liable to any or more of the following would be liable to any or more of the following actions: monetary penalty, liability for action actions: monetary penalty, liability for action under the enquiry proceedings regulations, under the enquiry proceedings regulations, including suspension/cancellation of registration including suspension/cancellation of registration and prosecution. The capital adequacy and prosecution. The capital adequacy requirements for brokers consist of a base requirements for brokers consist of a base minimum capital and an additional capital related minimum capital and an additional capital related to the volume of business.to the volume of business.

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A sub-broker acts on behalf of a stockbroker, as an A sub-broker acts on behalf of a stockbroker, as an agent or otherwise, for assisting investors in agent or otherwise, for assisting investors in buying/selling/dealing in securities through such buying/selling/dealing in securities through such brokers, but he is not a member of a stock exchange. brokers, but he is not a member of a stock exchange. However, he must be registered with the SEBI. The However, he must be registered with the SEBI. The code of conduct applicable to him covers his duty to code of conduct applicable to him covers his duty to investors, his relationship with stock brokers and investors, his relationship with stock brokers and regulatory authorities. The general obligations and regulatory authorities. The general obligations and responsibilities and inspection and activities in responsibilities and inspection and activities in default applicable to brokers are also applicable to default applicable to brokers are also applicable to sub-brokers.sub-brokers.

Sub-BrokersSub-Brokers

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A trading member is a member of a derivate A trading member is a member of a derivate exchange/derivative segment of a stock exchange/derivative segment of a stock exchange, who settles the trade in the clearing exchange, who settles the trade in the clearing corporation/house through a clearing member. A corporation/house through a clearing member. A clearing member is a member of a clearing clearing member is a member of a clearing house/corporation, who may clear and settle house/corporation, who may clear and settle transactions in securities. A self-clearing member transactions in securities. A self-clearing member is a member who may clear and settle is a member who may clear and settle transactions on its own account or on account oftransactions on its own account or on account of

Trading and Clearing/Self-Trading and Clearing/Self-Clearing MembersClearing Members

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its clients only. He cannot clear/settle its clients only. He cannot clear/settle transactions for any other trading member(s). To transactions for any other trading member(s). To act as a trading, clearing or self-clearing member, act as a trading, clearing or self-clearing member, one must be registered with SEBI. The code of one must be registered with SEBI. The code of conduct and the general obligations/inspection conduct and the general obligations/inspection and action in case of default applicable to stock and action in case of default applicable to stock brokers is applicable to them as well. They have brokers is applicable to them as well. They have also to abide by the code of conduct specified by also to abide by the code of conduct specified by the derivative exchange.the derivative exchange.

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Trading and Clearing Members of Currency Trading and Clearing Members of Currency Derivative Segment Derivative Segment The framework of operation The framework of operation of trading and clearing members of a derivative of trading and clearing members of a derivative exchange/ segment of a stock exchange is also exchange/ segment of a stock exchange is also applicable to the trading/clearing members of its applicable to the trading/clearing members of its currency derivative segment.currency derivative segment.

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With a view to helping the FIIs in following the With a view to helping the FIIs in following the procedures and encouraging them to invest in India, procedures and encouraging them to invest in India, foreign brokers are now allowed to deal in securities foreign brokers are now allowed to deal in securities on own account as principal in India. Such a broker on own account as principal in India. Such a broker has to have two accounts: (i) a foreign currency has to have two accounts: (i) a foreign currency denominated bank account and a rupee account with denominated bank account and a rupee account with a designated bank branch and (ii) multiple custodian a designated bank branch and (ii) multiple custodian accounts with the approved custodian of all accounts with the approved custodian of all registered FIIs whom he may be assisting or on registered FIIs whom he may be assisting or on whose behalf he would be placing orders with a whose behalf he would be placing orders with a member of the Indian stock exchange(s).member of the Indian stock exchange(s).

Foreign Brokers Foreign Brokers

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Custodial services mean safe-keeping of Custodial services mean safe-keeping of securities of a client and providing incidental securities of a client and providing incidental services such as maintaining accounts of the services such as maintaining accounts of the securities; collecting the benefits/rights accruing securities; collecting the benefits/rights accruing to him in this respect; keeping him informed of to him in this respect; keeping him informed of the actions of the issuer of the securities having the actions of the issuer of the securities having a bearing on the benefit accruing to him; and a bearing on the benefit accruing to him; and maintaining and reconciling a record of the above maintaining and reconciling a record of the above services. Registration of custodians with SEBI isservices. Registration of custodians with SEBI is

CUSTODIAL SERVICESCUSTODIAL SERVICES

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mandatory. The custodian should abide by the mandatory. The custodian should abide by the specified code of conduct. The activities relating specified code of conduct. The activities relating to his business as a custodian should be to his business as a custodian should be segregated from his all other activities. A segregated from his all other activities. A separate custody account for each client should separate custody account for each client should be opened and the assets of one client should be opened and the assets of one client should not be mixed with those of others. The not be mixed with those of others. The custodians should have adequate internal control custodians should have adequate internal control to prevent manipulation of records/documents to prevent manipulation of records/documents and appropriate safekeeping measures to ensure and appropriate safekeeping measures to ensure that securities are protected from theft and that securities are protected from theft and natural hazards. They should follow the uniform natural hazards. They should follow the uniform norms and practices prescribed by SEBI, during norms and practices prescribed by SEBI, during their interaction with other market participants.their interaction with other market participants.

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A major reform of the Indian stock markets A major reform of the Indian stock markets has been the introduction of the depository has been the introduction of the depository system and scripless trading mechanism. The system and scripless trading mechanism. The essential element of scripless trading is the essential element of scripless trading is the dematerialisation of share certificates through dematerialisation of share certificates through depositories. Conversion of physical share depositories. Conversion of physical share certificates into dematerialised holdings is certificates into dematerialised holdings is called dematerialisation.called dematerialisation.

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The depository system in India operates The depository system in India operates within the framework of the Depositories Act within the framework of the Depositories Act and the SEBI Depositories and Participants and the SEBI Depositories and Participants Regulations. Any person can avail of Regulations. Any person can avail of depository services through a depository depository services through a depository participant, by surrendering the certificate of participant, by surrendering the certificate of security to the issuer company in the security to the issuer company in the specified manner. The issuer would cancel the specified manner. The issuer would cancel the certificate and substitute in its records, the certificate and substitute in its records, the name of the depository as a registered owner name of the depository as a registered owner in respect of that security. The depository in respect of that security. The depository would record the name of the person would record the name of the person surrendering the certificate as the beneficial surrendering the certificate as the beneficial owner.owner.

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All securities held by the depository would be All securities held by the depository would be dematerialised and would be in fungible form. dematerialised and would be in fungible form. A depository would be deemed to be the A depository would be deemed to be the registered owner for the purpose of transfer of registered owner for the purpose of transfer of ownership of the security on behalf of a ownership of the security on behalf of a beneficial owner, though it would not have any beneficial owner, though it would not have any voting rights in respect of the securities held. voting rights in respect of the securities held. The beneficial owner would be entitled to all The beneficial owner would be entitled to all the rights/benefits and would be subjected to the rights/benefits and would be subjected to all liabilities.all liabilities.

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A beneficial owner can opt out of a depository. A beneficial owner can opt out of a depository. Rematerialisation is a process by which a Rematerialisation is a process by which a client can get his electronic holding converted client can get his electronic holding converted back into physical holdings-that is, he can get back into physical holdings-that is, he can get back the physical form of the share back the physical form of the share certificates.certificates.

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The depository system consists of The depository system consists of depositories and depository participants depositories and depository participants (DPs). A depository is an organisation which (DPs). A depository is an organisation which holds the securities of shareholders holds the securities of shareholders (investors) in electronic form, transfers (investors) in electronic form, transfers securities between accountholders, facilitates securities between accountholders, facilitates the transfer of ownership without handling the transfer of ownership without handling securities and facilitates their safekeeping. securities and facilitates their safekeeping. The functions of depositories include, The functions of depositories include, inter-inter-aliaalia, account opening, dematerialisation, , account opening, dematerialisation, rematerialisation, settlement and clearing and rematerialisation, settlement and clearing and so on. Their sponsors can be public financial so on. Their sponsors can be public financial institutions, Indian and foreign banks, stockinstitutions, Indian and foreign banks, stock

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exchanges, financial services companies, exchanges, financial services companies, companies/institutions providing custodial, companies/institutions providing custodial, clearing/settlement services in a securities clearing/settlement services in a securities market outside India.market outside India.

The DP is the key player in the system which The DP is the key player in the system which acts as an agent of the depository and is, in acts as an agent of the depository and is, in fact, the customer interface of the depository. fact, the customer interface of the depository. The DPs are the service providers for the The DPs are the service providers for the investors.investors.

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In order to provide a mechanism for borrowing In order to provide a mechanism for borrowing of securities to enable settlement of of securities to enable settlement of securities, the SEBI has put in place a full-securities, the SEBI has put in place a full-fledged SLB scheme (2008) fro all market fledged SLB scheme (2008) fro all market participants under the overall framework of participants under the overall framework of the Securities Lending Scheme, 1997.the Securities Lending Scheme, 1997.

SHORT SELLING AND SECURITIES SHORT SELLING AND SECURITIES LENDING AND BORROWING SCHEME, 2008LENDING AND BORROWING SCHEME, 2008

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The main elements of the SLB are: Broad The main elements of the SLB are: Broad Framework for Securities Lending and Framework for Securities Lending and Borrowing, SLS, 1997; and Broad Framework Borrowing, SLS, 1997; and Broad Framework for Short Selling.for Short Selling.

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Short selling is selling a stock which the seller Short selling is selling a stock which the seller does not own at the time of trade. All classes of does not own at the time of trade. All classes of investors are permitted to sell. Naked short investors are permitted to sell. Naked short selling is not allowed. No institutional investor selling is not allowed. No institutional investor can do day trading. The stock exchanges should can do day trading. The stock exchanges should frame uniform deterrent provisions and take frame uniform deterrent provisions and take appropriate action against brokers for failure to appropriate action against brokers for failure to deliver securities at the time of settlement.deliver securities at the time of settlement.

Short SellingShort Selling

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A SLB scheme has been put in place to provide A SLB scheme has been put in place to provide the necessary impetus to short sell. · The the necessary impetus to short sell. · The securities traded on the F&O Segment are eligible securities traded on the F&O Segment are eligible for short selling. The institutional investors for short selling. The institutional investors should disclose upfront whether the transaction should disclose upfront whether the transaction is a short sale.is a short sale.

Securities Lending and Securities Lending and BorrowingBorrowing

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The main elements of the broad framework for SLB The main elements of the broad framework for SLB scheme are: (1) It would be operated through scheme are: (1) It would be operated through Clearing Corporation/House of the stock exchange; Clearing Corporation/House of the stock exchange; (2) It would take place an automatic screen-based (2) It would take place an automatic screen-based order matching platform independent of all other order matching platform independent of all other platforms; (3) Securities trading in the F&O Segment platforms; (3) Securities trading in the F&O Segment are eligible for lending/borrowing; (4) All categories are eligible for lending/borrowing; (4) All categories of investors are eligible; (5) The authorised of investors are eligible; (5) The authorised intermediary, clearing members and clients should intermediary, clearing members and clients should enter into an agreement(s) specifying their respectiveenter into an agreement(s) specifying their respective

Broad Framework of Securities Broad Framework of Securities Lending and BorrowingLending and Borrowing

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rights, responsibilities and obligations; (6) The rights, responsibilities and obligations; (6) The intermediary should allot a unique ID to each client; intermediary should allot a unique ID to each client; (7) The tenure of contract should be 7 days; (8) The (7) The tenure of contract should be 7 days; (8) The settlement cycle of SLB transaction should b T+1 settlement cycle of SLB transaction should b T+1 basis and on a gross basis; (9) The intermediary basis and on a gross basis; (9) The intermediary should frames suitable risk management system to should frames suitable risk management system to guarantee delivery/return of securities; (10) The guarantee delivery/return of securities; (10) The market-wide position limit for SLB transaction should market-wide position limit for SLB transaction should be 10 per cent of the free float capital of the be 10 per cent of the free float capital of the company; (11) There should be no activity during the company; (11) There should be no activity during the period of corporate action in the security and so on.period of corporate action in the security and so on.

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The securities lending scheme of the SEBI The securities lending scheme of the SEBI enables lending of securities through an enables lending of securities through an approved intermediary, to a borrower, for a approved intermediary, to a borrower, for a specified period, with the condition that the specified period, with the condition that the borrower would return equivalent securities of borrower would return equivalent securities of the same type/class at the end of the period, the same type/class at the end of the period, along with the corporate benefits accruing on along with the corporate benefits accruing on the securities, including dividends, rights, the securities, including dividends, rights, bonus, redemption benefits, interest or any bonus, redemption benefits, interest or any other benefit/right accruing on the securities other benefit/right accruing on the securities lent.lent.

Securities Lending Scheme Securities Lending Scheme (SLS), 1997(SLS), 1997

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There is no direct agreement between the There is no direct agreement between the lender(s) and the borrower(s). The intermediary lender(s) and the borrower(s). The intermediary should maintain a complete record of the should maintain a complete record of the securities deposited/lent, received from the securities deposited/lent, received from the borrower/returned to the lender. In the event of a borrower/returned to the lender. In the event of a default by the borrower, the intermediary would default by the borrower, the intermediary would have the right to liquidate collateral securities in have the right to liquidate collateral securities in order to purchase the equivalent securities from order to purchase the equivalent securities from the market, to be returned to the lender. It can the market, to be returned to the lender. It can also take appropriate action against the defaulter also take appropriate action against the defaulter to make good its loss.to make good its loss.

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Transactions of lending shares under the Transactions of lending shares under the securities lending scheme would not result in securities lending scheme would not result in a transfer for the purposes of capital gains.a transfer for the purposes of capital gains.