CODE OF CONDUCT AND INVESTOR PROTECTION MEASURES

Code of Conduct and Investor Protection Measures

Definition: The code of conduct for brokers is prescribed by Schedule II of the SEBI (Stock Brokers) Regulations, 1992, which outlines the duties and responsibilities of stockbrokers towards their clients and other market participants.
Details: The code of conduct emphasizes the importance of maintaining high standards of integrity, fairness, and transparency in all business dealings.

Key Concepts

Duty towards Investors: Stockbrokers have a duty to faithfully execute orders, inform clients about transaction execution, make prompt payments, and maintain confidentiality of client information.
Duty towards Other Stock-Brokers: Stockbrokers must cooperate with other brokers, comply with regulatory requirements, and refrain from unfair practices such as inducing clients from other brokers.
Investor Grievance Mechanism: Investors can approach the concerned intermediary, stock exchange, or SEBI to resolve grievances, and can also use the Online Dispute Resolution (ODR) portal for dispute resolution.
Online Dispute Resolution: The ODR portal is a platform for resolving disputes between investors and intermediaries, and is available for use by individual and institutional clients.

Investor Protection Measures

SEBI's Role: SEBI plays a crucial role in protecting investor interests by regulating market intermediaries, monitoring trading activities, and enforcing compliance with regulatory requirements.
Stock Exchange's Role: Stock exchanges are responsible for ensuring that their member brokers comply with regulatory requirements and maintain fair trading practices.
Importance of Transparency and Disclosure: Transparency and disclosure are essential for maintaining investor trust and confidence in the securities market, and brokers must disclose all relevant information to their clients.

Key Terms

SEBI (Stock Brokers) Regulations, 1992: Regulations that prescribe the code of conduct for stockbrokers in India.
Online Dispute Resolution (ODR) Portal: A platform for resolving disputes between investors and intermediaries in the Indian securities market.
Market Infrastructure Institutions (MIIs): Institutions that provide infrastructure for the securities market, including stock exchanges and depositories.

Key Concept 1: Online Dispute Resolution Portal (ODR Portal)

Definition: The ODR Portal is a platform for resolving disputes between investors/clients and market participants in the securities market.
Details: The ODR Portal is operated by the Market Infrastructure Institutions (MIIs) and provides a platform for online conciliation and arbitration.

Key Concept 2: Responsibilities of MIIs

Agreement: The MIIs shall enter into an agreement amongst themselves to outline their responsibilities, cost of development, operating, upgradation, maintenance, and inspection/audit of the ODR Platform.
Cooperation with SEBI: The MIIs shall provide complete cooperation to SEBI for inspection and ensuring proper functioning of the ODR Portal.

Key Concept 3: ODR Institutions

Empanelment: Each MII will identify and empanel one or more independent ODR Institutions capable of undertaking time-bound online conciliation and/or online arbitration.
Qualifications: The ODR Institutions shall have duly qualified conciliators and arbitrators.

Key Concept 4: Dispute Resolution Process

Initiation: An aggrieved investor or client can initiate the dispute resolution process by directly lodging a complaint against the market participant.
Escalation: If the grievance is not resolved satisfactorily, the investor or client may escalate the same to the MIIs or through the SCORES portal of SEBI.

Key Concept 5: ODR Portal Features

Enrolment: The ODR Portal shall have the necessary features and facilities to enrol the investor/client and the market participant.
Complaint Filing: The ODR Portal shall allow filing of complaints/disputes and uploading of documents.

Key Concept 6: Conciliation

Appointment of Conciliator: The ODR Institution shall appoint a sole independent and neutral conciliator from its panel of conciliators.
Timeframe: The conciliator shall conduct one or more meetings for the disputing parties to reach an amicable and consensual resolution within 21 calendar days.

Key Concept 7: Arbitration

Appointment of Arbitrator: The ODR Institution shall appoint a sole independent and neutral arbitrator from its panel of arbitrators.
Timeframe: The arbitrator shall conduct one or more hearings and pass the arbitral award within 30 calendar days of the appointment.

Key Concept 8: Fees and Charges

Fees: The fees for the dispute resolution process shall be borne by the MIIs and recoverable from the concerned market participant.
Late Fees: A late fee of Rs 1000/- shall be payable for initiation of conciliation process after six months from the date of transaction/dispute arising.

Code of Conduct and Investor Protection Measures

Key Concepts

Arbitration: In case of a challenge to an arbitral award, the Market Participant must deposit 100% of the amounts payable in terms of the arbitral award with the relevant MII prior to initiation of the challenge.
Conciliation and Arbitration: The ODR Institutions shall conduct conciliation and arbitration in the online mode, enabling online/audio-video participation by the investor/client, the Market Participant, and the conciliator or the arbitrator.
Venue and Seat of Online Proceedings: The venue and seat of the online proceedings shall be deemed to be the place where the investor resides permanently or, where the investor is not an individual, the place where it is registered in India or has its principal place of business in India.

Arbitration Fees

The fees for the arbitration process will be based on the claim amount, with varying fees for the arbitrator and the ODR Institution.
Claim Amount: The fees will range from Rs 4800 to Rs 1,20,000 or 1% of the claim value, depending on the claim amount.
Arbitrator's Fee: The arbitrator's fee will be collected by the ODR Institution and paid to the arbitrator.
ODR Institution's Fees: The ODR Institution's fees will be collected in addition to the arbitrator's fees.

Responsibilities of Market Participants under ODR

Amended Agreements: All agreements, contractual frameworks, or relationships entered into by Market Participants with investors/clients shall stand amended or be deemed to incorporate provisions to the effect that the parties agree to undertake online conciliation and/or online arbitration.
Prompt Attendance to Complaints: Market Participants shall promptly attend to all complaints or disputes raised by its investors or clients in accordance with applicable SEBI rules, regulations, and circulars.
Training of Staff: Market Participants shall duly train their staff in attending to complaints/disputes and in handling references arising from the SCOREs portal or the ODR Portal.

Handling of Investor's Claims/Complaints in Case of Default of a Trading Member/Clearing Member

Default of TM/CM: In case of default of a Trading Member/Clearing Member, the Stock Exchange will issue a circular, disseminate information on its website, and issue a public notice inviting claims within a specified period.
Eligibility of Claims: The norms for eligibility of claims for compensation from the IPF will be available on the Stock Exchange website.
Claim Form: A claim form for lodging a claim against a defaulter stock broker will be available on the Stock Exchange website.

Investor Protection Fund

Establishment: The Central Government has stipulated the setting up of the Investor Protection Fund (IPF) by Stock Exchanges to take care of legitimate investment claims of clients of defaulting members.
Administration: The IPF will be administered by a Trust created for the purpose.
Contributions: The Stock Exchange will make contributions to the IPF, including 1% of listing fees, interest earned on security deposits, and penalties collected from Trading Members.
Utilization: The amount in the IPF and any interest or income generated will be utilized to meet legitimate investment claims of clients of defaulting Trading Members and to pay interim relief to investors.

Code of Conduct and Investor Protection Measures

Investor Protection Fund (IPF): The IPF is a fund established to protect investors in case of default by a trading member. The stock exchanges shall fix suitable per investor compensation limits in consultation with the IPF Trust and SEBI.
Claim Procedure: Any claim received after three years from the date of expiry of the specified period may be dealt with as a civil dispute. The IPF Trust shall disburse the amount of compensation from the IPF to the investor, not exceeding the maximum amount fixed for a single claim.
Disclosure: The Stock Exchange will disclose the corpus of the IPF on its website and update the same on a monthly basis, along with the policy on processing investor claims from IPF.

Execution of Power of Attorney (PoA)

PoA Guidelines: SEBI has issued guidelines for the execution of PoA by clients in favor of stock brokers/depository participants. PoA is optional and should not be insisted upon for opening a client account.
Permitted Uses of PoA: PoA can be used for:
- Transfer of securities for settlement obligations
- Pledging/re-pledging of securities for margin requirements
- Limited purposes like applying for mutual funds, public issues, etc.
- Transfer of funds from the client's bank account for settlement obligations, margin requirements, or recovering outstanding amounts
Demat Debit and Pledge Instruction (DDPI): DDPI is a separate document that authorizes the stock broker to access the client's BO account for limited purposes, mitigating the misuse of PoA.

Risk Disclosure to Client and KYC

Client Onboarding: The account opening process involves submitting standard documents, including the client account opening form, KYC form, and risk disclosure documents.
KYC Norms: Know Your Client (KYC) norms require verification of identity, address, financial status, occupation, and other personal information. SEBI allows e-KYC services provided by UIDAI as a valid process for KYC verification.
KYC Process: The KYC process involves collecting and verifying proof of identity and address, and obtaining express consent from the investor before undertaking online KYC.
Online KYC: SEBI allows the use of technology innovations like eSign, online/App-based KYC, and video verification to facilitate online KYC.
Documentary Evidence: The stock broker must have documentary evidence of financial details provided by clients dealing in the derivative segment, and obtain documents in accordance with its risk management system for other clients.

Code of Conduct and Investor Protection Measures

Introduction: The Securities and Exchange Board of India (SEBI) has implemented various measures to protect investors and ensure a fair market. This includes the Know Your Client (KYC) process, Anti-Money Laundering (AML) regulations, and risk disclosure documents.
KYC Process: The KYC process involves verifying the identity and address of clients. SEBI has advised members to categorize clients as Low Risk, Medium Risk, and High Risk based on their due diligence and KYC documents.

Risk Categorization of Clients

Low Risk Clients: Clients with a respectable social and financial standing, with satisfactory transactions and dealings, and timely payments.
Medium Risk Clients: Clients who indulge in speculative transactions in excess of their known sources of income.
High Risk Clients: Clients with a history of default and suspect financial status.

Enhanced Due Diligence

Non-Face to Face Clients: Clients who do not meet in person with the member.
Multiple Accounts: Clients with multiple accounts in similar names, with common parameters such as partners, directors, promoters, address, email address, or telephone numbers.
Unexplained Transfers: Unexplained transfers between multiple accounts.
Unusual Activity: Unusual activity compared to past transactions, with the use of different accounts by the client alternatively.
Dormant Accounts: Sudden activity in dormant accounts.

SEBI Regulatory Framework

KYC Registration Agency (KRA) Regulations, 2011: All members must be registered with a KRA registered by SEBI.
KYC for New Clients: Members must perform initial due diligence, upload KYC information, and furnish scanned images of KYC documents to the KRA.
KYC for Existing Clients: Members must upload KYC information with proper authentication on the system of the KRA.

Central Know Your Client (CKYC)

Introduction: CKYC is an initiative of the Government of India to have a centralized repository of KYC records.
CKYC Registry: The Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) is authorized to act as the Central KYC Registry.
CKYC Requirements: Additional information, such as maiden name, mother's name, and FATCA information, must be collected and submitted to CERSAI.

Digital KYC for Persons with Disabilities

Accessibility: Intermediaries must ensure that the digital KYC process is accessible to persons with disabilities.
Alternate Parameters: Alternate parameters, such as facial expressions, nodding of head, or real-time video recording, may be used for persons with disabilities.

Unique Client Code (UCC)

Introduction: SEBI has made it mandatory for brokers to use unique client codes for all clients.
UCC Requirements: Each client is assigned a unique client code by the broker, which acts as an identity for the client.

Risk Disclosure

Introduction: Clients must be aware of the risks involved in trading in exchange-traded derivatives markets.
Risk Disclosure Document: The document must specify broadly all the key risks, including price fluctuation, macroeconomic scenarios, liquidity risk, basis risk, and counterparty risk.

Risks in Exchange-Traded Currency Derivatives Markets

Market Risk: The risk of losses caused by adverse movement of currency prices.
Liquidity Risk: The risk of lower liquidity in some derivatives contracts.
Leverage Risk: The risk of high degree of risk due to the small amount of margin relative to the value of the derivatives contract.
Execution Risk: The risk that the buy or sell order may not get executed at the desired price due to higher price volatility or type of order placed.

Code of Conduct and Investor Protection Measures

Basis Risk and Cash Settlement Risk

Basis Risk: Arises from mismatches in a hedged position, resulting in imperfect hedges and residual risk. This can occur due to standardization of derivatives contracts for amount and expiry date.
Risk due to Cash Settlement: Current ETCD contracts are cash settled, leading to imperfect hedging or arbitrage.

Suspicious Transaction Reporting (STR)

Definition: The process of reporting suspicious transactions to the Financial Intelligence Unit (FIU) to prevent money laundering and tax evasion.
Key Points:
- Brokers must monitor client transactions to identify suspicious activities.
- Examples of suspicious trades include reversal trades, profit transfer trades, and dabba trades.
- Brokers must report suspicious transactions to FIU through an online mechanism within 7 days of identifying them.
- The Principal Officer must record reasons for treating a transaction as suspicious.
- Brokers should not inform clients about the reporting, as it may lead to tipping-off information.

Reporting Requirements and Formats

FIU-IND Website: Contains detailed directives on compilation and submission of reports, including the Suspicious Transaction Report (STR) and Non-Profit Organization Transaction Reports (NTRs).
Submission Deadlines:
- STR: Within 7 days of identifying a suspicious transaction.
- NTRs: By the 15th of the succeeding month.

Sample Questions and Answers

Investors can have grievances against d. All of the above.
Fund created to take care of legitimate investment claims: a. Investor protection fund.
Arbitration is a a. Quasi judicial process.
Execution of Power of attorney by the client in favour of stock broker is c. Optional.
Subsequent to KYC, broker has to upload the KYC information in b. KRA system.