Other Services Provided by Brokers

Other Services Provided by Brokers (Part 1)

• Introduction to Securities Market: The securities market plays a crucial role in the Indian economy by facilitating the transfer of resources from those with idle resources to others who have a productive need for them.
• Definition of Securities: The term "Securities" includes shares, scrips, stocks, bonds, debentures, debenture stock, derivatives, units of collective investment schemes, security receipts, and government securities.
• Segments of Securities Market: The securities market has two interdependent segments:
  • Primary Market: Where issuers raise capital from investors through initial public offers, rights issues, or private placements.
  • Secondary Market: Where existing securities are traded, providing liquidity to investors.
• Key Players in Securities Market: Major players in the primary market include merchant bankers, mutual funds, financial institutions, and individual investors, while the secondary market involves stock exchanges, clearing corporations, stock brokers, and depository participants.
• Money Market: A short-term market that handles instruments with maturities ranging from 1 day to 1 year, used by governments, banks, and corporate entities to meet short-term funding requirements.
• Services Provided by Brokers: Brokers offer various services, including:
  • IPO Applications
  • Trading of Mutual Fund Units
  • Portfolio Management Services
  • Research Reports
  • Depository Services
  • Margin Trading
  • Internet-Based Trading and Securities Trading using Wireless Technology

Other Services Provided by Brokers (Part 2)

• Call Money: Call money transactions are dealt with on the Reserve Bank of India’s NDS-CALL (Negotiated Dealing System – Call) platform, which is managed by CCIL. These transactions are predominantly overnight, with the tenor of borrowing possibly extended to account for weekends and holidays.
• Notice Money: This is an extension of the interbank call market with uncollateralized lending and borrowing of funds for a period beyond overnight and up to 14 days. Notice money transactions are dealt with on the RBI’s NDS-CALL.
• Term Money: This is an extension of the interbank call market for uncollateralized lending and borrowing of funds for a period between 15 days and 1 year. Term money transactions are dealt with on the RBI’s NDS-CALL.
• Market Repo: Repo refers to borrowing funds via the sale of securities with an agreement to repurchase the same at a future date with the interest for the borrowings incorporated in the repurchase price. Reverse repo is the exact opposite transaction, which is essentially a collateralized lending of funds.
• Triparty Repo in Government Securities: "Triparty repo" is a type of repo contract with a third-party intermediary between the borrower and lender known as the Triparty Agent (TPA). The TPA does the collateral selection, payment, and settlement, custody, and management during the repo period.
• Treasury Bills (T-bills): In India, Treasury bills or T-bills are used for short-term borrowing by the Government of India and are considered part of the money market as they mature within a year from issue.
• Cash Management Bills (CMBs): Essentially very short-term T-bills, Cash Management Bills (CMBs) are issued by the Government of India to fund the temporary mismatches in its cash flow. CMBs have maturities less than 91 days.
• Commercial Paper (CP): A Commercial Paper (CP) is used by Indian corporates to raise short-term unsecured funds. CPs are also discounted instruments like T-bills and are issued for ₹5 lakh and multiples thereof for maturities between 7 days and one year.
• Certificate of Deposit (CD): Certificate of Deposits is a negotiable, unsecured money market instrument issued by a bank as a Usance Promissory Note against funds deposited at the bank for a maturity period up to one year.
• Repo in Corporate Bond/ Corporate Debt Securities: Repo in corporate bonds was introduced by RBI in 2010, and the eligible securities for Corporate Bond Repo include listed corporate bonds and debentures, CPs, and CDs.
• Exchange Traded Tri-party Repo: Tri-party repo on corporate bonds is available for trading on the exchanges. The product is similar to Tri-party repo on government securities except collateral is corporate bond (including commercial paper and certificate of deposits) instead of G-Secs.

Products Traded in the Indian Securities Market

• Equity/Cash Markets and its Products: The equity/cash segment of the stock exchange allows trading in shares, government securities, debentures, warrants, mutual funds, and exchange-traded funds (ETFs).
• Equity Shares: An Equity Share normally known as ordinary shares represents the form of fractional ownership in a business venture. Equity shareholders collectively own the company.
• Preference Shares: Preference Shares, also commonly known as preferred stock, are a special type of share where dividends are paid to shareholders prior to the issuance of equity stock dividends.
• Debentures: Debentures are instruments for raising debt. Debenture is debt securities which indicate a loan to the company.
• Government Securities: Government Securities are also known as “sovereign debt” and are generally issued via auctions and traded in the secondary market.
• Warrants: Warrants entitle an investor to buy equity shares after a specified time period at a given price.
• Mutual Funds: A Mutual Fund is an investment vehicle that pools money from numerous investors who wish to save or make investments having similar investment objectives.
• Exchange Traded Fund (ETF): An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.
• Indian Depository Receipt (IDR): An IDR is an instrument that allows foreign companies to raise capital in Indian currency.

Other Services Provided by Brokers (Part 3)

• Indian Depository Receipts (IDRs): IDRs are depository receipts denominated in Indian Rupees, created by a Domestic Depository against the underlying equity shares of a foreign issuing company. This allows foreign companies to raise funds from the Indian securities market.
• Key Features of IDRs:
  • Issued by foreign companies to Indian investors
  • Listed on Indian stock exchanges
  • Can be held, traded, or converted into underlying shares
  • Redemption/conversion is permitted after 1 year from the date of listing
  • Two-way fungibility is permitted, allowing conversion between IDRs and underlying shares

Derivative Market and its Products

• Definition of Derivatives: A product whose value is derived from the value of an underlying asset or group of assets—a benchmark.
• Types of Derivatives:
  • Forwards: Non-standardized contracts traded over-the-counter (OTC), promising to deliver an asset on a pre-determined date at a predetermined price.
  • Futures: Standardized exchange-traded contracts, agreeing to buy or sell an asset at a certain time in the future at a certain price.
  • Options: Give the buyer a right, but not an obligation, to buy or sell an asset at a predetermined price within or at the end of a specified period.
  • Swaps: Agreements to exchange cash flows in the future, according to a prearranged formula, helping manage risk associated with volatile interest rates, currency exchange rates, and commodity prices.
• Legality of Derivatives: Derivatives are considered securities and are legal if traded on a recognized stock exchange, settled on the clearing house of the recognized stock exchange, and between specified parties and terms.

Equity Derivatives

• Definition: Financial instruments whose value is derived from price movements of the underlying asset, which is a stock or stock index.
• Types of Equity Derivatives:
  • Equity Index Futures and Options: Available for trading on indices such as BSE's SENSEX and NSE's NIFTY 50.
  • Stock Futures and Options: Available for specific listed stocks, chosen by the stock exchange based on guidelines and criteria defined by SEBI.

Currency Derivatives

• Definition: Financial instruments whose value is derived from the exchange rate between two currencies.
• Types of Currency Derivatives:
  • Currency Futures: Available for trading on four INR pairs (USDINR, EURINR, GBPINR, and JPYINR) and three cross-currency pairs (EURUSD, GBPUSD, and USDJPY).
  • Currency Options: Available for monthly and weekly contracts, with final settlement prices derived from FBIL reference rates.

Interest Rate Derivatives

• Definition: Financial instruments whose value is derived from interest rates.
• Types of Interest Rate Derivatives:
  • Interest Rate Futures (IRF): Standardized contracts traded on a recognized stock exchange to buy or sell a notional security or index of such instruments at a specified future date.
  • Interest Rate Options: Introduced in 2019, providing an option to buy or sell a notional security or index of such instruments at a specified future date.

Other Services Provided by Brokers (Part 4)

• Single Bond Futures: Last trading day is the last Thursday of the expiry month. If the last Thursday is a holiday, the previous trading day will be the last trading day. The contract is cash settled. The final settlement price is the value weighted average price of the underlying bond based on the prices during the last two hours of trading on NDS-OM. If less than 5 trades are executed in the underlying bond during the last two hours of trading, then FIMMDA/FBIL price shall be used for final settlement.
• Interest Rate Options: Currently available on single bond GOI securities. Typically, three serial monthly contracts followed by three quarterly contracts of the cycle March/June/September/December are available for single bond options. Last trading day is the last Thursday of the expiry month. If the last Thursday is a holiday, the previous trading day will be the last trading day. These contracts are cash settled. The final settlement price is the value weighted average price of the underlying bond based on the prices during the last two hours of trading on NDS-OM.
• Commodity Derivatives: Derivatives products, the price of which is derived from the underlying commodities. Commodity derivatives facilitate the trading of commodities such as gold, silver, metal, energy, and agricultural goods. Commodity derivatives contracts can be cash settled or physically settled with actual delivery of the commodity.
• Debt Market and its Products: Mainly consists of government securities, money market instruments, bonds, and debentures, which provide financing through the issuance of bonds and enable the subsequent trading thereof. The debt market is broadly divided into two parts: Government Securities (G-Sec) Market and the Corporate Bond Market.
• Government Securities Market: The Government needs enormous amounts of money to perform various functions. A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. G-Secs carry practically no risk of default and are called risk-free gilt-edged instruments.
• Corporate Bond Market: The corporate bond or corporate debt market is a market where debt securities of corporate (non-government entities, municipal corporation, etc.) such as corporate bonds, debentures, etc. are issued and traded. Corporates adopt either the public offering route or the private placement route for issuing debentures/bonds.
• Real Estate Investment Trusts (REITs): Trusts registered with SEBI that invest in commercial real estate assets. REITs shall make an initial offer of its units by way of public issue only. Any subsequent issue of units by the REIT may be by way of follow-on offer, preferential allotment, qualified institutional placement, rights issue, bonus issue, offer for sale, or any other mechanism.
• Infrastructure Investment Trusts (InvITs): Trusts registered with SEBI that invest in the infrastructure sector. InvITs can raise funds through public issue and/or through private placement. The value of InvIT assets shall not be less than Rs. 500 crore, and the offer size shall be of at least Rs. 250 crores.
• Sovereign Gold Bond Scheme (SGB): Launched in 2015 to provide an alternative way for investing in gold.

Other Services Provided by Brokers (Part 5)

• Sovereign Gold Bonds (SGBs): Allow investors to take exposure to gold as an investment, with bonds denominated in grams of gold and issued in denominations of one gram and above.
• Key Features of SGBs:
  • Tenor of 8 years
  • Interest rate of 2.50% per annum, paid semi-annually
  • Available for investment by resident individuals, HUFs, Trusts, Universities, Charitable Trusts, and others
  • Can be held in physical or dematerialized form
  • Tradable on stock exchanges if held in dematerialized form
• International Financial Services Centres (IFSC): Cater to customers outside the domestic economy, providing services such as banking, insurance, asset management, and capital markets.
• Key Features of IFSC:
  • Located in GIFT City, Gandhinagar, Gujarat
  • Deemed foreign territory, dealing in foreign currency
  • Entities recognized as non-resident under FEMA regulations, with exemptions from security transaction tax, commodity transaction tax, dividend distribution tax, and capital gains tax
  • Stock exchanges operating in IFSC can deal in various securities and products, including equity shares, debt securities, currency and interest rate derivatives, and commodity derivatives
• Direct Listing of Equity Shares: Allows Indian companies to list their equity shares on international exchanges, with a framework provided by the IFSCA Act, 2019, and Rules and Regulations notified thereunder.
• Eligible Investors in IFSC:
  • Non-resident Indians
  • Financial institutions resident in India, eligible under FEMA to invest funds offshore
  • Persons resident in India, eligible under FEMA to invest funds offshore, subject to the Liberalized Remittance Scheme of Reserve Bank of India.

Other Services Provided by Brokers (Part 6)

• Accredited Investors: Recognized by securities and financial market regulators, these investors are typically termed as Accredited Investors or Qualified Investors or Professional Investors.
• Eligibility Criteria:
  • Individuals, HUFs, Family Trusts, and sole proprietorships with an annual income of >= INR 2 Crore or a net worth of >= INR 7.5 Crore.
  • Partnership Firms with each partner meeting the individual criteria.
  • Trusts (other than family trusts) with assets under management of >= INR 50 Crore.
  • Body corporates with a net worth of >= INR 50 Crore.
• Accreditation Agencies: Subsidiaries of depositories and stock exchanges, or institutions specified by SEBI, can grant accreditation certificates to eligible investors.
• Validity of Accreditation:
  • 2 years from the date of issuance if the applicant meets the eligibility criteria for the preceding financial year.
  • 3 years from the date of issuance if the applicant meets the eligibility criteria for each of the preceding two financial years.
• Benefits for Accredited Investors:
  • Participation in investment products with lower ticket sizes.
  • Relaxation from regulatory requirements.
  • Participation in investment products designed exclusively for Accredited Investors.

Market Makers

• Definition: Provide liquidity to facilitate efficiency in the functioning of financial markets.
• Guidelines: Operate under SEBI guidelines or exchange guidelines.
• Responsibilities: Provide two-way quotes on a continuous basis with a minimum amount and reasonable bid-ask spread.

Issuers

• Definition: Public and private sector enterprises, banks, and financial institutions that tap the securities market to finance capital expansion and growth plans.
• Funding Options:
  • Domestic market: equity shares, preference shares, debentures, bonds.
  • International markets: Global Depository Receipts (GDRs), American Depository Receipts (ADRs), Foreign Currency Convertible Bonds (FCCBs), External Commercial Borrowings (ECBs), Masala Bonds.
• Regulations:
  • SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
  • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Market Structure and Participants

• Intermediation: The process of enabling savers or buyers of securities to buy or sell securities and acquire related rights.
• Intermediaries: Play a crucial role in the securities market, bringing together buyers and sellers.
• Market Infrastructure Institutions:
  • Stock Exchanges: provide a trading platform for buyers and sellers.
  • Depositories: hold securities in electronic form.
  • Clearing Corporations: facilitate the settlement of trades.

Other Services Provided by Brokers (Part 7)

• Investor Education and Awareness: Brokers provide investor education, awareness, and protection to their clients.
• Redressal Mechanism: Brokers facilitate a redressal mechanism for investors to resolve their grievances.
• Surveillance and Investigation: Brokers are involved in surveillance and investigation to prevent fraudulent activities in the market.
• Listing of Securities: Brokers assist in the listing of securities and monitoring compliance of listed companies.
• Inspection and Monitoring: Brokers are responsible for inspecting and monitoring member compliance.

Clearing Corporation

• Definition: A Clearing Corporation is an entity that undertakes the activity of clearing and settlement of trades in securities or other instruments.
• Functions: A Clearing Corporation performs three main functions: clearing and settlement of transactions, risk management, and acting as a central counterparty.
• Key Terms:
  • Novation: The process by which a Clearing Corporation provides a financial guarantee for all transactions executed on the Exchange.
  • Pay-In: The process of delivering securities or funds by the clearing member to the clearing house/corporation to effect settlement of a sale/purchase transaction.
  • Pay-Out: The process of paying money or delivering securities to the clearing member and custodians.

Depository

• Definition: A Depository is an entity that facilitates holding securities in electronic form and enables transfer of securities by book entry.
• Objective: The main objective of a Depository is to provide maintenance of ownership or transfer records of securities in an electronic book entry form.
• Key Terms:
  • Dematerialization: The process of converting physical securities into electronic form.
  • Depository Participants (DPs): Agents appointed by the depository to provide services to clients.

Market Participants

• Trading Member/Clearing Member: A trading member is a member of the stock exchange who can execute trades on their own account as well as on account of their clients.
• Authorized Person: An individual or entity appointed by a stock broker to provide access to the trading platform of a stock exchange.
• Custodian: An entity that carries on the business of providing custodial services, including settling trades on behalf of clients.
• Eligibility Criteria: The eligibility criteria for trading members, clearing members, and custodians are specified by SEBI and the stock exchanges.

Membership Criteria

• Age: The minimum age for individual trading membership is 21 years.
• Education: The applicant should have at least an HSC or equivalent qualification.
• Experience: The applicant should have at least 2 years of experience in an activity related to dealing in securities.
• Net Worth: The applicant should have a minimum net worth as specified by SEBI or the stock exchange.
• Deposit: The applicant should deposit a minimum sum with the stock exchange as specified by SEBI or the stock exchange.

Other Services Provided by Brokers (Part 8)

• Broker: A broker can be an authorized agent or authorized clerk or authorized representative or remisier or apprentice to a member of a recognized stock exchange, dealer, jobber, market maker, or in any other manner in dealing in securities or clearing and settlement thereof.
• Limited Liability Partnership (LLP):
  • Definition: A Limited Liability Partnership as defined in the Limited Liability Partnership Act, 2008.
  • Eligibility: Shall be eligible to be admitted as a member of a Stock Exchange if it undertakes to comply with financial requirements and norms specified by the SEBI.
  • Designated Partners:
    • Identification: At least two partners as designated partners who would be taking care of the day to day management of the LLP.
    • Age: Minimum age of 21 years.
    • Education: At least HSC or equivalent qualification.
    • Experience: Minimum of 2 years’ experience in an activity related to dealing in securities or as portfolio managers or as investment consultants.
• Corporations / Companies / Institutions:
  • Definition: A Company as defined in the Companies Act, 2013.
  • Eligibility: Shall be eligible to be admitted as a member of a Stock Exchange if it is formed in compliance with the provisions of Section 12 of the said Act and undertakes to comply with financial requirements and norms specified by the SEBI.
  • Directors:
    • Identification: At least two directors as designated directors who would be managing the day to day trading operations.
    • Age: Minimum age of 21 years.
    • Education: At least HSC or equivalent qualification.
    • Experience: Minimum of 2 years’ experience in an activity related to dealing in securities or as portfolio manager or as investment consultant or as a merchant banker or in financial services or treasury, broker, authorised agent or authorised clerk or authorised representative or remisier or apprentice to a member of a recognised stock exchange, dealer, jobber, market maker, or in any other manner in dealing in securities or clearing and settlement thereof.
• Other Criteria:
  • Certification Requirements: The applicant has to ensure that either the proprietor/one designated director/partner or the Compliance Officer of the applicant entity meets the certification requirements specified by SEBI or the Stock Exchanges.
  • Minimum Net Worth and Deposit Requirement: The member should satisfy the minimum net worth and deposit requirement as specified by SEBI/Exchanges/Clearing Corporation from time to time.
• Ineligibility:
  • Bankruptcy: An entity that has been adjudged bankrupt or a receiver order in bankruptcy has been made against it.
  • Insolvency: An entity that has been proved to be insolvent even though it has obtained its final discharge.
  • Conviction: An entity that has been convicted of an offence involving a fraud or dishonesty.
  • Expulsion: An entity that has been expelled or declared a defaulter by any other Stock Exchange.
• Fit and Proper Person:
  • Definition: A person who is considered fit and proper to be a member of a stock exchange based on criteria such as integrity, reputation, character, absence of convictions, and competence.
  • Criteria: The SEBI Board may take into account any consideration as it deems fit, including but not limited to the following criteria in relation to the applicant or the intermediary, the principal officer, and the key management persons.
• Authorized Person:
  • Definition: An authorized person is not a member of a Stock Exchange but is appointed by a Stock Broker to provide access to the trading platform of a Stock Exchange as an agent of the Stock Broker.
  • Criteria: The authorized person should satisfy the criteria specified by SEBI/stock exchanges from time to time and have the necessary infrastructure to effectively discharge the activities on behalf of the stock broker.
• Custodian:
  • Definition: A custodian is an entity that is responsible for safeguarding the securities of its clients and providing custodial services.
  • Registration: A custodian should be registered with SEBI and obtain a certificate to carry on the business of providing custodial services.
  • Services: A custodian provides services such as maintaining a client’s securities account, collecting benefits or rights accruing to the client, and keeping the client informed of actions taken or to be taken by the issuer of securities.
• Regulators:
  • SEBI: Regulates the securities market and the commodity derivatives market.
  • RBI: Regulates and monitors the banking sector.
  • IRDAI: Regulates the insurance sector.
  • PFRDA: Regulates the pension fund sector.
  • IFSCA: A unified authority for the development and regulation of financial products, financial services, and financial institutions in the IFSC in India.

Other Services Provided by Brokers (Part 9)

• Introduction: The powers in respect of the contracts for sale and purchase of securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently by RBI.
• SEBI Administration: The SEBI Act and the Depositories Act are primarily administered by SEBI. The rules under the securities laws are framed by Government and regulations by SEBI.

Key Concept 1: Role of Securities Exchange Board of India (SEBI)

• Definition: SEBI is the regulatory authority in India established under Section 3 of SEBI Act, 1992.
• Details: SEBI’s primary role is to protect the interest of the investors in securities and to promote the development of securities market and regulate the securities market.
• Role of SEBI:
  • Protecting the interests of investors in securities.
  • Promoting the development of the securities market.
  • Regulating the business in stock exchanges and any other securities markets.
  • Registering and regulating the working of stock brokers, Authorized Persons etc.
  • Promoting and regulating self-regulatory organizations
  • Prohibiting fraudulent and unfair trade practices
  • Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self-regulatory organizations, mutual funds and other persons associated with the securities market.

Key Concept 2: Regulatory Framework for Securities Market

• Introduction: The process of liberalization of the Indian securities market started in 1992.
• Main Acts: The four main Acts governing the securities market are:
  • The SEBI Act, 1992
  • The Securities Contract (Regulation) Act {SC(R)A}, 1956
  • The Depositories Act, 1996
  • The Companies Act, 2013
• Regulations/Acts: Apart from the four Acts, from time to time SEBI issues rules, regulations, guidelines, circulars etc.
• Examples of Regulations/Acts:
  • The Securities Contracts (Regulations) Rules, 1957
  • Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018
  • SEBI (Stock Brokers) Regulations, 1992
  • SEBI (Prevention of Insider Trading) Regulations, 2015
  • Prevention of Money laundering Act, 2002

Key Concept 3: SEBI Act, 1992

• Introduction: The SEBI Act, 1992 was enacted to empower SEBI with statutory powers.
• Powers: SEBI has powers to protect the interests of investors in securities, promote the development of the securities market, and regulate the securities market.
• Regulatory Jurisdiction: SEBI’s regulatory jurisdiction extends over corporates, intermediaries, and persons associated with securities market.

Key Concept 4: Securities Contract (Regulation) Act, 1956

• Introduction: The Securities Contract (Regulation) Act, 1956 provides for direct and indirect control of virtually all aspects of securities trading and the running of Stock Exchanges.
• Regulatory Jurisdiction: The Act gives Central Government the regulatory jurisdiction over Stock Exchanges, contracts in securities, and listing of securities on Stock Exchanges.

Key Concept 5: Depositories Act, 1996

• Introduction: The Depositories Act enables the setting up of multiple depositories in the country.
• Depository: A depository established under the Depositories Act can provide any service connected with recording of allotment of securities or transfer of ownership of securities in the record of a depository.

Key Concept 6: Companies Act, 2013

• Introduction: The Companies Act, 2013 deals with issue, allotment and transfer of securities and various aspects relating to company management.
• Regulatory Jurisdiction: The Act provides for standard of disclosure in public issues of capital and regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends.

Key Concept 7: Securities Contract (Regulation) Rules, 1957

• Introduction: The Securities Contract (Regulation) Rules, 1957 provide guidelines on application and recognition of stock exchanges, qualifications for membership on a recognised stock exchange, and requirements with respect to the listing of securities.

Key Concept 8: SEBI (Stock Broker) Regulation, 1992

• Introduction: The SEBI (Stock Brokers) Regulation, 1992 lays down the rules and regulation for registration of Stock Brokers.
• Code of Conduct: The regulation prescribes a code of conduct for stock brokers, including maintaining high standards of integrity, promptitude and fairness in the conduct of all business.

Key Concept 9: Prevention of Money Laundering Act, 2002

• Introduction: The Prevention of Money-Laundering Act, 2002 is an act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering.
• Definition of Money Laundering: Money laundering has been defined as “any process or activity connected with proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property”.

Other Services Provided by Brokers (Part 10)

• Money Laundering: It is an offence to be involved in the concealment, possession, acquisition, or use of proceeds of crime, and projecting or claiming it as untainted property.
• Punishment for Money Laundering: The punishment for money laundering is rigorous imprisonment for a minimum of 3 years, which may extend to 7 years, and a fine.
• Adjudicating Authority: The Central Government appoints an Adjudicating Authority to exercise jurisdiction, powers, and authority under the Prevention of Money Laundering Act (PMLA).
• Powers of Adjudicating Authority: The Adjudicating Authority has the same powers as a civil court, including discovery and inspection, enforcing attendance, compelling production of records, and receiving evidence on affidavits.

Key Concepts

• Reporting Entities: Reporting entities, such as banking companies, financial institutions, and intermediaries, must maintain records of all transactions and furnish information to the Director.
• Client Due Diligence: Reporting entities must verify the identity of clients, maintain records of documents evidencing identity, and keep information confidential.
• Enhanced Due Diligence: Reporting entities must conduct enhanced due diligence for specified transactions, including verifying the identity of clients and examining the ownership and financial position of the client.
• Suspicious Transaction Reporting: Reporting entities must report suspicious transactions to the Financial Intelligence Unit-India.

SEBI Guidelines on Anti-Money Laundering

• SEBI Directives: SEBI has laid down guidelines and master circulars on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) for securities market intermediaries.
• Client Acceptance Policies: Registered intermediaries must develop client acceptance policies and procedures to identify high-risk clients.
• Risk Management: Intermediaries must categorize clients as low, medium, or high risk based on due diligence and KYC documents.
• Principal Officer and Designated Director: Intermediaries must appoint a Principal Officer and a Designated Director to ensure compliance with PMLA provisions.

Other Services Provided by Brokers (Part 11)

• Definition of Insider Trading: Insider Trading denotes dealing in a company’s securities on the basis of confidential information relating to the company which is not published or not known to the public (known as unpublished price sensitive information), used to make profits or avoid loss.
• Prohibition of Insider Trading: Insider Trading is considered as an offence and is hence prohibited as per the SEBI (Prohibition of Insider Trading) Regulations, 2015.
• SEBI Regulations: The SEBI (Prohibition of Insider Trading) Regulations, 2015, lay down the definition of ‘Insiders’; restrictions on communication and trading by insiders; disclosures of trading by them; and the systemic provisions which need to be laid down and followed by listed company, proposed to be listed company as well as intermediaries.

Key Concepts

• Insider: Any person who is a connected person or in possession of or having access to unpublished price sensitive information.
• Connected Person: Any person who is or has been, during the six months prior to the concerned act, associated with a company, in any capacity, directly or indirectly.
• Unpublished Price Sensitive Information: Any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003

• Fraud: Includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities.
• Prohibition of Certain Dealing in Securities: No person shall directly or indirectly buy, sell or otherwise deal in securities in a fraudulent manner.
• Prohibition of Manipulative, Fraudulent and Unfair Trade Practices: No person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities markets.
• Instances of Manipulative, Fraudulent or Unfair Trade Practices: Includes knowingly indulging in an act which creates a false or misleading appearance of trading in the securities market, dealing in a security not intended to effect transfer of beneficial ownership, inducing any person to subscribe to an issue of the securities for fraudulently securing the minimum subscription, and more.

Other Services Provided by Brokers (Part 12)

• Unfair Trade Practices: Include circular transactions, fraudulent inducement, falsifying records, and insider trading.
• Front Running: An illegal act where a dealer/broker places their own order ahead of a client's order, giving them an unfair advantage.
• Consequences of Unfair Trade Practices: Violation of SEBI Act and Regulations, penalty, and cancellation of registration.
• Dabba Trading: Illegal trading in securities outside the stock exchange mechanism, carried out by unregistered persons.
• Consequences of Dabba Trading: Credit risk, default, and loss to investors, as well as violation of SCRA and Indian Penal Code.
• SEBI (Custodian) Regulation, 1996: Regulates custodian services, requiring registration with SEBI and a minimum net worth of Rs. 50 crores.
• SEBI (KYC Registration Agency) Regulations, 2011: Introduced to eliminate duplication of KYC process and have a uniform KYC process across SEBI registered intermediaries.

Key concepts:

• Custodian: An entity responsible for safeguarding securities and providing related services.
• KYC (Know Your Client): A process to verify the identity of clients, required for registration with SEBI.
• KRAs (KYC Registration Agencies): Administered under SEBI KYC Registration Agency Regulations, 2011, to provide uniform KYC process.
• SEBI Act, 1992: Regulates securities market, including provisions for unfair trade practices and penalties.
• SCRA (Securities Contracts (Regulation) Act), 1956: Regulates securities contracts, including provisions for dabba trading and penalties.

Other Services Provided by Brokers (Part 13)

• KYC Upload: The intermediary must upload the KYC information on the system of the KRA within 3 working days from the date of completion of the KYC process.
• Incomplete KYC Documents: In case a client’s KYC documents sent by the intermediary to KRA are not complete, the KRA shall inform the same to the intermediary who shall forward the required information/documents promptly to KRA.
• Existing Clients: For existing clients, the KYC data shall be uploaded by the intermediary provided they are in conformity with details sought in the uniform KYC format.
• Internal Controls: The intermediary shall have adequate internal controls to ensure the security/authenticity of data uploaded by it.

Key Concepts Related to KRAs and Intermediaries

• Intermediary: An entity associated with securities market and registered under sub-section (1A), (1B) and (1) of Section 12 of the SEBI Act, 1992; who is required to do KYC of its clients.
• KRA System: Shall provide KYC information in data and image form to the intermediary.
• KRA Responsibilities: Shall send a letter to the client within 2 working days of the receipt of the initial/updated KYC documents from intermediary, confirming the details thereof and shall maintain the proof of dispatch.
• Audit Trail: KRA shall maintain an audit trail of the upload/modifications/downloads made in the KYC data, by the intermediary in its system.
• Annual Audit: KRA shall ensure that a comprehensive audit of its systems, controls, procedures, safeguards and security of information and documents is carried out annually by an independent auditor.

Regulations

• SEBI (Intermediaries) Regulations, 2008: Provides details on Registration of Intermediaries, General obligation of intermediaries including redressal of investor grievance, appointment of compliance officer, investment advice, code of conduct, Inspection and disciplinary proceedings etc.
• SEBI (Depositories and Participants) Regulations, 2018: Provides details on registration, ownership and governance of depositories and depositories participants.

Introduction to Securities Broking Operations

• Securities Trade Life Cycle: Involves multiple participants like investors, brokers, Exchanges, Clearing agency/corporation, Clearing banks, Depository Participants, Custodians etc.
• Front Office, Middle Office and Back Office Operations:
  • Front Office: Placing of an order by the investor/client/broker, matching of order and its conversion into trade and routing of order through the trading platform.
  • Middle Office: Risk management.
  • Back Office: Confirmation of trades and Clearing and Settlement of trades.
• Trader Workstation (TWS): The terminal from which the member accesses the trading system of Exchange.
• Order Placement: Clients have the option of placing their orders through various channels like internet, phone, direct market access (DMA) etc.
• Record Keeping: Brokers are required to maintain the records for a minimum period for which the arbitration accepts investors’ complaints as notified from time to time (which is currently three years).

Other Services Provided by Brokers (Part 14)

• Internet Trading: Allows clients to trade using the internet as a medium through brokers' internet trading systems, with orders routed to exchange trading systems for execution.
• Direct Market Access (DMA): A facility that enables brokers to offer clients direct access to the exchange trading system, providing advantages such as direct control, faster execution, reduced errors, and greater transparency.
• Algorithmic Trading: Involves the use of automated execution logic to generate orders, with SEBI advising stock exchanges to ensure all algorithmic orders are routed through broker servers in India and have appropriate risk controls.
• High Frequency Trading (HFT): A type of algorithmic trading characterized by high daily portfolio turnover and high order-to-trade ratio, requiring low latency and sophisticated technology.

Key Features of Broker Services

• Risk Management: Brokers must have an online risk management system in place, including pre-defined limits and checks, to protect against various risks and ensure stability in the financial system.
• Order Matching and Conversion: Orders are matched with similar counter orders on a price-time priority basis, resulting in trades that are confirmed to the broker and client.
• Affirmation and Confirmation: Institutional clients use custodians to assist with clearing and settlement, with brokers assigning trades to custodians for settlement and custodians verifying security details and confirming trades.
• Straight Through Processing (STP): Automates the end-to-end processing of transactions, streamlining trade execution and settlement, and reducing errors and costs.

Important Documents

• Contract Note: A legal record of transactions carried out on a stock exchange, serving as confirmation of trade and establishing a legally enforceable relationship between the broker and client.
• Electronic Contract Notes (ECNs): Digitally signed contract notes that can be sent to clients who have opted for electronic delivery, with brokers required to maintain proof of dispatch and acknowledgement.

Other Services Provided by Brokers (Part 15)

• Contract Notes: Contract notes should be unique, running serially numbered, and contain the client's name, PAN, client's code, order number, order entry time, trade number, trade time, quantity of securities transacted, rates/price, etc.
• Electronic Contract Notes (ECNs): ECNs should be digitally signed, encrypted, non-tamperable, and comply with the provisions of the IT Act, 2000. They should be sent to clients through email or SMS/electronic instant messaging services, and a physical copy should be sent if the email is rejected or bounced back.
• Clearing and Settlement: The clearing corporation determines the obligations of members based on trade details from the exchange. The settlement process begins as soon as member's obligations are determined, and it is carried out by the clearing corporation with the help of clearing banks and depositories.
• Front Office Operations: The front office is responsible for order capture and execution, and it includes activities such as client on-boarding and registration, sales, and account opening.
• Client On-Boarding and Registration: This includes filling out a client account opening form, which has two parts: Know Your Client (KYC) form and a document capturing additional information about the client.
• KYC and Other Documents: KYC is an acronym for "Know your Client", a term commonly used for Customer Identification Process. SEBI has prescribed certain requirements relating to KYC norms for Financial Institutions and Financial Intermediaries, including verification of identity and address, financial status, etc.

Key Concepts

• Contract Note: A contract note is a document that contains the details of a trade, including the client's name, PAN, client's code, order number, order entry time, trade number, trade time, quantity of securities transacted, rates/price, etc.
• Electronic Contract Note (ECN): An ECN is a digital version of a contract note, which is sent to clients through email or SMS/electronic instant messaging services.
• Clearing Corporation: A clearing corporation is an entity that determines the obligations of members based on trade details from the exchange and carries out the settlement process.
• Front Office: The front office is the part of a brokerage firm that is responsible for order capture and execution, and it includes activities such as client on-boarding and registration, sales, and account opening.
• Know Your Client (KYC): KYC is a term commonly used for Customer Identification Process, which entails verification of identity and address, financial status, etc.

Other Services Provided by Brokers (Part 16)

• Know Your Customer (KYC): The process of verifying the identity of clients, which is a crucial part of the Anti-Money Laundering (AML) process.
• Customer Due Diligence (CDD): Policies and procedures used to verify the identity of clients and assess their risk profile.
• Proof of Identity (PoI) and Proof of Address (PoA): Documents required to verify the identity and address of clients, such as PAN card, passport, and utility bills.

Digital KYC

• Digital Medium: SEBI allows clients to complete KYC through digital medium, such as online or app-based KYC.
• Aadhaar e-Sign: Clients can use their Aadhaar number to complete KYC, which is verified through UIDAI's authentication/verification mechanism.
• e-KYC: SEBI registered intermediaries can use e-KYC service launched by UIDAI to complete KYC of clients.

In-Person Verification (IPV)

• Mandatory: All registered stock brokers must carry out IPV of their clients.
• Video In Person Verification (VIPV): SEBI allows stock brokers to use VIPV to complete IPV of clients, which involves a live video interaction between the client and the intermediary.
• Exemptions: IPV is not required in cases where KYC is completed using Aadhaar authentication/verification or where documents are submitted online through Digilocker or other sources.

Documents Required for KYC

• PAN Card: Mandatory for identity verification, except in certain cases such as government transactions or investors residing in Sikkim.
• Proof of Address Document: List of admissible documents includes passport, voter ID card, driving license, and utility bills.
• Proof of Identity: Documents such as Aadhaar, passport, voter ID card, and driving license are considered admissible as proof of identity.

Additional Requirements

• Non-Individual FPIs: Must provide Legal Entity Identifier (LEI) as part of KYC.
• Accessibility: Digital KYC process must be accessible to persons with disabilities, as per the Supreme Court's judgment.

Other Services Provided by Brokers (Part 17)

• Client Identification: For non-residents and foreign nationals, a copy of passport/PIO Card/OCI Card and overseas address proof is mandatory. The LEI (Legal Entity Identifier) code is also required.
• Identification of Beneficial Ownership: SEBI Master Circular SEBI/HO/MIRSD/MIRSDSECFATF/P/CIR/2024/78 dated June 06, 2024 prescribes the approach to be followed towards identification of beneficial ownership.
• Client Due Diligence (CDD) Process: The stock broker shall periodically update all documents, data or information of all clients and beneficial owners collected under the CDD process.
• Bank Account Details: The client must have a valid bank account from which transactions can be made for pay-in/pay-out of funds. The bank account will be mapped to the client’s trading account.
• Demat Account: The client must have opened a demat account with a DP for pay-in or pay-out of securities.
• Power of Attorney (POA): The client may give POA in favour of the broker for smooth functioning.
• Running Account Authorization: The client can authorize the broker to retain funds in his Trading Account and maintain it as a Running Account.
• Rights and Obligations: The document provides the rights and obligations of the stock broker, authorized persons, and client for trading on exchanges.
• Risk Disclosure Document: This document contains important information on risks involved during trading in Equities/Derivatives Segments of the stock exchanges.
• Nomination of Eligible Trading Accounts: Submission of “choice of nomination” for trading accounts has been made voluntary by SEBI.
• Financial Details: The stock broker shall have documentary evidence of financial details provided by the clients who opt to deal in the derivative segment.
• Confidentiality: Stock brokers shall keep confidentiality of every information maintained, furnished, or verified.

KRA Agency (Know Your Client Registration Agency)

• Centralization of KYC Records: SEBI has devised the KRA system for centralization of the KYC records in the securities markets.
• KYC Process: The brokers or trading members shall perform the initial KYC/due diligence of the client and upload the KYC information with proper authentication on the system of the KRA.
• Validation of Records: The KRAs shall verify the necessary attributes of records of all clients within 2 days of receipt of KYC records.

Central Know Your Client (CKYC)

• Centralized Repository: CKYC is an initiative of the Government of India which aims to have a system that allows investors to complete their KYC only once before interacting with various entities across the financial sector.
• CERSAI: CERSAI is authorized by the Government of India to function as the Central KYC Registry (CKYCR).
• KYC Identification Number: Once the KYC form is submitted, a unique KYC Identification Number (also known as CKYC Number) is generated and communicated to the client.

Unique Client Code (UCC)

• Mandatory Requirement: SEBI has made it mandatory for brokers to use unique client codes for all clients.
• Client Identity: The unique client code (UCC) acts as an identity for the client with respect to the broker.
• PAN Mapping: The UCC should be mapped with the PAN number of the client.

Other Services Provided by Brokers (Part 18)

• Unique Client Code (UCC): The Stock Exchanges provide an upload facility to the brokers through which the UCC and other client details are uploaded on the stock exchange platform on a regular basis.
• Validation: Stock Exchanges validate UCC and PAN for all orders in all markets at the time of order entry with the details uploaded by members on Exchange.
• Mapping: UCC allotted by the trading member to the client shall be mapped with the demat account of the client.
• Client Details: Stock Brokers shall upload the details of clients, such as name, mobile number, address for correspondence, and E-mail address.
• Transaction Details: Stock Exchanges shall send details of the transactions to the investors by the end of the trading day through SMS and E-mail alerts uploaded by the stock-brokers.

Execution of Power of Attorney (PoA)

• Definition: A Power of Attorney (PoA) is executed by the client in favour of the stock broker/stock broker and depository participant to authorize the broker to operate the client’s demat account and bank account.
• Optional: PoA is optional and should not be insisted upon by the stock broker/depository participant for opening of the client account.
• Utilization: PoA executed in favour of stock broker/stock broker depository participant by the client shall be utilized for specific purposes such as transfer of securities, pledging/re-pledging of securities, and application for various products.
• Guidelines: SEBI has provided guidelines for execution of PoA, including identification of beneficial owner account(s) and bank account(s) of the client(s) and execution of PoA in the name of the concerned SEBI registered entity only.

Execution of ‘Demat Debit and Pledge Instruction’ (DDPI)

• Definition: DDPI is a separate document that authorizes the stock broker/stock broker and depository participant to access the Beneficial Owner (BO) account of the client to meet settlement obligations of the trade executed by the client.
• Purpose: DDPI serves the same purpose as PoA and mitigates the misuse of PoA.
• Limitation: The use of DDPI is limited to specific purposes such as transfer of securities, pledging/re-pledging of securities, and mutual fund transactions.

Brokerage

• Definition: Brokerage is a charge that is mutually agreed between member and client subject to the maximum permissible by the Exchange.
• Rules: Brokerage rules vary for Equity/Capital Market segment and Derivatives segment, with maximum brokerage rates specified for each segment.
• Types of Brokers: Trading members can be full service brokers, discount brokers, or online brokers, with different commission charges for each type.
• Commission Schemes: Brokers use multiple commission schemes such as volume-based commission, slab-wise commission, or scrip-wise commission.

Order Management

• Definition: Order management consists of entering orders, order modification, order cancellation, and order matching.
• Components: The main components of an order are price, time, quantity/no. of contract.

Other Services Provided by Brokers (Part 19)

• Order Entry: A trading member can enter various types of orders depending upon their requirements, including security details, buy/sell, quantity, price, time condition, and client identity (UCC).
• Order Conditions: Order conditions are broadly classified into three categories:
  • Price Related Conditions: Include market orders, limit orders, and stop orders.
  • Time-Related Conditions: Include day orders, immediate or cancel (IOC) orders, good till cancelled (GTC) orders, and good till days/date (GTD) orders.
  • Quantity Related Conditions: Include disclosed quantity (DQ) conditions.

Key Concepts

• Market Order: A market order is where a trader purchases or sells their security at the best market price available across the market depth to complete the order quantity.
• Limit Order: A limit order involves setting the entry or exit price and then aiming to buy at or below the market price or sell at or above it.
• Stop Order: A stop order allows the trading member to place an order which gets activated only when the market price of the relevant security reaches or crosses a threshold price.
• Day Order: A day order is an order which is valid for the day on which it is entered.
• Immediate or Cancel (IOC) Order: An IOC order allows a trading member to buy or sell a security as soon as the order is released into the market, failing which the order will be removed from the market.
• Good Till Cancelled (GTC) Order: A GTC order is an order that remains in the system until it is cancelled by the trading member.
• Good Till Days/Date (GTD) Order: A GTD order allows the trading member to specify the days/date up to which the order should stay in the system.
• Disclosed Quantity (DQ) Condition: An order with a DQ condition allows the trading member to disclose only a part of the order quantity to the market.

Other Services Provided by Brokers (Part 20)

• Minimum Fill (MF) Orders: Allow the Trading Member to specify the minimum quantity by which an order should be filled. For example, an order of 1000 units with a minimum fill of 200 will require that each trade be for at least 200 units.
• All or None (AON) Orders: Allow a Trading Member to impose the condition that only the full order should be matched against. This may be by way of multiple trades. If the full order is not matched, it will stay in the books till matched or cancelled.
• Proprietary Trading: Trading members are allowed to trade on their own behalf. To facilitate this, Stock Exchanges provide the facility of placing orders on a proprietary (pro) account.
• Order Routing: Once an order is entered and confirmed by the client/dealer at their trading terminal and verified by the broker software, the order is routed to the Exchange for its execution.
• Order Matching: The order matching in an Exchange is done based on price-time priority. The best price orders are matched first. If more than one order arrives at the same price, they are arranged in ascending time order.
• Order Modification/Cancellation: All orders can be modified or cancelled during trading hours and the pre-open market stage, provided they are not fully executed. For orders that are partially executed, only the open or unexecuted part of the order can be cancelled/modified.
• Trade Execution: Execution of trade occurs when a buyer and seller reach an agreement pertaining to the terms and price of a trade, and the order to buy or sell a security is completed after the same is matched on the Exchange platform.
• Trade Modification: Trade modification is allowed for parameters like client code and custodian participant code, subject to certain conditions and timings.
• Trade Annulment: Trading members are allowed to provide trade annulment requests on the trading system. The request should be submitted within 30 minutes from trade execution.
• Middle Office Operations: The middle office handles validations, bookings, and confirmations. Risk Management and Surveillance typically form the main function of the middle office.
• Risk Management: An efficient risk management system is integral to an efficient securities market. It plays a crucial role in identifying and mitigating potential risks associated with transactions or behavior that may affect prices and/or volumes.

Other Services Provided by Brokers (Part 21)

• Settlement System: The obligation to settle trades lies with the broker. If a client defaults, the broker must make good on the trade to the clearing corporation.
• Risk Management: Brokers have online risk management capabilities for all orders placed on the exchange platform, including trading limits such as order quantity and value limits, user/branch order limits, and order price limits.
• Margin: Clearing corporations levy margins on brokers to maintain positions on the exchange, proportional to the exposure and risk the broker carries.
• Broker Responsibilities: Brokers are responsible for collecting margins from clients upfront and allowing trading based on collateral provided.

Key Risk Management Concepts

• Risk Management Standards: Broking firms must define risk management standards, measure risk appetite, and establish policies for risk management, internal control, and audit.
• Position Limits: Broking firms impose limits to cover exposures and overall position concentrations relative to potential systematic risks.
• Investment Guidelines: Broking firms outline investment guidelines and strategies for risk-taking, including commitments to particular market areas and hedging against systematic risk.
• Compliance Reporting: Broking firms have risk management and control reporting and review processes, including mechanisms for reporting compliance with established policies and procedures.

Types of Risk for Members

• Operational Risk: The risk of monetary loss from inadequate or failed internal processes, manual and systems errors, or external events.
• Market Risk: The possibility of incurring large losses from adverse changes in financial asset prices, such as stock prices.
• Credit Risk: The risk of default on a debt that may arise from a borrower failing to make required payments.
• Legal Risk: The risk that an entity may not be able to enforce a contract against another party.
• Systemic Risk: The risk that a disruption at a firm, in a market segment, or to a settlement system could cause a "domino effect" throughout the financial markets.
• Technology Risk: The risk of technical glitches and cyber-attacks.

Back Office Operations

• Trade Enrichment: The process of including additional information in one instruction in a trade that is already being executed.
• Trade Allocation: The process of allocating trades to clients, including generating client-wise brokerage, obligations for securities and funds, and tax amounts to be collected and paid.

Other Services Provided by Brokers (Part 22)

• Trade Allocation: Refers to the process of allocating trades to various portfolios, specifically how the trade is allocated (pro rata, all or nothing, etc).
• Deal Sheets: Provided by the front office team, containing details of allocation to individual schemes.
• Contract Note: Issued by the broker, informing the client of their obligations, and serves as a legally enforceable relationship between the stock broker and the client.

Clearing and Settlement Process

• Clearing House/Corporation: An entity through which settlement of securities takes place, providing an obligation report to brokers and custodians.
• Obligation Report: Serves as a statement of mutual contentment, outlining the settlement obligations of brokers and custodians.
• T+1 Rolling Settlement: Implemented in the Indian securities market, where settlement occurs on the next working day (T+1).
• T+0 Rolling Settlement: Introduced on an optional basis for a limited number of scrips, allowing for same-day settlement.

Accounting

• Books of Account: Stock brokers are required to maintain books of account, including:
  • Register of transactions (sauda book)
  • Clients ledger
  • General ledger
  • Journals
  • Cash book
  • Bank pass book
  • Securities register
  • Counterfoils or duplicates of contract notes
  • Margin deposit book
  • KYC forms
  • Client account opening form
• Record-Keeping: Stock brokers must maintain records for a minimum period of 5 years, including electronic forms, and comply with the Information Technology Act, 2000.

Information Technology (IT)

• Integrated System: Stock broking offices need a complete integrated system to optimize business processes, covering all aspects of brokerage operations and management.
• Business Functions: Include customer database, document archiving, customer accounting, portfolio management, risk management, and auditing system.
• Technical Functions: Include support and standby database function, disaster recovery, and customer data management.
• Trades Functions: Include automatic entry of daily executions, identification of new customers, and link of executions to orders.
• Order Management System: Features include sell orders, buy orders, order execution, log of orders, and orders confirmation.
• SEBI Guidelines: Mandate comprehensive testing of software, including user acceptance testing and mock testing, to protect against trading disruption due to software failure.

Other Services Provided by Brokers (Part 23)

• Definition: Other services provided by brokers include access to design documents, training of staff, and penalty clauses for disruptions to the trading system.
• Details: These services are crucial for maintaining the integrity of the trading system and ensuring that brokers can provide continuous services to their clients.

Key Concepts

• System Audit: SEBI has mandated periodic system audits for stock brokers to ensure that their systems are secure and capable of handling trading activities.
• Cyber Security and Cyber Resilience: Stock brokers and depository participants are required to have a robust cyber security and cyber resilience framework to protect against breaches and maintain the integrity of data.
• Business Continuity Plan: Stock brokers are required to have a business continuity plan in place to ensure that they can continue to provide services to their clients in the event of a disruption.
• Technical Glitches: SEBI has introduced measures to address technical glitches in stock brokers' electronic trading systems, including the requirement to inform stock exchanges immediately and submit a preliminary incident report and root cause analysis report.

Regulatory Framework

• SEBI Circulars: SEBI has issued various circulars to regulate the services provided by brokers, including circulars on system audits, cyber security, and business continuity plans.
• Guidelines: Stock brokers are required to comply with guidelines issued by SEBI and stock exchanges, including guidelines on know-your-client (KYC) requirements and outsourcing of activities.
• Framework for Monitoring and Supervision: SEBI has introduced a framework for monitoring and supervision of system audits of stock brokers through technology-based measures.

Best Practices

• Capacity Planning: Stock brokers should have adequate capacity planning to ensure that they can handle an increasing number of investors and provide continuous services to their clients.
• Proactive Monitoring: Stock brokers should proactively monitor their systems to mitigate the impact of technical glitches and ensure that their trading systems function smoothly.
• Compliance: Stock brokers should comply with all regulatory requirements and guidelines issued by SEBI and stock exchanges to maintain the integrity of the trading system and protect the interests of their clients.

Other Services Provided by Brokers (Part 24)

• Cyber Security and Cyber Resilience Framework (CSCRF): The Securities and Exchange Board of India (SEBI) has formulated a framework to provide standards and guidelines for strengthening cyber resilience and maintaining robust cybersecurity of SEBI Regulated Entities.
• Key Objectives of CSCRF: The key objectives of CSCRF are to address evolving cyber threats, align with industry standards, encourage efficient audits, and ensure compliance by SEBI Regulated Entities.
• Market Infrastructure Institutions (MIIs): The following entities are constituted as MIIs:
  • Stock Exchanges
  • Depositories
  • Clearing Corporations
  • KYC Registration Agencies (KRAs)
  • Qualified Registrars and Transfer Agents (QRTAs)
• Cyber Resilience Goals: The Cyber Security and Cyber Resilience Framework is based on 5 cyber resiliency goals:
  1. Anticipate: Maintain a state of informed preparedness from adversary attacks.
  2. Withstand: Continue essential business functions at times of adversary attacks.
  3. Contain: Localize containment of crisis and isolate trusted functions from untrusted ones to continue business operations.
  4. Recover: Restore business functions to the maximum extent, subsequent to adversary attacks.
  5. Evolve: Change business functions and its supporting cyber capabilities to minimize adverse impacts of adversary attacks.
• Security Operation Centre (SOC): CSCRF mandates that all Regulated Entities are required to establish appropriate security monitoring mechanisms through SOC.
• Safeguards to Avoid Trading Disruption: Adequate mechanisms should be in place to ensure smooth transition by stock brokers to another software vendor in case of inability of the existing software vendor to provide software and related services.
• Framework for Adoption of Cloud Services: SEBI has provided a framework for the adoption of cloud services by Regulated Entities, which highlights key risks, mandatory control measures, and regulatory and legal compliances.
• Securities Transaction Tax (STT): STT is levied on every purchase or sale of securities listed on Indian Stock Exchanges, and the rates vary depending on the type of transaction.
• Stamp Duty: The Central Government has created a mechanism to enable states to collect stamp duty on securities market instruments at one place by one agency, and a mechanism for sharing the stamp duty with relevant State Governments has been developed.

Other Services Provided by Brokers (Part 25)

• Stamp Duty Collection: The collecting agents, such as Stock Exchanges or authorized Clearing Corporations and Depositories, shall collect stamp duty from brokers and transfer it to the account of the concerned State Government.
• Mechanism for Stamp Duty Collection: A mechanism similar to Securities Transaction Tax (STT) has been implemented for the determination and collection of stamp duty from brokers.
• Bulk Deals: Disclosure is required for all transactions in a scrip where the total quantity of shares bought/sold is more than 0.5% of the number of equity shares of the company listed on the stock exchange.
• Block Deals: A trade with a minimum value of Rs.10 crore executed through a single transaction on a separate window of the stock exchange constitutes a block deal.
• Regulatory Compliances: Stock brokers must follow certain regulatory compliances under the law, rules, regulations, and bye-laws of SEBI and the Exchanges, including maintaining documents and books, and submitting periodic reports to the stock exchanges.

Key Concepts

• Bulk Deals: Require disclosure of transactions exceeding 0.5% of the company's listed equity shares.
• Block Deals: Involve a minimum trade value of Rs.10 crore and are executed on a separate window.
• Stamp Duty: Collected by Stock Exchanges or authorized Clearing Corporations and Depositories, and transferred to the concerned State Government.
• Regulatory Compliances: Mandatory for stock brokers, including document maintenance, book-keeping, and report submission to SEBI and the Exchanges.

Other Services Provided by Brokers (Part 26)

• Definition: The clearing corporation provides various services to its members, including monitoring of member performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions, and automatic disablement from trading when limits are breached.
• Details: The clearing corporation's risk management system consists of several components, including margin, liquid assets, base minimum capital, pre-trade risk control, and risk reduction mode.

Key Components of Risk Management System

• Margin: The process by which a clearing corporation computes the potential loss that can occur to the open positions held by members across all its clients.
• Liquid Assets: The core of the risk management system, which includes acceptable liquid assets and applicable haircuts.
• Base Minimum Capital: The minimum capital required by members to trade.
• Pre-trade Risk Control: The process of monitoring and controlling the risk of trades before they are executed.
• Risk Reduction Mode: A mode that is triggered when a member's losses exceed the available collateral.

Types of Margins

• Value at Risk (VaR) Margin: A margin intended to cover the largest loss that can be encountered on 99.9% of the days.
• Mark to Market (MTM) Loss Margin: A margin that covers the mark to market losses on outstanding settlement obligations of the member.
• Extreme Loss Margin: A margin that covers the expected loss in situations that go beyond those envisaged in the 99.9% value at risk estimates used in the VaR margin.

Calculation of VaR Margin

• VaR Margin Rate: The applicable VaR margin rates are updated at least 5 times a day, based on the closing price of the previous day and the prices at 11:00 a.m., 12:30 p.m., 2:00 p.m., and at the end of the trading session.
• Scrip Sigma: The volatility of the security computed as at the end of the previous trading day, using the exponentially weighted moving average method.

Collection of Margins

• VaR Margin: Collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade.
• MTM Margin: Collected before the start of the trading of the next day, and adjusted against the cash/cash equivalent component of the liquid assets of the member.

Additional Margins

• Intraday Crystallized Mark to Market Losses (ICMTM): Calculated and levied by the clearing corporation for all trades subject to upfront margining, which are executed and closed out on the same trading day.
• Additional Margin on High Volatile Stocks: Applied to securities with intra-day price movement of more than 10% in the underlying market for 3 or more days in the last one month.

Other Services Provided by Brokers (Part 27)

• Cash Equivalents:
  • Definition: Includes cash, bank fixed deposits, and bank guarantees with a 0% haircut and no limit.
  • Details: Also includes securities of the Central Government and units of overnight mutual fund schemes with no limit.
• Other Liquid Assets:
  • Definition: Includes equity shares, units of mutual fund schemes, and corporate bonds with applicable haircuts and limits.
  • Details:
    • Equity shares with impact cost of up to 0.1% for an order value of Rs. 1 lakh and traded for at least 99% of days over the previous 6 months have a VaR margin based on 6 sigma with a limit on exposure to a single issuer.
    • Units of mutual fund schemes other than those listed under cash equivalents have a VaR margin based on 6 sigma with no limit.
    • Corporate bonds have a fixed percentage-based or VaR-based haircut, with a minimum haircut of 10% and a limit of 10% of the total liquid assets of the clearing member.
• Liquidity Categorization of Securities:
  • Definition: Securities are classified into three groups based on their liquidity: Liquid (Group I), Less Liquid (Group II), and Illiquid (Group III).
  • Details:
    • Group I: Securities with at least 80% trading frequency over the previous six months and an impact cost of less than or equal to 1%.
    • Group II: Securities with at least 80% trading frequency over the previous six months and an impact cost of more than 1%.
    • Group III: Securities with less than 80% trading frequency over the previous six months.
• Margining of Institutional Trades:
  • Definition: Institutional trades in the cash market are subject to payment of margins as applicable to transactions of other investors.
  • Details:
    • Trading members, clearing members, and custodians are exempt from collecting upfront margins for institutional transactions.
    • Institutional trades are margined on a T+1 basis, with the margin being collected from the custodian upon confirmation of trade.
    • Institutional investors include SEBI-registered category I & II FPIs, mutual funds, public financial institutions, banks, insurance companies, and pension funds.
• Shortfall of Margins / Pay-in of Funds:
  • Definition: In case of any shortfall in margin, the Clearing Corporation may advise the Exchange to withdraw any or all of the membership rights of the clearing member.
  • Details: The Clearing Corporation may withdraw trading facilities of all trading members and/or clearing facility of custodial participants in case of a margin shortfall.

Other Services Provided by Brokers (Part 28)

• Clearing and Settlement: Clearing members are responsible for settling trades on behalf of their clients, and there are penalties for margin violations.
• Margining: Trades of Foreign Portfolio Investors (FPIs) are margined on a T+1 basis, while Category II FPIs who are corporate bodies, individuals, or family offices are margined on an upfront basis.
• Pay-in Shortfall: If a trading member has a pay-in shortfall, their trading facility may be withdrawn, and security pay-out may be withheld if the shortfall exceeds the base minimum capital (BMC) or 20% of the BMC on six occasions within three months.

Key Concepts

• Base Minimum Capital (BMC): The minimum capital required for trading members, which varies based on their risk profile and segment of operation.
• BMC Deposit: A deposit required to meet contingencies in any segment of the exchange, which must be maintained by trading members.
• Additional Margins: Exchanges and clearing corporations may impose additional risk containment measures, such as ad-hoc margins, to deal with unforeseen circumstances.
• Early Pay-in: A facility that allows trading members to pay in funds and securities early, which can help reduce margin obligations.
• Pre-trade Risk Controls: Checks and mechanisms in place to prevent aberrant orders or uncontrolled trades, including value and quantity limits, cumulative limits, and dynamic price bands.
• Risk Reduction Mode: A mechanism to reduce risk in trading, although the specifics of this mode are not detailed in this section.

Important Terms

• FPIs: Foreign Portfolio Investors
• BMC: Base Minimum Capital
• T+1: Trading plus one day, referring to the margining period for FPI trades
• UCC/PAN: Unique Client Code/Permanent Account Number, used for client identification and verification
• EPI: Early Pay-In, a facility for early payment of funds and securities
• CC: Clearing Corporation, responsible for clearing and settling trades
• SEBI: Securities and Exchange Board of India, the regulatory body for the Indian securities market

Other Services Provided by Brokers (Part 29)

• Risk Reduction Mode: Stock Exchanges/Clearing Corporation shall ensure that stock brokers are mandatorily put in risk-reduction mode when a specific percent (currently 90%) of the stock broker’s collateral available for adjustment against margins gets utilized.
• Key Features of Risk Reduction Mode:
  • All unexecuted orders shall be cancelled once the stock broker breaches the 90% collateral utilization level.
  • Only orders with Immediate or Cancel attribute shall be permitted in this mode.
  • All new orders shall be checked for sufficiency of margins.
  • Non-margined orders shall not be accepted from the stock broker in risk reduction mode.
• Risk Management Framework for Derivatives (Equity Future and Option) Segment:
  • Margins: Initial margin is payable on all open positions of clearing members, up to the client level.
  • Liquid Net worth & Liquid Assets: Not explicitly defined in this section, but important for overall risk management.
  • Pre-trade risk control: Not explicitly defined in this section, but important for overall risk management.
  • Risk Reduction Mode: As described above.
  • Position Limits: Not explicitly defined in this section, but important for overall risk management.
• Types of Margins:
  • Initial Margin Computation: Initial margin is payable on all open positions of clearing members, up to the client level.
  • SPAN Margining: Uses Value-at-Risk (VaR) to compute initial margin, with two modifications: generates 16 “what-if” scenarios and considers the entire portfolio of an investor.
  • Margin Period of Risk (MPOR): SEBI has advised Clearing corporation to estimate appropriate MPOR, subject to a minimum of 2 days, for each equity derivatives product.
  • Price Scan Range: Based on 6σ, scaled up by √2, subject to at least 9.3% of the underlying price after considering scaling up.
  • Volatility Calculation: The standard deviation (volatility estimate) is calculated using the Exponential Weighted Moving Average (EWMA).
• Calendar Spread Charge:
  • Index Derivatives: 1.75% of the far month contract.
  • Single Stock Derivatives: 2.2% of the far month contract.
• Margin on Consolidated Crystallized Obligation:
  • Intra-day Basis: Payable crystallized obligations based on closed-out futures positions and payable/receivable premium at the client level.
  • End-of-day Basis: Payable obligations at the client level considering all futures and options positions.

Other Services Provided by Brokers (Part 30)

• Margin on Consolidated Crystallized Obligations: The margin on consolidated crystallized obligations has replaced the net buy premium, intraday crystallized losses, assignment margin, and futures final settlement margin levied.
• Risk Management System: To make the risk management system more robust, the payment of MTM (Mark-to-Market) is mandatorily to be paid by all members before the start of trading on the next day.

Key Concepts

• Net Option Value: Net Option Value is computed as the difference between the long option positions and the short option positions, valued at the last available closing price of the option contract.
• Upfront Collection of Option Premium: SEBI has mandated the upfront collection of option premium from options buyers by the Trading Member (TM)/Clearing Member (CM) to avoid undue intraday leverage and discourage practices of allowing positions beyond collateral at the end-client level.
• Delivery Margins: Delivery margins shall be levied on the lower of potential deliverable positions or in-the-money long option positions four days prior to the expiry of the derivative contract, which must be settled through delivery.
• Extreme Loss Margin: Clearing members shall be subject to extreme loss margins in addition to initial margins, with varying percentages applicable to different products such as index futures, single stock futures, short index options, and short stock options.
• Additional Margin on High Volatile Stocks: For securities with high intraday price movements, additional margins shall be levied to cover the increased risk.
• Cross Margining: SEBI has introduced cross-margining across cash and equity derivatives segments to improve the efficiency of margin capital use by market participants, allowing offsetting positions in eligible securities to be considered for cross-margining benefits.

Additional Margins and Cross Margining

• Additional Margin: Exchanges/clearing corporations have the right to impose additional risk containment measures, including surveillance margin, additional margin for highly volatile stocks, and client concentration.
• Cross Margining Benefit: The cross-margining benefit is available for offsetting positions in eligible securities, including index futures, constituent stock futures, ETFs, and constituent stock positions, with a spread margin levied on the applicable margin.
• Eligible Positions for Cross Margining: Positions eligible for cross-margining benefits include index futures and constituent stock futures, index futures and constituent stock positions, ETFs and constituent stock futures, and ETFs and constituent stock positions.
• Spread Margin: A spread margin of 25% to 40% of the total applicable margin on eligible offsetting positions shall be levied, depending on the type of positions and expiry dates.

Other Services Provided by Brokers (Part 31)

• Cross Margining Benefit: The cross margining benefit shall be computed at the client level on an online real-time basis and provided to the trading member/clearing member/custodian, who shall pass on the benefit to the client. For institutional investors, the cross margining benefit shall be provided after confirmation of trades.
• Liquid Net Worth and Exposure Limits of a Clearing Member:
  • Liquid Net Worth: Defined as the total liquid assets deposited with the Exchange/Clearing Corporation towards initial margin and capital adequacy, LESS initial margin, and extreme loss/exposure margin applicable to the total gross open positions at any given point of time on all trades to be cleared through the clearing member.
  • Liquid Assets: Can be deposited in the form of cash, bank guarantees, fixed deposit receipts, approved securities, and other forms of collateral as prescribed by the Clearing Corporation.
  • Cash Component and Non-Cash Component: Liquid assets are segregated into cash components (cash, bank guarantees, fixed deposit receipts, etc.) and non-cash components (approved list of demat securities, units of mutual funds, etc.).
• Haircut and Limits:
  • Cash Equivalents: Haircut and limits for cash equivalents such as cash, bank fixed deposits, bank guarantees, securities of the Central Government, and units of mutual fund schemes.
  • Other Liquid Assets (Non-Cash Component): Haircut and limits for other liquid assets such as equity shares, units of mutual fund schemes, and corporate bonds.
• Pre-trade Risk Control and Risk Reduction Mode:
  • Pre-trade Risk Controls: Implemented to ensure orderly trading and market integrity, such as quantity freeze, price band, dynamic price band, trade execution range, and self-trade check.
  • Risk Reduction Mode: Stockbrokers are mandatorily put in risk-reduction mode when a specific percentage (currently 90%) of the stockbroker's collateral available for adjustment against margins gets utilized.
• Position and Exposure Limits:
  • Position Limits: Prescribed by SEBI and applicable at instrument level, stock-broker level, clearing member level, limits for FPIs/MFs, non-institutional clients, and market-wide position limits.
  • Exposure Limits: Implemented to monitor and limit the exposure of clearing members and stockbrokers to various assets and instruments.
• Margin Collection by Clearing Corporation:
  • Initial Margin and Extreme Loss Margins: Payable upfront by clearing members and collected from clients/constituents on an upfront basis.
  • Eligible Collateral Modes: Clearing members can provide margin in various eligible collateral modes, including cash, bank guarantees, and approved securities.

Other Services Provided by Brokers (Part 32)

• Clearing Member Services: Clearing members can provide "own" securities or trading member proprietary securities or client securities towards the margin deposit requirements.
• Margin Pledge Facility: Clearing members can re-pledge client/trading member (TM) proprietary securities only through the Margin Pledge facility provided by NSDL and CDSL.
• Collateral Allocation: Clearing members shall ensure that sufficient collateral is allocated to TM Prop/CP/Clients to cover their margin requirements.
• Collateral Transfer: Clearing corporations provide a facility to enable clearing members to transfer collaterals from one segment to another on an intraday basis.
• Collateral Release: Clearing corporations also provide a facility to release collateral intra-day as well as at the end of the day (EOD).

Margins from Clients

• Risk Management: Trading members/clearing members should have a prudent risk management system to protect themselves against client defaults.
• Margin Collection: Margins constitute an important element of risk management systems and are required to be well-documented and made accessible to clients and stock exchanges.
• Capital Market Segment: Trading members/clearing members in the cash segment are required to mandatorily collect upfront VaR margins and ELM from their clients.
• F&O Segment: In the F&O segment, it is mandatory for trading members to collect initial margins (excluding delivery margins) and Extreme Loss Margin from respective clients on an upfront basis.
• Currency Derivative Segment: In the currency derivatives segment, it is mandatory for trading members to collect initial margin and Extreme Loss Margin from their clients on an upfront basis.

Mechanism for Client Collateral

• Pledge/Re-pledge: Margin obligations to be given by way of Pledge/Re-pledge in the depository system.
• Margin Pledge: Collateral from clients in the form of securities is allowed only by way of 'margin pledge', created in the depository system.
• Client Securities Margin Pledge Account: The trading member shall open a separate demat account for accepting such margin pledge, which shall be tagged as 'Client Securities Margin Pledge Account'.
• Re-pledge: For the purpose of providing collateral in the form of securities as margin, a client shall pledge securities with the trading member, and the trading member shall re-pledge the same with the clearing member, and the clearing member in turn shall re-pledge the same to the clearing corporation.

Other Services Provided by Brokers (Part 33)

• Collateral Management: Securities that are not on the approved list of a Clearing Corporation (CC) may be pledged in favour of the Trading Member (TM) / Clearing Member (CM). Each TM / CM may have their own list of acceptable securities that may be accepted as collateral from clients.
• Re-pledging of Securities: CM shall be allowed to re-pledge acceptable/approved client securities with the CC by furnishing the UCC wise client details. CC shall not allow any exposure to the CM on re-pledged securities of the client / TM.
• Margin Trading Facility: Funded stocks held by the TM / CM under the margin trading facility shall be held by the TM / CM only by way of pledge. For this purpose, the TM / CM shall be required to open a separate demat account tagged ‘Client Securities under Margin Funding Account’.
• Framework for Verification of Upfront Collection of Margins: The guideline reiterated that the applicable upfront margins are required to be collected from the clients in advance of the trade. SEBI has specified a framework to the Stock Exchanges/ Clearing Corporations for the purpose of ‘Mechanism for regular monitoring of and penalty for short-collection/ non-collection of margins from clients’ in Cash and Derivatives segments.
• Demat Debit and Pledge Instruction (DDPI): The DDPI shall serve the same purpose of Power of Attorney (PoA) and significantly mitigate the misuse of PoA.
• Segregation and Monitoring of Collateral at Client Level: A reporting mechanism, covering both cash and non-cash collateral, shall be specified by the CCs. TM shall report disaggregated information on collaterals up to the level of its clients to the CM.
• Upstreaming of Clients’ Funds: SEBI has decided the upstreaming of all client funds received by Stock Brokers (SBs) / Clearing Members (CMs) to the Clearing Corporations (CCs). No clients’ funds shall be retained by SBs/CMs on End of Day (EoD) basis.
• Trading supported by Blocked Amount in Secondary Market: SEBI has decided to introduce a supplementary process for trading in secondary market based on blocked funds in investor’s bank account, instead of transferring them upfront to the trading member, thereby providing enhanced protection of cash collateral.

Other Services Provided by Brokers (Part 34)

• UPI Block Facility: A mechanism that allows clients to block funds in their account for trading purposes, with the funds remaining in the client's account but blocked in favor of the clearing corporation till the expiry date of the block mandate or till block is released by the CC.
• Settlement Process: The settlement for funds and securities will be done by the clearing corporation without the need for handling of client funds and securities by the member.
• SEBI Guidelines: SEBI has provided guidelines for ASBA in the secondary market, including the provision of trading supported by blocked amount in the secondary market using UPI block mechanism or the 3-in-1 Trading Account facility.

Key Concepts

• Margin Related Information: Stock Brokers should send margin related information to their clients, including client code and name, trade day, margin deposit available, margin adjustments, and margin status.
• Client Collateral: Brokers should maintain proper records of client collateral and prevent misuse of client collateral, with adequate systems and procedures in place to ensure that client collateral is not used for any purposes other than meeting the respective client's margin requirements/pay-ins.
• Risk Management: Stock-Broker/Clearing Members should have a prudent risk management system to protect themselves against the default made by their clients, with margins constituting an important element of risk management systems.

Enhanced Supervision of Stock Brokers

• Uniform Nomenclature: Stock brokers should follow a uniform nomenclature for naming/tagging of bank and demat accounts, with the nomenclature reflecting the purpose for which those bank/demat accounts are being maintained.
• Monitoring of Clients' Funds: Stock Exchanges should monitor clients' funds lying with the Stock Broker through a sophisticated alerting and reconciliation mechanism to detect any mis-utilisation of clients' funds.
• Internal Audit: Stock brokers/depository participants should have a robust internal audit system, with the appointment, rotation of Internal Auditors, formulation of objective sample criteria, monitoring of quality of Internal Audit Reports, and timeline for submissions of Internal Audit Reports.
• Financial Strength: Stock Exchanges should monitor the financial strength of stock brokers to detect any signs of deteriorating financial health and serve as an early warning system to take pre-emptive and remedial measures.

Naming/Tagging of Demat Accounts

• Designated Client Bank Account: Stock brokers should maintain designated client bank accounts with appropriate nomenclature to reflect the purpose for which those bank accounts are being maintained.
• Demat Account Categories: Stock brokers should maintain demat accounts only under the specified categories, including Proprietary Account, Pool account, Client Unpaid Securities Pledgee Account, Client Securities Margin Pledge Account, Client Securities under Margin Funding Account, and Client Nodal MFOS Account.
• Tagging of Demat Accounts: All demat accounts maintained by stock brokers should be appropriately tagged, with credit and debit of securities not allowed in any demat account left untagged from the specified dates onwards.

Other Services Provided by Brokers (Part 35)

• Introduction: Stock brokers provide various services to their clients, including trading, demat account services, and other related services.
• Key Services:
  • Informing the Stock Exchanges of existing and new bank and demat account(s) as per the format specified by SEBI/Exchange.
  • Complying with Graded Surveillance Measure (GSM) and Additional Surveillance Measure (ASM) to enhance market integrity and safeguard investor interests.
• Graded Surveillance Measure (GSM) and Additional Surveillance Measure (ASM):
  • Definition: GSM and ASM are measures introduced by SEBI to monitor securities with abnormal price rises and surveillance concerns.
  • Objective: To alert and advise investors to be cautious while dealing in these securities and to advise market participants to carry out necessary due diligence.
• Compliances and Regulatory Reporting:
  • Introduction: SEBI and Stock Exchanges issue directives, guidelines, and circulars to be followed by stock brokers.
  • Key Compliances:
    • Client registration and dealing with clients.
    • Issuance of contract notes and margin requirements.
    • Submission of various reports, including audit reports and annual reports.
    • Payment of fees specified by SEBI.
• Penalties for Non-Compliance:
  • Section 15A of SEBI Act: Penalty for failure to furnish information, return, etc.
  • Section 15C of SEBI Act: Penalty for failure to redress investors' grievances.
  • Section 23B of SCRA and 15B of SEBI Act: Penalty for failure to enter into an agreement with clients.
• Maintenance of Books and Records:
  • Introduction: Stock brokers are required to maintain and preserve specified books of account and documents.
  • Key Requirements:
    • Maintenance of books of accounts and records for a minimum period of five years.
    • Preservation of originals of documents, both in electronic and physical form.
• Submission of Periodic Reports:
  • Introduction: Stock brokers are required to submit various periodic reports to Exchanges and Clearing Corporation.
  • Key Reports:
    • System Audit Report.
    • Annual Returns (Audited Financial Statements).
    • Internal Audit Report.
    • Net worth certificate.
    • Proof of Insurance cover.
    • Risk-Based Supervision report.
    • Cyber Security Incident reporting.
    • Vulnerability Assessment and Penetration Testing (VAPT) report.
• Settlement of Accounts (Funds) and Statement of Accounts:
  • Introduction: SEBI has issued guidelines for the settlement of running accounts of client's funds/securities.
  • Key Requirements:
    • Settlement of funds and/or securities shall be done within 1 working day of the pay-out.
    • Actual settlement of funds and securities shall be done by the member depending on the mandate of the client.

Other Services Provided by Brokers (Part 36)

• Settlement of Running Account: The settlement of running account for securities has been discontinued, and SEBI circulars dated December 03, 2009, and September 26, 2016, are applicable for settlement of running account of client's funds only.
• Statement of Accounts: While settling the account, the member should send to the client a 'statement of accounts' containing an extract from the client ledger for funds and an extract from the register of securities, explaining the retention of funds/securities and details of the pledge, if any.
• Handling of Client Securities: SEBI has given directions for handling client securities by trading members/clearing members, including:
  • Transferring securities received in pay-out to the demat account of the respective clients within one working day.
  • Transferring unpaid securities to the client's demat account, followed by creation of an auto-pledge.
  • Sending communication to the client about their funds obligation and the right of the trading member/clearing member to sell such securities in case of failure to fulfill their obligation.
• Pledging of Client Securities: SEBI has restricted brokers from pledging client securities to Banks/NBFCs for raising funds, even with client authorization, as it amounts to fund-based activity.
• Margin Pledge: SEBI has discontinued title transfer of securities to the demat account of trading members for margin purposes, and trading members shall accept collateral from clients in the form of securities only by way of 'margin pledge' created in the Depository system.
• Settlement of Running Account of Client's Funds: The settlement of running account of funds of the client shall be done by the trading member after considering the End of the day (EOD) obligation of funds across all Exchanges, at least once within a gap of 30/90 days between two settlements of running account, as per the preference of the client.
• Client's Running Account: The client's running account shall be considered settled only by making actual payment into the client's bank account, and not by making any journal entries.
• Annual Global Statement: SEBI has directed that all members shall issue an Annual Global Statement to their clients, containing details of all transactions executed by the client in the financial year, within 30 days from the end of the financial year.
• Daily Margin Statement: Stock Brokers should daily send margin-related information to their clients, including client code and name, margin deposit available, margin adjustments, and margin status.
• Risk-Based Supervision: SEBI has initiated a process of formalizing its risk-based approach towards supervision of market intermediaries, including stock brokers, to assess the various business areas and associated quality of management and internal controls, and identify areas of risk and concern.

Other Services Provided by Brokers (Part 37)

• Financial Reporting: The half-year ending September and the financial year ending March require reporting within 2 months from the end of the period.
• Suspicious Transaction Reporting (STR): Brokers must monitor client transactions to identify suspicious activities related to money laundering or tax evasion and report them to the Financial Intelligence Unit (FIU) through an online mechanism.
• STR Requirements:
  • The broker must not inform the client about the reporting.
  • The broker must have robust controls and procedures in place.
  • The Cash Transaction Report (CTR) must be submitted by the 15th of the succeeding month.
  • The Suspicious Transaction Report (STR) must be submitted within 7 days of identifying a suspicious transaction.
• Voluntary Freezing/Blocking of Trading Accounts: Clients can request to freeze/block their trading accounts due to suspicious activities, and the broker must provide a facility for this, including:
  • A detailed policy for voluntary freezing/blocking.
  • Modes for clients to request freezing/blocking.
  • Acknowledgement and processing of requests.
• Qualified Stock Brokers (QSBs): Certain stock brokers are designated as QSBs based on parameters such as size, scale of operations, and governance standards, and they must meet enhanced obligations and responsibilities, including:
  • Appropriate governance structure.
  • Risk management policy and processes.
  • Scalable infrastructure and technical capacity.
  • Framework for orderly winding down.
  • Robust cyber security framework.
  • Investor services, including online complaint redressal mechanism.
• Core Settlement Guarantee Fund: A fund established by clearing corporations to guarantee the settlement of trades, which includes:
  • Corpus of Core SGF: The fund's corpus must be adequate to meet settlement obligations, and its sufficiency is tested through periodic stress tests.
  • Contribution to Core SGF: Contributions come from clearing corporations, stock exchanges, and clearing members, with specific percentages and requirements for each.
  • Minimum Required Corpus (MRC): The MRC is fixed for a month, reviewed, and determined based on daily stress tests, and it must be higher than the average of daily worst-case loss numbers.
  • Replenishment of Core SGF: Contributors must replenish the fund immediately after its usage, with restrictions on the frequency of replenishment.

Other Services Provided by Brokers (Part 38)

• Settlement Guarantee Fund (SGF): The Clearing Corporation (CC) manages the Core SGF, which is utilized in the event of a member's failure to honor settlement commitments.
• Default Waterfall: In the event of a default, the utilization of the Settlement Guarantee Fund follows a specific order, including:
  • Monies of the defaulting member
  • Insurance, if any
  • CC resources (equal to 5% of the segment MRC)
  • Core SGF of the segment
  • Proportion of remaining CC resources
  • CC/SE contribution to Core SGFs of other segments
  • Capped additional contribution by non-defaulting members
  • Any remaining loss to be covered by way of pro-rata haircut to pay-outs
• Stress Testing and Back Testing: CC should effectively measure, monitor, and manage its credit exposures by stress testing and back testing, including:
  • Stress test for credit risk using standardized stress testing methodology
  • Liquidity stress test and adequacy of liquidity arrangements
  • Reverse stress test to identify market conditions under which the combination of margins, Core SGF, and other financial resources prove insufficient
  • Back testing for adequacy of margins
• Adequacy of Financial Resources: CC shall continuously monitor the adequacy of financial resources against the uncovered loss estimated by stress tests and take steps to address any shortfall.
• Risk Management: CC's risk-management model shall be validated at least annually, and the results of tests carried out shall be monitored by the Risk Management Committee and communicated to the Board of the CC.

Other Services Provided by Brokers (Part 39)

• Settlement Cycle: In India, the settlement cycle for trades executed on a Wednesday has to be settled on Thursday (if Thursday is a working day), with pay-in and pay-out of funds and securities being completed on that day.
• T+0 Settlement Cycle: SEBI introduced the beta version of T+0 rolling settlement cycle on an optional basis, in addition to the existing T+1 settlement cycle in Equity Cash Markets, for a limited set of scrips and with a limited number of brokers.
• Clearing Agency: The clearing agency is the main entity managing the clearing and settlements of transactions and settlement guarantee for transactions done on a Stock Exchange.

Key Concepts

• Novation: The act of a clearing corporation interposing itself between both parties of every trade, being the legal counterparty to both.
• Central Counterparty: The clearing corporation participates as counterparty in every transaction, monitors the market and market participants, and provides structured procedures and resources for dispute resolution.
• Clearing Corporations in India: There are two clearing corporations in India, viz., the NSE Clearing Limited (NCL) and the Indian Clearing Corporation Limited (ICCL).

Interoperability among Clearing Corporations

• Interoperability: SEBI introduced the concept of Interoperability among Clearing Corporations, which necessitates linking of multiple Clearing Corporations.
• Benefits of Interoperability: Interoperability enables a Clearing Member to select the Clearing Corporation of its choice to clear and settle trades executed in multiple exchanges, leading to efficient allocation of capital, cost savings, and better execution of trades.
• Interoperability Framework: The interoperability framework is applicable to all recognized clearing corporations, excluding those operating in International Financial Services Centre (IFSC), and all products available for trading on stock exchanges, except commodity derivatives and Tri-party repo.

Clearing Banks and their Function

• Clearing Banks: Clearing Banks act as an important intermediary between a clearing member and the clearing corporation, handling pay-in and pay-out of funds.
• Clearing Bank Accounts: Clearing members need to maintain an account with an empaneled clearing bank, which is used exclusively for clearing and settlement operations.

Clearing Members and Custodians

• Clearing Members: There are three types of clearing members: professional clearing member (PCM), trading cum clearing member (TCM), and trading cum self-clearing member (SCM).
• Custodians: Custodians act as clearing members but not trading members, settling trades in the cash segment on behalf of their institutional clients.
• Clearing Member Functions: Clearing members handle the responsibility of clearing and settlement of all deals executed by Trading Members, performing functions such as clearing, settlement, risk management, and confirmation of custodian participant trade.

Depositories & Depository Participants

• Depositories: A depository is an entity facilitating holding securities in electronic form and enabling transfer of securities by book entry.
• Depository Participants: Depository participants (DPs) are agents of the depository, providing services to clients and facilitating transfer of securities from one account to another.
• Demat Accounts: For trading in the Cash Market, it is mandatory for buyers and sellers to open demat (beneficiary) accounts with a depository participant in either of the depositories.

Other Services Provided by Brokers (Part 40)

• Standing Instructions (SI): A facility that allows transferees to give instructions to their Depository Participant (DP) for receiving securities, eliminating the need for separate instructions each time.
• Transfer of Securities: Can be done for various purposes, including:
  • Off-market transactions
  • Transactions done on a recognized Stock Exchange
  • Transmission of securities and account closure
• Delivery Instruction Slip (DIS): A prescribed form that must be completed by the beneficial owner to debit their beneficiary account.
• Demat Debit and Pledge Instruction (DDPI): A concept introduced by SEBI to authorize stock brokers/DPs to access a client's BO account for settling trades, mitigating the misuse of Power of Attorney (PoA).
• Clearing Process: The process of determining obligations after a trade is executed, which involves multilateral netting to determine net settlement obligations.
• Settlement Process: A two-way process involving the transfer of funds and securities on the settlement date, with the Clearing Corporation guaranteeing that all contracts will be honored.

Key Concepts in Clearing and Settlement

• Multilateral Netting: A process used by the Clearing Corporation to determine net settlement obligations.
• Clearing Members: Members who have pay-in or pay-out obligations for funds and securities.
• Settlement: The process of discharging obligations after clearing, involving the transfer of funds and securities.
• Gross Settlement: Settlement done on a trade-for-trade basis, without netting of transactions.

Institutional Transactions

• Institutional Investors: Include Category I and II Foreign Portfolio Investors (FPI), Mutual Funds, Public Financial Institutions, Banks, Insurance Companies, and Pension Funds.
• Custodian: An entity that holds and settles trades on behalf of institutional investors.
• Custodial Participant (CP) Code: A code applied for by institutions to trade with multiple brokers and settle deals with a single custodian.
• Straight Through Processing (STP): A system used for processing institutional trades, which requires a contract note in electronic form.

Block Mechanism in Demat Accounts

• Block Mechanism: A mechanism that blocks shares in a client's demat account in favor of the Clearing Corporation when a sale transaction is intended.
• Blocking of Securities: Can be done by the client, depository, or depository participant, and is kept until pay-in day.
• Early Pay-in (EPI) Benefit: A benefit provided to clients who block securities in their demat account, which allows for early pay-in of securities.

Other Services Provided by Brokers (Part 41)

• Securities Transfer: Securities will be transferred from the Trading Member (TM) pool account to the Clearing Member (CM) pool account and will be credited to the linked TM pool account up to the pay-in day.
• Pool Account Mapping: TM shall not transfer securities to any other pool account other than the CM pool account mapped to the TM account.
• Settlement Process: Securities lying in the CM pool account will be delivered in the settlement process on the pay-in date.
• Block Mechanism: The facility of block mechanism shall be mandatory for all Early Pay-In transactions, but shall not be applicable to clients having arrangements with custodians registered with SEBI.
• Validation of Instructions: Instructions for pay-in of securities from client demat account to TM pool account against obligations received from Clearing Corporations (CCs) shall be validated by depositories.

Key Concepts

• Clearing Process for Derivatives: The clearing mechanism in derivatives involves working out open positions and obligations of clearing members, which is considered for exposure and daily margin purposes.
• Net Settlement of Cash and F&O Segments: SEBI has introduced the mechanism of net settlement of cash segment and F&O segment upon expiry of stock derivatives to provide better alignment of cash and derivatives segment.
• Balancing/Netting of Clients' Accounts: Stock brokers are allowed to net the clients' account within the firm, and the final pay-in/pay-out of securities/funds is carried out through clearing banks and depository participants.
• Broker Netting with Clearing Corporation: Every day, the clearing corporation sends the clearing member a list of all trading transactions made by him and his clients for the day, and clearing is performed by multilateral netting.

Important Terms

• TM Pool Account: Trading Member pool account
• CM Pool Account: Clearing Member pool account
• CCs: Clearing Corporations
• UCC: Unique Client Code
• SEBI: Securities and Exchange Board of India
• STT: Securities Transaction Tax
• F&O: Futures and Options
• CPs: Custodial Participants
• PMS: Portfolio Managers

Other Services Provided by Brokers (Part 42)

• Broker Services: Brokers provide various services to their clients, including trade execution, clearing, and settlement.
• Netting of Obligations: The process of determining the net settlement obligations of clearing members, which involves netting of buy and sell transactions to determine the final obligation.

Key Concepts

• T+0 Settlement Cycle: A settlement cycle where trades are settled on the same day, introduced by SEBI on an optional basis.
• Eligible Investors: All investors are eligible to participate in the T+0 settlement cycle, provided they meet the prescribed timelines, process, and risk requirements.
• Trade Timings: T+0 settlement cycle operates from 09:15 AM to 1:30 PM, with a continuous trading session.
• Price Band: The price band in the T+0 segment operates with a +100 basis points band from the price in the regular T+1 market, recalibrated after every 50 basis points movement.

Settlement Process

• Settlement Cycle: The period within which settlement is made, excluding intervening holidays.
• Netting of Obligations: Determining the net settlement obligations of clearing members, which involves netting of buy and sell transactions.
• Pay-in and Pay-out: The process of settling funds and securities between clearing members and the clearing corporation.

Determination of Settlement Obligations

• Netted Obligation: All purchase and sell transactions are netted to determine the obligations.
• Trade to Trade or Gross Obligations: Transactions are not netted to determine obligations, with member's security pay-in obligation equivalent to cumulative sell quantity.
• Daily Mark to Market Settlement: Daily settlement prices are computed for futures contracts, with all open positions marked to market to determine mark to market obligations.

Settlement of Funds and Securities

• Pay-in of Securities and Funds: Clearing members pay-in securities and funds to the clearing corporation.
• Pay-out of Funds and Securities: The clearing corporation pays out funds and securities to clearing members.
• Auction Session: An auction session is held for trades that are not settled on the scheduled settlement day.

Other Services Provided by Brokers

• Settlement Process: The settlement process for option contracts involves the debit/credit of relevant clearing accounts of clearing members with the respective clearing bank towards the exercise settlement value for each unit of the option contract.
• Delivery Settlement: For equity F&O, delivery settlement is applicable for individual stock derivatives, considering all open futures positions after the close of trading on the expiry day and all in-the-money option contracts that are exercised and assigned.
• Net Settlement: SEBI has introduced the mechanism of net settlement of cash and F&O segments upon expiry of stock derivatives, where obligations are settled on a net basis.
• Dematerialized Mode: Delivery settlement of securities is done only in dematerialized mode through depositories.

Settlement Price for Derivatives

• Futures Contracts: The settlement price for futures contracts on index or individual security is the closing price of the futures contracts on the index or individual security on the trading day, calculated based on the last half an hour weighted average price.
• Options Contracts: The settlement price for options contracts is the closing price of the relevant underlying index or security on the last trading day of the futures or options contract.
• Currency Futures: The settlement price for currency futures is the closing price of the futures contracts for the trading day, calculated based on the last half an hour weighted average price across exchanges.
• Cash Settlement: The settlement price for cash-settled contracts, such as GOI bond futures, is the weighted average price of the underlying bond based on the process during the last two hours of trading.

Settlement of Funds

• Clearing Accounts: Every clearing member must maintain a separate and distinct primary clearing account with a designated clearing bank for each segment.
• Funds Obligation: Clearing members must have a clear balance of requisite funds in their clearing accounts on or before the stipulated funds pay-in day and time.
• Mode of Payment: Brokers should not accept cash from clients and should receive/make payments strictly by account payee crossed cheques, demand drafts, or direct credit into the bank account through EFT.
• Running Account: A client may authorize a stock broker to maintain a running account for funds, subject to certain conditions, including dated and revocable authorization, settlement of funds at least once in a calendar quarter or month, and maintenance of an audit trail of funds received through electronic fund transfers.

Other Services Provided by Brokers (Part 44)

• Settlement of Accounts: The broker shall send a 'statement of accounts' to the client, containing an extract from the client ledger for funds and an extract from the register of securities, displaying all receipts/deliveries of funds/securities.
• Outstanding Obligations: For clients with outstanding obligations on the settlement date, the stock broker may retain the requisite funds towards such obligations as specified by SEBI / Stock Exchanges.
• Dispute Resolution: The client shall bring any dispute arising from the statement of running account to the notice of the broker within 30 working days from the date of the statement.
• Periodic Settlement: Periodic settlement of running accounts may not be necessary for clients availing of margin trading facility (MTF), funds received from clients towards collaterals/margin in the form of bank guarantee (BG) / fixed deposit receipts (FDR), or for institutional clients settling trades through custodians.
• Transfer of Funds/Securities: The stock broker shall transfer funds/securities lying in the credit of the client within one working day of the request if the same are lying with him, and within three working days from the request if the same are lying with the Clearing Member/Clearing Corporation.

Margin Payment

• Upfront Margin: The clearing member is required to pay upfront margin to the clearing corporation as specified by the clearing corporation / SEBI from time to time.
• Eligible Collaterals: Clearing members shall provide for margin in any one or more of the eligible collaterals as specified by the clearing corporation from time to time.
• Real-time Basis: The margins shall be collected/adjusted from the liquid assets of a clearing member on a real-time basis.
• Segregation and Monitoring of Collateral: SEBI vide circular dated July 20, 2021, advised Segregation and Monitoring of Collateral at Client Level.

Settlement of Securities

• Delivery Instructions: In case of sale of securities, the seller client should issue delivery instructions slip to the DP with whom the client maintains his demat account.
• Demat Debit and Pledge Instruction (DDPI): Clients can give DDPI under which the clients shall explicitly agree to authorize the stock broker/stock broker and depository participant to access their BO account for the limited purpose of transferring securities from their individual demat account to the broker's pool account for the purpose of meeting their pay-in obligation.
• Standing Instruction: A purchaser of securities can give one-time standing instruction to his DP for receiving securities in his account.

Auction of Securities

• Shortages in Delivery: An auction is resorted to when there are shortages in delivery by a seller broker.
• Buy-in Auction: The clearing corporation conducts a buy-in auction through the Exchange system to buy shares from the open market for delivering to the buyer broker.
• Auction Tender Notice: An auction tender notice is issued by Exchanges/CCs to the trading members informing them about the names of the scrips which are short or have not been delivered, quantity slated for auction, and the date and time of the auction session on the Exchanges.

Other Services Provided by Brokers (Part 45)

• Internal Shortages: These occur when a member's client sells shares but fails to deliver them, and another client of the same member buys the same shares. The member can submit details of these shortages to the clearing corporation for a self-auction.
• Close Out Procedure: If there are no sellers for a particular short delivery on the auction day, the clearing corporation will carry out a close-out process, compensating the buyer with the highest price prevailing across the stock exchange from the day of trading till the auction/close-out day or 20% above the official closing price on the auction day.
• Corporate Actions Adjustment: Adjustments are made to futures and options contracts when the underlying stock undergoes corporate actions like bonus, rights, mergers, or demergers. The goal is to keep the value of the position the same before and after the corporate action.

Key Concepts

• Corporate Actions: These include bonus, rights, mergers, demergers, amalgamations, splits, consolidations, hive-off, warrants, and Secured Premium Notes (SPNs).
• Adjustment Methodology: The methodology for adjusting corporate actions involves calculating the adjustment factor, which is used to modify the strike price, position, and market lot/multiplier.
• Time of Adjustment: Adjustments are carried out on the last day the security is traded on a cum basis in the underlying equities market after the close of trading hours.

Adjustment for Specific Corporate Actions

• Bonus, Stock Splits, and Consolidations: The new strike price, market lot/multiplier, and position are calculated using the adjustment factor.
• Rights: The new strike price, market lot/multiplier, and position are calculated using the adjustment factor, which takes into account the rights entitlement, issue price, and underlying close price.
• Dividends: Ordinary dividends (below 2% of the market value) do not require adjustments, while extra-ordinary dividends require adjustments to the strike price.
• Mergers/Demergers: Contracts are compulsorily settled at the settlement price, and new contracts may be introduced on the post-restructured company's stock if certain conditions are met.

Other Services Provided by Brokers (Part 46)

• Intimation of Execution of Trade: The broker with whom the demat account is maintained will provide intimation of execution of trade, which can be in the form of credit, debit, hold, or no action to be taken.
• Corporate Action Adjustments: These adjustments are done on all open positions.
• Failure to Deliver Securities: In case of failure to deliver securities, the action taken is auction.
• Extra-ordinary Dividend: In case of declaration of extra-ordinary dividend by any company, the total dividend amount would be reduced from all the strike prices of the option contracts on that stock.

Investor Grievances and Arbitration

• Investor Grievance: Investor grievance is handled at the trading member level, stock exchange level, and the regulator level.
• Investor Grievance Handling at Trading Member Level: All trading firms have a designated cell/person for redressing investor grievances, and the broker shall endeavor to redress investor grievances promptly within the time specified (currently within 21 days from the receipt of complaint) by the SEBI/Exchanges from time to time.
• SEBI Complaints Redressal System (SCORES): SCORES is a web-based centralized system to capture investor complaints against listed companies and registered intermediaries, and it allows investors to lodge their complaints and track the status online.
• Key Features of SCORES:
  • Centralized database of all complaints
  • Online movement of complaints to the concerned entities
  • Online upload of Action Taken Reports (ATRs) by the concerned entities
  • Online tracking of status of complaints by investors
• Revised Framework for Redressal of Investor Grievances through SCORES:
  • All entities who are in receipt of complaints of investors through SCORES shall resolve the complaint within 21 calendar days of receipt of such complaint
  • The complaints lodged on SCORES against any entity shall be automatically forwarded to the concerned entity through SCORES for resolution and submission of Action Taken Report (ATR)
  • The complainant may request for a review of the resolution provided by the entity within 15 calendar days from the date of the ATR
  • The Designated Body may seek clarification on the ATR submitted by the entity for the first review, and the concerned entity shall provide clarification to the respective Designated Body within the stipulated timeline.

Other Services Provided by Brokers (Part 47)

• SCORES: The limitation period for filing an arbitration reference with stock exchanges is three years. Investors can lodge a complaint on SCORES within one year from the date of cause of action.
• Complaint Filing: Investors can file complaints on SCORES if they have approached the listed company or registered intermediary for redressal and:
  • The complaint was rejected
  • No communication was received
  • The investor is not satisfied with the reply or redressal action
• SEBI's Right to Reject: SEBI reserves the right to reject a complaint lodged on SCORES if the date of cause of action is more than one year old or the complainant has not taken up the complaint with the concerned entity prior to lodging the complaint.
• Complaint Status: Investors can verify the status of their complaints by logging in using their unique complaint registration number.
• Complaint Resolution: Every complaint has an audit trail and is saved in a central database. If the complaint is successfully resolved, the entity is advised to send a reply to the complainant.
• Online Dispute Resolution: Investors can approach the Online Dispute Resolution mechanism or other appropriate civil remedies at any point in time.

Types of Complaints Not Dealt with on SCORES

• Complaints against unlisted/delisted companies
• Complaints that are sub-judice (under consideration by a court of law)
• Complaints falling under the purview of other regulatory bodies (e.g., RBI, IRDAI, PFRDA, CCI)
• Complaints against sick companies or companies under winding up/insolvency proceedings
• Complaints against companies where the name has been struck off from the RoC or is a vanishing company

Matters Not Considered as Complaints under SCORES

• Complaints not pertaining to investment in securities market
• Anonymous complaints (except whistleblower complaints)
• Incomplete or un-specific complaints
• Allegations without supporting documents
• Suggestions or seeking guidance/explanation
• Disputes arising out of private agreements with companies/intermediaries
• Matters involving fake/forged documents
• Complaints on matters not in SEBI's purview
• Complaints about unregistered/un-regulated activities

SCORES 2.0

• Key Features:
  • Reduced and uniform timelines for redressal of investor complaints (21 calendar days)
  • Auto-routing of complaints to concerned regulated entities
  • Monitoring of timely redressal by 'Designated Bodies'
  • Two levels of review: first by the 'Designated Body' and second by SEBI
  • Auto-escalation of complaints to the next level in case of non-adherence to timelines
  • Integration with KYC Registration Agency database for easy registration
• Investor Service Centres (ISCs): SEBI has advised stock exchanges to open ISCs in metro cities and other specified locations to provide counseling services and basic minimum facilities to investors.

Online Dispute Resolution (ODR) Portal

• Purpose: To resolve disputes between investors and listed companies/specified intermediaries/regulated entities in the securities market through online conciliation and arbitration.
• Specified Intermediaries and Regulated Entities: Includes AIFs, banker to an issue, CIS, commodities clearing corporations, depository participants, investment advisors, InvITs, merchant bankers, mutual funds, portfolio managers, registrars and share transfer agents, REITs, research analysts, and stock brokers.
• Dispute Resolution Process: Disputes can be resolved through online conciliation and/or online arbitration as specified in the SEBI circular on ODR.

Other Services Provided by Brokers (Part 48)

• Empanelment of ODR Institution: An MII shall empanel one or more ODR Institutions as a service provider and enter into relevant agreements with such ODR Institution(s) in accordance with guidelines issued by the SEBI.
• Introduction of the common Online Dispute Resolution Portal: The MIIs shall establish and operate a common Online Dispute Resolution Portal (“ODR Portal”) in consultation with their empanelled ODR Institutions.
• Initiation of the dispute resolution process: An investor/client shall first take up his/her/their grievance with the Market Participant by lodging a complaint directly with the concerned Market Participant.
• ODR Portal and Allocation System: The ODR Portal shall have the necessary features and facilities to enroll the investor/client and the Market Participant, and to file the complaint/dispute and to upload any documents or papers pertaining thereto.
• Conciliation: The ODR Institution that receives the reference of the complaint/dispute shall appoint a sole independent and neutral conciliator from its panel of conciliators.
• Fees and Charges: The fees as stipulated in the SEBI circular may be borne by the MIIs and will be recoverable by them from the concerned Market Participant against whom the complaint/dispute is raised.
• Arbitration: Arbitration is an alternate dispute resolution mechanism prescribed under the Arbitration and Conciliation Act, 1996. When the investor/client and/or the Market Participant pursue online arbitration, the ODR Institution shall appoint a sole independent and neutral arbitrator from its panel of arbitrators.

Key points to note:

• The SEBI guidelines play a crucial role in the empanelment of ODR Institutions and the operation of the ODR Portal.
• The ODR Portal provides a platform for investors/clients and Market Participants to resolve disputes through online conciliation and/or online arbitration.
• The allocation system for disputes is a round-robin system, which governs the allocation of each dispute among all empaneled ODR Institutions.
• The fees and charges for the dispute resolution process are borne by the MIIs and are recoverable from the concerned Market Participant.
• Arbitration is a quasi-judicial process that is an alternate dispute resolution mechanism prescribed under the Arbitration and Conciliation Act, 1996.

Other Services Provided by Brokers (Part 49)

• Arbitration Proceedings: The Sole Arbitrator or Arbitral Tribunal may extend the time for disputes exceeding claims and/or counterclaims of Rs 1,00,000/- (or such other sum as the Board may specify) up to a further period of 30 calendar days.
• Ex-Parte Order: If parties to the dispute do not provide representation, the arbitrator may pass an ex-parte order after giving a notice of 7 calendar days to the concerned non-cooperative party(ies).
• Interim Relief: The Sole Arbitrator or Arbitral Tribunal may provide interim relief as may be required for reasons to be recorded after affording hearing to the parties to the dispute.
• Payment and Performance: Upon the conclusion of the arbitration proceedings, payment shall be made by the Market Participant within a period of 15 calendar days from the date of the arbitral award.
• Enforcement of Arbitral Award: MII shall provide necessary assistance to the investor/client for enforcement of the arbitral award.

Key Concepts

• ODR Institutions: Conduct conciliation and arbitration in online mode, enabling online/audio-video participation by the investor/client, the Market Participant, and the conciliator or arbitrator.
• Venue and Seat of Online Proceedings: Deemed to be the place where the investor resides permanently or where the investor is registered in India or has its principal place of business in India.
• Arbitration Fees: The fees for the arbitration process will be as specified in the table, with applicable GST, Stamp Duty, etc. on actual outgoings.
• Late Fees: Arbitration initiated after one month of failure of conciliation and up to six months, the fees payable would be double of the non-refundable fees specified in the table above.

Responsibilities of Market Participants

• Amendment of Agreements: All agreements, contractual frameworks, or relationships entered into by Market Participants with investors/clients shall stand amended or be deemed to incorporate provision 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 the references arising from the SCOREs portal or the ODR Portal.

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 which are not of speculative nature of the clients of defaulting member(s).
• Administration: The IPF shall be administered by way of a Trust created for the purpose.
• Contributions: The Stock Exchange shall make contributions to the IPF, including 1% of the listing fees received, 100% of the interest earned on the 1% security deposit, and penalty collected from Trading Members for deficiency in modification of client code.

Other Services Provided by Brokers (Part 50)

• Introduction to Other Services: Brokers provide various services to clients, including facilitating IPO applications, trading of mutual fund units, portfolio management services, research reports, depository services, margin trading, and internet-based trading.
• IPO Applications: The process by which a company goes public, offering shares to the public for sale for the first time. Electronic trading through broking firms has made investing in IPOs simpler.
• Application Supported by Blocked Amount (ASBA): A facility introduced by SEBI where the application money remains blocked in the investor's account till the finalization of the basis of allotment in the issue.
• Unified Payment Interface (UPI): A payment mechanism used with ASBA for application in public issues by retail investors through intermediaries.
• Services Offered by Stock Brokers:
  • Investment advice and research reports
  • Depository services
  • Direct Market Access (DMA)
  • Mobile trading and Smart Order Routing (SOR)
  • Algorithmic trading
  • IPOs and mutual funds distribution
  • Internet-based online trading (IBT)
  • Margin funding
• Investor Protection Fund (IPF): Established and maintained by stock exchanges to compensate investors in case of default by trading members.
• Investor Services Fund (ISF): Set aside by stock exchanges to provide services to the investing public, utilized for promoting investor education and awareness programs.

Other Services Provided by Brokers (Part 51)

• Introduction to UPI for Public Issues: As per SEBI's circular dated September 24, 2024, individual investors applying in public issues of securities through intermediaries with an application amount of up to Rs. 5 Lakh must use UPI for blocking funds and provide their bank account-linked UPI ID in the bid-cum-application form.
• Online Application for Public Issues: SEBI's circular dated October 18, 2024, allows investors to submit bid-cum-application forms online using linked online trading, demat, and bank accounts (3-in-1 type accounts) for public issues of debt securities, non-convertible redeemable preference shares, municipal debt securities, and securitised debt instruments.
• Trading of Mutual Fund Units:
  • Definition: The client can invest in different mutual fund schemes online or through phone using tele-services offered by trading members.
  • Details: The Exchanges provide a platform (e.g., Mutual Fund Service System of NSE and BSE Star MF) to trading members and mutual fund distributors for trading in open-ended mutual fund schemes.
• Eligibility for Trading Mutual Fund Units:
  • Requirements: Trading members who are AMFI Registration Number (ARN) holders and have passed the NISM certification examination are permitted to participate in the trading of mutual fund units through the exchange trading platform.
  • Registration: Eligible members must register as distributors with the mutual fund company and comply with SEBI and Exchange regulations.
• SEBI Guidelines for Mutual Fund Transactions:
  • Discontinuation of Pool Accounts: SEBI has advised that pooling of funds and/or units by stock brokers/clearing members should be discontinued for mutual fund transactions.
  • Direct Fund Transfer: Funds pay-in is directly received by the clearing corporation from the investor account, and funds pay-out is directly made to the investor account.
  • Unit Transfer: Units are credited and debited directly to/from the investors' demat account/folio account without routing through the pool account of stock brokers/clearing members.
• Portfolio Management Service (PMS):
  • Definition: Many stock brokers offer PMS to their clients, which requires a separate PMS license from SEBI.
  • Details: The stock broker makes investment decisions on behalf of the client and manages their portfolio, typically offered to High Net Worth Individuals (HNIs).
• SEBI (Portfolio Managers) Regulation, 2020:
  • Definition of Portfolio Manager: A body corporate that advises or directs the management or administration of a portfolio of securities or funds of a client.
  • Types of Portfolio Managers: Discretionary and non-discretionary portfolio managers, with the former exercising discretion in investment decisions and the latter managing funds according to client directions.
  • Co-investment Portfolio Manager: A portfolio manager who provides services to investors of Category I or Category II Alternative Investment Fund(s) and makes investments in unlisted securities of investee companies.
• Registration Requirements for Portfolio Managers:
  • Body Corporate: The applicant must be a body corporate.
  • Infrastructure: The applicant must have necessary infrastructure, including office space, equipment, and manpower.
  • Compliance Officer: The applicant must appoint a compliance officer.
  • Principal Officer: The principal officer must have a professional qualification, experience, and relevant NISM certification.

Other Services Provided by Brokers (Part 52)

• Eligibility Criteria: The applicant must have at least one person with a graduation degree from a recognized university and at least two years of experience in related activities in the securities market.
• Disciplinary Action: Any disciplinary action taken against a person connected with the applicant under the Act or regulations is a consideration for registration.
• Net Worth Requirement: The applicant must have a net worth of at least Rs. 5 crores.
• Litigation and Conviction: The applicant, its director or partner, principal officer, compliance officer, or employee should not be involved in any litigation connected with the securities market or convicted of any offence involving moral turpitude.
• Fit and Proper Person: The applicant must be a fit and proper person as per the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

Fees

• Application Fee: A non-refundable application fee of Rs. 1,00,000 is required for registration as a portfolio manager.
• Registration Fee: A sum of Rs. 10 lakh is required as a registration fee at the time of grant of certificate of registration.
• Renewal Fee: A fee of Rs. 5 lakh is required every three years to keep the registration in force.

Content of Agreement between Portfolio Manager and Client

• Written Agreement: A written agreement is required between the portfolio manager and the client, defining their mutual rights, liabilities, and obligations.
• Disclosure Document: The portfolio manager must provide a Disclosure Document to the client, containing details such as fees, portfolio risks, and conflicts of interest.

Disclosure Document

• Fees: The quantum and manner of payment of fees payable by the client.
• Portfolio Risks: Risks specific to each investment approach offered by the portfolio manager.
• Transactions with Related Parties: Complete disclosures in respect of transactions with related parties.
• Conflicts of Interest: Details of conflicts of interest related to services offered by group companies or associates of the portfolio manager.
• Performance: The performance of the portfolio manager.
• Audited Financial Statements: The audited financial statements of the portfolio manager for the immediately preceding three years.

Code of Conduct

• Abiding by Code: The portfolio manager must abide by the Code of Conduct as specified in Schedule III of the SEBI (Portfolio Managers) Regulations, 2020.

General Responsibilities of a Portfolio Manager

• Discretionary Portfolio Manager: The discretionary portfolio manager must manage the funds of each client in accordance with the needs of the client.
• Non-Discretionary Portfolio Manager: The non-discretionary portfolio manager must manage the funds in accordance with the directions of the client.
• Minimum Investment Amount: The portfolio manager shall not accept from the clients, funds or securities worth less than Rs. 50 lakh.
• Fiduciary Capacity: The portfolio manager must act in a fiduciary capacity with regard to the client's funds and segregate each client’s holding in securities in separate accounts.

Management or Administration of Clients' Portfolio

• Investment: The money or securities accepted by the portfolio manager shall not be invested or managed except in terms of the agreement between the portfolio manager and the client.
• Discretionary Portfolio Manager: The discretionary portfolio manager shall invest funds of his clients in the securities listed or traded on a recognized stock exchange.
• Non-Discretionary Portfolio Manager: The non-discretionary portfolio manager may invest or provide advice for investment up to 25% of the assets under management of such clients in unlisted securities.

Other Responsibilities of a Portfolio Manager

• Separate Client-Wise Accounts: The portfolio manager must maintain separate client-wise accounts.
• Fees: The fees on such accounts must be distinguished and accounted for separately.
• Audit: The books of account will be audited yearly by a qualified auditor.
• Custodian: Every portfolio manager has to appoint a custodian in respect of securities managed or administered by it.

Research Reports

• Fundamental Research: Stock brokers bring out regular research reports, including fundamental research.
• Stock Research: Stock brokers bring out regular research reports, including stock research.
• Newsletters: Stock brokers bring out regular newsletters, including daily, weekly, fortnightly, and monthly newsletters.
• Special Reports: Stock brokers bring out special reports to cater to the needs of some investors.
• Sector Reports: Stock brokers bring out sector reports.

Other Services Provided by Brokers (Part 53)

• Research Reports: These reports educate investors about industry trends, sectors, and company performance to help them make informed investment decisions.
• Sector Research: Includes details on industry performance, policies, and other factors to help investors choose which industries to invest in.
• Regulations: SEBI has issued rules and regulations for research-based advisory services provided by broking houses, including the SEBI (Research Analysts) Regulation, 2014, and the "Master Circular for Research Analyst" dated May 21, 2024.

Depository Services

• Depository Participants (DPs): Brokers can provide depository services by registering as DPs with a depository, governed by the SEBI Act 1992 and the Depositories Act of 1996.
• Eligibility Criteria: DPs must meet eligibility criteria prescribed by SEBI and the depositories, including the SEBI (Depository & Participants) Regulations, 2018.
• Services Provided: DPs can provide services such as opening demat accounts, dematerialization, maintaining records of securities, and settling trades.

Margin Trading

• Definition: Margin trading is trading with borrowed funds or securities, allowing investors to take exposure in the market beyond their own resources.
• Eligibility: Only corporate brokers with a net worth of at least Rs. 3 crore can provide margin trading facilities to their clients.
• Securities Eligible: Margin trading is available for Group 1 securities and Equity Exchange Traded Funds (ETFs), with initial margin requirements specified by SEBI.
• Maintenance of Margin: Stock brokers must ensure that clients maintain the required margin at all times, with margin calls made in case of shortfalls.
• Liquidation of Securities: Stock brokers can liquidate securities in case of default by the client, with conditions specified in the "Rights and Obligations Document".
• Sources of Funds: Stock brokers can use own funds, borrow from scheduled commercial banks, or issue Commercial Paper (CP) to provide margin trading facilities.
• Leverage and Exposure Limits: Stock brokers must ensure that their total indebtedness for margin trading does not exceed 5 times their net worth, with exposure limits specified by SEBI.
• Rights and Obligations: Stock exchanges must frame a Rights and Obligations document laying down the rights and obligations of stock brokers and clients for margin trading.
• Maintenance of Records: Stock brokers must maintain separate client-wise ledgers, records of funds used, and sources of funds for margin trading, with half-yearly audits and submission of auditor's certificates to the exchange.

Other Services Provided by Brokers (Part 54)

• Margin Trading Facility: Stock brokers are required to disclose details on gross exposure towards margin trading facility, including client information, scrip details, and lender information, on or before 6 pm on T+1 day.
• Disclosure Requirements: Stock exchanges shall disclose scrip-wise and equity ETF gross outstanding in margin accounts with all brokers on their websites after trading hours.
• Other Conditions:
  • Brokers must take adequate care and exercise due diligence before providing margin trading facility.
  • Disputes arising between clients and brokers shall be treated as normal trades and covered under the investor grievance redressal mechanism.
  • SGF and IPF shall be available for transactions done on the exchange, but losses suffered in connection with margin trading facility shall not be covered under IPF.

Internet Based Trading (IBT) & Securities Trading Using Wireless Technology (STWT)

• Definition: Internet-based trading can take place through order routing systems, and SEBI-registered brokers can introduce this service after obtaining permission from stock exchanges.
• Requirements:
  • Net Worth Requirement: Brokers must have a minimum net worth of Rs.50 lacs to provide internet-based trading facilities.
  • Operational and System Requirements: Brokers' systems must have provision for security, reliability, and confidentiality of data through encryption technology.
  • Client-Broker Relationship: Brokers must provide additional rights and obligations to clients, including information on rules and regulations, arbitration rules, and investor protection rules.
  • Risk Management: Exchanges must ensure brokers have a system-based control on trading limits and exposures taken by clients.
• Security Features:
  • User Id: Unique identification number for clients.
  • First-Level Password: Automatic expiry of passwords at the end of a reasonable duration.
  • Secure Socket Level Security: For server access through the internet.
  • Firewalls: Between trading set-up directly connected to an exchange trading system and the internet trading set-up.
• Additional Requirements:
  • IP Address Capture: Brokers must capture the IP address from where orders are originating.
  • System Availability: Brokers' systems should have built-in high system availability to address single-point failures.
  • End-to-End Encryption: Secure end-to-end encryption for all data transmission between clients and brokers.
  • Mutual Authentication: Procedure of mutual authentication between clients and broker servers.

Other Services Provided by Brokers (Part 55)

• Security Measures: Brokers should implement Public Key Infrastructure (PKI) based on digital signatures, supported by government-certified agencies, for secure transactions.
• Two-factor Authentication: The two factors in the Two-factor authentication framework should not be the same.
• Back-up and Restore Systems: Brokers should have adequate back-up and restore systems to ensure sustained performance and high availability, with both on-site and remote site back-up capabilities.
• Software Testing: Brokers should undertake User Acceptance Testing (UAT) of software used for trading and risk management to ensure it meets their requirements.
• System Audit: Brokers should engage system auditors to examine reports of mock tests and UAT, and submit System Audit Reports to the Exchange on a periodic basis.
• Additional Services: Brokers can provide facilities like Direct Market Access, Algorithmic Trading, and Smart Order Routing to clients, as specified by SEBI/Exchanges.

Code of Conduct for Stock Brokers

• General Principles: Stock brokers should maintain high standards of integrity, promptitude, and fairness in their business conduct.
• Duty towards Investors: Stock brokers should faithfully execute orders, inform clients about transaction execution, and make prompt payments and deliveries.
• Duty towards Other Stock-Brokers: Stock brokers should cooperate with other brokers in comparing unmatched transactions, protecting client rights, and completing settlements.
• Disclosure and Transparency: Stock brokers should disclose their interests, including those of their dependent family members and employer, when rendering investment advice.
• Training and Arrangements: Stock brokers should have adequately trained staff and arrangements to render fair, prompt, and competent services to clients.