Professional Documents
Culture Documents
forms. The composite application forms must be mailed to the company within a period of 30
days.
Value of a right share:
The value of a share after the rights issue is calculated as follows:
Ex- rights price of a scrip = NPo + M S
N + M
Where N = No. of existing shares held
M = No. of right shares entitled for a holding of N shares
Po = Cum rights price of the scrip
S = Subscription price for the rights.
Solution:
Intrinsic Value = (Earning per share * Dividend payout ratio)*100
(Discount rate - Growth rate)
= (3.00 * 0.6)*100 / (15 - 6)
= Rs. 20
1.6.2 Earnings Per Share & Price-Earnings Approach
The other approach used in financial analysis is the PriceEarnings (P/E) ratio approach, the
value as per the P/E approach is given by
Value = Earning per share (EPS) * Price Earnings ratio
Where EPS
P/E
Example 8: What is the Price-Earnings ratio of the company if the Profit after Tax is Rs.100
crore. The preference dividend to be paid is Rs.10 crore and the outstanding equity is 90 lakh
shares. The current market rate of the share is Rs.250/-.
EPS
Example 10: What is the book value of the firm having a net worth of Rs.2500 crore and the
number of shares outstanding is 50 crore?
Intrinsic Book Value = Rs.2500 core/ 50 crore i.e. Rs.50
1.6.4 Liquidation Value of the Share Approach
The value of the shares on liquidation of the company is calculated after deducting the amount to
be paid to the creditors & the preference shareholders. Thus the value of the share is given by
Value = (Liquidation Value of the companyAmount paid to the creditors & preference
shareholders) /No. of equity shares outstanding.
Example 11: The company XYZ Ltd. is liquidated realizing Rs.10 crore from liquidation of it
assets. The company had to pay Rs.1 crore to the creditors. What is the value of the share, if the
total outstanding number of share is 45 lakh.
Value of each share = (Rs.10 crore Rs.1 crore)/ 45 lakh shares; i.e. Rs.20
Rp
= 15.5%
Beta
= jm j/m
= -0.90 * 10% / 5% i.e. - 1.80
Example 16: A portfolio has a beta of 0.5. It is well diversified, and carries little unsystematic
risk. On average, on a day when Nifty rises by 2%, how much does the portfolio value change?
Portfolio value = Beta * Return on index = 0.5*2 = 1%
1.7.4 Relationship between Risk and Return
The Capital Asset Pricing Model, also called as CAPM, explains the relationship between the
risk and return of a security. The relationship between the risk and the return as explained by
CAPM is given be the formula:
RoRj = Rf + j * (RoRm - Rj)
Where RoRj is the required rate of return on the security j; Rf is the risk free rate of return, m is
the beta coefficient of security j and RoR m is the expected rate of return on the market portfolio
(market index)
In the above equation (RoRm - Rj) is also called as the risk premium.
Example 17: The stock XYZ Ltd. has a beta of 0.80 and a standard deviation 4 % per day. S & P
CNX Nifty has a standard deviation of 1.3% per day. How much is the unsystematic risk of the
stock?
1.7.5 Unsystematic Risk
Unsystematic Risk
From CAPM,
Unsystematic Risk
0.75
0.25
0.20
12
2. MARKET INDICES
2.1. Methods of Computation
(a)
(b)
(c)
(d)
Example 1: Index comprises of the following four securities on the base date.
Share
A
B
C
D
Price
20.00
60.00
145.00
15.00
Total Shares
4000
5000
2000
10000
Price
20.00
60.00
145.00
15.00
240.00
Weightage
20.00 / 240.00
60.00 / 240.00
145.00 / 240.00
15.00 / 240.00
Total =
0.0830
0.2500
0.6042
0.0625
1.0000
Price
45.00
50.00
150.00
15.00
Issue Size
4000
5000
2000
10000
13
Share Weightages
Share
A
B
C
D
PriceTotal
Base
Price
45.00
50.00
150.00
15.00
260.00
240.00
Weightage
80,000/8,20,000
3,00,000/8,20,000
2,90,000/8,20,000
1,50,000/8,20,000
Total
0.098
0.366
0.354
0.183
1.000
Capitalisation
1,80,000
2,50,000
3,00,000
1,50,000
8,80,000
8,20,000
14
Index Value (I) = {Market Capitalisation (M)/ Base Capitalisation (B)} Initial Index Value
(IIV)
Change in Market Capitalisation (M) = *Change in Issue Size Issue Price
Index should not move with change in issue size.
Therefore
I = {(M + M)/(B +B)} IIV
B +B = (M + M) (IIV/ I)
B +B = M IIV/ I + M IIV/ I
B +B = B + M IIV/ I
New Base Capitalisation = Old Base Capitalisation + M IIV/ I
or
Change in Base Capitalisation (B) = M IIV/ I
Example 2: On April 5, the total market capitalisation of S&P CNX Nifty is Rs. 197500 crore
and base capitalisation is Rs. 195000 crore. It is decided to replace Scrip A, a constituent of S&P
CNX Nifty having a market capitalisation of Rs. 1000 crore with scrip B that has a market
capitalisation of Rs. 900 crore with effect from April 6. What is the revised base capitalisation of
the S&P CNX Nifty on April 6?
IIV = 1000
M= 197500
B =195000
I = 197500/195000 = 1012.8205
M = 1000-900= -100
New Base Capitalisation = 195000 + (-100 1000)/1012.8205
New Base Capitalisation = 194901
Hence Index Value = 197400/194901 = 1012.8205
Buy Price
98.00
97.00
96.00
Sell Price
99.00
100.00
101.00
Sell Quantity
1000
1500
1000
16
By continuous compounding:
FV = 1000 * e (0.10 * 5) = 1000 * 1.648721 = Rs.1,648.72
Example 2: Find the value of Rs. 50,000 deposited for a period of 3 years at the end of the period
when the interest is 10% and continuous compounding is done.
Future Value = 50000* e^(0.01*10*3) = Rs. 67493
The future value (FV) of the present sum (PV) after a period t for which compounding is done
m times a year at an interest rate of r, is given by the equation
FV = PV (1+(r/m))t
The equation used to convert the nominal rate of interest rm where compounding is done m
times a year to a continuously compounded rate rc is given by
rc = m ln (1+rm/m)
17
The effective rate of interest Re, if compounding is done for a shorter period of m times a year,
is more than the nominal rate of interest Rn specified. The difference in the effective and
nominal rate of interest can be found using the formula
Re = (1 + (Rn/m))m - 1
Example 3: How much does a deposit of Rs. 5,000 grow to at the end of 3 years, if the nominal
rate of interest is 10 % and compounding is done quarterly?
Future value = 5000 * ((1 + 0.10/4)^(4*3)) = Rs.6724.45
3.1.2 Future Value of an Annuity
The future value (FV) of a uniform cash flow (CF) made at the end of each period till the time of
maturity t for which compounding is done at the rate r is given by
FV = CF*(1+r)t-1 + CF*(1+r)t-2 + ... + CF*(1+r)1+CF
= CF [{(1+r)t - 1} / r]
Example 4: Suppose, you deposit Rs. 1,000 annually in a bank for 5 years and your deposits earn
a compound interest rate of 10 per cent, what will be value of this series of deposits (an annuity)
at the end of 5 years? Assuming that each deposit occurs at the end of the year, the future value
of this annuity will be:
=Rs. 1,000 (1.10)4 + Rs. 1,000 (1.10)3 + Rs. 1,000 (1.10)2 + Rs. 1,000 (1.10) + Rs. 1,000 = Rs.
1,000 (1.4641) + Rs. 1,000 (1.3310) + Rs. 1,000 (1.2100) + Rs. 1,000 (1.10) + Rs. 1,000
= Rs. 6,105
Example 5: Two equal annual payments of Rs.2000 are made into a deposit account that pays 8%
interest per year. What is the future value of this annuity at the end of 2 years?
FV = 2000((1+0.01*8)^2-1)/0.01*8 = Rs. 4160
In case of continuous compounding, the future value of annuity is determined using the formula
FV = CF * (ert -1)/r
3.1.3 Present Value of a Single Cash Flow
Present value of (PV) of the future sum (FV) to be received after a period t for which
compounding is done at an interest rate of r, is given by the equation
PV = FV / (1+r)t
Example 6: What is the present value of Rs.1,000 payable 3 years hence, if the interest rate is 12
% p.a.
PV
PV = FV * e-rt
Example 7: What is the present value of Rs. 50,000 receivable after 3 years at a discount rate of
10% under continuous discounting?
Present Value = 50,000/(exp^(0.01*10*3)) = Rs. 37041
3.1.4 Present Value of an Annuity
The present value of annuity is the sum of the present values of all the cash inflows/outflows.
Present value of an annuity (in case of discrete compounding)
PV = FV [{(1+r)t - 1 }/ {r * (1+r)t}]
Present value of an annuity (in case of continuous compounding)
PVa = FVa * (1-e-rt)/r
Example 8: Future Value of Rs.1000 deposited at the end of each year for 3 years at an interest
rate of 10% compounded annually is
=
Rs. 1,000 (1+0.10)2 + Rs. 1,000 (1+0.10)1 + Rs. 1,000 i.e. Rs. 3310.
Example 9: What is the value at maturity of an annuity of Rs. 50,000, continuously compounded
at an interest of 8% for a period of 3 years?
Value of Annuity = 50,000 *(exp^(0.01*8*3)-1)/0.01*8) = Rs. 169530.72
Annual
Investment
20
Period (yr.)
0
1
2
3
4
5
Inflows
Lakh)
350
350
200
200
250
In 3 years we recover Rs.900 lakh. Thus the time required to recover Rs. 100 lakh is = (100 /
200) = .5 year
Thus the Payback period = 3.5 yrs (i.e. 3yrs 6 months)
3.2.4 Internal Rate of Return
It is the discounting rate r, which equates the present value of the cash outflows with the
expected cash inflows for an investment proposal.
CF1
CF2
CF3
CFn
CF0 =
____ +
____ +
____ ++_____
(1+r)
(1+r) 2
(1+r) 3
(1+r) n
Where,
CFn is the cash flow at time intervals,
n is the investment period duration,
For a proposal the IRR may be calculated manually by trial and error and the approximate value
can be interpolated from the closest answers or a financial calculator may be used.
3.2.5. Net Present Value
For an investment proposal, the NPV is the summation of the present value of all cash flows,
where the discounting is done at a required rate of return k. A positive NPV will give an accept
signal and negative a reject signal.
CF1
CF2
CF3
CFn
NPV = -(CF0 ) + ____ +
____ +
____ ++ _____
(1+r) 1
(1+r) 2
(1+r) 3
(1+r) n
Where,
CF0 is the initial cash outflow,
CFn is the cash inflow at time intervals,
n is the investment period duration,
Example 13: An investment proposal has the following cash flows. If discounting rate is 12%,
then what is the Net present value of the proposal?
Time
Period (yr.)
Initial
Investment Expected
Annual
(Rs. Lakh)
Inflows (Rs. Lakh)
21
0
1
2
3
4
5
NPV = -(1000)
1,000
-
350
350
200
200
250
350
350
200
200
250
+ ____ + ____
+ ____
+ _____ + _____
(1+.12) (1+.12) 2 (1+.12) 3 (1+.12) 4 (1+.12) 5
22
23
26
Illustration:
Balance Sheet of XYZ Co. Ltd as on March 31, 1999 (Rupees in Crore)
Liabilities
Share Capital
- Equity
- Preference
Reserves
&
Surplus
Secured Loans
- Term Loans
8.30
- Debentures
6.00
Unsecured Loans
Current Liabilities
& Provisions
Total
1999
1998
15.00
15.00
11.20
10.60
14.30
13.10
6.90
10.50
57.90
2.50
8.10
49.30
Assets
Fixed Assets (Net)
Gross Block
Less: Depreciation
Investments
1999
33.00
1998
32.20
1.00
1.00
23.40
15.60
Miscellaneous
Exps & Losses
0.50
0.50
Total
57.90
49.30
Current
Assets,
Loans & Advances
Cash & Bank
Debtors
Inventories
Pre-paid expenses
27
59.00
26.00
0.20
11.80
10.60
0.80
Income statement for the year ending March 31, 1999 (Rupees in Crore)
1999
70.10
55.20
1998
62.30
47.50
14.90
5.60
14.80
4.90
Operating Profit
Non-operating surplus/deficit
Earnings before interest and tax
Interest
9.30
(0.40)
8.90
2.10
9.90
0.60
10.50
2.20
6.80
3.50
3.30
2.70
0.60
1999
8.30
4.10
4.20
2.70
1.50
1998
2.20
1.80
21.00
17.46
2.80
1.80
20.00
17.07
Net Sales
Less: Cost of goods sold
- Stocks
- Wages and Salaries
- Other Mfg. Expenses
Gross Profit
Operating expenses
- Depreciation
- General Administration
- Selling
42.10
6.80
6.30
3.00
1.20
1.40
Turnover
Inventory Turnover = Cost of goods sold/Inventory = 55.20/10.60 = 5.20
Average Collection period = Receivables / Average Sales per day = 11.80/70.1*1/360 = 61 days
Receivables Turnover ratio = Net Sales / Receivables = 70.10/11.80 = 5.94
Fixed Assets Turnover ratio = Net Sales / Fixed Assets = 70.10/33 = 2.12
Profitability Ratios
Gross Profit Margin Ratio = Gross Profit/Net Sales = 14.90/70.10 = 0.21
Net Profit Margin ratio = Net Profit / Net Sales = 3.30/70.10 = 0.047
Net Income to Total Assets ratio = Net income (profit)/Total Assets = 3.30/57.90 = 0.057
Return on Investment = Earnings before Interest and taxes / Total Assets = 8.90/57.90 = 0.154
Return on Equity = Equity earnings / Net Worth = 3.30/26.20 = 0.126
Valuation Ratios
Price Earnings Ratio = Marker Price per share / Earnings per share = 21.0/2.20 = 9.55
Yield = Dividend/Initial Price + Price Change/Initial Price
(Dividend Yield)
(Capital gains/losses yield)
=
1.80/20.0
+
1.0/20.0 = 0.14 or 14%
Example 1: A firms current assets and current liabilities are 1600 and 1000 respectively. How
much can it borrow on a short-term basis without reducing the current ratio below 1.25?
Let the maximum short-term borrowings be x. The current ratio with this borrowing should be
1.25
1600 + x / 1000 + x = 1.25
x = 1400. Hence the maximum permissible short-term borrowing is 1400.
Example 2: Determine the sales of a firm, given the following information
Current Ratio = 1.4
Quick Ratio = 1.2
Current Liabilities = 1600
Inventory turnover ratio = 8
Current Assets = Current liabilities * Current Ratio = 1600*1.4 = 2240
Current Assets Inventories = Current Liabilities * Quick ratio = 1600*1.2 = 1920
Inventories = 2240 1920 = 320
Sales = Inventories * Inventory ratio = 320*8 = 2560
Example 3: Mohan Inc. has profit before tax of 40 lakh. If the companys interest coverage ratio
is 6, what is the total interest charge?
29
30
(a) actual delivery of securities and the payment of a price therefor either on the same day as
the date of the contract or on the next day, the actual period taken for the despatch of the
securities or the remittance of money therefor through the post being excluded from the
computation of the period aforesaid if the parties to the contract do not reside in the same
town or locality;
(b) transfer of the securities by the depository from the account of a beneficial owner to the
account of another beneficial owner when such securities are dealt with by a depository
The SC(R)A gives Central Government regulatory jurisdiction over 1. stock exchanges, through a process of recognition and continued supervision,
2. contracts in securities, and
3. listing of securities on stock exchanges.
As a condition of recognition, a stock exchange complies with conditions prescribed by Central
Government. Organised trading activity in securities in any area takes place on a recognised
stock exchange. The stock exchanges determine their own listing requirements which have to
confirm with the minimum listing criteria set out in the Rules.
Some of the Powers under the SCRA are exercisable by SEBI. Some other powers exercisable by
Central Government have been made exercisable by SEBI in terms of notification issued under
Section 29 of the SC(R)A.
Powers exercisable by SEBI
Section
Powers
6
9
10
17
32
The SEBI may withdraw recognition if it is in the interest of the trade or in the public interest by
serving a written notice on the governing body of the stock exchange in this regard and after
giving an opportunity to the governing body to be heard in the matter.
A person without the permission of the SEBI shall not organise or assist in organising or be a
member of any stock exchange (other than a recognised stock exchange) for the purpose of
assisting in, entering into or performing any contracts in securities, according to section 19.
Periodical returns and books of accounts
Every recognised stock exchange shall furnish prescribed periodical returns to the Securities and
Exchange Board of India.
Every recognised stock exchange and every member thereof shall maintain and preserve for such
periods not exceeding five years such books of account, and other documents as the Central
Government, after consultation with the stock exchange concerned, may prescribe in the interest
of the trade or in the public interest, and such books of account, and other documents shall be
subject to inspection at all reasonable times by the Securities and Exchange Board of India
[Section 6(2)].
Annual reports to be furnished by stock exchanges
Every recognised stock exchange shall furnish the SEBI with a copy of the annual report, and
such annual report shall contain such particulars as may be prescribed (Section 7).
33
As per section 13, if the SEBI is satisfied, having regard to the nature or the volume of
transactions in securities in any State or area, that it is necessary so to do, it may, by notification
in the Official Gazette, declare this section to apply to such State or area, and thereupon every
contract in such State or area which is entered into after date of the notification otherwise than
between members of a recognised stock exchange in such State or area or through or with such
member shall be illegal.
As per section 14, any contract entered into in any State or area specified in the notification
under section 13 which is in contravention of any of the bye- laws specified in that behalf under
clause (a) of sub-section (3) of section 9 shall be void with regard to the rights of any member of
the recognised stock exchange who has entered into such contract in contravention of any such
bye-laws, and the rights of any other person who has knowingly participated in the transaction
entailing such contravention.
Members may not act as principals in certain circumstances
A member of a recognised stock exchange shall not in respect of any securities enter into any
contract as a principal with any person other than a member of a recognised stock exchange,
unless he has secured the consent or authority of such person and discloses in the note,
memorandum or agreement of sale or purchase that he is acting as a principal, section 15.
Power to prohibit contracts in certain cases
If the SEBI is of opinion that it is necessary to prevent undesirable speculation in specified
securities in any State or area, it may, by notification in the Official Gazette, declare that no
person in the State or area specified in the notification shall, save with the permission of the
Central Government, enter into any contract for the sale or purchase of any security specified in
the notification except to the extent and in the manner, if any, specified therein, according to
section 16.
Section 22(a) provides for a right of appeal to Securities Appellate Tribunal against refusal of
stock exchange to list securities of public companies, if the said companies feel aggrieved with
such refusal. Securities Appellate Tribunal has been given power to vary or set side the decision
of the stock exchange.
Section 29(a) deals with the power of Central Government to delegate the powers (except the
power under Section 30), exercisable by it under the provisions of SCRA to SEBI or RBI subject
to such conditions it may specify.
Section 30 of the SCRA provides power for Central Government to make rules for the purpose of
carrying out into effect the object of this Act.
36
A person who is a member at the time of application for recognition or subsequently admitted as
a member shall continue as such if (a) he ceases to be a citizen of India,
(b) he is adjudged bankrupt or a receiving order in bankruptcy is made against him or he is
proved to be insolvent;
(c) he is convicted of an offence involving fraud or dishonesty;
(d) he engages either as principal or employee in any business other than that of securities except
as a broker or agent not involving any personal financial liability.
Contracts between members of recognised stock exchange
All contracts between the members of a recognised stock exchange shall be confirmed in writing
and shall be enforced in accordance with the rules and bye-laws of the stock exchange of which
they are members (Rule 9).
Books of account and other documents by every recognised stock exchange
37
Rule 14 of the SCRR requires every recognised stock exchange shall maintain and preserve the
following books of account and documents for a period of five years:
(1) Minute books of the meetings of(a) members;
(b) governing body;
(c) any standing committee or committees of the governing body or of the general body of
members.
(2) Register of members showing their full names and addresses. Where any member of the stock
exchange is a firm, full names and addresses of all partners shall be shown.
(3) Register of authorised clerks.
(4) Register of remisiers of authorised assistants.
(5) Record of security deposits.
(6) Margin deposits book.
(7) Ledgers.
(8) Journals.
(9) Cash book.
(10) Bank pass-book.
Books of account and other documents to be maintained and preserved by every member of
a recognised stock exchange
Rule 15 of the SCRR requires every member of a recognised stock exchange to maintain and
preserve the following books of account and documents for a period of five years:
(a) Register of transactions (Sauda book).
(b) Clients' ledger.
(c) General ledger.
(d) Journals.
(e) Cash book.
(f) Bank pass-book.
(g) Documents register showing full particulars of shares and securities received and delivered.
Every member of a recognised stock exchange shall maintain and preserve the following
documents for a period of two years:
(a) Members' contract books showing details of all contracts entered into by him with other
members of the same exchange or counter-foils or duplicates of memos of confirmation issued to
such other members.
(b) Counter-foils or duplicates of contract notes issued to clients.
(c) Written consent of clients in respect of contracts entered into as principals.
Submission of annual report
According Rule 17, every recognised stock exchange shall within the specified time furnish the
SEBI annually with a report about its activities during the preceding calendar year, which shall
interalia contain detailed information about the following matters:
38
39
The SEBI has offices in Mumbai, Calcutta, New Delhi and Chennai.
The Board shall consist of the following members, namely:(a) a Chairman;
(b) two members from amongst the officials of the Ministries of the Central Government dealing
with Finance and Law;
(c) one member from amongst the officials of the Reserve Bank of India constituted under
section 3 of the Reserve Bank of India Act, 1934;
(d) two other members, to be appointed by the Central Government.
The general superintendence, direction and management of the affairs of the Board shall vest in a
Board of members, which may exercise all powers and do all acts and things which may be
exercised or done by the Board.
Save as otherwise determined by regulations, the Chairman shall also have powers of general
superintendence and direction of the affairs of the Board and may also exercise all powers and do
all acts and things which may be exercised or done by the Board.
The Chairman and members referred to in clauses (a) and (d) of sub-section (1) shall be
appointed by the Central Government and the members referred to in clauses (b) and (c) of that
sub-section shall be nominated by the Central Government and the Reserve Bank of India
respectively.
The Chairman and the other members referred to in clauses (a) and (d) of sub-section (1) shall be
from amongst the persons of ability, integrity and standing who have shown capacity in dealing
with problems relating to securities market or have special knowledge or experience of law,
finance, economics, accountancy, administration or in any other discipline which, in the opinion
of the Central Government, shall be useful to the Board.
The Board may appoint officers and employees for the efficient discharge of its functions under
this Act.
Functions of the Board
The SEBI shall protect the interests of the investors in securities and to promote and
development of, and to regulate the securities market by such measures as it thinks fit. The
measures referred to therein may provide for (a) regulating the business in stock exchanges and any other securities markets;
(b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents,
bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other intermediaries who
may be associated with securities markets in any manner.
(c) registering and regulating the working of the depositories, participants, custodians of
securities, foreign institutional investors, credit rating agencies and such other intermediaries
as the Board may, by notification, specify in this behalf.
41
(d) registering and regulating the working of venture capital funds and collective investment
schemes including mutual funds;
(e) promoting and regulating self-regulatory organisations;
(f) prohibiting fraudulent and unfair trade practices relating to securities markets;
(g) promoting investors' education and training of intermediaries of securities markets;
(h) prohibiting insider trading in securities;
(i) regulating substantial acquisition of shares and take-over of companies;
(j) calling for information from, undertaking inspection, conducting inquiries and audits of the
stock exchanges, mutual funds and other persons associated with the securities market and
intermediaries and self- regulatory organisations in the securities market;
(k) performing such functions and exercising according to Securities Contracts (Regulation) Act,
1956, as may be delegated to it by the Central Government;
(l) levying fees or other charges for carrying out the purpose of this section;
(m)conducting research for the above purposes;
(n) calling from or furnishing to any such agencies, as may be specified by the Board, such
information as may be considered necessary by it for the efficient discharge of its functions;
(o) performing such other functions as may be prescribed.
Registration of stock broker, sub-broker, share transfer agents etc.
A person in the following capacity shall buy, sell or deal in securities after obtaining a certificate
of registration from SEBI, as required by Section 12:
1) Stock-broker,
2) Sub- broker,
3) Share transfer agent,
4) Banker to an issue,
5) Trustee of trust deed,
6) Registrar to an issue,
7) Merchant banker,
8) Underwriter,
9) Portfolio manager,
10) Investment adviser
11) Depository,
12) Depository Participant
13) Custodian of securities,
14) Foreign institutional investor,
15) Credit rating agency or
16) Collective investment schemes,
17) Venture capital funds,
18) Mutual fund, and
19) Any other intermediary associated with the securities market
An application shall be made for registration in the prescribed manner with the prescribed fee.
But the SEBI may, by order, suspend or cancel a certificate of registration.
Scheme of penalties under the SEBI Act
42
The SEBI Act, 1992 provides for two alternative types of punishment for violation of the
provisions of the Act. They are :
a) suspension or cancellation of certificate of registration to be imposed by SEBI only as on
regulation framed by SEBI,
b) monetary penalty to be imposed by an adjudicating officer appointed by SEBI, as per rules
framed by Central Government.
SEBI has been empowered to adjudicate a wide range of violations and impose monetary
penalties on any intermediary or other participants in the securities market. Chapter VI-A has
listed out a wide range of violations along with maximum penalties leviable. It provides for a
highest penalty of Rs.10 lakh and the violations listed are failure to submit any document,
information or furnish any return, failure to maintain required books of accounts or records
carrying on any collective investment scheme without registration, failure to enter into
agreement with clients, insider trading, failure to redress the grievances of investors, failure to
issue contract notes, charging excessive brokerage by brokers, failure to disclose substantial
acquisition of shares and takeovers etc. The amendment Act provides for three types of monetary
penalties, viz, (a) a lump sum penalty for a specific violation of the Act, (b) a penalty for
everyday during which the violation continues, and (c) a multiple of the amount involved in the
violation. The amount of penalty is determined subject to the ceiling, by the adjudicating officer
who will be guided by the factors including amount of disproportionate gain or unfair advantage
wherever quantifiable made as a result of the amount of loss caused to an investor or any group
of investors as a result of default, and the repetitive nature of the default.
The adjudicating officer is required to be appointed by the SEBI. He shall not be an officer
below the rank of a division chief of SEBI. He will hold an enquiry after giving a person
reasonable opportunity of being heard for the purpose of determining if any violation has taken
place and imposing penalty. To ensure fair enquiry and penalty, it has been provided that appeal
against the orders of adjudicating officers would lie to the securities appellate tribunal.
43
exchange of which the stock- broker with whom he is to be affiliated is a member. The stock
exchange on receipt of an application shall verify the information contained therein and shall
also certify that the applicant is eligible for registration. The stock exchange shall forward the
application form of such applicants who comply with all the requirements specified in the
Regulations to the Board as early as possible, but not later than thirty days from the date of its
receipt.
The eligibility criteria for registration as a sub-broker are as follows:
In case of company, partnership firm and sole proprietorship firm, the directors, the partners and
the individual, shall comply with the following requirements :
(a) the applicant is not less than 21 years of age;
(b) the applicant has not been convicted of any offence involving fraud or dishonesty;
(c) the applicant has atleast passed 12th standard equivalent examination from an institution
recognised by the Government:
Maintenance of proper books of accounts, records etc
Every stock-broker shall keep and maintain the following books of accounts, records and
documents for a period of five years, as required by Regulation 17:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
45
Every stock broker shall, after the close of each accounting period furnish to the Board if so
required as soon as possible but not later than six months from the close of the said period a copy
of the audited balance sheet and profit and loss account, as at the end of the said accounting
period:
Procedure for inspection
The SEBI may appoint one or more persons as inspecting authority to undertake inspection of
the books of accounts, other records and documents of the stock- brokers under Regulation 19
for the following purposes:
(a) to ensure that the books of accounts and other books are being maintained in the manner
required;
(b) that the provisions of the Act, rules, regulations and the provisions of the Securities Contracts
(Regulation) Act and the rules made thereunder are being complied with;
(c) to investigate into the complaints received from investors, other stock brokers, sub-brokers or
any other person on any matter having a bearing on the activities of the stock- brokers; and
(d) to investigate suo-moto, in the interest of securities business or investors' interest, into the
affairs of the stock-broker.
It shall be the duty of broker on inspection to produce to the inspecting authority such books,
accounts and other documents in his custody or control and furnish him with the statements and
information relating to the transactions in securities market within such time as the said officer
may require. The stock-broker shall allow the inspecting authority to have reasonable access to
the premises occupied by such stock- broker or by any other person on his behalf and also extend
reasonable facility for examining any books, records, documents and computer data in the
possession of the stock- broker or any other person and also provide copies of documents or
other materials which, in the opinion of the inspecting authority are relevant.
The inspecting authority, in the course of inspection, shall be entitled to examine or record
statements of any member, director, partner, proprietor and employee of the stock- broker. It shall
be the duty of every director proprietor, partner, officer and employee of the stock broker to give
to the inspecting authority all assistance in connection with the inspection, which the stock
broker may be reasonably expected to give.
The inspecting authority shall, as soon as may be possible submit an inspection report to the
SEBI. The SEBI shall after consideration of the inspection report communicate the findings to
the stock-broker to give him an opportunity of being heard before any action is taken by the
Board on the findings of the inspecting authority. On receipt of the explanation, if any, from the
stock-broker, the Board may call upon the stock-broker to take such measures as the Board may
deem fit in the interest of the securities market and for due compliance with the provisions of the
Act, rules and regulations.
Procedure in case of default
46
A stock-broker who
(a) fails to comply with any conditions subject to which registration has been granted;
(b) contravenes any of the provisions of the Act, rules or regulations;
(c) contravenes the provisions of the Securities Contracts (Regulation) Act or the rules
made thereunder;
(d) contravenes the rules, regulations or bye-laws of the stock exchange;
shall be liable to suspension of registration, after the inquiry, for a specified period; or
cancellation of registration (Regulation 25).
A penalty of suspension of registration of a stock- broker may be imposed if:(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
the stock-broker violates the provisions of the Act, rules and regulations;
the stock-broker does not follow the code of conduct
the stock-broker (a) fails to furnish any information related to his transactions in securities as required by
the Board;
(b) furnishes wrong or false information,
(c) does not submit periodical returns as required by the Board;
(d) does not co-operate in any enquiry conducted by the Board;
the stock-broker fails to resolve the complaints of the investors or fails to give a
satisfactory reply to the Board in this behalf;
the stock-broker indulges in manipulating or price rigging or cornering activities in the
market;
the stock-broker is guilty of misconduct or improper or unbusinesslike or unprofessional
conduct;
the financial position of the stock broker deteriorates to such an extent that the Board is
of the opinion that his continuance in securities business is not in the interest of investors
and other stock- brokers;
the stock-broker fails to pay the fees;
the stock-broker violates the conditions of registration;
the membership of the stock- broker is suspended by the stock exchange:
47
4. Execution of Orders
48
5. Accumulation of orders
The Trading Member shall not accumulate clients order / unexecuted
balances of order where such aggregate orders / aggregate of unexecuted
balance is greater than the Regular lot size, specified for that security by the
Exchange. The Trading Member shall place forthwith all the accumulated
orders where they exceed the Regular lot size.
Where the Trading Member has accumulated the orders of several clients to
meet the requirement of the Regular lot quantity, he may give his own order
number referred to as the Reference Number, together with a reference
number to the NEAT Order Number, to the client.
Example 1: If a client is interested to buy shares from a broker, what should
he inform his brokers?
Ans. The
(i)
(ii)
(iii)
(iv)
6. Contract Notes
A Stock-broker shall issue a contract note to his clients for trades
(purchase/sale of securities) executed with all relevant details as required
therein to be filled in. A contract note shall be issued to a client within 24
hours of the execution of the contract duly signed by the Trading Member or
his Authorized Signatory or Client Attorney. A contract note should contain name,
registered address and dealing office address of the issuing broker and SEBI registration number
of the issuing broker. The contract note should have all trade related information viz., trade date,
scrip name, quantity, rate at which trade has taken place, brokerage charged by broker, service
tax etc. The contract note should be signed by the authorised signatory. The Trading Member
shall maintain details in the counterfoils of contract notes.
No member of a recognised stock exchange shall in respect of any securities
enter into any contract as a principal with any person other than a member
of a recognised stock exchange, unless he has secured the consent or
authority of such person and discloses in the note, memorandum or
agreement of sale or purchase that he is acting as a principal.
The contract note attracts stamp duty at the rates prescribed by concerned
state
8. Brokerage
The Trading Member shall charge brokerage at rates not exceeding the rate
prescribed by SEBI i.e., 2.5%. The brokerage shall be charged separately
from the clients and shall be indicated separately from the price, in the
contract note. The Trading Member may not share brokerage with a person
who is a Trading Member or in employment of another Trading Member.
The Trading Member can charge the following levies/fee from the clients in
addition to the brokerage:
1. Service Tax (Service Tax is 5 % of the brokerage).
2. Stamp duty
50
Example 2: If a client has sold 10000 shares of a scrip @ Rs. 50, what is the
maximum brokerage that the client can be charged?
Ans. The client can be charged a maximum brokerage of 2.5%
Maximum brokerage = 2.50 % Rs. 5,00,000
= Rs. 12,500.
2. Orders
51
The sub-broker shall ensure that appropriate confirmed order instructions are
obtained from the clients before placement of an order on the system and
shall keep relevant records or documents of the same and of the completion
or otherwise of these orders thereof.
3. Purchase/Sale Note
The Sub-broker shall provide a purchase/sale note for all transactions made
within 24 hours of the execution of the contract.
The sub-broker shall ensure that 1.
2.
3.
4.
4. Payments/Delivery Of Securities
The Sub-broker shall make payments to his clients or deliver the securities
purchased within 48 hours of pay-out unless the client has requested
otherwise.
5. Brokerage
The Sub-broker shall charge his brokerage at rates not exceeding the rate
prescribed by SEBI i.e., 1.5%.
The brokerage charged by the Trading Member and the Sub-broker shall be
indicated separately from the clients and shall be indicated separately from
the price, in the purchase/sale note.
The total brokerage that can be charged to a client is (max of 1.5 by subbroker of the traded value + 1.0 % or more by the Trading member) subject
to an over all % of 2.5.
Example 3: What is the maximum brokerage that can be charged by a subbroker, to his client who has purchased shares worth Rs. 3,00,000?
Max brokerage = (3,00,000*1.5)/100
= Rs. 4500.
52
1. A listed company shall be eligible to make a public issue of equity shares or any security
convertible at later date into equity share.
2. Public issue by listed companies which has changed its name to indicate as if it was engaged
in the business / activities in information technology sector during a period of three years prior to
filing of offer document with the Board, shall be eligible to make a public issue of equity share
or securities convertible at a later date into equity share, if;
(a) (i) it has a track record of distributable profits in terms of Section 205 of Companies Act,
for at least three (3) out of immediately preceding five (5) years from the information
technology business / activities, and
(ii) it has a pre-issue networth of not less than Rs. one crore in three (3) out of preceding
five (5) years, with the minimum networth to be met during immediately preceding two
(2) years
(b) if the company does not satisfy the requirements specified in clause (a) above, it can make
a public issue provided that it satisfies the requirements laid down for unlisted companies.
Exemptions from Eligibility norms
There are certain exemptions from some of the above provisions in case of ;
i) a banking company including a Local Area Bank (hereinafter referred to as Private Sector
Banks) set up under sub-section (c) of Section 5 of the Banking Regulation Act, 1949 and which
has received license from the Reserve Bank of India, or
ii) a corresponding new bank set up under the Banking Companies (Acquisition and Transfer of
Undertaking) Act, 1970 Banking Companies (Acquisition and Transfer of Undertaking) Act,
1980, State Bank of India Act 1955 and State Bank of India (Subsidiary Banks) Act, 1959
(hereinafter referred to as public sector banks).
iii) an infrastructure company
a) whose project has been appraised by a Public Financial Institution or Infrastructure
Development Finance Corporation (IDFC) or Infrastructure Leasing and Financing Services Ltd.
(IL&FS) and
b) not less than 5% of the project cost is financed by any of the institutions referred to in subclause (a), jointly or severally, irrespective of whether they appraise the project or not, by way of
loan or subscription to equity or a combination of both.
iv) rights issue by a listed company
54
Unpublished price sensitive information" means any information which relates to the following
matters or is of concern, directly or indirectly, to a company, and is not generally known or
published by such company for general information, but which if published or known, is likely to
materially affect the price of securities of that company in the market (i) financial results (both half-yearly and annual) of the company:
(ii) intended declaration of dividends (both interim and final);
(iii) issue of shares by way of public rights, bonus, etc.;
(iv) any major expansion plans or execution of new projects;
(v) amalgamation, mergers and take-overs;
(vi) disposal of the whole or substantially the whole of the undertaking;
(vii) such other information as may affect the earnings of the company.
(viii) any changes in policies, plans or operations of the company.
56
57
which is a holding company, subsidiary or relative of the acquirer. Provided that subclause (ix) shall not apply to a bank whose sole relationship with the acquirer or with
any company, which is a holding company or a subsidiary of the acquirer or with a
relative of the acquirer, is by way of providing normal commercial banking services
or such activities in connection with the offer such as confirming availability of
funds, handling acceptances and other registration work.
x)
any investment company with any person who has an interest as director, fund
manager, trustee, or as a shareholder having not less than 2% of the paid-up
capital of that company or with any other investment company in which such
person or his associate holds not less than 2% of the paid up capital of the
latter company.
(4) Offer period means the period between the date of public announcement of the first offer
and the date of closure of that offer.
(5) Promoter means
(a) (i) the person or persons who are in control of the company, or
(ii) person or persons named in any offer document as promoters;
(b) a relative of the promoter within the meaning of section 6 of the Companies Act, 1956
(c) in case of a corporate body:
(i) a subsidiary or holding company of that body, or
(ii) any company in which the `Promoter' holds 10% or more of the equity capital or
which holds 10% or more of the equity capital of the Promoter, or
(iii) any corporate body in which a group of individuals or corporate bodies or
combinations thereof who hold 20% or more of the equity capital in that company
also hold 20% or more of the equity capital of the `Promoter'; and
(d) in case of an individual,
(i)
any company in which 10% or more of the share capital is held by the `Promoter' or
a relative of the `Promoter' or a firm or Hindu undivided family in which the
`Promoter' or his relative is a partner or co-parcener or a combination thereof,
(ii)
any company in which a company specified in (i) above, holds 10% or more of the
share capital, or
(iii)
any HUF or firm in which the aggregate share of the Promoter and his relatives is
equal to or more than 10% of the total.
(6) Shares means shares in the share capital of a company carrying voting rights and includes
any security which would entitle the holder to receive shares with voting rights.
(7) Target company means a listed company whose shares or voting rights or control is directly
or indirectly acquired or is being acquired.
The SEBI (Substantial Acquisition of Shares and Take Over) Regulations, 1994 governs the
following areas:
1) Disclosure of shareholding and control in a listed company
58
2) Substantial acquisition of shares or voting rights in and acquisition of control over a listed
company
3) Bail out takeovers
59
60
(i)
(ii)
(iii)
(iv)
(v)
A person shall not effect, take part in, or enter into, either directly or indirectly,
transactions in securities, with the intention of artificially raising or depressing the prices
of securities and thereby inducing the sale or purchase of securities by any person,
A person shall not indulge in any act, which is calculated to create a false or misleading
appearance of trading on the securities market,
A person shall not indulge in any act which results in reflection of prices of securities
based on transactions that are not genuine trade transactions,
A person shall not enter into a purchase or sale of any securities, not intended to effect
transfer of beneficial ownership but intended to operate only as a device to inflate,
depress, or cause fluctuations in the market price of securities, and
A person shall not pay, offer or agree to pay or offer, directly or indirectly, to any person
any money or money's worth for inducing another person to purchase or sell any security
with the sole object of inflating, depressing, or causing fluctuations in the market price of
securities
(e) when acting as an agent, execute a transaction with a client at a price other than the price at
which the transaction was executed by him, whether on a stock exchange or otherwise, or at a
price other than the price at which it was offset against the transaction of another client.
Investigation into alleged contravention
The SEBI has right to conduct investigation under Regulation 7 suo-moto or upon information
received by it through an investigating officer in respect of the conduct and affairs of any person
buying, selling or otherwise dealing in securities. The investigation can be conducted:
(a) to ascertain whether there are any circumstances which would render any person guilty of
having contravened any of these regulations or any directions issued thereunder;
(b) to investigate into any complaint of any contravention of the regulation, received from any
investor, intermediary or any other person;
The SEBI shall give a notice to the person in respect of whom an investigation before causing an
investigation but Board may not give such notice if it is in the interest of the investors or in the
public interest.
Duties of the person in respect of whom an investigation has been ordered [Regulation 9]
(1) He should produce to the Investigating Officer such books, accounts and other documents in
his custody or control and furnish him with such statements and information as the said
officer may reasonably require for the purposes of the investigation
(2) He should (a) allow the Investigating Officer to have access to the premises occupied by such person at
all reasonable times for the purpose of investigation,
(b) extend to the Investigating Officer reasonable facilities for examining any books,
accounts and other documents in his custody or control (whether kept manually or in
computer or in any other form) reasonably required for the purposes of the investigation,
(c) provide to such Investigating Officer copies of any such books, accounts and records
which, in the opinion of the Investigating Officer, are relevant to the investigation or, as
the case may be, allow him to take out computer printout thereof.
(3) He should give to the Investigating Officer, all such assistance and otherwise extend all such
co- operation as may reasonably be required in connection with the investigation and to
furnish information relevant to such investigation as may be reasonably sought by such
officer
Investigating Officer
The Investigating Officer shall conduct investigation as directed by the Board. He has power to
examine orally and to record the statement of the person concerned, any director, partner,
member or employee of such person [Regulation 9 (3)]. The Investigating Officer shall, on
completion of the investigation, after taking into account all relevant facts and submissions made
by the person concerned, submit a report to the Board (Regulation 10).
62
The SEBI on receipt of the report from the investigating officer may issue directions under
Regulation 11 for ensuring due compliance with the provisions of the Act, Rules and Regulations
made thereunder The Board may give opportunity of hearing to the person concerned.
Purpose of the direction
The directions may be issued for the following purposes:
(a) directing the person concerned not to deal in securities in any particular manner;
(b) requiring the person concerned to call upon any of its officers, other employees or
representatives to refrain from dealing in securities in any particular manner;
(c) prohibiting the person concerned from disposing of any of the securities acquired in
contravention of these regulations;
(d) directing the person concerned to dispose of any such securities acquired in contravention of
these regulations, in such manner as the Board may deem fit, for restoring the status-quo
ante.
The Board may, in the circumstances specified in Regulation 11, and without prejudice to its
power under Regulation 12, initiate action for suspension or cancellation of registration of an
intermediary holding a certificate of registration under section 12 of the Act.
63
13.1 Databases
The Stock Watch System has standardized information available with all the
stock exchanges. This standard information is stored in the form of four
databases classified as follows:
a) Issuer Database.
b) Securities Database.
c) Trading Database.
d) Member Database.
In order to access information on a security from any of these databases,
there is a unique identification number which comprises the first seven digits
of the ISIN number issued by SEBI. In order to access information for any
member, a unique identification code is being formulated on lines similar to
the ISIN codes for securities. Final objective of the uniform structure of these
databases is to make these databases accessible on line to other stock
exchanges.
In order to detect any improper activity, the system has standardized alerts,
which are classified as follows:
Online Real Time Alerts.
Online Non-real Time Alerts.
These alerts generated are stored in two separate databases, which are
dynamically updated.
Detailed description of these databases and alerts is given below:
13.1.1. Issuer Database
This database is maintained by the regional stock exchange and is updated
every week. The database contains information about the company whose
instruments are traded on the exchange. This information includes the name,
64
address, the line of business, the promoters, share holding pattern, capital
history, balance sheet, profit and loss accounts, corporate actions, subsidiary
companies etc.
13.1.2. Securities Database
This database is maintained by all stock exchanges and updated every week.
The database contains information about the instruments like shares,
preference shares, warrants, debentures etc, which are traded on the
exchange. This information includes the name of the company, the
instrument type, floating stock, trading start date, ex-date, no-delivery
periods, dates and reasons for suspension of trading, details of fake and
forged shares etc.
13.1.3.Trading Database
This database is maintained by all stock exchanges. It is updated online/daily/end of settlement based on the type of information. This
information includes price, volume and value relating to the trades,
obligations, deliveries and auctions, positions, price bands etc.
13.1.4 Member Database
This database is maintained by all stock exchanges. The information in this
database includes the name and the type of membership, name, address
and qualification, details of other exchanges membership, securities in
which the member is active, short and bad delivery record, suspension
record, investor grievance complains, arbitration cases, sub-brokers with
their names and addresses, the turnover details, net worth etc.
13.2 Alerts
13.2.1 Online Real Time Alerts
These alerts are based on the order and trade related information during the
trading hours. The objective of these alerts is to identify any abnormality as
soon at it happens. These alerts include intra-day price movement related
and abnormal order and trade quantity or value related alerts.
13.2.2 Online Non real Time Alerts
These alerts are based on the traded related information at the end of the
day and the available historical information. The objective of these alerts is
to analyze the price, volume and value variations over a period.
65
Price
Band
Less than Rs.10.00 +/50.00%
Rs. 10.00 to Rs. +/19.95
25.00%
Rs.20.00
and +/- 8.00%
above
In case of 200 securities jointly identified by BSE and NSE the price band are
relaxed by further 4%. Once the scrip touches 8% price band in either
direction, trading in that scrip would be restricted up to the price band for
half an hour. After half an hour of trading, price band would be further
relaxed by 4% in that direction only.
In case of scrip touches the price band of 8% in BSE prior to NSE, on receipt
of such information from BSE, the price band would be relaxed at NSE by 4%
in that direction, after such relaxation is applied at BSE
In cases where the scrip touches the price band on either side, in last half an
hour of trading, then the trading in that scrip would be restricted up to the
price band for fifteen minutes instead of half an hour. After fifteen minutes,
the price band would be further relaxed by 4%in that direction only.
The relaxation in price band would be effected only if the scrip (scrip other
than those in compulsory rolling settlement) touches the price band in any
direction in EQ series in the normal market. Once the price band is flexed in
series EQ for a security then price band shall also be flexed in other relevant
series AE,BE,BT and TT. In case of rolling settlements the price band shall be
flexed in series BE only and price band in series BT for the respective
security shall be flexed only on request from member. Similarly price bands
shall be flexed in market type S and O for the purpose of ALBM and
Limited Physical Market, only if the price bands have been flexed in the
66
Price
Band
Less than Rs.10.00 +/50.00%
Rs. 10.00 to Rs. +/19.95
25.00%
Rs.20.00
and +/above
15.00%
13.3.3 Quantity Freeze Percentage (volume of large order)
Any order, whose value is greater than or equal to around Rs.5.00 crore
subject to a ceiling of 1.00% of the issue size, results in a quantity freeze and
does not go directly into the order books. Such orders go into the books only
after the exchanges approval. Rejected quantity freeze results in the
cancellation of the order.
13.3.4 Price Variation
It is defined a the variation between the last trade price (LTP t) and the
previous close price (P) of a security expressed as a percentage of the
previous close price (P). i.e.
Price Variation = {(LTPt P)/ P} 100
13.3.5 High-Low Variation
It is defined as the variation between the high price (H) and the low price (L)
of a security expressed as a percentage of the previous close price (P). i.e.
High-Low Variation = {(H L)/ P} 100
This parameter can also be expressed as a percentage of the low price i.e.
67
1 day of settlement:
P1 = (1-0.12) 22.00 = 19.36 19.40
2nd day of settlement:
P2 = (1-0.25) 19.40 = 14.55=14.55
3rd day of settlement:
P3 = (1-0.25) 14.55 = 10.91 10.95
4th day of settlement:
P4 = (1-0.25) 10.95 = 8.21 8.25
last day of settlement:
P5 = (1-0.50) 8.25 = 4.13 4.15
Hence the close price of the security on the last day of settlement is Rs 4.15
Example 2: Issue size of a security is 8,00,00,000. Close price of a security
on the last day of a settlement is Rs.25.00. A trading member enters an
order to buy 8,50,000 shares at a price of Rs. 25.25 on the first day of the
next settlement. Will the order directly go into the order books?
Solution:
Step 1:
Order Price = Rs. 25.25
Order Size = 8,50,000 shares.
Value of the order = 25.25 850000 = 2,14,62,500 Rs. 2.15 Cr.
This is less than Rs.5.00 Cr.
Step 2:
Order size as a percentage of issue size = (850000/80000000) 100 =
1.06%
This is greater than 1.00.
Hence the order will not go directly into the order books and will result in a
Quantity Freeze.
Example 3: Following alerts have been configured on the Stock Watch
System of the Exchange.
1) Magnitude of the close price variation percentage as compared to the
previous day's close price is greater than or equal to 4.00%.
2) Magnitude of the high-low variation percentage as compared to the
previous day's close price is greater than or equal to 7.00%.
69
(not satisfied )
8) Traded Qty to 2 month daily average. = 1,00,000/75050 =1.33
(not satisfied < 2.00)
9) % Difference in Index and Security price variation
Security falls while the index rises.
Index Variation % = {(1031.00 996.00)/996.00} 100 = +3.51%
Close Price Variation = {(93.00 100.00)/100.00} 100 = 7.00%
Difference = (+3.51) (7.00) = 10.51
(satisfied >=+5.00)
Thus alerts 1, 2, 6 and 9 would be triggered.
71
Price variations on account of calls, bonuses, rights, mergers, amalgamations and scheme of
arrangements are adjusted for determining volatile securities and adjustment in prices, when
securities are traded ex-benefits, is made for the purpose of computation of volatility. The margin
rates are as under :
Price Variation
10
15
20
25
150%
30
The securities that attract volatility margin and the margin rates applicable are announced on the
last day of the trading cycle and are applicable from the first day of the succeeding trading
cycle. The volatility margin is levied on the net outstanding position of the member in each
security based on the respective margin rates.
Further, if prices have been volatile, say, upwards (or downwards) and are attracting margins on
the buy side (or sell side), and if the price movement reverses and exhibits a decline (or
increases) of 16% or more, then the margins will be applicable on sell side (buy side) as per rates
prescribed.
The volatility margins is not applicable for securities whose prices are less than Rs.40. However,
it attracts volatility margin if the price of a security increases to Rs. 40 or more. If a price of a
security reduces to below Rs. 40 in a trading period, it will still be eligible for consideration
during that trading period.
If a security attracts both the mark-to-market and the volatility margins, the higher of the two is
levied as daily margin.
14.1.3 Gross Exposure Margin
Gross Exposure Margin is computed on the aggregate of the net cumulative outstanding positions
in each security of the CM in the following manner:
Gross Exposure (Rs. Million)
Margin Payable
0 10
Nil
2.5%
> 200
14.1.4 Additional margin of 5% will be imposed on net sale position at the end of day on all
securities.
14.1.5 Gross exposure
Example 1: The price movements for the following securities is as given below:
Security
A
B
C
D
E
Preceding
6-week High
140.00
205.00
15.00
105.00
130.00
Preceding
6-week Low
80.00
195.00
5.00
95.00
90.00
Settlement
Close
100.00
200.00
10.00
100.00
110.00
Which of the following statements is true for the above securities for the next settlement.
1.Security A will attract an additional volatility margin at a rate of 15.00%.
2. Security B will attract an additional volatility margin at a rate of 5.00 %.
3.Security C will attract an additional volatility margin at the rate of 20.00%.
4. Security D will attract an additional volatility margin at the rate of 10.00 %.
5.Security E will attract an additional volatility margin at the rate of 5.00%.
Answer: Security A and E will attract an additional volatility margin at a rate of 15.00% and
5.00% respectively.
Example 2: A member trades in four securities, A, B, C and D on a trading day. The Gross
Exposure Margin computed for the member is Rs.10.00 Lakh. All the above securities are
identified as volatile at their respective margin rates. The Mark-to-Market Margin and the
Volatility Margin computed for each of these securities is given below:
Security
A
B
C
D
Mark-to-Market Margin
Rs.6.00 Lakh
Rs.4.00 Lakh
Rs.2.00 Lakh
Rs. 6.00 Lakh
Volatility Margin
Rs. 5.00 Lakh
Rs.5.00 Lakh
Rs. 3.00 Lakh
Rs. 5.00 Lakh
The Member has to pay a sum of Daily margin and Volatility Margin. The daily margin consists
of Mark to market margin and Gross Exposure Margin.
First, we find out the higher of the Mark-to-Market Margin and Volatility Margin for each scrip
Scrip A - Rs. 6 lakh (Mark-to-Market Margin)
Scrip B - Rs. 5 lakh (Volatility Margin)
Scrip C - Rs. 3 lakh (Volatility Margin)
Scrip D - Rs. 6 lakh (Mark-to-Market Margin)
Hence, the Mark-to-Market Margin is Rs. 12 lakh and Volatility Margin is Rs. 8 lakh. And the
Gross Exposure Margin is Rs. 10 lakh.
So, the Daily Margin comes to Rs. 12 lakh (higher of Mark to market margin and Gross
Exposure Margin) and Volatility Margin comes to Rs. 8 lakh.
The Member has to pay a total margin of Rs. 20 lakh.
Example 3: A member has traded in the following five securities on a trading day.
(In Rs. lakh)
Security Buy Position Sell Position
A
Rs.60.00
Rs. 0.00
B
Rs.40.00
Rs.5.00
C
Rs.0.00
Rs. 34.00
D
Rs. 6.00
Rs. 19.00
E
Rs.29.00
Rs. 4.00
All the above securities are identified as volatile at their respective margin rates. What is the
Gross Exposure Margin payable by the Member?
Answer:
Gross Exposure Margin is computed on the aggregate of the cumulative net outstanding positions
(purchases or sales) in the following manner:
Gross Exposure (Rs. crore)
0-1
>1 and upto 3
>3 and upto 6
>6 and upto 8
>8 and upto 10
>10
Margin Payable %
Nil
2.5% in excess of Rs.1 crore
Rs.5 lakh plus 5% in excess of Rs.3 crore
Rs.20 lakh plus 10% in excess of Rs.6 crore
Rs.40 lakh plus 15% in excess of Rs.8 crore
Rs.70 lakh plus 25% in excess of Rs.10 crore
First, calculate net outstanding position for each scrip and the aggregate of the
(In Rs. lakh)
Security Buy Position Sell Position
Net outstanding position
A
60.00
Nil
60.00
75
B
40.00
5.00
C
Nil
34.00
D
6.00
19.00
E
29.00
4.00
Cumulative net outstanding position
35.00
34.00
13.00
25.00
167.00
The Gross Exposure Margin for the Cumulative net outstanding position of the member (as per
above table) comes to Rs. 1.675 lakh (167 lakh minus 100 lakh = 67 lakh * 2.5%).
Security shortage
Each clearing member communicates to the NSCCL on the pay-in day the securities it is
delivering and those it is unable to deliver. NSCCL identifies short deliveries on Tuesday and
conducts a buying-in auction for the quantity of securities actually found short-delivered, on the
pay-out day through the NSE trading system.
The clearing member is also debited by an amount equivalent to the securities not delivered and
valued at a valuation price (the closing price as announced by NSE on the Friday previous to the
day of the valuation).
If the buy-in auction price is more than the valuation price, the clearing member is debited the
difference in amount.
Bad delivery
Bad deliveries (deliveries which are prima facie defective such as not containing pre-specified
particulars like the trading member stamp on the transfer deed etc.) are required to be reported to
the NSCCL within two days from the receipt of documents. The delivering member is required to
rectify these within two days.
In a typical settlement cycle bad deliveries are reported by Friday. These are handed over to the
delivering member on Saturday for rectification by Tuesday, failing which NSCCL conducts an
auction buy-in on Wednesday. As in the case of short deliveries there is a valuation debit and a
square up in the event of unsuccessful auctions. All shortages not bought-in are deemed closed
out at the highest price between the first day of the trading period till the day of squaring up or
closing price on the auction day plus 20%, whichever is higher. This amount is credited to the
receiving members account on the auction pay-out day.
76
Company Objections
Company objections arise when, on lodgment of the securities, accompanied with the duly
executed transfer deeds, with the company for transfer by the transferee (last buyer), they are
returned by the company due to signature mismatch or for any other reason for which the transfer
of security in the name of the transferee cannot take effect.
The original selling clearing member (referred to as introducing member) of the documents in
NSE is responsible for rectifying/replacing defective documents (objection cases) to the
receiving clearing member. If the clearing member is unable to rectify/replace defective
documents on or before 21 days of lodgment of documents, NSCCL conducts a buying-in
auction for the unrectified part of defective document, on the next auction day (Wednesday)
through the trading system of NSE. All objections which are not bought-in are deemed closed out
on the auction day at the closing price on the auction day plus 20%. This amount is credited to
the receiving members account on the auction pay-out day.
Non-availability of clear funds
In case of funds shortage, NSCCL withholds securities which are receivable as pay-out to the
CM. These securities are released only after the shortage amount is cleared. If shortage is not
cleared, the NSCCL disposes off the securities by selling them out and requiring the CM to pay
the difference between the funds shortage and the sale proceeds.
Auction Settlement
The buy-in auctions are settled on trade for trade basis. In a typical settlement cycle, auctions are
usually held on Wednesday. The auction pay-in for both funds and securities is on Friday and
pay-out on Saturday.
14.2.2 Exception Handling for account period settlement in Book Entry segment
Exception conditions may arise because of short delivery of securities by clearing members or
non-availability of clear funds into the clearing account on the pay-out day.
Security shortage
Each clearing member communicates to the NSCCL on the settlement day the securities it is
delivering and those it is unable to deliver and the NSCCL conducts a buying-in auction for the
quantity of securities actually found short-delivered, on the following day through the NSE
trading system.
The clearing member is also debited by an amount equivalent to the securities not delivered and
valued at a valuation price (the closing price as announced by NSE on the Friday previous to the
day of the valuation).
If the buy-in auction price is more than the valuation price, the clearing member is debited the
difference in amount.
All shortages not bought-in are deemed closed out at the highest price between the first day of
the trading period till the day of squaring off or closing price on the auction day plus 20%,
77
whichever is higher. This amount is credited to the receiving members account on the auction
pay-out day.
Non-availability of clear funds
In case of funds shortage, NSCCL withholds securities which are receivable as pay-out to the
CM. These securities are released only after the shortage amount is cleared. If shortage is not
cleared, the NSCCL disposes off the securities by selling them out and requiring the CM to pay
the difference between the funds shortage and the sale proceeds.
Securities, approved by the Exchange, are maintained with approved custodians. Securities
deposited as a part of the base minimum capital are valued with a specified haircut on a weekly
basis.
Only corporates are admitted as new members. Only a member on the CM segment can take
membership on the Futures and Options segment. In case of new members, the following deposit
structure is applicable:
(in Rs. lakh)
Deposit Structure
WDM
Segment
CM
150
--
100
25
79
Upon TM clearing member violating the reduced intra-day turnover limit, the above mentioned
provisions shall apply and the intra-day turnover limit will be further reduced to 15 times. Upon
subsequent violations, the intra-day turnover limit will be further reduced from 15 times to 10
times and then from 10 times to 5 times the base capital. TM clearing members shall not be
permitted to trade if any subsequent violation occurs till the required additional deposit is
brought in.
(b) Gross Exposure Limit
TM clearing members are subject to gross exposure limits. Gross exposure, being the aggregate
of the cumulative net outstanding positions (purchases or sales) in each security of TM clearing
member at any time, shall not exceed eight and half (8.5) times the base capital (cash deposit and
other deposits in the form of securities or bank guarantees with the Clearing Corporation and the
NSE) or any such lower limits as applicable to the members.
For TM clearing members who participate in the ALBM scheme of the Securities Lending
Programme (Participant), the gross exposure for ALBM transactions (ALBM Gross
Exposure) for each Participant shall be computed based on transactions executed in the ALBM
session in the same manner as stipulated above. For such TM Clearing Members, the gross
exposure limit as calculated above shall be reduced by the ALBM gross exposure so computed.
If TM clearing members desire to increase the limit, additional deposits by way of cash, bank
guarantee or Fixed Deposit Receipt (FDR) have to be submitted to the Clearing Corporation.
Additional deposits by way of securities in electronic form (demat securities) may be
deposited. These additional deposits other than deposits in the form of securities will be
considered for the purpose of meeting margin requirements.
All ABC given in the form of cash/FDR (cash component) should be atleast 30% of the total
ABC and cash margins in respect of every trading member. In case where non-cash component is
more than 70% of the total additional base capital, the excess non-cash component shall be
ignored for the purpose of exposure limits requirements and/or for margin requirements.
The additional deposits of the member shall be used first for adjustment against gross exposure
of the member. After such adjustments, the surplus additional deposits, if any, excluding deposits
in the form of securities, shall be utilised for meeting margin requirements.
TM clearing members exceeding the gross exposure limit shall not be permitted to trade with
immediate effect and shall not be permitted to do so until the cumulative gross exposure is
reduced to below 8.5 times the base capital or any such lower limits as applicable to the
members. Members who desire to reduce their gross exposure may submit their order entry
requirements to the Clearing Corporation.
A penalty of Rs.5000/- will be levied for each violation of gross exposure limit which shall be
paid by next day. The penalty will be debited to the clearing account of the member. Nonpayment of penalty in time will attract penal interest of 15 basis points per day till the date of
payment. In respect of violation of gross exposure limits on more than one occasion on the same
day, each violation would be treated as a separate instance for purpose of calculation of penalty.
80
The penalty as indicated above, would be charged to the members irrespective of whether the
member brings in additional base capital subsequently.
14.4 Compliance
14.4.1 Inspection
The Ministry of Finance has prescribed that every stock exchange shall inspect the books of
accounts and records of 10% of active Trading Members in a year.
The NSE and NSCCL require the clearing members to maintain several books of accounts and
other documents. They are required to strictly adhere to a code of conduct and standards of
service. NSCCL along with NSEIL conducts periodic inspection of the books and accounts of the
clearing members to ensure compliance with its Bye Laws, Rules and Regulations.
Purpose of inspection:
a) to ensure that the accounts and other books are being maintained in the manner required;
b) to ensure that the provisions of SEBI Act, rules and regulations thereunder are being
complied with;
c) to ensure that provisions of the Securities Contracts(Regulation) Act and the rules made there
under are being complied with;
d) to ensure that various provisions of NSE Bye-laws, Rules and Regulations and any directions
or instructions issued thereunder are being complied with;
e) to investigate into complaints received from investors, other members of the Exchange or any
other person on any matter having a bearing on the activities of the Trading Member,
f) to investigate suo-moto, for any reason where circumstances so warrant an inspection into the
affairs of the Trading Member in public interest;
g) to examine whether any notices, circulars, instructions or orders issued by the
Exchange/Clearing Corporation time to time relating to trading and other activities of
Trading Members are being complied with;
h) to comply with any of the directives issued in this behalf by any regulating authority
including Government of India.
The Exchange may get the inspection conducted by its own officials or by outside professionals.
The Inspecting Authority shall, as soon as possible submit an inspection report to the Exchange.
The Exchange shall after consideration of the inspection report, communicate the findings to the
Trading Member to give him an opportunity of being heard before any action is taken by the
Exchange on the findings of the inspecting authority. On receipt of explanation, if any, from the
Trading Member, the Exchange may call upon Trading member to take such measures as the
Exchange may deem fit in public interest.
14.4.2 Investigation
NSE also conducts investigation of the books of accounts and records of its Members in case of
the fake, forged and stolen shares introduced and/or delivered by the Member, voluminous
trading in illiquid scrips, sudden spurt in the price of a scrip etc.
81
Methods employed
A. Settlement Guarantee Mechanism
The principle of novation is the hallmark of modern clearing institutions. NSCCL has adopted
this principle for settlement of all trades. It is the legal counter-party to the settlement obligations
of every member. NSCCL meets all settlement obligations, regardless of member complying
with his obligations, without any discretion. Once a member fails on any obligations, NSCCL
immediately initiates measures to reduce exposure limits, withhold pay out of securities, square
up open positions, disable trading terminal until members obligations are fully discharged.
NSCCL assumes the counter party risk of each member and guarantees financial settlement.
Counter party risk is guaranteed through a fine tuned risk management system and an innovative
method of on-line position monitoring and automatic disablement. A large Settlement Guarantee
Fund, which stood at Rs. 1391 crore as on 31st March 2000, provides the cushion for any residual
risk. As a consequence, despite the fact that daily traded volumes have crossed Rs. 8000 crore,
credit risk no longer poses any problem in the market place. The market has now full confidence
that settlements will take place in time and will be completed irrespective of possible default by
isolated trading members. The concept of guaranteed settlements has completely changed the
way market safety is perceived
The Settlement Guarantee Fund is an important element of reservoir facilitating the settlement
process. The Fund operates like a self-insurance mechanism and is funded through the
contributions made by trading members, transaction charges, penalty amounts, fines etc.
recovered by NSCCL.
A part of the cash deposit and the entire security deposit of every clearing member with the
Exchange has been converted into an initial contribution towards the Settlement Guarantee Fund,
as indicated below:
Type of Member
Cash Deposit
(Rs. Lakh)
6.00
17.50
Corporates
9.00
25.00
82
There is a provision that as and when volumes of business increase, members may be required to
make additional contributions allowing the fund to grow alongwith the market volumes.
NSCCL guarantees financial settlement of settlement obligations arising out of regular market
deals:
Up to the normal pay-out in the case of non-depository deals involving physical settlement
of securities
All Depository deals excluding those in trade-for-trade segment and the negotiated deals.
Net worth
100
75
Cash Deposit
50*
32.5
Security Deposit
25
17.5
Security Deposit
Security Deposit
The Bye-laws of NSE and NSCCL require CMs to maintain several books of accounts and other
documents. They are required to strictly adhere to a code of conduct and standards of service.
NSCCL along with NSE conducts periodic inspection of the books and accounts of CMs to
ensure compliance with its Bye-laws, Rules and Regulations, Rules under SCRA, Regulations
relating to stock-brokers and sub-brokers notified by SEBI and various circulars, notices, orders
issued by NSE/NSCCL and various guidelines, directives, circulars etc. issued by SEBI.
83
I. Indemnity insurance
The Exchange has arranged a comprehensive insurance scheme to cover risks of trading
members. The Exchange has also taken adequate insurance cover to protect against risks arising
from settlement defaults and transit risk arising from securities movement among its Clearing
Centres located at four Metros, Mumbai, Calcutta, Delhi and Chennai.
J. Pre-delivery verification of securities
To minimise risks associated with bad paper, there is a system of pre-delivery verification of
securities to detect upfront fake, forged or stolen securities in respect of several securities. To
effectively handle this critical activity, NSCCL has put in place a Lost and Stolen Shares LASS database. This database is based on information obtained from/made available by various
companies/registrars and share transfer agents in respect of lost/misplaced/stolen/duplicate
certificates
K. Dematerialisation of securities
The Exchange took a major step in promoting the National Securities Depository Ltd. (NSDL),
the first depository in the country so as to enhance the efficiency in settlement systems as also to
reduce the menace of fake/forged and stolen securities. This has ushered in an era of
dematerialised trading which has reduced handling of large volumes of paper and eliminated
risks associated with physical certificates such as loss, theft, mutilation, forgery etc.
All of the above measures are taken with a view to minimize systemic risks. Most importantly,
the above laid down procedures are strictly enforced. As a result, all settlements are going
through smoothly. The proportion of short deliveries for which the Exchange has had to conduct
auctions has averaged 1.3% in 1999-2000. The proportion of bad deliveries unrectified and due
for auction has averaged 0.23%. This is in sharp contrast to the experience of other exchanges in
India. Investors are now able to plan their cash flows reasonably well. Institutions are able to
trade with a higher degree of confidence and a much lower settlement and credit risk.
85
ISG Meeting Ban of short sales in view of the huge bear phase
Dated 15-6-98 experienced by the market.
Removal of the weekly price bands and introduction of
additional volatility margins and concentration margins.
88
10
ISG
Meeting
Dated 17-5-2000
89
IES/SrED/CIR-/98
January 21, 1998
The Presidents/Executive Directors/managing Directors
All Stock Exchanges
Dear Sir,
The Meeting of the Inter Exchange market Surveillance Group (ISG) along with the meeting of
the Heads of the Stock Exchanges was held on December 17, 1997 at Mumbai. In the meeting of
the ISG after discussion the following decisions were taken which need to be implemented by
the Exchanges and indicated below:
Uniform intra-day price band of 10% : (Action by all stock Exchanges)
In addition to the price cap of 25% which is being implemented uniformly by all stock
exchanges, it was decided that the intra-day price band which is presently flexible in the range of
upto 10% would be implemented uniformly at 10%. This is to be implemented by all exchanges
by January 31, 1998, if not already done.
Price bands on the scrips traded below Rs.20/-- (Action by all Stock Exchanges)
It was decided to retain the flexibility of the price bands by the exchanges themselves in the
scrips trading upto Rs.20/- However, the exchanges are required to send us details of how they
are operating the price bands in the scrips quoted below Rs.20/- for information.
Price bands in respect of infrequently traded scrips : (Action by NSE, BSE and DSE)
Though broadly it was agreed that if the scrip is not traded for six settlement the NSE formula
(sq. root of Number of days not traded on NSE)* (Normal price band of NSE) for fixing the
price bands may be used. If the scrip is not traded for more than 15 settlements then the
exchange would approve the price case by case. However, no uniform view could emerge on
fixing of price bands for infrequently traded scrips. It was therefore, decided to form a small
group comprising of representatives of BSE, NSE and DSE, to frame the guidelines and the basis
on which such price bands could be fixed. NSE would be the co-ordinator and give a report by
January 31, 1998.
Public disclosure of information relating to actions taken against the members : (Action by
all Stock Exchnages)
Presently the action taken against the members including penal actions are not disclosed to other
market participants/investors by all the Exchanges. It was agreed that such actions need to be
disclosed in the larger interest of the investors and market participants. It was therefore decided
that the actions taken by the Disciplinary Action Committee (DAC) against the member brokers
would be made public and would at least be displayed on the notice board of the respective
90
exchanges. Exchanges are also advised to consider issue of press releases when such actions are
of a grave nature.
Dissemination of price sensitive information to public/investors : (Action by all Stock
Exchanges)
It was discussed that there was need to have proper dissemination of price sensitive and other
important information relating to corporates/market, to investors in the quickest possible manner.
For this purpose the service provider like Reuters etc., cold also be used. The exchanges should
also display such information on their terminals in the quickest possible manner.
Dealing with market rumours: (Action by all Stock Exchanges and SEBI)
It was agreed that the rumours in the market can do considerable damage to the normal
functioning and behavior of the market. It is therefore essential to have quick verification of
such rumours from the corporates as well as from other entities whenever it is so necessary.
Therefore it was decided that exchanges would make it possible to verify such rumours in the
quickest possible manner and inform other market participants/investors, if possible through
their terminals. Further to begin with top 100 companies which figure in BSE specified groups
of securities and NSE Nifty would be asked to designate a compliance officer who could be
contacted by exchanges whenever such verification is needed. This would be taken up by SEBI.
Co-ordination between exchanges : (Action by all Stokc Exchanges)
To facilitate better and quicker co-ordination it was decided that all exchanges would designate a
co-ordination officer who cold be contacted by the other exchanges for immediate exchange of
information . A list of such co-ordinating officers would be sent to the Senior Executive
Director, Investigation, Enforcement and Surveillance, SEBI, who would communicate the same
to all exchanges. This should be done by January 31, 1998.
Joint Inspection/investigation in case of brokers having multiple membership :Action taken
by SEBI and all Stock Exchanges)
It was decided that in some suitable cases, the exchanges would co-ordinate and carry out joint
inspection of members having multiple membership. Besides there should be information
sharing also in such cases. Modalities of such inspection and sharing of such information would
be worked out by SEBI with the help of the Exchanges.
Putting scrip on spot delivery : (Action by all Stock Exchanges)
It was agreed that there is no longer a need for putting scrip on spot delivery at the time of a
rights issue/public issue by an existing listed company since surveillance systems which were not
existing earlier when this decision was taken are now in place.
91
Implementation of phase I of the Stoc Watch System : (Action by all Stock Exchanges)
The time limit for implementation of Phase I of the Stock Watch System has been extended to
January 31, 1998.
Reconstitution of Inter Excahnge Market Surveillance Group (ISG: (Action by BSE, SEBI
and members of ISG)
ISG is reconstituted and now it would be consisting of representatives of BSE, NSE, DSE, CSE,
ASE, LASE, and BgSE. Further, it is decided that the convenor for the meetings for the year
1998 would be BSE and at least once a month meeting of this group would be held, which would
be convened by BSE and co-ordinated by SEBI.
The above decisions should be implemented as indicated. However, if there is some problem in
implementation, the same should be brought to our notice in time.
Yours faithfully,
(L.K.SINHHVI)
92
L. K. SINGHVI
SR. EXECUTIVE DIRECTOR
Investigations Enforcement and Surveillance
5 May, 1998
IES/LKS/
/98
The Executive Directors/Managing Director/Presidents
of all the Stock Exchanges
Re: Meeting of the Inter-Exchange Market Surveillance Group (ISG) held on April 21,
1998
Dear Sir,
Please find enclosed the minutes of the meeting of the Inter Exchange Market Surveillance
Group (ISG) held on April 21, 1998.
As was decided at the meeting all the stock exchanges are required to initiate immediate action
on the following points:
1. Price Bands for Scrips trading at less than Rs. 20/It was observed that in the cases of scrips trading at less than Rs. 20/- different systems of price
bands were being followed by stock exchanges. The price bands for scrips being traded at less
than Rs. 20/- would have to be simplified by the stock exchanges.
2. Implementation of the first phase of the Stock Watch System
With respect to the implementation of the first phase of the Stock Watch System, all the
exchanges are advised to take up this matter on top priority. NSE and BSE informed that at their
exchanges the same would be operational by June 1998. In the case of DSE it would be
operational by first week of August.
3. Names and other details in respect of co-ordination officers
All the stock exchanges had not sent names and other details in respect of co-ordination officers
to SEBI. The exchanges are to send the details by May 13, 1998.
4. The issue of dealing with market volatility.
Of late the stock markets had seen a lot of volatility coupled with large intra-day and intrasettlement variations in the indices and/or prices of certain scrips.
The role and importance of the surveillance departments of the stock exchanges in maintaining
the market equilibrium and balance during the period of volatility in the market is felt. Therefore,
93
the surveillance departments of the exchanges are asked to gear up to such situations for ensuring
safety and fairness of the market.
5. Prompt Collection of Margins
In the context of ensuring market safety as discussed in 4 above it was decided that the Stock
Exchanges would collect margins due from members before the close of banking hours on the
following day. The margins would be collected either by direct debit to the members bank
account or by cheque issued on the clearing bank branch of the exchange. In the event of non
payment of margins by the members the exchanges would ensure that the members are not able
to increase their exposure in the market and a member would not have unsupervised access to the
trading terminal.
6. Need to levy special margin in an objective manner.
Exchanges have to frame internal broad parameters for levying special margins so that the
element of subjectivity could be reduced to the extent possible and the procedure is perceived as
transparent and fair. The decisions to levy special margins would have to be specifically recorded
with reasons and approval of the Executive Director of the Exchange.
7. Need for narrowing down price variations on exchanges on the day the scrip is listed.
The existing system of keeping the scrip free of price bands for price discovery on the first day
of trading is to be continued with.
Yours sincerely,
Sd/(L.K. SINGHVI)
94
95
L K SINGHVI
SENIOR EXECUTIVE DIRECTOR
Investigations Enforcement and Surveillance
Meeting of the Inter-Exchange Market Surveillance Group (ISG) held on October 15,
1998
Dear Sir,
Please find enclosed the minutes of the meeting of the Inter Exchange Market Surveillance
Group (ISG) held on October 15, 1998. The stock exchanges are advised to go through the
minutes carefully and implement the agreed propositions and the decisions taken. Following
follow-up actions also need to be taken expeditiously:
1. The stock exchanges would inform SEBI about the present staff strength and present
surveillance system, and would also indicate by October 31, 1998 manpower and systems
requirements keeping in view the existing functions and further improvements which are to
be put in place.
2. A working group comprising representatives of NSE, BSE and DSE will work out the
training capsule for the surveillance staff of the stock exchanges. This group will also
indicate how certification is to be done. The three stock exchanges may intimate to SEBI the
names of the senior staff members who would be preparing the training capsule. NSE will
co-ordinate the proceedings of this working group and send the report and the working paper
to SEBI by November 30, 1998.
3. The core group, constituted for the Stock Watch System will suggest new formats of
reporting by the stock exchanges to SEBI latest by November 30, 1998.
4. The Phase I of the Stock Watch System based on the parameters specified by SEBI is to be
implemented by DSE by November 30, 1998, CSE by December 30, 1998. BSE is to
implement the same by January 31, 1999. As informed by NSE, it has largely implemented
the Phase I of the Stock Watch System; however, if any areas need further
implementation/improvement, the same may be done by December 31, 1998. Other stock
exchanges should also endeavour to implement on priority, preferably by March 31, 1999.
5. The core group for Stock Watch System will consider prescribing separate simplified
requirements for stock watch system to be implemented by the smaller stock exchanges. The
meeting should be held on priority.
96
6. A working group comprising of NSE, BSE, DSE, CSE and BgSE has been formed to discuss
co-ordination and sharing of information by the stock exchanges. The working group would
address the issues of identifying common members, nature and type of information to be
shared, situations in which such information sharing is required, timeliness of such
information and possible actions to be initiated at the stock exchanges level. The Group will
have its first meeting in the first week of November 1998. BSE will co-ordinate the meetings
of this working group.
7. A working group comprising of Shri Kamal Parekh, President, CSE, Shri Tapas Datta, ED,
CSE, Smt Dina Mehta, Board Member, BSE, Shri R C Mathur, ED, BSE, Dr. R H Patil, MD,
NSE, Shri Deepak Chowdhary, President, DSE, Shri Sodhi, ED, DSE, Shri Vishwanath
Dhiri, President, LSE, Shri Prem Kumar, President, MSE and D D Sharda, President, UPSE
will deliberate on evolving the code of ethics for elected directors and key functionaries of
the stock exchanges. It should have a meeting in the early part of November 1998. SEBI will
co-ordinate the meetings of this working group.
Yours sincerely,
(L.K. SINGHVI)
Encl: a/a
97
DEEPAK SANCHETY
DIVISION CHIEF
The Executive Directors/Managing Directors
Of all the Stock Exchanges.
March 26, 1999
Dear Sir,
Sub: Meeting of the interchange market Surveillance Group (ISG) held on March 10, 1999
Please find enclosed the minutes of the meeting of the Inter-Exchange Market Surveillance
Group (ISG) held n March 10, 199. The Stock Exchanges are advised to go through the minutes
carefully and implement the agreed prepositions and the decisions taken. The following followup actions need to be taken expeditiously:
1. With a view to streamline, rationalise and refine the margining system, a group comprising of
NSE, BSE, DSE, CSE, UPSE, BgSE, and Shri L.K.Singhvi, Dr. Executive Director, Shri
Pratip Kar, Executive Director and Shri M.D.Patel, Executive Director, from SEBI has been
formed. This group would review the existing margin mechanism and submit their
recommendation within a month. The meeting of the group will be convened by SEBI.
2. The need for strengthening of the surveillance departments of the stock exchanges in terms
of manpower and systems was again emphasied in the meeting. All exchanges had earlier
been asked to submit their existing and proposed manpower requirement to SEBI. Not all
Exchanges had sent their replies. The exchanges are advised to identify their manpower
requirements for surveillance activity and to go their respective boards for additional staff,
keeping SEBI informed of the same.
3. In order to bring about greater responsibility and accountability, the surveillance departments
of the exchanges are advised to devise an internal system of documentation of surveillance
activity and follow up actions.
4. NSE and DSE have implemented the Phase-I of the stock watch system prescribed y SEBI.
BSE would be implementing the same by the end of March 1999, CSE and BgSE would have
their system in place by the end of April, 1999 and ASE by the end of June 1999. Other
exchanges should also endeavor to implement the system on priority.
5. The working group constituted to formulate a training module and to lay down procedure for
certification for the surveillance staff of the exchanges has submitted its report. After
considering the same it has been decide that BSE and NSE shall conduct the training and
98
certification program. Both BSE and NSE shall be independently prepare the training
module and a question bank for the purpose of examination on the lines of the syllabus
submitted b the working group, and submit the same for SEBI approval. The training and
certification programme should be in place within a month and it shall be mandatory for
surveillance staff of all the exchanges to acquire the certification. They may obtain the
certification either from BSE or NSE.
6. The daily market report, which is being sent by major exchanges to SEBI, stands
discontinued. All exchange will now be required to report daily on exemption basis,
outlining circumstances which have a bearing on the risk management of the exchange and
the safety and integrity of the market, if any. A circular in this regard is issued separately.
7. A working group comprising NSE, BSE, DSE, CSE and BgSE had been formed to detail
norms for coordination and sharing of information among stock exchanges. The working
group is in the process of finalizing their report, which would be put up shortly. However, if
a member has introduced fake and forged shares worth rupees five lakh or more in a quarter
(three month period) the information about it should immediately be shares with all
exchanges.
8. It was once again emphasized that the Executive Directors are directly responsible for
surveillance functioning of the exchanges. The executive Directors of exchanges would also
ensure that surveillance is effective and all surveillance decisions are taken without any
interference.
9. The stock exchanges are once again advised to keep a strict vigil on market movements
especially in the case of some companies which have changes their name or added prefix or
suffix to their names suggesting that these companies are related to software and information
technology areas. Further, such companies will be required to disclose the turnover and
income from software business in their quarterly and annual report. A circular in this regard
shall be issued separately.
Yours sincerely,
Sd/DEEPAK SANCHETY
99
L.K.SINGHVI
SENIOR EXECUTIVE DIRECTOR
Investigation, enforcement and Surveillance
December 21, 1999
LKS/203/99
The Executive Directors/ Managing Directors/Presidents
Of all the Stock Exchanges
Dear Sir,
In the meeting of the Inter Exchange Market Surveillance Group (ISG) held on December 15,
1999 at SEBI, recent market trends and the issues related to surveillance and monitoring by the
exchanges were discussed. The exchanges assured us that because of the comprehensive
margining system and other risk containment measures in place, the markets, have achieved
overall safety. However, while taking note of the comfort level in the area of market safety, it
was emphasied by me that apart from safety of the market, the exchanges also have to ensure that
market manipulations are detected and dealt with promptly and effectively. This was very
crucial to protect the investors and preserve the health of the markets.
In the context of recent trends the exchanges need to have a more pro-active approach
particularly with respect to certain sectors which are showing relatively very high .volumes as
well as valuations. The exchanges now also have Stock Watch System in place which provides
them with enhanced surveillance capabilities. Any further steps required for realizing the full
potential of the system should be taken on utmost priority.
If need not be reiterated that the Executive Directors of the exchanges are fully responsible for
the surveillance and monitoring and they have to ensure timely, ongoing, effective and pro-active
surveillance to preserve the safety as well as integrity of the markets.
This letter may please be acknowledged.
Yours sincerely,
Sd/(L.K.SINGHVI)
100
L. K. SINGHVI
Sr. Executive Director
Tel : 91-22-2851599 Fax : 91-22-2883296
Email: lks@sebi.gov.in
18 January, 2000
IES/LKS/
/2000
The Executive Directors/Managing Directors
of all the Stock Exchanges
Re: Meeting of the Inter-Exchange Market Surveillance Group (ISG) held on January 14,
2000.
Dear Sir,
With reference to the meeting of the Inter-Exchange Market Surveillance Group held on January
14, 2000 the following decisions were taken. All the stock exchanges are required to initiate
immediate action on the following and send a compliance report latest by January 31, 2000:
1. Daily Price Bands for the top 100 scrips
The system of price bands has evolved well over a period of time and has served its purpose
well. As a measure to increase liquidity in high turnover stocks, it was decided to modify the
daily price band in the following manner for the top 100 scrips:
a)
It was decided that once a scrip touched the 8% price band in either direction, the trading
in that scrip would be restricted upto the price band for half an hour. After half an hour,
the price band would be further relaxed by 4% in that direction only.
b)
The relaxation of the price bands can only be done at BSE or NSE. The other exchanges
would relax the price bands (by 4%) only after such relaxation is applied at BSE or NSE.
c)
This modification of the price bands would initially be applicable on the top 100 scrips.
The 100 scrips would be commonly identified by BSE and NSE. The list of 100 scrips
would be communicated.
d)
The exchange (BSE or NSE) where the price band in any of the 100 scrips is hit first,
would communicate such information to the other exchanges including by email so that
the relaxation of price bands could also be undertaken by the other exchanges. The
information would also be communicated through PTI and Reuters.
e)
In case the price band is hit on either side in the last half an hour of trading, then the
trading in that scrip would be restricted upto the price band for fifteen minutes instead of
half an hour. After fifteen minutes, the price band would be further relaxed by 4% in that
direction only.
101
f)
The modified price band system would be made applicable from Monday, January 24,
2000.
Volatility
1
2
3
4
5
6
60% - 70%
70% - 90%
90% - 110%
110% - 130%
130% - 150%
Above 150%
% of Additional
Volatility Margins
5%
10%
15%
20%
25%
30%
The above rates would be applicable from settlement accounting period commencing
immediately after Monday, January 24, 2000.
3. Indefinite suspension of scrips
Presently, the exchanges have to seek prior approval from SEBI for suspending scrips for more
than three days. The issues related to suspension of trading in scrips were discussed in the
meeting and it was decided that as all the information required for taking such decisions is
available with the exchanges, the decision for suspension of trading of scrips including for more
than 3 days should be taken at the exchange level itself. However, if the trading in a scrip is
suspended for 2 days or more the exchange would have to immediately intimate all the other
exchanges where the scrip is traded for necessary action at their end as per the earlier SEBI
circular no. SMD/SED/ RCG/271/96 dated January 19, 1996. It may again be noted that if the
trading in a scrip is suspended beyond 3 days then it is mandatory for all the exchanges to
investigate the trading in the scrip and submit a preliminary report to SEBI within 15 days which
would be followed by a final report within one month after the date of suspension . It would also
be the responsibility of the exchange to inform SEBI about the suspension in trading of scrips for
more than 3 days.
Yours sincerely,
(L.K. SINGHVI)
102
O.P.GAHROTRA
SR. EXECUTIVE DIRECTOR
OPG/2880/2000
February 11, 2000
Managing Director/Executive Director
BSE/NSE/CSE/DSE/ASE
Dear Sir,
Considering the recent increase in volatility in the stock markets, the market positions was
reviewed in consultation with major exchange. After discussions, it was decided that stock
exchanges should further enhance their vigilance on the market operations and also take the
following measures in addition to measure taken earlier : Brokers-specific measures : where the brokers have built up sizeable positions they should
be asked to either reduce positions or to make advance pay-in. Such brokers could also be
subjected to adhoc margins by the stock exchanges.
Scrips-specific measures : these would include impositions of special margins on volatile
scrips.
Exchanges should take incremental additional capital and margins from their top 25 brokers
in the form of cash or FDRs only for the next four weeks, i.e. they should withdraw the
exiting facility of accepting incremental additional capital/margins by way of bank
guarantees or securities. Top 25 brokers are to be selected in terms of marginable gross
exposure at the close of the third day of their trading cycle. The unutilised portion of bank
guarantee and securities deposited by these brokers would not be considered for margin and
capital requirements would be payable in cash/FDR only. The list of top 25 brokers selected
in one trading cycle would continue till the next list of top 25 brokers is selected in the
subsequent trading cycle.
In cases of excessive market volatility or circumstances where risk element is higher, exchanges
are expected to take further action as required.
Further to review the market scenario and measures taken to ensure safety and security in the
market, a meeting will be held on Feb 14, 2000 at 11.30 a.m. in Conference Room, SEBI, Mittal
court, -B Wing, Nariman Point, Mumbai. You are requested to attend the meeting.
Your sincerely,
(O.P.GAHROTRA)
103
L. K. SINGHVI
Sr. Executive Director
Tel : 91-22-2851599 Fax : 91-22-2883296
Email: lks@sebi.gov.in
15 February, 2000
IES/LKS/
/2000
The Executive Directors/Managing Directors
of all the Stock Exchanges
Re:Meeting of the Inter-Exchange Market Surveillance Group (ISG) held on February 14,
2000.
Dear Sir,
With reference to the meeting of the Inter-Exchange Market Surveillance Group held on
February 14, 2000 the following decisions were taken. All the stock exchanges are required to
initiate immediate action on the following and send a compliance report latest by February 29,
2000:
1. Additional 5% margin to be imposed on end of the day net outstanding positions
Following ten scrips in terms of outstanding positions, volume and Volatility have been
identified by the stock exchanges who attended the meeting -:
SCRIP NAME
Infosys Technologies Limited
Zee Telefilms Ltd
Satyam Computers Ltd
Global Telesystems Ltd
Himachal Futuristic Communications Ltd.
SCRIP NAME
Pentamedia Graphic Limited
Silverline Technologies Ltd.
Digital Equipment Ltd.
NIIT Ltd.
DSQ Software Ltd
The list above should be reviewed by BSE/NSE periodically till any further decision in this
regard. The additional 5% margin would be imposed on end of the day net outstanding positions
of brokers in these scrips. This margin will be retained till the first day of the next accounts
period . This additional margin should be imposed beginning February 16, 2000.
2.. Increase in Cash component of additional capital and margin to 50%
It was decided that the cash component of additional capital and margin should be increased and
standardised. The cash component should reach the level of 50% by the end of March 2000. The
Stock Exchanges are requested to work out a phased programme to implement the above and
inform SEBI of the same.
3. Collection of Margins from clients
Exchanges should ensure that brokers collect margins from clients wherever the margin liability
for the client exceeds Rs.1 Lakh . The exchanges would carry out inspections to verify that the
brokers are abiding by this requirement.
104
The Exchanges are further advised to strengthen their surveillance and monitoring to detect
market manipulations in a timely and proactive manner.
Yours sincerely,
(L.K. SINGHVI)
105
L. K. SINGHVI
Sr. Executive Director
Tel : 91-22-2851599 Fax : 91-22-2883296
Email: lks@sebi.gov.in
Re: Meeting of the Inter-Exchange Market Surveillance Group (ISG) held on May 17,
2000.
Dear Sir,
In the meeting of the Inter-Exchange Market Surveillance Group held on May 17, 2000 the
following decisions were taken. All the stock exchanges are required to initiate immediate action
on the same and send a compliance report by May 31, 2000:
1)
2)
As regards the responsibility of the Executive Director, since surveillance is a very important and
sensitive area it was stipulated that this would be under the direct responsibility of the Executive
Director who is the senior most executive of the exchange. It was also advised earlier that there
should be no interference in the functioning of the surveillance department, which should be
done in a very professional and objective manner. The spirit behind such stipulation was that
there should be no interference from individual directors, member brokers or any other vested
interest and there was never any doubt that Board as a whole would oversee and give policy
directive to the surveillance functioning in the exchange.
106
3)
4)
Augmentation of the surveillance staff strength: The staff strength in the exchanges
for surveillance and monitoring is generally not adequate. It may be recalled that earlier
also, (letters dated October 29, 1998 and March 26, 1999) the exchanges were asked to
review the staff strength of the surveillance function and appropriately augment the same.
However no significant action has been taken by the exchanges. Hence the exchanges are
advised to review and assess the requirements of surveillance manpower and take steps to
deploy the required manpower within a short and reasonable timeframe.
5)
Training and Certification Program for surveillance staff at the exchanges : It may
be recollected that a surveillance training module was prepared earlier by BSE and NSE.
All the exchanges are advised to arrange for training and certification for their
surveillance personnel from either BSE or NSE. This is necessary to bring a more
professional approach in the area of surveillance and monitoring.
6)
7)
8)
Modification in the price band system: The meeting also discussed and reviewed the
functioning of the price band mechanism and the recent relaxation of price band by 4%
beyond 8% after half an hour halt. The feedback given was that the new system of price
relaxation by 4% has been working well and has served the purpose for which it was
introduced. It has been noticed that the scrips after hitting 8% freeze when relaxed to
further 4% in majority of the cases were traded between 8% and 4% and only in a small
number of cases were hitting 12% freeze. This is providing the required opportunity to
the investors to trade in the scrips which would have been denied to them in the earlier
107
system. It was also agreed that while the system is working well any deliberate attempt
in the market to misuse the system of price band should be examined properly and
whenever such instances are detected, preventive and punitive actions should be
immediately taken and also reported to SEBI.
Yours sincerely,
(L.K. SINGHVI)
108
time value of money, present value, future value, compound value, annuities, amortization,
discount rate, internal rate of return, equal monthly installments; pay back period, internal
rate of return, net present value, return on investment.
financial statements, net worth, current assets, current liability, debt to equity ratio, current
ratio, current assets, understanding and interpreting of financial statements, interpretation of
credit ratings.
analysis of data use of excel sheets and fox procreation, analysis and storing of data bases,
report forms, graphs etc.
qualification for membership of recognised stock exchanges, books of account and other
documents to be preserved by the recognised stock exchanges and their members, listing
requirements, etc.
SEBI guidelines on disclosures and investor protection, SEBI (insider trading) Regulations,
the definition of insider, person deemed to be a connected person, Unpublished price
sensitive information, responsibilities of insider. SEBI substantial acquisition of shares and
take over regulations, SEBI Regulation on prohibition of fraudulent and unfair trade practices
relating to securities markets, prohibition against market manipulation, prohibition of
misleading statements to induce sale or purchase of securities, prohibition on unfair trade
practices relating to securities.
power of the Board to order investigation, procedure for investigation, duty to produce
records, power of the board to issue direction, purpose of direction, suspension or
cancellation of registration of an intermediary holding a certificate of registration.
scrip monitoring using stock watch systems, price, volume, volatility analysis, real time
graphs, queries, alerts on line analysis, reports.
110
FURTHER READINGS
1. Indian Securities Market-A Review, NSEs Publication
2. Please refer to the following Act, Rules and Regulations:
- Securities Contracts (Regulation) Act, 1956
- Securities Contracts (Regulation) Rules, 1957
- Securities and Exchange Board of India Act, 1992
- SEBI (Stock Brokers and Sub-brokers) Regulations, 1992
- SEBI (Disclosures & Investor Protection) Guidelines, 2000
- Securities and Exchange Board of India (Insider Trading) Regulations, 1992
- SEBI (Substantial Acquisition of Shares and Take Over) Regulations, 1997
- Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade
Practices relating to Securities Market) Regulations, 1995
111