Financial Markets Management Class XII PDF

FMM- FINANCIAL Central Board of Secondary Education MARKETS MANAGEMENT Skill Education 0 Financial Markets Management Class-XII Skill Education CENTRAL BOARD OF SECONDARY EDUCATI...

FMM- FINANCIAL Central Board of Secondary Education MARKETS MANAGEMENT Skill Education 0 Financial Markets Management Class-XII Skill Education CENTRAL BOARD OF SECONDARY EDUCATION 1 Preface About NSE Academy NSE Academy is a subsidiary of National Stock Exchange of India. NSE Academy straddles the entire spectrum of financial courses for students of standard VIII and right up to MBA professionals. NSE Academy has tied up with premium educational institutes in order to develop pool of human resources having right skills and expertise which are apt for the financial market. Guided by our mission of spreading financial literacy for all, NSE Academy has constantly innovated its education template, this has resulted in improving the financial well-being of people at large in society. Our education courses have so far facilitated more than 41.8 lakh individuals become financially smarter through various initiatives. NSE Academy’s Certification in Financial Markets (NCFM) NCFM is an online certification programme aimed at upgrading skills and building competency. The programme has a widespread reach with testing centers present at more than 154+ locations across the country. The NCFM offers certifications ranging from the Basic to Advanced. One can register for the NCFM through: Online mode by creating an online login id through the link ‗Education‘>‗Certifications‘ >‗Online Register / Enroll‘ available on the website www.nseindia.com https://www.ncfm-india.com/ORE/OREloginPage.jsp Offline mode by filling up registration form available on the website www.nseindia.com > Education ‘> ‘Certifications ‘>Register for Certification ‘ Once registered, a candidate is allotted a unique NCFM registration number along with an online login id and can avail of facilities like SMS alerts, online payment, checking of test schedules, online enrolment, profile update etc. through their login id. 2  CONTENTS SR.NO. CHAPTER PAGE INTRODUCTION TO INDIAN 1 SECURITIES MARKET AND TRADING 8 MEMBERSHIP 2 TRADING 47 CLEARING, SETTLEMENT AND 3 LEGAL FRAMEWORK 104 4 INTRODUCTION TO DERIVATIVES 160 INTRODUCTION TO FUTURES AND 5 OPTIONS 181 6 SAMPLE PAPER 219 3 List of Abbreviations ADs Authorised Dealers AT Algorithmic Trading AI Auction Inquiry AL Activity Log ASBA Application Supported by Blocked Amount ADRs American Depository Receipts AL Activity Log AON All or None BOVL Branch Order Value Limit BSE Bombay Stock Exchange BM Branch Manager CADT Client Allocation Details CDS Currency Derivatives Segment CD Cum-Dividend CB Cum-Bonus CLI Client CI Cum-Interest CM Clearing Member CR Cum-Rights CSD Collateral Security Deposit CDSL Central Depositories Services Ltd. CM Capital Market Co. Company CTCL Computer to Computer Link DEA Department of Economic Affairs DFDS Demat Final Delivery Statement DFRS Demat Final Receipt Statement DMA Direct Market Access DP Depository Participant DPG Dominant Promoter Group DQ Disclosed Quantity DvP Delivery versus Payment ECBs External Commercial Borrowings EPI Early Pay-In FCCBs Foreign Currency Convertible Bonds FI Financial Institution FII Foreign Institutional Investors FIPB Foreign Investment Promotion Board F&O Futures and Options FTP File Transfer Protocol FPO Follow-on Public Offer GDRs Global Depository Receipts 4 HUF Hindu Undivided Family ICDR Issue of Capital and Disclosure Requirements IEPF Investor Education and Protection Fund IFSD Initial Free Security Deposit INST Institutional IOC Immediate or Cancel IPO Initial Public Offer IPF Investor Protection Fund ISC Investor Service Cell ISIN International Securities Identification Number KYC Know Your Client LTP Last Trade Price MBP Market By Price MAC Membership Approval Committee MF Mutual Funds MI Market Inquiry MM Market Movement MCA Member Constituent Agreement MCA Ministry of Corporate Affairs MRC Membership Recommendation Committee MTM Mark To Market MW Market Watch NEAT National Exchange for Automated Trading NCFM NSE‘s Certification in Financial Markets NCIT Non Custodian Institutional Trade ND No Delivery NISM National Institute of Securities Market NOC No Objection Certificate NSCCL National Securities Clearing Corporation Ltd. NSDL National Securities Depository Ltd. NSE National Stock Exchange NT Negotiated Trade O Odd Lot market OCXL Order Cancellation OTC Over The Counter OECLOB Open Electronic Consolidated Limit Order Book OO Outstanding Orders OM Order Modification OS Order Status PAN Permanent Account Number PCM Professional Clearing Member PFRDA Pension Fund Regulatory and Development Fund PRO Proprietary 5 PT Previous Trades RBI Reserve Bank of India RDD Risk Disclosure Document RETDEBT Retail Debt RDM Retail Debt Market SAT Securities Appellate Tribunal SBTS Screen Based Trading System SC(R)A Securities Contracts (Regulation) Act, 1956 SC(R)R Securities Contracts (Regulation) Rules, 1957 SEBI Securities and Exchange Board of India SL Stop Loss SLBS Securities Lending and Borrowing Scheme SGF Settlement Guarantee Fund SQ Snap Quote SRO Self Regulatory Organization STT Securities Transaction Tax SURCON Surveillance and Control T+2 Second day from the trading day TFT Trade for Trade TFTS Trade for Trade Surveillance TM Trading Member UCC Unique Client Code UDR Unique Documentary Requirement UTI Unit Trust of India UOVL User Order Value Limit VaR Value at Risk VIX Volatility Index VSAT Very Small Aperture Terminal WDM Wholesale Debt Market XB Ex-Bonus XD EX-Dividend XI Ex-Interest XR Ex-Rights 6 References and suggested readings The readings suggested here are supplementary in nature and would prove to be helpful for those interested in acquiring advanced knowledge about Capital Markets. 1. www.nseindia.com 2. www.sebi.gov.in 3. www.rbi.org.in 4. www.finmin.nic.in 5. Rules, Regulations and Byelaws of NSEIL & NSCCL 6. Indian Securities Market: A Review - NSEIL publication 7. NSE Newsletter – NSEIL publication Note:- Candidates are advised to refer to NSE‘s website: www.nseindia.com while preparing for NCFM test (s) for announcements pertaining to revisions/updations in NCFM modules or launch of new modules, if any. Copyright © 2016 by NSE ACADEMY LTD (NAL) National Stock Exchange of India Ltd. (NSE) Exchange Plaza, Bandra Kurla Complex, Bandra (East), Mumbai 400 051 INDIA All content included in this book, such as text, graphics, logos, images, data compilation etc. are the property of NSE. This book or any part thereof should not be copied, reproduced, duplicated, sold, resold or exploited for any commercial purposes. Furthermore, the book in its entirety or any part cannot be stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise. 7 CHAPTER 1 Introduction to Indian Securities Market and Trading Membership 1.1 Market segments Securities markets provide a channel for allocation of savings to those who have a productive need for them. The securities market has two interdependent and inseparable segments: (i) primary market and (ii) secondary market. 1.1.1 Primary Market Primary market provides an opportunity to the issuers of securities, both Government and corporations, to raise resources to meet their requirements of investment. Securities, in the form of equity or debt, can be issued in domestic/international markets at face value, discount or premium. The primary market issuance is done either through public issues or private placement. Under Companies Act, 1956, an issue is referred as public if it results in allotment of securities to 50 investors or more. However, when the issuer makes an issue of securities to a select group of persons not exceeding 49 and which is neither a rights issue nor a public issue it is called a private placement. 1.1.2 Secondary Market Secondary market refers to a market where securities are traded after being offered to the public in the primary market or listed on the Stock Exchange. Secondary market comprises of equity, derivatives and the debt markets. The secondary market is operated through two mediums, namely, the Over-the-Counter (OTC) market and the Exchange-Traded market. OTC markets are informal markets where trades are negotiated. 8 1.2 KEY INDICATORS OF SECURITIES MARKET 1.2.1 Index An Index is used to give information about the price movements of products in the financial, commodities or any other markets. Stock market indices are meant to capture the overall behaviour of the equity markets. The stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. The bluechip index of NSE is CNX Nifty. 1.2.2 Market Capitalisation Market capitalisation is defined as value of all listed shares on the country s exchanges. It is computed on a daily basis. Market capitalisation of a particular company on a particular day can be computed as product of the number of shares outstanding and the closing price of the share. Here the number of outstanding shares refers to the issue size of the stock. Market Capitalisation = Closing price of share * Number of outstanding shares Similarly, to compute the market capitalization of all companies listed on an Exchange we aggregate the market capitalization of all the companies traded on the Exchange. 1.2.3 Market Capitalisation Ratio The market capitalization ratio is defined as market capitalization of stocks divided by GDP. It is used as a measure of stock market size. 1.2.4 Turnover Turnover for a share is computed by multiplying the traded quantity with the price at which the trade takes place. Similarly, to compute the turnover of the companies listed at the Exchange we aggregate the traded value of all the companies traded on the Exchange. 1.2.5 Turnover Ratio The turnover ratio is defined as the total value of shares traded on a country‘s stock Exchange for a particular period divided by market capitalization at the end of the period. It is used as a measure of trading activity or liquidity in the stock markets. Turnover Ratio = Turnover at Exchange / Market Capitalisation at Exchange 1.3 PRODUCTS AND PARTICIPANTS 1.3.1 Products Financial markets facilitate reallocation of savings from savers to entrepreneurs. Savings are linked to investments by a variety of intermediaries through a range of complex financial products called securities. Under the Securities Contracts (Regulation) Act [SC(R)A], 1956, securities‖ include (i) shares, bonds, scrips, stocks or other marketable securities of like nature in or of any incorporate company or body corporate, (ii) government securities, (iii) derivatives of 9 securities, (iv) units of collective investment scheme, (v) interest and rights in securities, and security receipt or any other instruments so declared by the central government. Broadly, securities can be of three types - Equities, Debt Securities and Derivatives. 1.3.2 Participants The securities market has essentially three categories of participants (i) the investors, (ii) the issuers, (iii) the intermediaries (Figure 1.1). These participants are regulated by the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), Ministry of Corporate Affairs (MCA) and the Department of Economic Affairs (DEA) of the Ministry of Finance. 10  Market Participants Investors Issuers Intermediaries Table 1.1 below provides the information on Market participants in India. Market Participants Investors Individual Investors Corporate Investors Foreign Venture Capital Investors FIIs Depositories Stock Exchanges With Equities Trading With Debt Market Trading With Derivative Trading With Currency Derivatives Brokers Corporate Brokers Sub-brokers Portfolio Managers Custodians Registrars to an issue & Share Transfer Agents Primary Dealers Merchant Bankers Bankers to an Issue Debenture Trustees Underwriters Venture Capital Funds 11 1.4 MARKET SEGMENTS AND THEIR PRODUCTS The Exchange (NSE) provides trading in four different segments - Wholesale Debt Market, Capital Market, Futures and Options and Currency Derivatives Segment as depicted in the figure 1.2 below. Figure 1.2: Market Segments (i) Wholesale Debt Market (WDM) Segment: This segment at NSE commenced its operations in June 1994. It provides the trading platform for wide range of debt securities which includes State and Central Government securities, T-Bills, PSU Bonds, Corporate debentures, Commercial Papers, Certificate of Deposits etc. (ii) Capital Market (CM) Segment: This segment at NSE commenced its operations in November 1994. It offers a fully automated screen based trading system, known as the National Exchange for Automated Trading (NEAT) system. Various types of securities e.g. equity shares, warrants, debentures etc. are traded on this system. (iii) Futures & Options (F&O) Segment: This segment provides trading in derivatives instruments like index futures, index options, stock options, and stock futures, and commenced its operations at NSE in June 2000. (iv) Currency Derivatives Segment (CDS) Segment: This segment at NSE commenced its operations on August 29, 2008, with the launch of currency futures trading in US Dollar-Indian Rupee (USD-INR). Trading in other currency pairs like Euro-INR, Pound Sterling-INR and Japanese Yen-INR was further made available for trading in February 2010. ‘Interest rate futures ‘was another product made available for trading on this segment with effect from August 31, 2009. 1.5 Reforms in Indian Securities Markets Over a period, the Indian securities market has undergone remarkable changes and grown exponentially, particularly in terms of resource mobilisation, intermediaries, the number of listed stocks, market capitalisation, turnover and investor population. The following paragraphs list the principal reform 12 measures undertaken since 1992. Creation of Market Regulator: Securities and Exchange Board of India (SEBI), the securities market regulator in India, was established under SEBI Act 1992, with the main objective and responsibility for (i) protecting the interests of investors in securities, (ii) promoting the development of the securities market, and (iii) regulating the securities market. Screen Based Trading: Prior to setting up of NSE, the trading on stock exchanges in India was based on an open outcry system. The system was inefficient and time consuming because of its inability to provide immediate matching or recording of trades. In order to provide efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully automated screen-based trading system (SBTS) on the CM segment on November 3, 1994. Reduction of Trading Cycle: Earlier, the trading cycle for stocks, based on type of securities, used to vary between 14 days to 30 days and the settlement involved another fortnight. The Exchanges, however, continued to have different weekly trading cycles, which enabled shifting of positions from one Exchange to another. It was made mandatory for all Exchanges to follow a uniform weekly trading cycle in respect of scrips not under rolling settlement. In December 2001, all scrips were moved to rolling settlement and the settlement period was reduced progressively from T+5 to T+3 days. From April 2003 onwards, T+2 days settlement cycle is being followed. Equity Derivatives Trading: In order to assist market participants in managing risks better through hedging, speculation and arbitrage, SC(R) A was amended in 1995 to lift the ban on options in securities. Trading in derivatives, however, took off in 2000 with index futures after suitable legal and regulatory framework was put in place. The market presently offers index futures, index options, single stock futures and single stock options. Demutualisation: Historically, stock exchanges were owned, controlled and managed by the brokers. In case of disputes, integrity of the stock exchange suffered. NSE, however, was set up with a pure demutualised governance structure, having ownership, management and trading with three different sets of people. Currently, all the stock exchanges in India have a demutualised set up. Dematerialisation: As discussed before, the old settlement system was inefficient due to (i) the time lag for settlement and (ii) the physical movement of paper-based securities. To obviate these problems, the Depositories Act, 1996 was passed to provide for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed and accuracy. There are two depositories in India, viz. NSDL and CDSL. They have been set up to provide instantaneous electronic transfer of securities. Demat (Dematerialised) settlement has eliminated the bad deliveries and associated problems. To prevent physical certificates from sneaking into circulation, it has been made 13 mandatory for all newly issued securities to be compulsorily traded in dematerialised form. Now, the public listed companies making IPO of any security for Rs.10 crore or more have to make the IPO only in dematerialised form. Clearing Corporation: The anonymous electronic order book ushered in by the NSE did not permit members to assess credit risk of the counter-party and thus necessitated some innovation in this area. To address this concern, NSE had set up the first clearing corporation, viz. National Securities Clearing Corporation Ltd. (NSCCL), which commenced its operations in April 1996. Investor Protection: In order to protect the interest of the investors and promote awareness, the Central Government (Ministry of Corporate Affairs1 ) established the Investor Education and Protection Fund (IEPF) in October 2001. With the similar objectives, the Exchanges and SEBI also maintain investor protection funds to take care of investor claims. SEBI and the stock exchanges have also set up investor grievance / service cells for redress of investor grievance. All these agencies and investor associations also organise investor education and awareness programmes. Globalisation: Indian companies have been permitted to raise resources overseas through issue of ADRs, GDRs, FCCBs and ECBs. Further, FIIs have been permitted to invest in all types of securities, including government securities and tap the domestic market. The investments by FIIs enjoy full capital account convertibility. They can invest in a company under portfolio investment route upto 24% of the paid up capital of the company. This can be increased up to the sectoral cap/statutory ceiling, as applicable to the Indian companies concerned, by passing a resolution of its Board of Directors followed by a special resolution to that effect by its general body. The Indian stock exchanges have been permitted to set up trading terminals abroad. The trading platform of Indian exchanges is now accessible through the Internet from anywhere in the world. RBI permitted two-way fungibility for ADRs / GDRs, which means that the investors (foreign institutional or domestic) who hold ADRs / GDRs can cancel them with the depository and sell the underlying shares in the market. Launch of India VIX: Volatility index is a measure of market‘s expectation of volatility over the near term. It measures the amount by which an underlying Index is expected to fluctuate in the near term, based on the order book of the underlying index options. India‘s first volatility index, India VIX (based on the Nifty 50 Index Option prices) was launched by NSE in April 2008. Direct Market Access: In April 2008, SEBI allowed the direct market access (DMA) facility to the institutional investors. DMA allows brokers to offer their respective clients, direct access to the Exchange trading system through the broker‘s infrastructure without manual intervention by the broker. 14 Launch of Securities Lending & Borrowing Scheme: In April 2008, the Securities Lending Borrowing mechanism was allowed. It allows market participants to take short positions effectively with less cost. Launch of Currency Futures: On August 29, 2008, NSE launched trading in currency future contracts in the USD-INR pair for the first time in India. Trading in other currency pairs like Euro – INR, Pound Sterling – INR and Japanese Yen was further made available for trading in March 2010. ASBA: Application Supported by Blocked Amount (ASBA) is a major primary market reform. It enables investors to apply for IPOs / FPOs and rights issues without making a payment. Instead, the amount is blocked in investors ‘own account and only an amount proportionate to the shares allotted goes out when allotment is finalized. Launch of Interest Rate Futures: On August 31, 2009, futures on interest rate was launched on the National Stock Exchange. Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009: In August 2009, the SEBI issued Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009, replacing the Disclosure and Investor Protection (DIP) Guidelines 2000. ICDR Regulations 2009 would govern all disclosure norms regarding issue of securities. 1 Earlier known as Department of Company Affairs. 2 ―VIX‖ is a trademark of Chicago Board Options Exchange, Incorporated (―CBOE‖) and Standard & Poor‘s has granted a license to NSE, with permission from CBOE, to use such mark in the name of the India VIX and for purposes relating to the India VIX. 15 Trading Membership 1.6 STOCK BROKERS A stock broker is an intermediary who arranges to buy and sell securities on the behalf of clients (the buyer and the seller). According to SEBI (Stock Brokers and Sub- Brokers) Regulations, 1992, a stockbroker is member of a stock exchange and requires to hold a certificate of registration from SEBI in order to buy, sell or deal in securities. SEBI grants a certificate to a stock broker subject to the conditions that the stock broker: (a) holds the membership of any stock exchange; (b) should abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which he is a member; (c) should obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange in case of any change in the status and constitution; (d) should pay the amount of fees for registration in the prescribed manner; and (e) should take adequate steps for redress of grievances of the investors within one month of the date of the receipt of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints. While considering the application of an entity for the grant of registration as a stock broker, SEBI checks out if the applicant: (b) is eligible to be admitted as a member of a stock exchange; has the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge his activities; (c) has any past experience in the business of buying, selling or dealing in securities; (d) is subjected to any disciplinary proceedings under the rules, regulations and bye-laws of a stock exchange with respect to his business as a stock-broker involving either himself or any of his partners, directors or employees. 16 1.7 NSE MEMBERSHIP There are no entry/exit barriers to the membership of NSE. Anybody can become a member by complying with the prescribed eligibility criteria and exit by surrendering membership without any hidden cost. The members are admitted to different segments of the Exchange subject to the provisions of the Securities Contracts (Regulation) Act, 1956, the SEBI Act, 1992, the rules, circulars, notifications, guidelines, etc. issued hereunder and the byelaws, rules and regulations of the Exchange. The trading members of NSE have certain benefits, which includes: Access to a nation-wide trading facility for equities, derivatives, debt and hybrid instruments / products; Ability to provide a fair, efficient and transparent securities market to the investors; Use of state-of-the-art electronic trading systems and technology; Dealing with an organisation which follows strict standards for trading & settlement at par with those available at the top international bourses and constantly strives to move towards a global marketplace in the securities industry. 1.7.1 New Membership The persons eligible to become trading members of Exchange are: (a) Individuals; (b) Partnership firms registered under the Indian Partnership Act, 1932. (c) Limited Liability Partnerships registered under the Limited Liability Partnership Act, 2008 (d) Institutions, including subsidiaries of banks engaged in financial services; (e) Banks for Currency Derivatives Segment; (f) Body corporates including companies as defined in the Companies Act, 2013. A company is eligible to be admitted as a member if: (i) It is formed in compliance with provisions of Companies Act 2013 which mentions about the mode of forming incorporated company; (ii) It complies with the financial requirements and norms as may be specified by SEBI; (iii) The directors of the company shouldn‘t have been disqualified for being members of a stock exchange and should not have held the offices of the directors in any company which had been a member of the stock exchange and had been declared defaulter or expelled by the stock exchange; and (f) Such other persons or entities as may be permitted from time to time by RBI/SEBI under the Securities Contracts (Regulations) Rules, 1957. 17 Membership for Different Segments at NSE Persons or Institutions desirous of securing admission as members (stock brokers) on the Exchange may apply for membership on any one of the following segment groups: (a) Wholesale Debt Market (WDM) Segment (b) Capital Market (CM) segment (c) Capital Market (CM) and Wholesale Debt Market (WDM) segment (d) Capital Market (CM) and Futures & Options (F&O) segment (e) Capital Market (CM), Futures & Options (F&O) segment and Wholesale Debt Market (WDM) segment (f) Currency Derivatives (CD) segment with or without the above mentioned segments. (g) Clearing Membership of National Securities Clearing Corporation Ltd. (NSCCL) as a Professional Clearing Member (PCM). Professional Clearing Members do not trade but only clear and settle trades executed by other trading members (TMs). Professional clearing membership is only applicable for the F&O and Currency Derivatives segments. Two types of memberships are offered: Normal - Unrestricted business expansion Alpha - For focused proprietary trading with limited clientele Following categories are available under Normal membership : Futures & Currency Cash Debt Types of Membership Option Derivatives Segment Segment Segment Segment Trading Member – √ √ √ Trading Cum Self Clearing Member √ √ √ √ Trading Cum Clearing Member – √ √ √ Professional Clearing Member – √ √ √ Membership of Alpha can be taken in combination with any of the above segments except for Futures & Options segment which has to be taken in combination with Cash segment. 18 Following categories are available under Alpha Membership In addition to the trading membership in the F&O segment, the trading member can also take two types of clearing membership in the F&O Segment i.e. as a clearing member and self-clearing member. The self-clearing members clear and settle the trades executed by them only, either on their account or on account of their clients. Trading members cum clearing members can clear and settle their own trades as well as trades of other trading members. Trading members registered in F&O segment and CD segment are eligible to trade in interest rate futures market. Membership can be taken for any segments individually or in combination Trading Member This category of membership entitles a member to execute trades on his own account as well as on account of his clients but, clearing and settlement of trades executed through the Trading Member would have to be done through a Trading-cum Clearing Member or Professional Clearing Member of the Exchange This category of membership entitles a member to execute trades Trading cum self- and to clear and settle the trades executed on his own account as clearing member well as on account of his clients. Trading cum This category of membership entitles a member to execute trades clearing member on his own account as well as on account of his clients and to clear and settle trades executed by themselves as well as by other trading members who choose to use clearing services of the member. Professional This category of membership entitles a member to clear and settle Clearing member trades of such members of the Exchange who choose to clear and settle their trades through this member. 19 1.7.2 Eligibility Criteria for Membership at NSE The standards for admission of members are laid down by the Exchange in terms of corporate structure (shareholding pattern), capital adequacy (Paid up capital), net worth, Interest Free Security Deposit (IFSD), Collateral Security Deposit (CSD), track record, education, experience etc. This is done to ensure quality broking services so as to build and sustain confidence among investors in the Exchange ‘s operations. Corporate Structure (Shareholding Pattern) Securities markets are inherently volatile and risky, and hence risk containment mechanisms are put in place by the stock exchange. One such risk containment tool is the concept of Dominant Promoter/Shareholder Group ‘which is very unique for applicants acquiring membership on the NSE. The shareholders holding the majority of shares have a dominant role in the affairs of the company. In case of any default by the broking entity, the Exchange should be able to identify and take action against the persons who are behind the company. The Exchange, therefore, needs to know the background, financial soundness and integrity of the shareholders holding such controlling interest. Hence, during the admission process (explained in the later section of the book) the dominant shareholders are called for an interview with the Membership Recommendation Committee (MRC). Dominant Promoter norms are applicable to all trading members. The norms relating to dominant promoters falls in different categories such as unlisted corporate trading member, listed corporate trading member, corporate shareholders, banks, central or state government owned finance and development institutions and foreign entities, which are given as under: (i) Unlisted corporate trading member: In case of an unlisted corporate trading member, there are three conditions under which the corporate trading member will be eligible to constitute dominant promoter group. These conditions are given below: If a person holds 51% of shares in the trading member corporate on his own or together with (a) his relatives as defined under Companies Act 2013 (b) person(s) falling within the definition of control‘ 3 under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. (c) the support of strategic investors in such corporate trading member. (Strategic investors mean the corporates or individual investors that add value to investments they make through industry and personal ties that can assist companies in raising additional capital including financial investors, venture capitalists and others who invest primarily with the aim of generating a large return on their investment). 20 (ii) Listed corporate trading member: In case of listed corporate trading members, any person(s) identified as promoter in the offer document or in any document for offer of securities to the public or existing shareholders or in the shareholding pattern disclosed by the corporate trading member under the provisions of the Listing Agreement, whichever is later, would be eligible to constitute dominant promoter group. (iii) Corporate shareholders to be identified as dominant shareholders: Corporate shareholder is allowed to be identified as dominant shareholders (Dominant Promoter Group - DPG) of a corporate trading member provided that the corporate shareholder identifies any person or persons as their dominant promoter group as per the aforesaid norms applicable to the corporate trading member. In case the dominant promoter group consists of more than one corporate shareholder, the dominant promoter group should be identified separately for each such corporate shareholder. (iv) Banks, central or state government owned finance and/or development institutions: The following entities are allowed to be identified as dominant shareholder(s) provided they have a net worth of at least Rs.50 crores: (a) Scheduled Banks; (b) Central or State Government owned Finance and/or Development Institutions; (c) Any financial institution registered and regulated by any regulatory authority such as RBI, SEBI, IRDA; (d) Any other entity that is fit to be identified as dominant shareholder in the opinion of relevant authority. (v) Foreign Entities: Foreign entities are allowed to take trading membership of the Exchange through their Indian subsidiary under the automatic approval route permitted by the government, subject to compliance with the following guidelines of the RBI in this regard. (a) The promoting foreign entity or its subsidiary should be either a bank or insurance organisation regulated by the Central Bank or such other appropriate regulatory authority of that country Or The promoting foreign entity or its subsidiary should be broking house/ participant in the securities market that is registered or regulated by the relevant regulatory authority of that country and that the relevant authority should be a member of International Organisation of Securities Commission (IOSCO). The entity should have a sound track record. Or The promoting foreign entity is one whose domestic arm or subsidiary is registered with SEBI for participation in any domestic venture for custodial or Asset Management services. 21  (b) The promoting foreign entity shall hold, directly or indirectly not less than 51 % of the controlling stake in the applicant company proposing to take the trading membership of the Exchange. (c) The net worth of the entity having controlling stake in the applicant company or the promoting foreign entity should be at least Rs. 50 Crores. A foreign entity is allowed to become part of the dominant promoter group of an existing trading member corporate provided it meets the dominant promoter group norms as applicable to Indian entities, FIPB (Foreign Investment Promotion Board) norms / RBI norms and any other requirements of the Exchange / SEBI as may be applicable from time to time. Corporate trading members will also be allowed to change their shareholding pattern so long as such change is within the above norms and the existing Dominant Promoter Group (DPG) continues to hold controlling interest and prior approval from the Exchange is obtained. Once a DPG is identified during admission, the same has to be maintained at all points of time. In case of any change in the DPG, the trading member is required to seek fresh approval of the Exchange as it is done at the time of admission of new trading member and rules relating to the same apply. Inter-se transfer of shareholding among the dominant promoters, however will be exempt from the formalities as required in case of new trading membership. Any changes in the shareholding require prior approval from the Exchange, except in case of shareholding changes related to public shareholding in a listed company. Failure to maintain the required level of shareholding by DPG is treated as a breach of the continuing membership norms and tantamount to reconstitution of the trading member corporate. This is because the existing DPG would no longer hold controlling interest in the trading member corporate or alternatively a new group would have emerged with controlling stake. In such case the Exchange can initiate disciplinary action including withdrawal of trading facility of such trading members. 3 Here ‗control ‘means the right to appoint majority of directors or to control the management or policy decisions by virtue of the shareholding or management rights. 22  Net worth and Other Deposit Requirements The networth of the member is calculated as summation of Capital and free reserves less non allowable assets. Non allowable assets include fixed assets, pledged securities, member ‘s card, non-allowable securities (unlisted securities), bad deliveries, doubtful debts and advances, prepaid expenses, intangible assets and 30% of marketable securities. Deposit requirements are of two types i.e. Interest Free Security Deposit (IFSD) and Collateral Security Deposit (CSD). IFSD has to be in liquid cash while CSD can be in cash or non-cash form. Cash component means cash, bank guarantees, fixed deposit receipts, units of money market mutual fund and gilt funds and any other form of collateral as may be prescribed from time to time. Non-cash component means all other forms of collateral deposits like deposit of approved list of demat securities and units of the other mutual funds and any other form of collateral as may be prescribed from time to time. The eligibility criteria for corporates, individuals and partnership firms for different segments of the Exchange are explained in Table 2.1 and 2.2 below. Table 2.1: Deposit & Networth Requirements (Corporates /Limited Liability Partnership) DEPOSIT STRUCTURE (` in lakhs) Non- Non- Type of Cash- Cash Net Segment Cash Cash Total Membership NSEIL NSCCL Worth NSEIL NSCCL Capital Market TM & SCM 85 – 15 25 125 100 TM 25 – – – 25 100 Futures & TM & SCM 25 – 25 25 75 100 Options TM & CM 25 – 25 25 75 300 PCM – – 25 25 50 300 TM 2 8 – – 10 100 Existing TM & SCM 2 8 25 25 60 500 Members Currency TM & CM 2 8 25 25 60 1000 Derivatives TM 2 13 – – 15 100 New Segment TM & SCM 2 18 25 25 70 500 Members TM & CM 2 18 25 25 70 1000 PCM – – 25 25 50 1000 *TM = Trading Membership. * TM & SCM = Trading and Self Clearing Membership. * TM & CM = Trading and Clearing Membership. * PCM = Professional Clearing Membership. 23 Table 2.2: Deposit & Net worth Requirements (Individual / Partnership Firms) DEPOSIT STRUCTURE (` in lakhs) Non- Non- Type of Cash- Cash Net Segment Cash Cash Total Membership NSEIL NSCCL Worth NSEIL NSCCL Capital Market TM & SCM 26.5 – 6 17.5 50 75 TM 25 – – – 25 75 Futures & Options TM & SCM 25 – 25 25 75 100 TM & CM 25 – 25 25 75 300 TM 2 8 – – 10 100 E x i s t i n g TM & SCM 2 8 25 25 60 500 Members Currency TM & CM 2 8 25 25 60 1000 Derivatives Segment TM 2 13 – – 15 100 N e w TM & SCM 2 18 25 25 70 500 Members TM & CM 2 18 25 25 70 1000 * TM = Trading Membership. * TM & SCM = Trading and Self Clearing Membership. * TM & CM = Trading and Clearing Membership. * PCM = Professional Clearing Membership. Fees and Charges: Application Processing Fees : ` 10,000/- + Applicable Service Tax. Admission Fees : One time ` 5,00,000/- + Applicable Service Tax except in case of Alpha Membership Annual subscription charges (Capital Market Segment): For Corporates - ` 1,00,000 P.A.+ Applicable Service Tax For Individuals/Partnership Firms - ` 50,000 P.A.+ Applicable Service Tax Advance minimum transaction charges (Futures & Options segment): ` 1,00,000 p.a. + Applicable Service Tax Advance transaction charges (Currency Derivatives segment) ` 50,000 p.a. + Applicable Service Tax In addition to the individuals, corporates and partnership firms, Banks authorized by the Reserve Bank of India under section 10 of the Foreign Exchange Management Act, 1999 as ‗AD Category - I bank‘ are permitted to become trading and clearing members of the currency derivatives market of the recognized stock exchanges, on their own account and on behalf of their clients, subject to minimum prudential requirements of minimum net worth of Rs. 500 crores, minimum CRAR of 10 per cent, net NPA not exceeding 3 per cent and net profit should have been made for last 3 years. 24 The AD Category - I banks which fulfill the prudential requirements are required to lay down detailed guidelines with the approval of their Boards for trading and clearing of currency derivatives contracts and management of risks. AD Category - I banks which do not meet the above minimum prudential requirements and AD Category - I banks which are Urban Co- operative banks or State Co-operative banks can participate in the currency derivatives market only as clients, subject to approval therefore from the respective regulatory Departments of the Reserve Bank. 1.7.3 Admission Procedure for New Membership Figure: Admission procedure for new membership at NSE Admission is a two-stage process with applicants requiring to go through an examination (a module of NCFM) followed by an interview with the Membership Recommendation Committee. At any point of time the applicant has to ensure that at least the sole proprietor/ one of the designated partner/one of the designated director/compliance officer has a valid certificate of Securities Market (Basic) Module or Compliance Officers (Brokers) Module or the relevant module pertaining to the segments wherein membership of the Exchange has been sought. i.e. (a) Capital Market (Dealers) Module (b) Derivatives Market (Dealers) Module (c) National Institute of Securities Markets (NISM) Series I – Currency Derivatives Certification Examination 25 Applicants are required to submit application form, in the prescribed format along with other relevant documents to the Exchange. The application for new membership is then forwarded to Membership Recommendation Committee. The Membership Recommendation Committee (MRC) consists Exchange officials. The MRC conducts interviews of the applicants for trading membership. In case of corporates, the dominant shareholder and designated directors; in case of individuals, the individual himself and in case of partnership firms – two designated partners have to appear for the interview. The purpose of the interview is to acquire information about their capability & commitment to carry on stock broking activities, financial standing and integrity. The MRC recommends the names for admission of trading members to the Membership Selection Committee (Sub-committee of board of directors)/Board of directors of the Exchange. Membership Selection Committee (MSC) after taking into consideration the recommendations of the MRC either approves or rejects the applications. On getting approval from MSC (NSEIL/NSCCL), an admission on a provisional basis is provided to the applicant subject to certain conditions like registration with SEBI, submission of relevant fees/ deposits and documents. The documents of the member are then forwarded to SEBI for registration. After satisfying itself as to compliance with respect to all the prescribed norms, SEBI grants a Registration Certificate in the name of the applicant. The applicant then has to remit the prescribed membership deposits (as required by the demand advice attached to the offer letter) within the time frame prescribed in the demand advice attached to the offer letter. After obtaining SEBI Registration, the trading member has to satisfy the Exchange and NSCCL regarding all the formalities and requirements such as payment of fees/deposits and submission of relevant documents, for enablement. The dealers on CM segment are required to clear the Capital Market (Dealers) Module of NCFM; dealers on Futures & Options Segment are required to clear the Derivatives Market (Dealers) Module or equivalent examination of NCFM and dealers on Currency Derivatives segment are required to clear National Institute of Securities Market (NISM) Series I- Currency Derivatives Certification Examination. This is a pre-requisite without which user-ids are not issued. After ensuring that all the formalities and requirements with regard to the Exchange and NSCCL are complied, the Trading Member is enabled to trade on the NEAT system. 26 1.8 SURRENDER of TRADING MEMBERSHIP Trading members can apply for surrender of their trading membership once admitted to the Exchange. Surrender of trading membership can be permitted by the Exchange after fulfilling certain conditions by the member such as, clearing off all the dues to the Exchange and NSCCL, notifying all other TMs of the approval of surrender, issuance of a public notification in leading dailies, etc. The deposits of the trading members would be released by the Exchange/ NSCCL after a prescribed lock-in period. There is, however, no lock-in period applicable in case of trading member, who is, (a) SEBI registered but not enabled (b) SEBI registered and enabled but not traded at all Provided certain criteria ‘s are fulfilled NSE provides a scheme for enabling the trading member to surrender their membership to the Exchange. Details of the norms and procedures related to the surrender of membership to the Exchange are prescribed as below: (a) A trading member desirous of surrendering its membership of the Exchange is required to send its request in writing in the prescribed format. (b) Before submission of an application for surrender of membership, the trading member is required to comply with all the pre-requisites for application of surrender in the prescribed format. The following aspects should be covered in the application for surrender of membership from a trading member, (i) who has been suspended/ disciplinary action taken by the Exchange /SEBI (ii) in respect of whom any investigation/ action consequent to a default has been initiated by the Exchange /SEBI, (iii) who is falling within the category of associates ‘as defined by SEBI, (iv) who owes dues to the Exchange/ NSCCL, (v) against whom claims by investors of value of Rs.10 lakh or more are pending or any claim for any amount is pending for a period more than 6 months, (vi) against whom any other claim /complaint is pending which, in the opinion of the Exchange/ NSCCL, needs to be resolved by the concerned trading member, (vii) whose turnover fees liability to SEBI is still outstanding, 27  The Exchange has absolute discretion in dealing with such applications and if it decides to process/accept the surrender application of such trading member, it may impose additional terms and conditions as it may deem fit. (c) No trading member, who has surrendered its trading membership, their partners (in case of partnership firm) and/ or dominant shareholders (in case of corporates) is eligible to be re-admitted to the trading membership of the Exchange in any form for a period of one year from the date of cessation of trading membership (i.e. from the date of approval of surrender). (d) The application of surrender of trading membership is subject to fulfillment of certain conditions, such as submission of original SEBI registration certificate(s) on all segments on which the trading member is registered; submission of sub-broker registration certificate(s) of all the sub-brokers associated with the trading member for onward transmission to the SEBI for cancellation etc. (e) The trading member should request the Exchange through their surrender application to dismantle and recover all the leased line(s)/ VSAT(s) and other equipment given to them at their dealing offices. (f) A notice to public by way of a public notification in newspapers should be made by the Exchange and certain time (from the date of public notification) is given to investors, public, etc. to lodge claims against the surrendering trading member. (g) A letter is also sent to SEBI seeking pending dues, if any, from member. (h) On the expiry of period for receipt of investor claims and on receipt of intimation of dues amount, if any, from SEBI, the total amount payable by the member should be appropriated against trading member‘s deposits available with the Exchange / NSCCL and the trading member will be intimated accordingly. In case the amount payable exceeds the deposits, the trading Member would be intimated to bring in the requisite amount within 21 days of intimation. Upon the failure of the member to do so within 21 days of intimation, the case shall be referred to the relevant authority for further action. 1.9 SUSPENSION & EXPULSION OF MEMBERSHIP The Exchange may expel or suspend, fine under censure, warn, withdraw any of the membership rights of a trading member if it is guilty of contravention, non-compliance, disobedience, disregard or evasion of any of the bye-laws, rules and regulations of the Exchange or of any resolutions, orders, notices, directions or decisions or rulings of the Exchange or the relevant authority. 28 1.9.1 Basis of Suspension of Membership Following are some grounds on basis of which there can be suspension or expulsion of membership: (i) Misconduct: A trading member is deemed guilty of misconduct for any of the following or similar acts or omissions namely: (a) Fraud or fraudulent act or if he is convicted of a criminal offence. (b) Violation of the provisions of any statute governing the activities, business and operations of the Exchange. (c) Improper conduct. (d) Failure to submit to or abide by arbitration. (e) Failure to testify or give information sought by the Exchange or any committee or any other person authorized on that behalf. (f) Failure to submit special returns in such form as the relevant authority may from time to time prescribe. (g) Failure to submit audited accounts. (h) Failure to compare or submit accounts with defaulter. (i) Failure to submit or make any false or misleading returns. (j) Make vexatious, malicious or frivolous complaints. (k) Failure to pay subscription fee, arbitration charges etc. (ii) Un-businesslike conduct: A trading member is deemed guilty of un-businesslike conduct for any of the following or similar acts or omissions namely: (a) Transaction or business dealings in fictitious names. (b) Circulation of rumours. (c) Any unfair dealing in securities which does not reflect the true market values. (d) Market manipulation and rigging. (e) Unwarrantable business which effects purchases or sales for its account or any account related to the trading member. (f) If a trading member accepts less than a full and bonafide money payment in settlement of a debt due by another trading member arising out of a transaction in securities. (g) Dishonoured cheque. (h) Failure to carry out transactions with constituents. 29 (iii) Unprofessional conduct: A trading member is deemed guilty of unprofessional conduct for any of the following or similar acts or omissions namely: (a) Business in securities in which dealings not permitted (b) Business for defaulting constituent who failed to carry out engagements relating to securities and is in default to another trading member (c) Transacts in business with an insolvent without obtaining the consent of the relevant authority even if the individual has obtained his final discharge from an insolvency court (d) Carrying out his business during his suspension period (e) Business with suspended, expelled and defaulter trading members (f) Business for employees of other trading members (g) Business for Exchange employees if it makes a speculative transaction in which an employee of the Exchange is directly or indirectly interested (h) If it advertises for business purposes or issue regularly circular or other business communications to persons other than its own constituents, trading members of the Exchange, banks and joint stock companies or publishes pamphlets, circular or any other literature or report or information relating to the stock markets with its name attached (i) Evasion of margin requirements (j) Evasion of brokerage charges (k) Dealings with entities prohibited by SEBI to buy or sell or deal in securities market (iv) Trading member ‘s responsibility for partners, agents and employees: A trading member is fully responsible for the acts and omissions of its partners, authorised officials, attorneys, agents, authorised representatives and employees. If any such act which is against the relevant rules and regulations is committed or omitted by them then the trading member is liable to the same penalty to the same extent has that act or omission been done or omitted by itself. (v) Suspension on failure to provide margin deposit and/or capital adequacy requirements: The Exchange can suspend the business of a trading member when it fails to provide the margin deposit and/or meets capital adequacy norms as provided in the Bye Laws, Rules and Regulations. The trading member shall remain suspended until he furnishes the necessary margin deposit or meet the capital adequacy requirements. 30 1.9.2 Suspension of Business The relevant authority may require a trading member to suspend its business in part or in whole under following conditions: (a) Prejudicial business: When the relevant authority finds that the trading member conducts business in a manner prejudicial to the Exchange by making purchases or sales of securities or offers to purchase or sell securities for the purpose of upsetting equilibrium of the market or bringing about a condition of demoralization in which prices will not fairly reflect market values, or (b) Unwarrantable business: When in the opinion of the relevant authority the trading member engages in unwarrantable business or effects purchases or sales for its constituent‘s account or for any account in which it is directly or indirectly interested which purchases or sales are excessive in view of its constituent‘s or its own means and financial resources or in view of the market for such security, or (c) Unsatisfactory financial condition: When the relevant authority finds that the trading member is in a bad financial condition and it cannot be permitted to do business with safety to its creditors or the Exchange. 1.9.3 Removal of Suspension The suspension of business as above shall continue until the trading member has been allowed by the relevant authority to resume business. It may be done on its paying such deposit or on its doing such act or providing such thing as the relevant authority may require. 1.9.4 Consequences of Suspension The suspension of a trading member has the following consequences: (a) Suspension of membership rights: The suspended trading member shall during the terms of its suspension be deprived of and excluded from all the rights and privileges of membership. It shall also include the right to attend or vote at any meeting of the general body of trading members of the relevant segment. (b) Rights of creditors unimpaired: The suspension should not affect the rights of the trading members who are creditors of the suspended trading member. (c) Fulfillment of contracts: The suspended trading members are bound to fulfill contracts outstanding at the time of its suspension. (d) Further business prohibited: The suspended trading member should not during the terms of its suspension make any trade or transact any business with or through a trading member. With the permission of the relevant authority, however it can close the transactions outstanding at the time of its suspension. 31 (e) Trading members not to deal with suspended trading member: No trading member is allowed to transact in business with a suspended trading member during the terms of its suspension except with the prior permission of the relevant authority. 1.9.5 Consequences of Expulsion The expulsion of a trading member has the following consequences: (a) Trading membership rights forfeited: The expelled trading member shall forfeit to the Exchange its right of trading membership and all rights and privileges as a trading member of the Exchange including any right to the use of or any claim upon or any interest in any property or funds of the Exchange but any liability of any such trading member to the Exchange or to any trading member of the Exchange shall continue and remain unaffected by its expulsion. (b) Office vacated: The expulsion would create a vacancy in any office or position held by the expelled trading member. (c) Rights of creditors unimpaired: The expulsion does not affect the rights of the trading members who are creditors of the expelled trading member. (d) Fulfillment of contracts: The expelled trading members are bound to fulfill transactions outstanding at the time of his expulsion and it may with the permission of the relevant authority close such outstanding transactions with or through a trading member. (e) Trading members not to deal with expelled trading member: No trading member is allowed to transact business for or with or share brokerage with the expelled trading member except with the previous permission of the relevant authority. (f) Consequences of declaration of defaulter to follow: The provisions of pertaining to default and Protection Fund mentioned in the byelaws become applicable to the trading member expelled from the Exchange as if such trading member has been declared a defaulter. 1.10 DECLARATION OF DEFAULTER A trading member may be declared a defaulter by direction /circular/notification of the relevant authority of the trading segment if: (a) he is unable to fulfill his obligations; or (b) he admits or discloses his inability to fulfill or discharge his duties, obligations and liabilities; or (c) he fails or is unable to pay within the specified time the damages and the money difference due on a closing-out effected against him under the bye laws, rules and regulations; or 32 (d) he fails to pay any sum due to the Exchange or to submit or deliver to the Exchange on the due date, delivery and receive orders, statement of differences and securities, balance sheet and such other clearing forms and other statements as the relevant authority may from time to time prescribe; or (e) if he fails to pay or deliver to the defaulters ‘committee all monies, securities and other assets due to a trading member who has been declared a defaulter within such time of the declaration of default of such trading member as the relevant authority may direct; or (f) if he fails to abide by the arbitration proceedings as laid down under the bye laws, rules and regulations. (g) if he, being an individual and /or partnership firm, /it, being a company incorporated under the Companies Act, files a petition before a Court of Law for adjudication of himself as an insolvent or for its winding up, as the case maybe. (h) (1A) Without prejudice to the foregoing, if a trading member is either expelled or declared a defaulter by any other recognised stock exchange on which he is a member or if the registration certificate is cancelled by SEBI, the said Trading Member may be expelled from the Exchange after providing an opportunity of being heard to such Trading Member. (i) Notwithstanding anything contained in this Byelaw, the trading facility of the member shall be withdrawn immediately after the receipt of information of expulsion /default by any other stock exchange or cancellation of registration certificate by SEBI. 1.11 AUTHORIZED PERSONS Trading members of the Exchange can appoint authorised persons in the Capital Market, Futures & Options and Currency Derivatives Segments. Authorised Person is ―Any person- individual, partnership firm, Limited Liability Partnership (LLP) or body corporate who is appointed as such by a stock broker (including trading member) and who provides access to trading platform of a stock exchange as an agent of the stock broker.‖ Authorised Person can receive remuneration - fees, charges, commission, salary, etc. for his services only from the stock broker and shall not charge any amount from the clients. Accordingly, stock broker can share brokerage with the Authorised Person but shall not charge any amount directly from the clients The clients introduced by the authorised person should have a direct relationship with the trading member i.e. the member-constituent agreement, know your client forms, risk disclosure document, etc. are executed between the client and the trading member. This implies that the authorised person is not allowed to have any trading relationship with the 33  clients. The trading member should issue the contract notes and bills directly to the client i.e. the authorized person should not issue contract notes, confirmation memo and/or bills in their name. The clients introduced by the authorised person are required to deliver securities and make payments directly in the trade name of the trading member (as appearing on the SEBI registration certificate). Similarly, the trading member should deliver securities and make payments directly in the name of the clients. 1.12 SUB BROKERS Sub broker is an important intermediary between stock broker and client in capital market segment. The trading members of the Exchange may appoint sub- brokers to act as agents of the concerned trading member for assisting the investors in buying, selling or dealing in securities. The sub-brokers are affiliated to the trading members and are required to be registered with SEBI. A sub-broker is allowed to be associated with only one trading member of the Exchange. Trading members desirous of appointing sub-brokers are required to submit the following documents to the Membership Department of the Exchange: (a) Copy of sub-broker - broker agreement duly certified by the trading members (b) Application form for registration as a sub-broker with Securities and Exchange Board of India (Form B) (c) Recommendation letter to be given by the trading member with whom the sub-broker is affiliated (Form C) (d) Reference Letter from the applicant‘s Banker (e) Reference letter from any other Third Party (Such as CA/CS/ Lawyer/Notary or other Stock Broker (f) Declaration from Sub-Broker about Non-Conviction or presently not under trial for any offence (On the letterhead of the sub broker) (g) Undertaking from Sub-Broker about Dealing directly with investors and not with any unregistered intermediary. (On the letterhead of the sub broker) (h) Confirmation from sub-broker that he has not applied through any other TM & also he is not a member /Sub-broker of any of the Commodity Exchange (On the letterhead of the sub broker) 34 (i) Annexure J or K – Letter from Trading Member to NSE giving Undertaking about dealing in fake and forged shares by the sub-broker as per circular no 69 dated July 23, 1997 ref no NSE/MEMB/0311. To be given by Trading member on their letterhead. (j) Annexure I – Letter from trading member undertaking to settle the obligations of the sub-broker as per circular no 63 dated June 25, 1997 ref no NSE/MEMB/0282. To be given by Trading member on their letterhead (k) Annexure O – Certificate from sub broker relating to shareholding pattern as per circular no 513 dated February 9, 2006 ref no NSE/MEM/7157. This needs to be submitted by all sub-broker applicants including individuals on the letterhead. (l) Annexure 3– Undertaking for ―Fit & Proper Person‖ in the name of entity & its partners/ Directors as per circular no 534 dated August 09, 2006 ref no NSE/MEM/7743. To be given by Trading member on their letterhead (m) Proof of address of sub broker Telephone Bill, Electricity bill, Voter ID, Driving License, Passport, MOA(Registration certificate), Rent agreement, Leave and License agreement, Ration Card. (n) Annexure L – For Firms/Corporates – Sharing Pattern as per circular no 168 dated May 19, 2000 ref no NSE/MEM/1708. It should be certified by C A & signed by all partners/ directors. (o) Registered Partnership Deed and Registered partnership Certificate / MOA & AOA Along with the Certificate of Incorporation (p) List of directors of sub broker as on specific date to be certified by CA/CS The trading member has to ensure the settlement of all deals entered into by a trading member even if the deals may have originated from its sub-broker. The sub-broker will be required to adhere to NSE ‘s know your clients ‘requirements. The important documents relating to dealing through a sub-broker are given below: 1) Individual client registration application form 2) Non-individual client registration application form 3) Sub-broker client agreement 1.12.1 Eligibility A sub-broker may be an individual, a partnership firm or a corporate. In case of corporate or partnership firm, the directors or partners and in the case of an individual sub-broker applicant should comply with the following requirements: (a) They should not be less than 21 years of age; (b) They should not have been convicted of any offence involving fraud or dishonesty; 35 (c) They should have either passed 12th standard equivalent examination from an institution recognized by the Government or 10th standard with 2 years of work experience in securities market. (d) They should not have been debarred by SEBI 1.12.2 Registration No sub-broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of registration granted by SEBI. Sub-brokers are required to obtain certificate of registration from SEBI in accordance with SEBI (Stock Brokers & Sub-brokers) Rules and Regulations, 1992, without which they are not permitted to buy, sell or deal in securities. SEBI may grant a certificate to a sub-broker, subject to the conditions that: (a) he should pay the fees in the prescribed manner; (b) he should take adequate steps for redress of grievances of the investors within one month of the date of the receipt of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints received; (c) in case of any change in the status and constitution, the sub-broker should obtain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange; and (d) he should be authorised in writing, by a stock-broker being a member of a stock exchange for affiliating himself in buying, selling or dealing in securities. The applicant sub-broker should submit the required documents to the stock exchange with the recommendation of a trading member. After verifying the documents, the stock exchange may forward the documents of the applicant sub-broker to SEBI for registration. A sub-broker can trade in that capacity after getting himself registered with SEBI. The Exchange may not forward the application of the sub-broker to SEBI for registration if the applicant dealt with fake, forged, stolen, counterfeit etc. shares and securities in the market. 1.12.3 Cancellation of Registration In case a trading member / sub-broker intends to cancel the registration as a sub-broker, the sub-broker is required to the following documents: 1. Request letter of the Trading member for surrender of sub-broker registration (on the letter head of TM); 2. Undertaking from the Trading Member (on the letter head of TM). 3. Application from Sub-Broker for surrender of registration (Annexure II), if the sub broker is traceable. If the sub broker is non-traceable than a copy of termination notice served to the sub broker along with the proof of delivery by the Trading Member. 36  Note: the difference between the proof of delivery of termination notice and the date of application to Exchange for surrender of sub-broker registration should be 30 days or more. 4. Copy of public notification intimating the investors/general public of the surrender of registration of sub broker and not to deal with such sub broker, issued in the local newspaper with wide circulation where the sub broker‘s place of work is situated – (The content of the advertisement should be in English) 5. SEBI registration certificate of the Sub-Broker in original. In case the original certificate is lost, FIR copy along with the affidavit must be submitted to SEBI in this regard by the concerned Trading Member and the Sub- Broker separately on stamp paper of Rs.100/- or of appropriate value as defined in the stamp act, duly notarized. 6. An undertaking from the member that SEBI has not taken/ initiated any action like enquiry proceedings / cancellation / suspension of registration / debarred / administrative warning or prohibited from dealing in securities market / imposed penalty after enquiry / adjudication / prosecution etc. against the sub-broker 7. PAN card of the sub-broker truly certified by the trading member 1.13 BROKER-CLIENTS RELATIONS 37 1.13.1 Client Registration Documents The trading member (TM) is required to enter into an agreement in the specified format provided by NSE with the client before accepting orders on latter‘s behalf. The agreement is executed on non-judicial stamp paper of adequate value, duly signed by both the parties on all the pages. Copy of the agreement has to be kept with the TM permanently. The agreement should contain all the clauses mentioned in Uniform Documentary Requirement (UDR). Stock broker may incorporate any additional clauses in these documents provided these are not in conflict with any of the clauses in the model document, and also the rules, regulations, articles, byelaws, circulars, directives and guidelines. There should be segregation of mandatory and voluntary documents/clauses pertaining to client registration in separate docket (compilation of documents). In case of internet trading, in addition to clauses mentioned in UDR, the client has to mention clauses pertaining to internet trading. Under ―Know Your Client (KYC) requirements, the TM should seek information such as: investor risk profile, financial profile, investor identification details, address details, income, PAN number, employment, age, investments experience, trading preference. The TM has to obtain recent passport size photograph (photographs of partners/whole time directors, individual promoters holding 5% or more, either directly or indirectly, in the shareholding of the company and of persons authorized to deal in securities, and of each of their clients in case of individual clients). The TM should also take proof of identification and address of the client. In-person verification should be done by the trading member‘s staff, name & signature of the person doing the in-person verification together with the stamp of trading member should be there on the KYC form. Under Member Constituent Agreement (MCA), trading members are required to make the constituent/clients aware of (a) trading segment to which TM is admitted, (b) particulars of SEBI registration number, (c) the precise nature of the trading member‘s liability for business to be conducted, (d) basic risks involved in trading on the Exchange (equity and other instruments) including any limitations on the liability and the capacity in which the trading member acts. In order to assess the risk involved in trading, TM is required to issue Risk Disclosure Document (RDD)4 in such format, as may be prescribed by the Exchange from time to time and should obtain the same from his constituents duly signed. A stock-broker should not deal knowingly, directly or indirectly, with a client who defaults to another stock-broker. There is no limit on the number of clients for a TM. Copy of the client registration documents is required to be sent to the clients. Trading member must ensure periodic review of client‘s financial information & client database. 38 1.13.2 Unique Client Code (UCC) SEBI has made it mandatory for all trading members/brokers to use unique client codes for all clients. Brokers are required to collect and maintain the Permanent Account Number (PAN) allotted by Income Tax Department for all their clients. Brokers should verify the documents with respect to the unique code and retain a copy of the document. They are also required to provide the PAN and UCC of their clients to the stock exchanges/clearing corporations and these details have to be updated before placing orders for the clients. The stock exchanges are also required to maintain a database of client details submitted by brokers. 1.13.3 Margins from the Clients Members should have a prudent system of risk management to protect themselves from client default. Margins are an important element of such a system. The policy of risk management addressing the margin requirements should be well documented and be made accessible to the clients and the stock exchanges. In capital market segment, however, the quantum of these margins, the form and the mode of collection are left to the discretion of the members5. The margin so collected is kept separately in the client bank account/client beneficiary account. In case of default, they are utilized for making payment to the clearing corporation for margin and settlement with respect to that client. 1.13.4 Execution of Orders Where the constituent requires an order to be placed or any of his order to be modified after the order has entered the system but has not been traded, the trading member may, if it so desires, obtain order placement/modification details in writing from the constituent. The trading member should accordingly provide the constituent with the relevant order confirmation/ modification slip or copy thereof, forthwith, if so required by the constituent. Where the constituent requires any of his orders to be cancelled after the order has been entered in the system but has not been executed, the trading member may, if it so desires, obtain the order cancellation details in writing from the constituent. The trading member should accordingly provide the constituent with the relevant order cancellation details, forthwith, if so required by the constituent. The trading member may, if it so desires, obtain in writing, the delivery and payment requirement in any instructions of an order that it receives from the constituent. Where a trading member receives a request for order modification or order cancellation from the constituent, it should duly bring it to their notice that if the total order results in a trade in the meantime, the requests for modification or cancellation cannot be executed. 39 1.13.5 Contract Note Contract note is a confirmation of trade(s) done on a particular day for and on behalf of a client. A stock-broker should issue a contract note to his clients for trades (purchase/sale of securities). The contract note should contain name and address (registered office address as well as dealing office address) of the TM, the SEBI registration number of the TM, details of trade viz. order number, trade number, order time, trade time, security name, quantity, trade price, brokerage, settlement number and details of other levies. As per Regulation 18 of SEBI (Stock-Brokers & Sub-Brokers) Regulations, 1992, the TM should preserve the duplicate copy of the contract notes issued for a minimum of five years. The TM should ensure that: (a) Contract note is issued to a client within 24 hours and should be signed by the trading member or by an authorized signatory trading member. (b) Contract notes are in the prescribed format6. (c) Stamp duty is paid, (d) All statutory levies are shown separately in the contract note 1.13.6 Payments/Delivery of Securities to the Clients Every TM should make payments to his clients or deliver the securities purchased within one working day of pay-out unless the client has requested otherwise. 1.13.7 Brokerage The maximum brokerage chargeable by TM in respect of trades effected in the securities admitted to dealing on the CM segment of the Exchange is fixed at 2.5% of the contract price, exclusive of statutory levies. This maximum brokerage is inclusive of sub-brokerage. The brokerage should be indicated separately from the price, in the contract note. The TM may not share brokerage with a person who is a TM or in employment of another TM. For example: If a client has sold 10000 shares of a scrip @ Rs. 50, what is the maximum brokerage that the client can be charged? In this case, the maximum brokerage = brokerage rate*value of the transaction = 2.5 %*(10000 shares *Rs. 50) = Rs. 12,500 1.13.8 Segregation of Bank Accounts The TM should maintain separate bank accounts for client ‘s funds and own funds. It is compulsory for all TMs to keep the money of the clients in a separate account and their own money in a separate account. Funds should be transferred from the client account to the clearing account for the purpose of funds pay-in obligations on behalf of the clients and vice- versa in case of funds pay-out. No payment for transaction in which the TM is taking position as a principal is allowed to be made from the client ‘s account. 40 1.13.9 Segregation of Demat (Beneficiary) Accounts The trading members should keep the dematerialised securities of constituents in a separate beneficiary account distinct from the beneficiary account maintained for holding their own dematerialised securities. No delivery towards the own transactions of the trading members is allowed to be made from the account meant for constituents. For this purpose, every trading member is required to open a beneficiary account in the name of the trading member exclusively for the securities of the constituents (to be referred to as ―constituents ‘beneficiary account‖). A trading member may keep one consolidated constituent ‘beneficiary account for all its constituents or different accounts for each of its constituents as it may deem fit. 1.14 SUB-BROKER-CLIENTS RELATIONS 1.14.1 Relationship with clients A sub-broker is required to enter into a tripartite agreement with its clients and the stock broker specifying the scope of rights and obligations of the sub-broker, the stock broker and such client of the sub-broker as per the format prescribed by SEBI for dealing in securities in cash segment. There should be privacy of contract between the stock broker and the sub- broker ‘s client. A separate agreement has to be executed for each Exchange. Sub-broker is required to help the client in redress of grievance in respect of transactions executed through its associated broker. Sub-broker is also required to assist and co-operate in ensuring faster settlement of any arbitration proceeding arising out of the transaction entered through its associated broker and is jointly/severally liable to implement the arbitration award. A sub-broker should provide assistance to stock broker and clients to reconcile their accounts at the end of each quarter with reference to all the settlements where payouts have been declared during the quarter. 1.14.2 Contract notes A stock broker should issue contract note as per the format prescribed by the Exchange to client introduced through a sub-broker. A sub-broker should render necessary assistance to its client in obtaining the contract note from the stock broker. Sub-broker should not issue any contract note or confirmation memo to its client. 1.14.3 Securities/ Funds Transactions in securities executed on behalf of a client introduced through the sub-broker should be settled by delivery/ payment between the stock broker and the client directly, in accordance of the rules, regulations and byelaws of the Exchange and such settlements should not take place through sub-broker. Delivery of securities and payment of funds relating to the transactions of a client introduced by the sub-broker should be directly between the stock broker and the client of the sub broker. 41 1.15 INVESTOR SERVICE CELL AND ARBITRATION Investor complaints received against the trading members / companies in respect of claims/ disputes for transactions executed on the Exchange are handled by the Investor Service Cell (ISC). The complaints are forwarded to the trading members for resolution and seeking clarifications. The ISC follows-up with the trading members and makes efforts to resolve the complaint expeditiously. In certain cases, on account of conflicting claims made by the investor and the trading member, when it is not possible to administratively resolve the complaint, investors are advised to take recourse to the arbitration mechanism prescribed by the Exchange. Arbitration, which is a quasi judicial process, is an alternate dispute resolution mechanism prescribed under the Arbitration and Conciliation Act, 1996. The Exchange bye-laws prescribe the provisions in respect of arbitration and the procedure therein has been prescribed in the regulations. The reference to arbitration should be filed within six months from the date when the dispute arose. The time taken by the ISC is excluded by the arbitrator, while considering the issue of limitation. 1.16 CODE OF ADVERTISEMENT Trading Members of the Exchange while issuing advertisements in the media have to comply with the Code of Advertisement prescribed by the Exchange. In pursuance of that, a copy of an advertisement has to be submitted to the Exchange to get a prior approval before its issue in publication/media. The trading members may apply for approval of advertisement as per the application format. Trading Members not complying with the Code of Advertisement may have to face disciplinary proceedings. The code of Advertisement is as follows: 1. Advertisement shall include all forms of communications issued by or on behalf of Stock Broker in publicly available media that may influence investment/sale decisions of any investor/prospective investors. 2. Forms of communications shall include, form of document, pamphlets, circulars, brochures, notice or any research reports or any other literature or information, material published, or designed for use in a newspaper, magazine, SMS or other periodical, radio, television, telephone or tape recording, video tape display, signs or bill boards, motion pictures, telephone directories (other than routine listings) or other public media including websites or emails, whether in print or audio visual form or used in workshop/seminar or public speaking or in any other manner. 3. Advertisement/Material shall contain: 3.1. Name of the Stock Broker, registered office address of the member, SEBI Registration No 42  (all registration numbers and names of the Exchanges in case of multiple memberships) / Stock Broker ID allotted by Exchange and logo of the Stock Broker, if any. 3.2. Information which is accurate, true, fair, clear, complete, unambiguous and concise. 3.3. Standard warning in legible fonts (minimum 10 font size) which states ‗investment in securities market are subject to market risks, read all the related documents carefully before investing.‘ No addition or deletion of words shall be made to the standard warning. In audio-visual media based advertisements, the standard warning in visual and accompanying voice over reiteration shall be audible in a clear and understandable manner. For example, in standard warning both the visual and the voice over reiteration containing 17 words running for at least 5 seconds may be considered as clear and understandable. 3.4. In case the mode of advertisement is SMS/Message/Pop-up, etc. and the details such as full name, logo, full registered office address, SEBI registration numbers and standard disclaimer are not mentioned, then official website hyperlink has to be provided in such SMS/Message/Pop-up, etc. and the website must contain all such details. 3.5. If there is mentioning of content pertaining to any other business activity such as Mutual Funds, IPO, Insurance, Commodities, Bonds, Fixed Deposits, Loans, etc., in the advertisement, then respective registration number(s) where applicable should be mentioned. 3.6. If the member is only a distributor/s for any of the products mentioned in the advertisement, disclaimer that they are only distributor/s of such products should be specifically mentioned in the disclaimer. 3.7. In case any specific security/securities are displayed in the advertisement as examples, disclaimer that ―The securities quoted are exemplary and are not recommendatory‖ should be mentioned. 3.8. If the advertisement contains prepaid Brokerage schemes, Exchange circular (ref. no. NSE/INSP/26252 dated March 24, 2014) regarding pre-paid schemes should be complied with. In case anything related to the brokerage rates offered by the member is mentioned in the advertisement, then a disclaimer stating that the ―Brokerage will not exceed the SEBI prescribed limit‖ should be mentioned. 4. Advertisement/Material shall not contain: 4.1. Anything which is otherwise prohibited for publication under the relevant Act, unwarranted, or make any promises. 4.2. Statements which are false, misleading, biased or deceptive, based on assumptions projections. 4.3. Shall not contain any misleading or deceptive testimonials. 43 4.4. Statements which directly or by implication or by omission may mislead the investor. 4.5. Any statement designed as likely to be misunderstood or likely to disguise the significance of the statement. 4.6. Any statement designed to exploit the lack of experience or knowledge of the investors. 4.7. Any slogan that is exaggerated or unwarranted or slogan that is inconsistent with or unrelated to the nature and risk and return profile of the product. 4.8. Any promise or guarantee of assured return to the general investors. 4.9. Any statement which directly or indirectly discredits other advertisements or Stock Broker or make unfair comparisons. 4.10. Representations made about the performance or activities of the broker unless accompanied by data regarding performance, disclosures of all the risk factors, etc. and disclaimer that ―Such representations are not indicative of future results‖. Such disclaimer shall be in the same font as the rest of the advertisement. 4.11. Superlative terms, such as best, no. 1, one of the best, among market leaders, etc. unless such terms is provided by an entity independent of the Stock Broker and its affiliates, and whose services are not procured by the Stock Broker or any of its affiliates to assign the Stock Broker such term. 4.12. Recommendations such as BTST (buy today and sell tomorrow), ATST (acquire today and sell tomorrow) etc. cannot be mentioned in the advertisement as per Exchange circular ref. no. NSE/COMP/13186 dated October 05, 2009. 5. Compliance and Other Requirements: 5.1. Prior approval for the advertisement/material to be obtained from the Stock Exchange before issue. 5.2. No celebrities shall form part of the advertisement/material. 5.3. Statistical information, charts, graphs, etc. when used should be supported by their source, if any 5.4. Where advertising claims are expressly stated to be based on or supported by independent research or assessment, the source and date of this should be indicated in the advertisement. 5.5. In the event of suspension of any Stock Broker by the Exchange, the Stock Broker so suspended shall not issue any advertisement either singly or jointly with any other Stock Broker, during the period of suspension. 5.6. In the event of any proceeding/action initiated against a Stock Broker by a regulatory body other than the Exchange, the Exchange reserves the right to direct the Stock Broker to refrain from issuing any advertisement for such a period as it may deem fit. 44 5.7. The Stock Broker shall not involve/engage in games/leagues/schemes/competitions etc. which may involve distribution of prize monies/medals/gifts, etc. 5.8. These norms shall be applicable to any other investment/consultancy agencies associated with the Stock Broker concerned and issuing advertisement wherein the Stock Broker has been named in the advertisement. 5.9. Copy of the advertisement shall be submitted to the Exchange atleast seven days in advance before its issue. 5.10. Further to Exchange circular ref. no. NSE/COMP/30985 dated October 21, 2015 wherein members were instructed to submit an undertaking alongwith every advertisement submitted for approval, the updated undertaking format in compliance with the revised Code of Advertisement for Stock Brokers is provided at Annexure II circular ref. no. NSE/COMP/33643 dated 16 November 2016. Revision Questions: 1) Very Short Questions: I. What are the two independent and inseparable segments of the securities market? II. Define Primary market. III. Define secondary market. IV. Define securities. V. How do you broadly categories the securities? VI. Whose are strategic investors?