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Chapter 17

Chapter 17. Stock Broking, Depositories, Custodial Services and Short Selling and Securities Lending and Borrowing Scheme. STOCK BROKING CUSTODIAL SERVICES DEPOSITORY SYSTEM SHORT SELLING AND SECURITIES LENDING AND BORROWING SCHEME, 2008. STOCK BROKING Stock Brokers.

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Chapter 17

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  1. Chapter 17 Stock Broking, Depositories, Custodial Services and Short Selling and Securities Lending and Borrowing Scheme

  2. STOCK BROKING • CUSTODIAL SERVICES • DEPOSITORY SYSTEM • SHORT SELLING AND SECURITIES LENDING AND BORROWING SCHEME, 2008

  3. STOCK BROKINGStock Brokers A stockbroker is a member of a recognised stock exchange, who buys/sells/deals in securities. He must be registered with the SEBI to carry on his activities. He should abide by the code of conduct in terms of the general requirements, duty to investors and relationship with other stockbrokers. The SEBI can conduct an inspection/ investigation into the records of the brokers. Any broker who contravenes any of the

  4. provisions of the SEBI Act/rules/regulations would be liable to any or more of the following actions: monetary penalty, liability for action under the enquiry proceedings regulations, including suspension/ cancellation of registration and prosecution. The capital adequacy re­quirements for brokers consist of a base minimum capital and an additional capital related to the volume of business.

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

  6. responsibilities and inspection and activities in default applicable to bro­kers are also applicable to sub-brokers.

  7. Trading and Clearing Members of Derivative Segment of Stock Exchange Member A trading member is a member of a derivate exchange/derivative segment of a stock exchange, who settles the trade in the clearing corporation/house through a clearing member. A clearing mem­ber is a member of a clearing house/corporation, who may clear and settle transactions in securi­ties. A self-clearing member is a member who may clear and settle transactions on its own account or on

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

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

  10. Foreign Brokers With a view to helping the FIIs in following the procedures and encouraging them to invest in India, foreign brokers are now allowed to deal in securities on own account as principal in India. Such a broker has to have two accounts: (i) a foreign currency denominated bank account and a rupee account with a designated bank branch and (ii) multiple custodian accounts with the approved custodian of all registered FIIs

  11. whom he may be assisting or on whose behalf he would be placing orders with a member of the Indian stock exchange(s).

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

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

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

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

  16. owner in respect of that security. The depository would record the name of the person surrendering the certificate as the beneficial owner.

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

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

  19. Depositories The depository system consists of depositories and depository participants (DPs). A depository is an organisation which holds the securities of shareholders (investors) in electronic form, transfers securities between accountholders, facilitates the transfer of ownership without handling securities and facilitates their safekeeping. The functions of depositories include, inter-alia, account opening,

  20. dematerialisation, rematerialisation, settlement and clearing and so on. Their sponsors can be public financial institutions, Indian and foreign banks, stock exchanges, financial services companies, companies/ institutions providing custodial, clearing/settlement services in a securities market outside India.

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

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

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

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

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

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

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

  28. Securities Lending Scheme (SLS), 1997 The securities lending scheme of the SEBI enables lending of securities through an approved intermediary, to a borrower, for a specified period, with the condition that the borrower would return equivalent securities of the same type/class at the end of the period, along with the corporate benefits accruing on the securities, including dividends, rights, bonus, redemption benefits, interest or any other benefit/right accruing on the securities lent.

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

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

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