inspection manual- bse

7/26/2019 Inspection Manual- BSE

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1. INTRODUCTION

Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992 provides for mechanism

for inspection of member-brokers with a view to ascertain whether the member-brokers registered are carrying on thebusiness in terms of the provisions of the Regulations and also whether the conduct of the member-brokers is in the

overall interest of the capital market and investors. Stock exchanges, being Self Regulatory Organizations (SRO) would

be primarily responsible for ensuring orderly conduct by its member-brokers and also ensuring that the relevant Rules,

Bye-laws, Regulations and directions are being complied with by its member-brokers.

As per Securities and Exchange Board of India (SEBI) Circular No. SEBI/SMD/DBA-1/CIR-27/2003/25.06.2003 dated

June 25, 2003; every stock exchange is required to inspect the books of accounts and other documents of at least

20% of its active member-brokers every year including the subsidiaries formed by the Regional Stock Exchange, who

have become members of the stock exchanges, are to be inspected every year.

The purpose of the inspection is to ensure that:

Proper books of accounts, records and documents have been maintained by a member-broker in the manner

specified in Rule 15 of the Securities Contracts (Regulation) Rules, 1957 and Regulation 17 (1) of the Securities

and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulation, 1992.

The member-broker has complied with the Rules, Byelaws and Regulations of the Exchange.

The member-broker has complied with the provisions of the Securities Contracts (Regulation) Act, 1956, the

Securities Contracts (Regulation) Rules, 1957, the SEBI Act, 1992 and the Rules and Regulations made thereunder

and SEBI (Stock-Brokers and Sub-Brokers) Rules, 1992.

The member-broker has complied with various notices, circulars, press releases, etc issued by the Ministry of

Finance, SEBI and the Stock Exchange.

The conduct of the member-broker is in the overall interest of the capital market and the member-broker is fair in

dealing with his clients.


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The Exchange has set up a separate cell called Inspection cell in the Department of Surveillance & Supervision (DOSS),

which has been entrusted with the responsibility to carry out inspection of the books of accounts, records and otherdocuments maintained by its member-brokers including their branches.

The Exchange issues letters to the member-brokers selected on the basis of defined criteria informing about the

scheduled date of inspection and advising them to send the Inspection Questionnaire in soft as well as hard copy

form (containing basic information about background and operations of the member) properly filled up alongwith all

the required data and documents before the commencement of inspection.

The Inspecting Team inspects the books and records on a sample basis and prepares inspection report on the

irregularities observed during the course of inspection. Observations/findings of the inspection report are forwarded to

the member-brokers concerned. The member-broker is required to submit his reply on the observations contained in

the Inspection Report, within the stipulated time.

The reply given by the member-broker is then vetted and action against the member-broker for the non-compliances

observed during the inspection, is initiated as per the norms laid down in this regard by the Disciplinary Action Committee

constituted by the Exchange.

The final action initiated is communicated to the member-broker and the member-broker is also advised to take

necessary steps to ensure that such non-compliances do not recur in future.

Further, to ensure compliance by the member-brokers with the recommendations made by the Exchange, the member-

brokers are required to submit a compliance certificate either from their Compliance Officer or from a Chartered

Accountant, within 30 days from the receipt of the final action letter from the Exchange confirming that all the

recommendations made by the Exchange have been implemented by them.

2. INSPECTION MECHANISM


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The member-brokers of the Exchange are required to maintain the following books of accounts and records as per

Rule 15 of the Securities Contracts (Regulation) Rules, 1957 and Regulation 17 of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. These books and records are to be preserved for a minimum period of five years as per

the requirements of Regulation 18 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.

It may however, be noted that SEBI has decided that in cases where, copies of documents have been taken by CBI,

Police or any other enforcement agency during the course of any investigation, it is necessary to preserve the original

documents, both in electronic and physical form till the trial is completed. Members may refer to Exchange Notice No.

20050805-20 dated August 5, 2005 & Exchange Notice No. 2005127 18 dated December 27, 2005 in this regard.

For the purpose of Inspection, the member-brokers shall keep the following records/documents, (including those of

branches) ready before the commencement of inspection.

a. Register of transactions (Sauda Book);

b. Clients ledger;

c. General ledger;

d. Journal;

e. Cash book;

f. Bank book;

g. Register containing particulars of securities received and delivered.

h. Counterfoils or duplicates of contract notes issued to clients;

i. Written consent of clients in respect of contracts entered into as principals;

j. Margin deposit book;

k. Register of accounts of sub-brokers;

l. KYC/Member-Client Agreement/Tripartite Agreement between broker, sub-broker and clients.

In addition to the above statutory requirements, member-brokers of the Exchange are inter-alia, required to maintain

the following records/documents:

3. MAINTENANCE OF BOOKS OF ACCOUNTS, RECORDSAND DOCUMENTS

Sr. No. Document Required Hard / Soft RemarksCopy

1.CERTIFICATES & APPROVALS

1. Members, Sub-brokers and Remisiers Registration HardCertificate (ORIGINAL)

2. Exchange approval for Own Trading from Multiple locations Hard

3. Approval letter from Exchange for advertisement Hard

4. Approval letter from Exchange for change in Shareholding HardPattern and change in designated directors.

5. Digital Signature Certificate for ECN Hard


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DOWNLOADABLES & SYSTEM REQUIREMENTS

6. Order Book (Order Log) Soft OR Hard

7. Margin Deposit Book (DM, DS, DP file) Soft OR Hard

8. Daily Margin Statement Soft OR Hard

9. Money Statement Soft OR Hard

10. Copy of IML undertaking Hard

11. E-Mail ID for Investor Grievance -

12. Mapping in back-office -

13. RCBDL FILE Soft

14. ACBDL FILE (For Auction trades) Soft

15. Valan Balance Sheet Soft

2. AUTHORITY & UNDERTAKINGS

16. Acknowledged copy of Board Resolution / Power of Attorney Hardfor Signing Contract Notes

17. Acknowledged letter of appointment of Compliance Officer Hard

18. Appointment of Principle Officer under PMLA and documented HardPMLA Procedures

19. Documented Risk Management System Hard

20. Documented Internal Control System Hard

21. List of subbrokers & remisiers pending registration Hard

22. List of Employees Hard

23. Brief Note on Funding Arrangement & Insider trading Hard

3. DOCUMENTS & REGISTERS

24. Pool A/c and Beneficiary A/c Statements Soft AND Hard(Transaction as well as Holding Statements)

25. Client wise segregation of securities Soft(If securities are lying in Beneficiary A/c)

26. Utilisation of Funds Statement Hard

27. Security Register / Ledger Hard

28. Copy of statement of accounts for Funds & Proof of HardSending to the clients

29. Copy of statement of accounts for Securities & Proof of HardSending to the clients


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30. Copy of STT Statement & Proof of sending to the clients Hard

31. Copy of Contract Notes (1stcontract note of the Financial Year) Hard

32. Lease Agreement/Rent Receipt for Branch Offices Hard

33. Proof of Designation of Client Bank A/c Hard

34. Investor Grievance Register Soft/Hard

35. Proof of Authorized user for operating BOLT

36. Organization Chart Hard

37. Blank copy of KYC Hard

38. Blank copy of contract note Hard

4. BOOKS OF ACCOUNTS & VOUCHERS

39. Trial Balance, Profit & Loss A/c and Balance Sheet Soft

40. General Ledger (Including Dividend ledger & Brokerage ledger) Soft

41. Client Ledger Soft

42. Bank Book & Cash Book Soft

43. Bank Reconciliation Statements Soft OR Hard

44. Bank Statements Hard

45. Contract Notes along with acknowledgement proof Hard

46. KYC/Member Client Agreements Hard

47. Authority for maintenance of Running Account of clients Hard

48. Disclosure of Own Trading to Clients Hard

49. Sauda Book Soft

50. Bill Summary & Scrip-wise client Summary Soft

51. Demat Instruction Slips & Vouchers Hard

52. Proof of Statutory Payments (SEBI Fees) Hard

53. Sub Brokers Inspection Report Hard

54. ECN Log Report Soft


Members are required to maintain separate set of books for each exchange in which they operate. Further, for a particular

Exchange a separate set of books is required to be maintained for each particular segment of the Exchange in which

the member is operating.


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From the above list of books and documents, few terms are explained herein below.

a) Order Book

SEBI vide Circular no. SMD/POLICY/IECG/1-97 dated February 11, 1997 has provided that the member-brokers

should maintain record of time when a client has placed the order. This information is required to be maintained

by the member-broker in his Order Book. Order book should generally contain the following information:

Identity of the person placing the order

Date and time of order received

Name of the person receiving the order

Name of the client, description and value of the securities to be bought or sold

Terms and conditions of the order stating price/rate limit or price/trade related instructions and time limit (if any)

Details of any modification or cancellation, if any

Reference number of the contract note issued

Serially numbered orders

However, the Exchange may consider accepting Order Log (Ord file) in cases where member-brokers have not

maintained Order Book as prescribed by SEBI.

b) Broker Query File (BRK file)

This statement is downloaded by the member-broker from the Exchange on a daily basis. This statement shows

the details of all the transactions executed by a member-broker across all his terminals for a particular trading day.

It shows Trade ID, Transaction ID, Time of execution of a transaction, scrip quantity, scrip code, type of transaction(such as own, client etc), Client ID and the terminal from which the transaction was executed alongwith date.

c) Register of Transactions (Sauda Book)

All member-brokers are required to maintain a Sauda Book, which contains details of all trades transacted by

them on a day-to-day basis. This is a basic record, which each member-broker is required to maintain regularly

on day-to-day basis. It contains the details regarding the name of the scrip, name of the client on whose behalf the

deals have been done, rate and quantity of scrip bought or sold. These details are maintained date-wise. This

register contains all the transactions, which may be of any of the kind mentioned below:

Member-brokers own business on the Exchange.

Member-brokers business on the Exchange on behalf of clients.

Member-brokers business with the clients on principal-to-principal basis.

Member-brokers business with the members of other Stock Exchanges.

Member-brokers business on behalf of his clients with the members of other Stock Exchanges.

Spot transactions, etc.

d) Contract Notes / Contract note cum bill

The Contract note is a document through which a contractual obligation is established between a member-broker

and a client. This is the prime document on the basis of which all the disputes between the member-broker andhis clients are settled.


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Every member-broker is required to issue contract notes to all his clients for the securities sold and purchased by

him on their behalf within 24 hoursof execution of trade and obtain acknowledgement of the clients alongwith the

date of receipt on the duplicates/counterfoils of the contract notes and preserve the same for future reference

(Bye law 247A of the Rules, Bye laws and Regulation of the Exchange and Exchange Notice No.4914/96 dated

August 13, 1996) The member-broker shall maintain a proper record for dispatch of contract notes to the clients if

the same are dispatched through post, courier etc.Rule 15 of the Securities Contracts (Regulations) Rules, 1957 provides that every member-broker of a recognized

Stock Exchange shall maintain and preserve counterfoils or duplicate of the contract notes issued to the clients for

a period of twoyears. (Rule 15 of SCR Rules and exchange Notice No. 20050805-20 dated August 5, 2005).

When a member-broker is acting as an agent for his client, he is required to issue contract note in Form A or

contract note cum bill in Form AA. Member-brokers are permitted to issue Contract note cum bill in Form AA to

include the particulars normally provided in the bills, in the contract notes issued by them to their clients, so that

they need not issue separate bills to their clients. Members brokers are advised to ensure that the contract notes

are issued strictly in accordance with the format prescribed either in Form A of Regulation 14.2 of the Rules, Bye-

Laws and Regulations of the Exchange or as per Form AA as prescribed in the Exchange Notice No. 20060627-

18 dated June 27, 2006 and Notice no. 20060630-02 June 30, 2006).

When a member-broker is dealing with constituents as Principals, the contract note is required to be issued in

Form B or Contract note cum Bill is required to be issued in Form BB.

Formats of Form AA and Form BB are merely recommendatory in nature and member-brokers are at liberty to

include any other additional matter or information therein as they may desire, without diluting/altering the basic

Form A and Form B of the contract note stipulated in Appendix B to Regulation 14.2 of the Rules, Byelaws and

Regulations of the Exchange.

The member-brokers are required to issue contract notes to clients, which are serially numbered. The serial

number on the contract notes shall be on an annual basis and not on a daily basis. The contract notes issued to

the clients shall be numbered with unique running serial number commencing from one which shall be reset onlyat the beginning of every financial year. Financial year for the purpose of resetting the serial number of contract

note is April to March.

The Contract Notes are required to be signed either by the member-broker himself or his constituted attorney.

Further, a copy of Board resolution / Power of Attorney, authorizing the person to sign the contract notes, is

required to be filed with the Exchnage (Bye-law 223 and Rule 213 of the Bue-Laws, Rules & Regulations of the

Exchange and Exchnage notice no. 1024/98 dated March 20, 1998). In case a sole proprietor/partnership firm

wishes to authorise another person to sign the Contract Notes, then the member-broker is required to execute a

power of attorney on a stamp paper of Rs. 100/- authorising another person (s) to sign the contract notes. In case

of corporate member, a board resolution is required to be passed to authorise a person (s) including Directors to

sign the contract notes. The power of attorney / board resolution(s) together with specimen signatures of authorisedsignatories are required to be filed with the Membership Department of the Exchange.

The member-brokers are required to quote their Permanent Account Number (PAN) as well as PAN of their clients

on the contract note issued to clients, if the value of the contract exceeds Rs. 1 lakh or more pursuant to Rule

114B of the Income Tax Rules, 1962. (Exchange Notice no. 20020930-4 dated September 30, 2002)

The member-brokers are also required to quote the unique client code allotted to the client on the contract note.

Electronic Contract Note (ECN)

As per SEBI Circular No. MRD/DoP/SE/Cir-20/2005 dated September 8, 2005, digitally signed ECNs are to be

sent only to those clients who have opted to receive the contract notes in an electronic form, either in the MemberClient agreement / Tripartite agreement or by way of a separate letter.


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All ECNs sent through e-mail are to be digitally signed, encrypted, non-tamperable and complying with the provisions

of the IT Act, 2000.

Whenever an Electronic Contract Note is sent, acknowledgement of e-mail, proof of delivery i.e., log report generated

by the system at the time of sending the contract notes is to be maintained by the member broker for the specified

period, in a soft and non-tamperable form. Further, a log report to provide the details of contract notes that are not

delivered to the client / rejected or bounced e-mails.

Proper communication is to be made in the agreement executed with the client for issuing Electronic Contract

Notes that non-receipt of bounced mail notification shall amount to delivery of the contract note at the e-mail ID of

the client.

Physical contract note to be sent to the clients, wherever an Electronic Contract Note has not been delivered to

the client or has bounced back from the e-mail ID of the client. Further, proof of delivery of such physical contract

notes is to be maintained by the member.

In addition to the e-mail communication of the ECN to the client, it has to be simultaneously published on the web-

site of the member in a secured way and enable easy access to the clients.

The member-brokers can issue contract notes authenticated by means of digital signatures (Electronic Contract

Notes ECNs) provided that the member-broker has obtained digital signature certificate from certifying authority

under the Information Technology Act, 2000. Members may kindly refer to SEBI Circular Nos. SEBI/SMD/SE/15/

2003/29/04 DTAED April 29, 2003 & SMDRP/Policy/Cir 56/2000 dated December 15, 2000 & Exchange Notice

No. 20050909-13 dated September 9, 2005 stipulating conditions for issue of Electronic Contract Notes by members.

Issue of Contract notes in case of multiple trades for a single order .

In case of multiple trades resulting from single order, at the request of the clients, the member-brokers may issue

contract notes with weighted average price (WAP), as per the following formula:

Total Value of the Shares traded for an order

Total Number of Shares traded for an order

The member-broker shall ensure that details of trades such as Order No., Trade No., Trade Time, etc is attached

to the contract note as an Annexure when a consolidated trade is shown in the contract note. The member-broker

shall mention the words as per annexure in the place provided for trade no. and trade time in the format of the

contract note prescribed by the Exchange. (Exchange notice no. 4646/97 dated November 29, 1997).

The Exchange has prescribed new format of contract note. Trading Members are advised to ensure that the

revised format of contract note is strictly implemented latest by October 23, 2006.

A statement indicating Securities Transaction Tax (STT) charged on the transaction should be separately given to

the clients as an annexure to the contract note or it can be sent to the clients on an annual basis. (Exchange

Notice No.2004092713 dated September 27, 2004 and No.20060929-22 dated September 29, 2006).

e) Margin Deposit Book

The member-brokers are required to maintain a margin deposit book wherein details of all the margins deposited

with the Exchange are to be recorded. Regulation 17 (1) of SEBI (Stock-brokers and Sub-brokers) Regulations,

1992. The Exchange may consider accepting DM/DS downloadable files available with the members in cases

where member-brokers have not maintained separate Margin Deposit Book.

f) Investor Grievance Register and designated e-mail ID

Members are required to maintain Investor Grievance Register for writing investors grievances (Notice

WAP =


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No.20040306-9 dated March 6, 2004 and Notice No.20070906-10 dated September 06, 2007).

SEBI vide its circular No.MRD/DoP/Dep/SE/Cir-22/06 dated December 18, 2006 advised all the member-brokers

to designate e-mail IDs of their respective grievance redressal division and / or of their compliance officers exclusively

for the purpose of registering complaints by investors and display such e-mail IDs and other relevant details

prominently on their websites and in the various materials / pamphlets / advertisement campaigns initiated by

them for creating investor awareness. (Exchange Notice No.20070131-11 dated January 31, 2007).

g) Clients Ledger

Every member-broker is required to maintain clients ledger in respect of all the clients registered with him. This

ledger contains the details of the bills raised by the member-broker on the clients and the payment received from

or made to them. Inspection of this ledger can bring out the cases of delay by a member-broker in making payment

to the clients. Receipt/payment from the ledger account may also indicate whether the member-broker is involved

in fund-based activities, which is in violation of the guidelines contained in the circular issued by SEBI.

h) Securities Ledger

A member-broker is also required to maintain a Register or Ledger Account of securities, client wise and security

wise, giving, inter alia, the following details:

Date of receipt of the security.

Quantity received.

Party from whom received.

Purpose of receipt.

Date of delivery of the security.

Quantity Delivered.

Party to whom delivered.

Purpose of Delivery, and

A Separate register or ledger in respect of its own securities.

Thus, member is required to maintain a register or ledger account of securities, client-wise and security-wise,

giving, inter alia the details of receipt/delivery of securities and a separate register or ledger in respect of own

securities as per Bye-Law 247A(2) and Reg. 17(1) of the SEBI (Stock Brokers & Sub Brokers) Rules, 1992.

The Exchange may consider accepting holding statement of securities as on a particular date acknowledged by

the clients.

i) Dematerialised Securities

All member-brokers are required to open two separate demat accounts with their Depository Participants (DPs)

for handling the receipt and delivery of own shares and client shares.

One such account is Own Beneficiary Account wherein the demat securities belonging to the member-broker for

his own account are held and the other is Pool Account wherein the demat securities of the clients are temporarily

lodged for transfer to/from the Clients/Clearing House in the Pay-in/Pay-out. In case of sale of securities by

clients, the clients transfer the securities to the member-brokers Pool Account before the pay-in and the member-

broker transfers the same from the Pool Account to the Clearing House on the Pay-in day. In case of purchase of

securities by the clients, the Clearing House transfers the securities to the Pool Accounts of the member-brokersand the member-brokers then transfers the same to the Demat Account of the individual client. The member-


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brokers are required to maintain a proper record of all shares received and delivered from their Pool Account as

well as preserve acknowledged copies of the delivery instructions given to their DP for transferring the securities

from the Pool Account to the Clients account after the Pay-Out.

In case of clients shares lying with the member, they have to be kept in a separate Beneficiary Account and the

member is required to maintain client wise segregation of clients securities lying with the member. (Bye-law 247A

and Exchange Notice No. 4850/97 dated December 10, 1997).

Nevertheless, securities of clients are to be received and delivered from/to the respective beneficiary account of

the client only. (Exchange Notice No. 20030903-5 dated September 3, 2003).

j) Bank Book and Cash Book.

The member-brokers are required to maintain separate bank accounts for own funds and clients funds (Bye-law

247A of the Rules, Bye-laws and Regulations of the Exchange). Funds received from the clients and payments

made to the clients should be reflected in the Client Bank Account. Client Account should be designated as Client

Bank Account and the word Client should appear in the title of the account. (Bye-law 247A (1) and Exchange

Notice No. 4850/97 dated December 10, 1997).

All fund transactions relating to members own trading and relating to own/office expenses should be routed

through Own Bank Account. Transactions other than those of clients should not be routed through Client Bank

Acount. Further, no overdraft facility should be availed on the Client Bank Account (Bye-law 247A (1) and Exchange

Notice No. 4850/97 dated December 10, 1997).

Members should not accept any cash from clients, whether against obligation or as margin for purchase of securities,

except in case of exceptional circumstances and to the extent not in violation with the Income Tax requirement as

may be in force from time to time. (Exchange Notice No. 20030903-5 dated September 3, 2003 and Exchange

Notice No. 20050324-21 dated March 24, 2005).

Members are to refrain from fund lending and borrowing activities, except those in connection with or incidental tothe securities business. [Rule 8(1)(f) and 8(3)(f) of Securities Contract (Regulations) Rules, 1957and SEBI circular

no.SMD/POLICY/CIR-6/97 dated May 7,1997].


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l REGULATION OF CLIENT-BROKER TRANSACTIONS

All transactions relating to clients are to be routed through the client bank account. A member-broker may open asingle client bank account or multiple client bank accounts. Whenever a member-broker trades as a principal, he cannot

use the clients account for payment.

No money shall be withdrawn from clients account other than money in respect of which there is a liability of clients to

the member-broker, provided that the money so drawn should not exceed the total of the money so held for the time

being for each such client.

Member-brokers should not use clients account for making payment for, Office Expenses such as, salary, Telephone

Bills, TDS payments, Purchase of Office Equipment, etc.

It is compulsory for all member- brokers to keep separate accounts for clients securities and to keep such books of

accounts, as may be necessary, to distinguish his securities from those of the clients securities. Such accounts for

clients securities shall, inter-alia, provide for the following:

a. Securities received for sale or kept pending delivery in the market;

b. Securities fully paid for, pending delivery to clients;

c. Securities received for transfer or sent for transfer by the member- broker, in the name of client or his nominee(s);

d. Securities that are fully paid for and are held in custody by the member-broker as security/margin etc. The member-

broker shall obtain proper authorisation from the client for the same.

e. Fully paid for clients securities registered in the name of the member-broker, if any, towards margin requirementsetc.;

Member-broker should ensure payment of money/delivery of securities to the clients within 24 hours of the declaration

of payout by the Exchange in respect of the concerned settlement.

At times payment may be delayed on specific instructions of the client. In such cases, member-broker should obtain

written confirmation from the clients. The member-brokers may be allowed to maintain running account of the clients,

if in respect of such accounts, the member-broker is having general authority from clients to maintain running account

without any obligation to receive payment/ delivery of securities strictly within 24 hours of declaration of pay-out by the

Exchange in respect of the concerned settlement.

The Interest, dividend or any Bonus / Right shares received on the securities of the clients should be passed on to theclients immediately.

Pursuant to provisions contained in SEBI circular no. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 it is to

be noted that member-brokers should not accept cash from the client whether against obligations or as margin for

purchase of securities and / or give cash to the clients against sale of securities.

All payments should be strictly received / made by the member-brokers from / to the clients strictly by account payee

crossed cheque / demand drafts or by way of direct credit into the bank accounts of the clients concerned through

EFT, or any other mode allowed by RBI.

The member-brokers should accept cheques drawn only by the clients and also issue cheques in favour of the clients

only, for their transactions. However, in exceptional circumstances the member-broker may receive the amount in cash,to the extent permitted by the Income Tax department / authorities from time to time.

4. DEALINGS WITH CLIENTS


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Similarly, receipt/delivery of securities in demat mode should also be directly to / from the beneficiary account of

the respective client except delivery of securities to a recognised entity such as approved intermediaries under the

approved scheme of the stock exchange and / or SEBI.

l REGISTRATION OF CLIENTS.

SEBI, in order to bring uniformity in documentary requirements across different segments and Exchanges and to avoidduplication and multiplicity of documents, has formulated uniform set of documents to be entered into and maintained

by the member-brokers with their clients and sub-brokers. SEBI vide its circular no.SEBI/MIRSD/DPS-1/Cir-31/2004

dated August 26, 2004 directed that the requirements of SEBI (Stock Brokers and Sub brokers) (Amendment)

Regulations, 2003 relating to change in role of sub brokers and their main brokers, including format of the Model Tripartite

Agreement between broker, sub-broker and clients shall come into effect from December 01, 2004. This was extended

by SEBI upto April 01, 2005 vide its circular no.SEBI/MRD/DOPS/Cir-44/2004 dated December 29, 2004 (Exchange

Notice no.20040827-11 dated August 27, 2004) which are as follows :

(a) Client Registration Form (KYC) (Uniform across all Segments & all Exchanges)

(b) Member-Client Agreement (Uniform across all Segments but different agreements for different Exchanges)

(c) Model Tripartite Agreement (Applicable only in Cash Segment and different agreements for different Exchanges)

(d) Risk Disclosure Document (Uniform across all Segments & all Exchanges) and

(e) Broker - Sub broker Agreement

l KNOW YOUR CLIENT FORMS (KYC)

SEBI has asked all the member-brokers of the Stock Exchanges to maintain a database of their clients. This concept

is known as KNOW YOUR CLIENT. SEBI has devised model formats for the Client Registration Form, Broker Client

Agreement and Tripartite Agreement between Broker-Sub broker and Clients. Different format has been prescribed for

individuals and non-individuals. The stock exchanges/member broker may incorporate any additional clauses in these

documents provided these are not in conflict with any of the clauses in the model document, as also the Rules,

Regulations, Articles, Byelaws, circulars, directives and guidelines.

SEBI has put onus on the member-brokers to complete all the details pertaining to the clients in Know Your Client

form.

It is reiterated that it shall be the responsibility of the member-broker to satisfactorily identify his clients. For the purpose,

the member-broker may also seek additional information, if any, so as to satisfy himself about the antecedents of the

client. It would be brokers responsibility to provide clients details as and when required.

Further, the requirement of obtaining Client Registration Form may be waived for SEBI registered Foreign Institutional

Investor, Mutual Funds, Venture Capital Funds and Foreign Venture Capital Investors, Scheduled Commercial Banks,

Multilateral and Bilateral Development Financial Institutions, State Industrial Development Corporations, Insurance

Companies registered with the Insurance Regulatory Development Authority (IRDA) and Public Financial Institution as

defined under section 4A of the Companies Act, 1956. Further the member-broker and these clients may at their

discretion, decide about the requirement of entering into broker-client agreement and bringing the contents of Risk

Disclosure Document to the notice of such clients.

The member-broker is required to disclose to his existing clients whether he does proprietary trading. Further, the

broker is also required to disclose this information upfront to his new clients at the time of entering into the Know

Your Client Agreement. In case a broker does not presently trade on proprietary account but chooses to do so at a

later date, he is required to disclose this to his clients before carrying out any proprietary trading. (Exchange Notice

No. 20031125-7 dated November 25, 2003).


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Member-brokers shall exercise due diligence with regard to trading by the clients vis--vis their income levels and

other parameters / information given in the Client Registration Forms. Member-brokers may seek additional information,

if any, so as to satisfy themselves about the antecedents of their clients.

Member-brokers are advised to exercise due and adequate caution and impress upon their local as well as upcountry

clients as well as sub-brokers to know all their clients thoroughly before executing trades on their behalf. Member-

brokers should also exercise offline surveillance over the transactions routed through their BOLT Terminals by their

clients / sub-brokers to detect the various kinds of abuses or misuse of the systems and take adequate steps to present

their recurrence. This is all the more necessary in view of the countrywide expansion of BOLT network and the increased

volume of business along with risk involved.

Member-brokers are advised to evolve and put in place an appropriate mechanism to assess financial strength,

performance tracking, trading pattern vis--vis their clients position and dealings in respect of all those clients in cash

segment who have value of receivables and deliverables (gross) taking into account two consecutive settlements of

Rs. 25 lacs or more.

Broker Client Agreement

Member-broker shall enter into an agreement with all his clients before accepting orders on behalf of clients. Thisagreement has to be on a non-judicial stamp paper of adequate value duly signed by the parties on all pages, and

the clauses in the agreement should be as prescribed by SEBI.

This agreement contains clauses defining the rights and responsibility of client vis--vis broker. The member-

broker can also add further clauses in the model agreement as per their requirement, provided these are not in

conflict with any of the clauses in the model document, as also the Rules, Regulations, Articles, Byelaws, circulars,

directives and guidelines.

Tripartite Agreement between Broker-Sub-Broker and Clients

A sub-broker shall enter into a tripartite agreement with his client and with the main broker specifying the scope of

rights and obligations of the sub-broker, main broker and clients of sub broker.

Risk Disclosure Document

Member-brokers of the Exchange are required to get the Combined Risk Disclosure Document (for Cash and

Derivatives Segment) signed by all their clients (existing as well as new). (Exchange Notice No. 20040827-11

dated August 27, 2004)

Risk Disclosure document is a document detailing the basic risks involved in trading on a stock exchange, the

rights and obligations of the clients, etc. The document makes the investors aware of the fact that things like

investment in equity shares, or other instruments traded on the stock exchange, is generally not an appropriate

avenue for those with limited resources or limited trading experience and low risk tolerance. It asks the investor toconsider whether such trading is suitable for them in the light of their financial condition. Investors are also made

aware of the fact that there can be no guarantee of profits, or no exception from losses. Highlighting these points,

the Exchange has devised a combined Risk Disclosure Document for both Cash and Derivatives Segment for the

purpose of operational convenience to the member-brokers.

SEBI vide circular number SEBI/MIRSD/DPS-I/Cir-31/2004 dated August 26, 2004 has prescribed uniform document

requirement for trading namely, (a) Client Registration Form (b) Member Client Agreements (c) Tripartite agreement

between broker-sub broker and clients wherever applicable and (d) Risk Disclosure documents. Paragraph 3 of

the said circular states that the 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, as also the Rules, Regulations, Articles,

Byelaws, Circulars, directives and guidelines. Moreover, the trading member may also seek additional informationso as to satisfy himself about the antecedents of the client.


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Trading members are required to ensure the following:

(1) At the time of registering a client, the client shall be informed in writing that only the documents stated above are

mandatory and any additional clause or documentation shall be voluntary and at the discretion of member and

client.

(2) Additional documents shall state at the beginning in bold that the document is voluntary.

(3) However, if such documents are required in order to ensure smooth functioning of special facility such as internet

trading offered by the trading member, the client shall be informed in writing clearly that such documents are

voluntary and the client need not execute such documents if he/she does not wish to use that facility.

(4) Such documents, if any shall also recognize specifically the right of the client to terminate the document. In such

an eventuality, the trading member may terminate the special facility.

(5) The docket or folder containing draft mandatory documents for signing and the checklist containing mandatory

documents shall not include draft voluntary documentations, if any. Further, these mandatory documents should

relate to only opening the account for stock trading and not for any other additional business/activity like opening

of Bank Account, DP Account etc.

(6) Ensure that Client Registration details as contained in the Client Registration Form / Know Your Client (KYC) form,

including financial details are complete in all respects, correctly obtained and are reviewed and updated periodically.

Further, ensure to monitor the trading activities of the clients based on his financial details as contained in the

clients KYC. (Exchange Notice No. 20061120-9 dated November 20, 2006).

(7) No documentation shall give any exclusive right or control to the trading member or third party over the demat

account or ledger account or bank account of the client except to the extent of and restricted to the client (including

family members who have given authorization) obligation to the trading member in respect of the transactions

done or to be done (like upfront margin) by the trading member on behalf of the client on the Exchange. (Exchange

Notice No.20060704-6 dated July 04, 2006).


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Members should not accept any cash from clients, whether against obligation or as margin for purchase of securities,

except in case of exceptional circumstances and to the extent not in violation of the Income Tax requirement as maybe in force from time to time. In view of the above, when such exceptional circumstances arise the members are

directed to inform the Department of Surveillance & Supervision of the Exchange within 15 days to seek an approval

in this regard on a case-to-case basis (Exchange Notice No. 20030903-5 dated September 3, 2003 and Notice No.

20050324-21 dated March 24, 2005).

All payments should be strictly received / made by the member-brokers from / to the clients strictly by account payee

crossed cheques / demand drafts or by way of direct credit into the bank accounts of the clients concerned through

EFT, or any other mode allowed by RBI.

The member-brokers should accept cheques drawn only by the clients and also issue cheques in favour of the clients

only, for their transactions. Similarly in case of securities, giving taking delivery of securities in demat mode should

also be directly to/from the beneficiary accounts of the respective clients except delivery of securities to a recognised

entity such as approved intermediaries under the approved scheme of the stock exchange and/or SEBI. (SEBI Circular

no. SEBI/MRD/SE/Cir-33/2003/27 /8 dated August 27, 2003). ((Exchange Notice No. 20030903-5 dated September 3,

2003).

The delivery of funds & securities has to be made to the clients within 24 hours of declaration of pay-out unless the

client has requested otherwise. (Bye-Law 247A(2) and Exchange Notice No. 20020917-2 dated September 17, 2002)

5. MODE OF PAYMENT & DELIVERY


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Member-brokers are mandatory required to appoint a Compliance Officer as per Regulation 18A of the SEBI (Stock

Brokers and Sub-brokers) Regulations, 1992. The concerned Compliance Officer shall be responsible for monitoringthe compliance by the concerned member-broker in respect of the SEBI Act, 1992, Rules, Regulations, notifications,

guidelines, instructions, etc issued by SEBI / Central Government. Monitoring redressal of the grievances of the investors

is also the responsibility of the Compliance Officer. Member are required to keep the Exchange informed of the

appointment of compliance officer (Exchange notice no. 20021001-5 dated October 01, 2002).

Compliance Officer shall immediately and independently report to SEBI any non-compliance observed by him.

6. COMPLIANCE OFFICER


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Securities and Exchange Board of India (SEBI) vide its circular no. SMDRP/Policy/CIR-39/2001 dated July 18, 2001

made it mandatory for all member-brokers to use Unique Client Codes (UCC) for all clients.

For this purpose, member-brokers shall allot a Client Code to each of his clients including the clients of his sub-brokers,

which is Unique. The same code shall not be allotted to any other client in his office or at their branches or to the

clients of sub-brokers and not more than one code should be allotted to any of clients. (Exchange Notice No.93424/

2001 dated July 23, 2001, No. 20040128-3 dated January 28, 2004, No.20060927-21 dated September 27, 2006 and

No.20060928-17 dated September 28, 2006). The Client Code allotted to the clients including the clients of sub-brokers

are required to be registered with the Exchange.

The member-brokers are also required to upload the PAN details of their client to the Exchange as part of the UCC

database and not to execute the trade for the client unless the PAN details of respective clients have been collected,

verified with the Income Tax website and uploaded to the Exchange.(Exchange Notice no.20061229-26 dated December

29, 2006 & 20070220-26 dated February 20, 2007 )

Member shall map the details of Unique Client Code of all their clients with their respective PAN/ Driving License etc.

in their back-office. (Exchange notice no. 20030115-5 dated January 15, 2003). Member-brokers are required to maintain

and preserve for a period of seven years a mapping of client codes used at the time of order entry in the trading.

Further, the Stock Exchange is required to maintain a database of client details submitted by member-brokers. The

Exchange shall maintain historical records of all submissions for a period of seven years.

The Exchange uploads to the members on a daily basis a cumulative file NPddmmyy.xxxx through the All Data Option

of Dload32, containing the client codes where trades have been executed either without registering the Client code or

without uploading the PAN details of the client to the Exchange database. The codes attract a Penalty of Rs.100/- per

code per day till the time these codes are registered / PAN details of these clients are uploaded in the ExchangeDatabase. (Exchange Notice no. 20070104-12 dated January 04, 2007).

For habitual offenders, who violate the requirement of timely updation of UCC along with PAN details of their clients,

higher penalties are prescribed vide Exchange Notice No. 20080307-7 dated March 07, 2008.

A special facility is provided to the members for modification of client codes of executed trades. This modification can

only be done in the post closing session between 3.40 pm to 4.00 pm. A control has been provided in the Admin

Terminal of the member-brokers facilitating the main member-broker to control the user who can be permitted to perform

this activity.

Member-brokers were advised vide notice no 20030329 1 dated March 29, 2003 to ensure that the correct client

codes are entered while placing the orders and the facility of modification of the client codes should be used sparinglyto rectify bonafide mistakes for genuine errors and to the minimum extent possible. Member-brokers are also advised

not to indulge in modification of client codes through their back office software and not to transfer trades from one

client to another client or from own account to clients account or vice-versa. Rectification, if any should be strictly

carried out during the post closing session only. (Exchange Notice No.20060221-11 dated February 21, 2006).

Members are required to ensure that the Client type is entered correctly at the time of placing the orders on the BOLT

system and in case non-institutional trades are erroneously entered as Institutional trades, the same should be rectified

during the post closing session. Further, where the client type is not rectified, the same has to be immediately reported

to the Exchange for collection of the required margin. (Exchange Notice no. 20050919-25 dated September 19, 2005).

7. UNIQUE CLIENT CODE


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As per SEBI circular no MRD/DoP/SE/Cir-18/2006 dated September 26, 2006 PAN no. has been made mandatory

w.e.f. January 01, 2007 for dealing in the cash segment. Accordingly, trading members are required to collect copiesof PAN cards from their existing as well as new clients and maintain the same in the record after verifying with the

original.

Trading members can execute transactions in the cash segment on behalf of any entity/person only if the PAN details

of such entity/person has been collected, cross-checked with the details on the website of the Income Tax Department,

and uploaded by them to the Exchange as part of the Unique Client Code (UCC) details of the respective entity/person.

Trading members will to ensure that:

1. All new UCC registrations are mandatorily accompanied with the PAN details of the client.

2. Name and PAN details of the clients already uploaded by them in the UCC database of the Exchange is correct

and verified with the details on the website of the Income Tax Department.

Trading members are also requested to ensure that Name and PAN of the client as appearing on the PAN Card is

correctly uploaded by them to the Exchange. Trading members are also required to maintain a photocopy of the PAN

card of the client in their records. (Exchange Notice No.20060908-13 dated September 08, 2006)

SEBI vide circular no MRD/DoP/SE/Cir-05/2007 dated April 27, 2007 has decided that Permanent Account Number

(PAN) would be the sole identification number for all participants transacting in the securities market, rrespective of

the amount of transaction.

Members are also advised to print PAN of the constituents on the contract notes, whenever the value of the contract

exceeds Rs.1 lakh (Exchange Notice no. 20020930-4 dated September 30, 2002)

8. PERMANENT ACCOUNT NUMBER (PAN)


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The Exchange installs trading terminals at the member-brokers or their sub-brokers offices on their request. As per

SEBI Circular No. SMDRP/Policy/CIR-49/2001 dated October 22, 2001, the member-brokers should install tradingterminals only at their registered offices, branch offices and their registered sub-brokers offices. Staff operating the

BOLT TWSs must be on the member-brokers payroll. Remisier is authorized to operate BOLT at member-brokers

office only. (Exchange Notice No.104616/2001 dated November 12, 2001 & Notice No. 20040205-13 dated February

05, 2004).

An office is considered as member-brokers office only if it is rented/owned/licensed by a member-broker of the

Exchange. In fact, member-brokers should have effective control over the functioning of those offices. A member-

broker cannot locate his trading terminal at any other location. It is clarified that the trading terminals cannot be installed

at Remisiers office or clients place.

TWS / IML Registration on BOLT

The Exchange had been permitting addition of new trading terminals and also installation of IML terminals for business

expansion of members and the members availing of IML are required to execute Affidavit-cum-Undertaking regarding

use of the IML software.

Members are required to upload the information for all their TWS / IML along with the details of the approved users

through BOLT TWS no. 1 which allows for addition / updating / deactivation / activation of TWS / IML information on

the BOLT. The approved users i.e. employees of the member, remisiers operating from the members office and sub-

brokers of the member can only be approved user for operating the trading / IML terminals.

Trading terminals / IML terminals allotted and particulars of which are not uploaded/wrong uploaded as above shall be

treated as unauthorized terminals and renders the concerned members liable for disciplinary action as may deem fit

including withdrawal of IML/additional terminals. (Exchange Notice nos. 20050118-3, 20050808-26, 20050819-9 &

20050819-19 issued on January 18, 2005, August 8, 2005, August 16, 2005 & August 19, 2005 respectively).

In order to ensure compliance with registration of the IML/BOLT terminal location details to the Exchange through the

CR module of the BOLT No.1, penalty norms are prescribed. Penalty of Rs 100/- per day per terminal will be levied till

the time the location ID details are registered with the Exchange. (Exchange Notice No. 20070517-22 dated May 17,

2007).

The Exchange will upload a file name LOC_DTL.xxxx (clg. no.) from April 24, 2006 onwards to all trading members

containing information regarding locations which are not registered or are incorrectly registered and orders are being

punched from that location. This file would contain one record consisting of the fields in respect of the unregistered

location such as, Member ID, Order ID, Scrip Code, Quantity, Buy/Sell, Location ID, Date & Time.

For each office of the trading member and their sub-brokers where BOLT / IML terminal is located, it would be mandatory

for the trading members to have atleast one user who has passed BSEs Certification on Securities Market (BCSM).

Further, for every block of additional five users, the trading member needs to have one BCSM certified user. The last

date for compliance of the above requirement is April 30, 2008 (Exchange Notice No.20070522-25 dated May 22,

2007 and No.20071024-28 dated October 24, 2007).

9. TRADING TERMINALS (BOLT / IML)


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It has been observed that certain member-brokers are putting large number of orders on pro-account from various

locations rather than from one location as specified by them.

With a view to check such misuse of the above facility, the member-brokers are required to comply with the following:

a. Members are required to place their proprietory transactions under own category.

b. Facility of placing orders on own account through trading terminals shall be extended only at one location of the

member-brokers as specified / required by the member-brokers

c. Trading terminals located at places other than the above location shall have a facility to place orders only for and

on behalf of clients by entering client code details as required / specified by the Exchange / SEBI.

d. In case any member-broker requires the facility of using own account through trading terminals from more than

one location, such member-broker shall be required to submit an undertaking to the stock exchange stating thereason for using the own account at multiple locations and the Exchange may, on case to case basis after due

diligence, consider extending the facility of allowing use of own account from more than one location. (Exchange

Notice no. 20030909-1 dated Septembar 09,2003).

Further, member-broker is required to disclose to his existing clients whether he does proprietary trading. Further, the

broker is also required to disclose this information upfront to his new clients at the time of entering into the Know

Your Client Agreement. In case a broker does not presently trade on proprietary account but chooses to do so at a

later date, he is required to disclose this to his clients before carrying out any proprietary trading. (Exchange Notice

No. 20031125-7 dated November 25, 2003).

10. PRO-ACCOUNT TRADING


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Maximum rate of brokerage that can be charged by a member-broker is provided in the Bye-laws 205, Regulation

14.1 & Notice No. 5116/93 dated November 11, 1993. As per this Regulation, the brokerage charged by a member-broker shall not exceed Rs. 0.25 per share or 2.5 % of the contract price, whichever is higher.

The maximum brokerage is exclusive of statutory levies but inclusive of the brokerage charged by a sub-broker. In

case member has transacted for the clients of sub broker, the aggregate amount of brokerage charged by trading

member to sub broker and sub broker to his client shall not exceed the maximum scale of brokerage prescribed by

the Exchange & SEBI in this regard. (Exchange Notice No. 20051207-10 dated December 7, 2005).

The brokerage shall be charged separately from the clients and shall be indicated separately from the execution price

of transaction (s) in the contract note (s).

Member-broker shall levy brokerage on all the trades executed on behalf of its constituents except those, which are in

the nature of charity. (Bye-law 205 and 215 of the Rules, Byelaws and Regulations of the Exchange).

Bye Laws 218 (a) & (b) of the Rules, Bye Laws & Regulations of the Exchange has also been amended so that the

sub brokers can also share brokerage with the member, in addition to the persons specified in the said Bye laws and

subject to such terms of brokerage as agreed upon in writing by way of agreement & as per the scale of brokerage

prescribed by the Exchange or SEBI in this regard from time to time.

11. BROKERAGE


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A large number of disputes arise between the member-brokers / sub-brokers and their clients pertaining to payments

due to/from the clients. This may be due to non-submission of statement of accounts of funds / securities by the member-brokers to the clients on a regular basis.

In order to avoid such incidences, member-brokers are advised to adopt the following practices in terms of the Exchange

Notice Nos. 20020906-3 dated September 6, 2002, No. 20030114-9 dated January 14, 2003 and No.20080307-8 dated

March 07, 2008 : -

1. Member-broker shall send to their clients, a complete Statement of Accounts for both funds and securities in

respect of each of their clients at least once in every quarter within a month of the expiry of the said period.

2. The statement shall also include error reporting clause stating that the client shall report errors, if any, in the

statement within 30 days of receipt thereof to the member-broker.

3. In respect of institutional clients, the said requirement is applicable in case the member-brokers pay or receive

funds and receive or deliver securities from or to the institutional clients directly and not through custodians.

4. Member-broker should maintain an acknowledgement/confirmation record of dispatch of Statement of Accounts

to the clients.

In the case of brokers providing Internet Trading facility and providing an access to an on-line accounting viewing and

print-out facility, it would be treated as sufficient compliance, if they send the Statement of Accounts by email or where

a facility has been given to the clients to verify the above statements on the Internet trading terminal itself.

12. STATEMENT OF ACCOUNTS FOR FUNDS / SECURITIES


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The mandatory requirement of collection of 10% upfront margin from non-institutional clients has been done away

with the implementation of Comprehensive Risk Management framework w.e.f May 30, 2005. However, SEBI hasdecided that, the Members should have a prudent system of risk management to protect themselves from client default

and the quantum, form and mode of collection of margins from the clients is left to the discretion of the member broker

w.e.f. May 30, 2005.

As per SEBI Circular No.MRD/SE/CIR-12/2005 dated May 13, 2005 members are therefore required to have a prudent

system of risk management which has to be well documented in writing and be made accessible to the clients and the

Exchange. (Exchange Notice No.20050513-26 dated May 13, 2005).

In order to provide a level playing field to all the investors in the Cash Market as in the case of Derivatives Market,

SEBI has provided that all the Institutional Trades in the Cash Market would be subject to payment of margins as

applicable to transactions of other investors. To begin with, from April 21, 2008, all institutional trades in the cash market

would be margined on a T+1 basis with margin being collected from the custodian upon confirmation of the trade.

Subsequently, the collection of margins would move to an upfront basis. (SEBI Circular No. MRD/DoP/SE/Cir- 06 /

2008 dated March 19, 2008).

13. COLLECTION OF MARGINS FROM CLIENTS


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Reports are being downloaded to member brokers on a daily basis, which give the client-wise details of VaR, ELM

and Mark To Market margins levied by the Exchange.

As per the directions of SEBI, the member brokers are required to inform their clients about the margins levied on

their traded positions on a day-to-day basis by way of either sending the margin information through email or along

with the physical contract notes. The member brokers are also advised to include the following information in the

statements being provided to their Clients:

1. Total collateral deposits placed by the client upto day T-1 (with break-up in terms of cash, FDRs, BGs and securities).

2. Collateral deposits utilised towards margins upto the end of T-1

3. Collateral deposits placed by the client on day T (with break-up in terms of cash, FDRs, BGs and securities)

4. Margin adjustments for T day

5. Collateral status (balance with the member / due from the client) at the end of T day

The member brokers are required to comply with the said requirements with effect from February 18, 2008 (Exchange

Notice No.20080211-19 dated February 11, 2008).

14. CLIENT MARGIN INFORMATION(MARGIN REPORTING TO CLIENTS)


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Where a member-broker either buys or sells securities directly from / to his client without entering the client order on

the trading system of the Exchange, then he is said to be entering into transaction on principal-to-principal basis withhis client. Member-brokers are allowed to enter into principalto-principal transactions with their clients, subject to certain

condition.

The following are the requirements regarding transactions on principal-to-principal basis:

1. Written consent of the client is to be obtained for executing a transaction on principal-to-principal basis, as required

under Section 15 of the Securities Contracts (Regulation) Act, 1956 and Bye-law 199 of the Rules, Byelaws and

Regulations of the Exchange. Such consent from the client is to be obtained within a period of three days of

execution of the transactions. Also separate consent is required to be obtained from a client for each transaction.

One general letter consenting to all the transactions of this nature by a client will not do.

2. Contract notes issued by the member-brokers to the clients, when dealing with them as principals, are to beissued in accordance with Form B or BB as prescribed in Regulation 14 of the Rules, Bye-laws and Regulations

of the Exchange.

3. Such transactions can be entered only as spot delivery contracts and required to be reported to the Exchange on

the same day pursuant to SEBI circular no. SMD/RCG/CIR/(BKG)/293/95 dated March 14, 1995 and Exchange

Notice No.20040306-9 dated March 6, 2004. The Exchange has provided a facility on BOLT to the member-

brokers to report Spot Delivery Bargains using DUS Software.

4. The transactions done on the spot basis are to be settled on the same day as the date of the contract or on the

next day as provided in section 2 (i) of the Securities Contracts (Regulation) Act, 1956. The Exchange does not

guarantee the settlement of these bargains.

It may be pertinent to mention that when a member-broker is transacting with client on principal-to-principal basis,

much transparency is required. To maintain this transparency, Section 15 of the Securities Contracts (Regulation) Act,

1956 provides that no member-broker of a recognized Stock Exchange shall in respect of any securities enter into any

contract as a principal with any person other than a member-broker of a recognized Stock Exchange unless he has

secured the consent or authority of such person and discloses in the note, memorandum or agreement of sale or

purchase that he is acting as a principal.

The member-brokers are also required vide Rule 15 (2)(c) of Securities Contracts (Regulations) Rules, 1957, to maintain

and preserve the written consent of the client in respect of contracts entered into as principals.

It may be further noted that for Principal-to-Principal transactions, no brokerage is charged to the client.

Principal-to-Principal transactions cannot be entered into in respect of scrip that is delisted or scrip, trading in which is

suspended. Further the price charged for the scrip for which transaction entered into on Principal-to-Principal basis

should be within the range of open and closing price of the scrip on that date.

Cross Deals and Negotiated Deals

A cross deal is a deal between two clients of the same member-broker and negotiated deal is a deal between two

member-brokers the terms of which have been negotiated by member-brokers between themselves.

SEBI vide its Circular no. SMDRP/POLICY/CIR-32/99 dated September 14, 1999 has directed that all negotiated deals

(including cross deals) are not permitted. As per SEBI directive, all negotiated deals will be permitted only if these areexecuted on screen in the price and order matching mechanism of the exchange just like any other normal trade.

15. PRINCIPAL TO PRINCIPALTRANSACTIONS


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Under SEBI guidelines on Margin Trading and Securities Lending and Borrowing advised vide SEBIs circular No. SEBI/

MRD/SE/SU/Cir-15/04 dated March 19, 2004 and circular No. SEBI/MRD/SE/SU/Cir-16/04 dated March 31, 2004; theExchange has decided to permit the members of the Exchange to provide facility of Margin Trading to their clients

within the aforesaid SEBI guidelines.

The modalities with respect to the Margin Trading facility by the members of the Exchange to their clients are given as

under:

Corporate members with a Net-worth of Rs. 3.00 crores are eligible to provide the facility of Margin Trading to their

clients. Such eligible members are required to make a request to the Membership Department seeking Exchanges

permission in this regard.

Margin Trading facility would be only permitted in the eligible securities as notified from time to time.

The members are required to report Margin Trades on the following day through Data Upload System (DUS) provided

by the Exchange.

The members are also required to place suitable internal systems to ensure that they are complying with the various

SEBI stipulations relating to Maximum borrowing, total and single client exposure etc. as per the aforesaid SEBI circular

and various other circular issued in this regard by SEBI from time to time.

Based on the reporting done by the brokers to the Exchange, the Exchange discloses the Margin Trade position across

the market (for all its members) at the end of the day.

The members providing facility of Margin Trading to their clients would be required to submit the following certificates:

Net-worth Certificate: The Net- worth certificate in respect of Margin Trading should be submitted in the prescribed

format as on 30thSeptember and 31stMarch latest by 31stOctober and 30thApril respectively.

Margin Trading Compliance Certificate: The books of accounts, maintained by the members, with respect to

margin trading facility offered by them are required to be audited. The member would be required to submit an

auditors certificate certifying the extent of compliance with the conditions of Margin Trading facility. The members

are required to submit such certificate for the half- year ending 31st March and 30th September latest by 31st

October and 30thApril respectively, to the Department of Surveillance & Supervision.

Members are required to refer to SEBI Circular No. SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004 and Circular

No. SEBI/MRD/SE/SU/Cir-16/04 dated March 31, 2004 & Exchange Notice No. 20040402-31 dated April 2, 2004

for further details.

16. MARGIN TRADING


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Pursuant to the directives issued by Securities and Exchange Board of India (SEBI) vide its letter dated July 16, 2004

addressed to the Exchange, the members of the Exchange are required to disclose their peak client funding detailsduring the month to the Exchange in the prescribed format through the DUS system provided by the Exchange. The

said data is displayed on the Exchanges website on a monthly basis.

The disclosure has to be with regards to the extent of client funding by the broker and the number of clients for whom

such funding has been made (for the cash segment only). The client funding for such purposes shall include the margin

and settlement obligations of a client funded by the member/broker.

Member to report client funding details to the Exchange through the DUS software on a monthly basis (Exchange

notice no.20060221-10 dated Feb 21, 2006).

Client funding disclosure to the Exchange should contain the break-up of funding to Institutional / Non-Institutional

clients, towards Settlement / Margin Obligation, Margin Trading etc., the details of which are as under: -

17. CLIENT FUNDING

Item Description

No. Of Clients for Temporary Funding The number of clients who have been funded during the reporting month.

Temporary Funding of Margin on behalf The amount funded means and includes members own money put

of Clients towards clients margin obligations.

Temporary Funding of Settlement The member has to enter the amount funded towards sett lement

Obligations of Institutional Clients obligations of the Institutional Clients who have been funded by him

for the reporting month. If this column is not applicable then the member

has to enter 0.

Temporary Funding of Settlement The member has to enter the amount funded towards sett lementObligations of Non-Institutional Clients obligations of the Non-institutional clients who have been funded by

him for the reporting month. If this column is not applicable then the

member has to enter 0.

No. of Clients under Margin Trading The number of clients who have been funded towards margin trading

during the reporting month.

Funding extended to Clients Amount funded by the member to clients under the option of Margin

under Margin Trading facility Trading. If this column is not applicable then the memberhas to enter

0.

Total Funding It will be the sum total of Temporary Funding of Margin on behalf of

Clients + Temporary Funding of Settlement Obligations of Institutional

Clients + Temporary Funding of Settlement Obligations of

Non-Institutional Clients + Funding extended to Clients under Margin

Trading facility

Members may refer to Exchange Notice No. 20050824-16 dated August 24, 2005 in this regard. In order to mitigate

the procedural difficulties involved in reporting the funding done by brokers with respect to transactions of small quantities

executed on behalf of large no. of clients, the Securities & Exchange Board of India vide letter no. MRD/Policy/AT/

55628/2005 dated December 13, 2005 has clarified that Member brokers may be advised to exclude the funding done

by them with respect to contracts of value Rs.1 lakh or below, executed by them on behalf of their clients for the

purpose of the aforesaid requirements w.e.f December 2005.members may refer to Exchange Notice No. 20051216-8 dated December 16, 2005 in this respect.


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In order to ensure the reliability of the IML / Internet Trading Systems used by the Trading Members, the Exchange

has decided to make it obligatory on the part of the Trading Members to get their IML / Internet Trading Systemsaudited by Certified Systems Auditor and Submit a report to the Exchange.

Accordingly, the Trading Members who have availed of the IML facility from the Exchange are advised to submit a

Systems Audit Report in the prescribed format every Financial Year.

The Trading Members are required to note the following with regards to the Systems Audit:

1. The System Audit should be carried out by CISA / ISA / CISSP Certified Systems Auditor and their name &

registration number should be mentioned on the certificate submitted.

2. The System Audit would have to be carried out for all the branches where IML facility is provided and one consolidated

report should be submitted to the Exchange.

Trading member are also required to submit the following documents / certificates to Exchange.

l Network Diagram duly certified by the Vendor showing the number and location of nodes.

l SSL (Secured Socket Layer) certificate or any other similar mechanism, which adequately protects the confidentiality

of trade data (Exchange Notice No. 20070517-26 dated May 17, 2007).

18. SYSTEM AUDIT


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During the course of inspections of the books of accounts and other documents of member-brokers, it has been observed

that certain member-brokers are dealing through or with other stock brokers of the same exchange /other exchangefor their proprietary trades as well as trades on behalf of their clients.

Trading through other stockbrokers raises serious issues of regulatory concerns including taking excessive exposure,

executing pro account trading from multiple locations in violation of SEBI circular no. SEBI/MRD/SE/Cir-32/2003/27/

08 dated August 27, 2003, possibility of over leveraging and default, etc.

With a view to address these concerns, SEBI vide its circular no: SEBI/MIRSD/CIR-06/2004 dated January 13, 2004

reviewed the norms relating to trading by member-brokers/sub-brokers. Accordingly, member-brokers are required to

comply with the following:

A sub-broker shall not be affiliated to more than one member-broker of one stock exchange.

Dealing with member of the same Exchange

Member-broker/sub-broker of an exchange cannot deal with another member-broker/sub-broker of the same

exchange either for proprietary trading or for trading on behalf of clients, except with the prior permissionof the

exchange. The Exchange while giving such permission, shall consider the reasons stated by the brokers/sub

brokers for dealing with brokers/sub brokers of the same exchange and after carrying out due diligence allow such

brokers/sub brokers to deal with only one stock broker/sub broker of the same exchange. (Exchange Notice no.

20040117-8 dated January 17, 2004).

Dealing with member of another Exchange

For proprietory trading, a stock broker/sub broker of an exchange can deal with only one broker/sub broker ofanother exchange after intimatingthe names of such stock broker/sub broker to his parent stock exchange.

For dealing on behalf of clients, a member-broker of an exchange can deal with only one broker of another

exchange after obtaining necessary registration as a sub-broker.

19. TRADING THROUGH ANOTHER MEMBER


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Sub-broker means any person not being a member of a Stock Exchange who acts on behalf of a member-broker as

an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such member-brokers.

All Sub-brokers are required to obtain a Certificate of Registration from SEBI in accordance with SEBI (Stock Brokers

and Sub-Brokers) Rules and Regulations, 1992, without which they are not permitted to deal in securities. SEBI has

directed that no broker shall deal with a person who is acting as a sub-broker unless he is registered with SEBI and it

shall be the responsibility of the member-broker to ensure that his clients are not acting in the capacity of a sub-broker

unless they are registered with SEBI as a sub-broker .

It is in the interest of member-brokers that they should get the books of accounts etc of the sub-brokers affiliated to

them, inspected at periodical intervals.

Member-brokers of a Stock Exchange executing transactions for and on behalf of their clients through the member-

brokers of other Exchanges are to be treated as sub-brokers. These member-brokers are required to obtain a Certificateof Registration from SEBI to act as a sub-broker under SEBI (Stockbrokers and Sub-Brokers) Rules and Regulations,

1992.

It is mandatory for member-brokers to enter into an agreement with all the sub-brokers in the format prescribed by

SEBI. The agreement lays down the rights and responsibilities of member-brokers as well as sub-brokers.

Securities and Exchange Board of India have issued a notification in the Gazette of India dated the 23 rdday of September

2003, amending the Stock brokers and Sub brokers Regulations, 1992, the salient features are produced below:

One sub-broker shall be affiliated to one member-broker of the Exchange. There shall be a privity of contract

between the member-broker and a client introduced to the member-broker by the sub-broker affiliated to such

member-broker.

The sub-broker should have necessary infrastructure like adequate office space, equipment and manpower to

effectively discharge his activities.

No director of a corporate member-broker shall act as a sub-broker to the same corporate member-broker.

A member-broker shall not deal with a person as a sub-broker unless such person has been granted certificate of

registration by the SEBI.

A sub-broker shall not issue confirmation memos but the member-broker shall issue contract note directly to the

client introduced by his sub-broker.

The delivery of securities and the payment of funds relating to the transactions shall be made directly between a

member-broker and the client introduced by the sub-broker affiliated to such member-broker.

A sub-broker shall enter into a tripartite agreement with his client and with the main member-broker specifying the

scope of rights and obligations of the member-broker, sub-broker and such client of the sub-broker.

Cancellation of sub-broker registration

In the event of cancellation of sub-broker registration, the affiliated membr-broker has to inform the investors/

general public about cancellation of registration of his/their sub-brokers and also advise them not to deal with such

sub-brokers. A public advertisement to this effect may be issued in a local newspaper where the sub-brokers

registered office, head office/corporate office is situated and another in English daily newspaper with wide circulation.

20. SUB-BROKERS


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Books And Documents To Be Maintained By Sub-Brokers

Sub clause (b) under clause (1) of Section 15 of Securities Contract Regulation Act specifies the books and

documents required to be maintained by the sub-broker. The list is as under: -

Register of transactions (Sauda book);

Clients ledger;

General ledger;

Journal;

Cash book;

Bank pass book;

Document should include particulars of shares and securities received and delivered to the clients.

Inspection of Sub-Brokers

Every Trading Member is required to carry out the inspection of Books and Accounts of at least 20% of its sub-

brokers every year .


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A Remisier is a person who is engaged by a member-broker primarily to solicit business in securities on a commission

basis.

The Exchange has revived the institution of Remisiers under its Rules, Byelaws and Regulations. Rules No. 216 to

235 of the Rules, Byelaws and Regulations of the Exchange provide for appointment and regulation of Remisiers. The

Remisiers appointed by the member-brokers are required to be registered with the Exchange.

In this connection, it is clarified that Remisier should not be an employee of any individual member-broker or any

organisation other than the member-broker concerned. A remisier shall not be or act as a sub-broker anywhere so

long as he continues as a remisier.

Remisier is expected to solicit business for a member-broker and get commission thereon. He is not supposed to

issue contract notes, confirmation memos or bills to the clients in his own name.

Remisier can operate the BOLT/IML terminal from the members office. However, he can not operate the terminal

from his residence/office.

Members can start business & pay commission to remisier only after getting them registered with the Exchange.

21. REMISIER


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Trading members should place a permanent notice board, as per the prescribed format, at all their offices including

the offices of sub-brokers, or any other offices where the trading terminals are located which should prominently displaythe following information: -

1. Name of the Trading Member

2. Address & Tel. No. of the main office of the trading member (also Name & Tel. No of the contact person in the main

office)

3. SEBI Registration No. of the trading member

4. BSE Investor Service Tel. No.

Apart from the notice board a list of general Dos and Donts, as per the prescribed format, to be observed by the

investors while investing/trading in the stock markets should be prominently displayed.

Trading Members are also required to ensure that a copy of their SEBI Registration Certificate is prominently displayed

in all their offices.

Trading Members should also ensure that the SEBI Registration Certificate issued to the sub-broker is prominently

displayed at all their sub-brokers offices. (Exchange Notice No.20050902-21 dated September 02, 2005).

22. DISPLAY OF SEBI REGISTRATION CERTIFICATE ANDNOTICE BOARD


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Prevention of Money Laundering Act, 2002 (PMLA) has been brought into force w.e.f. July 01, 2005. As per the provisions

of the Act, all the prescribed entities shall have to maintain records pertaining to the transactions of the value andnature prescribed as under :

All cash transactions of the value of more than Rs.10 lakhs or its equivalent in foreign currency

All series of cash transactions integrally connected to each other which have been valued below Rs.10 laks or its

equivalent in foreign currency where such series of transactions take place within one calender month.

All suspicious transactions whether or not made in cash.

All intermediaries are advised to ensure a proper policy framework as per the guidelines on anti-money laundering

provisions. Members are required to appoint Principle Officer under Prevention of Money Laundering Act 2002. Also,

members are required to have documented procedures to implement the Anti Money Laundering provisions as envisaged

under Prevention of Money Laundering Act, 2002.

The Guidelines on Prevention of Money Laundering Standards, inter-alia require the members to:

Ensure Customer due diligence (As stipulated under Guideline 5 of Part II of the Guidelines on Anti Money

Laundering Provisions).

Monitor and Report Suspicious Transactions to FIU (Financial Intelligence Unit) India. (As specified under Guidelines

2.2 and 9 of Guidelines on Prevention of Money Laundering Provisions) (Exchange Notice No.20060321-15 dated

March 21, 2006 and 20070330-27 dated March 30, 2007).

23. ANTI MONEY LAUNDERING PROVISIONS


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Member-brokers of the Exchange are not permitted to trade in unlisted securities or in scrips before being listed on

the Exchange. However, in order to facilitate member-brokers to enter into trades on behalf of their client in the scripsnot listed on the Exchange but listed on some other Exchange, as also in the scrips not listed on any Exchange, the

Exchange gives permission to the member-brokers to enter into Specific Bargains.

Member-brokers intending to enter into such trades are required to approach the Clearing and Settlement Dept. with

a request letter alongwith the latest annual report of the Company whose shares are to be traded, the latest quotation

of the scrip in the Exchange where it is listed and traded etc.

The request of the member-broker is scrutinised by the Clearing and Settlement Dept. The Dept checks whether the

scrip was earlier listed/delisted, suspended by the Exchange, the reason for entering in to this deal, the present and

proposed holding of the purchaser in this scrip, price band and the limit of FII holding prescribed by RBI (if the purchaser

is an FII), etc., and then gives its approval on a case to case basis. In case the holding of the proposed purchaser in

the concerned scrip exceeds 5% of the paid up capital of the company after the deal is executed then the buyer would

have to inform the concerned stock exchange and SEBI about the purchase and the total holding in the same. The

nominal charges for granting approval to enter into specific bargains are recovered by the exchange from the member-

brokers by debiting their General Charges Account.

24. SPECIFIC BARGAINS


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With a view to imparting transparency in bulk deals so as to prevent rumors /speculation about bulk deals causingvolatility in the scrip price, SEBI vide its Circular No. SEBI/MRD/SE/Cir-7/2004 dated January 14, 2004 has decided tobring about greater disclosure of such bulk deals as mentioned below:

a. The disclosure shall be made by the member-brokers to the Stock Exchange with respect to all transactions in a

scrip where total quantity of shares bought/sol