BROKING SERVICESBy Shweta Bambuwala

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Definition & Features

Stockbroker can be an individual or firm who executes buy and sell orders of securities on behalf of his clients for a commission

Trading in stock exchanges are restricted by membership and brokers are members of stock exchanges

Investors can participate in trading only through members of stock exchanges

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Registration Requirements

All brokers are to be registered with SEBI and the concerned stock exchange

The registration certificate issued by SEBI and stock exchange should be exhibited in the broker’s office

Brokers should possess adequate infrastructure to carry on trade

Brokers can trade on behalf their clients

The relationship between broker and client is governed by the broker/client agreement

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Opening of Stock Broking Firm

The membership in the stock exchange is based on

certain factors such as corporate structure, track record,

education, experience etc

Trading Membership: Persons or Institutions desirous of

securing admission as Trading Members (Stock Brokers)

on the Exchange may apply for any one of the following

segment groups: Wholesale Debt market (WDM) segment,

Capital Market (CM) and Futures and Options segment,

Capital market and Wholesale Debt Market segment

Capital Market, Wholesale Debt Market and Futures and Options

segment.

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Organizational Structure

Managing Director

VP OperationsVP Finance VP Systems

HRVP Distributions

VPCompliances

AVP OPERATIONS

(RESEARCH DEPT.)

AGM, GM, CM and RMs OPERATIONS

BRANCH MANAGERS

AGMRisk/settlement

AGM Distribution

AGM systems, Internet trading

AGMTraining

Development

AGM LegalCo.

Secretary

Assist. Manager, Business Relationship Manager

Dealers, Channel Distribution

Membership Corporate can become members of WDM Individuals and firms are CM and F&O segment provided

At least two partners of the firm/ two directors of the corporate should be graduate

They must possess at least two years’ experience in securities market The applicant/any of its partners/directors/ shareholders should not have

been declared as defaulters by the stock exchange They should not have been debarred by SEBI from acting as

intermediary in the capital market For F&O segment, at least two dealers should have passed SEBI

approved certification test for derivatives A compliance officer is appointed The minimum capital requirement of Rs.30 lakhs and the shareholding

by dominant promoter/shareholder group is at least 51% (40% in case of listed companies) of paid-up equity capital of such corporate entity.

Self-clearing members, clear and settle their trades executed by them only either on their own account or on account of their clients.

Trading member-cum-clearing member, clear and settle their own trades as well as trades of other trading members.

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Role of Clearing Banks

Settlement of funds takes place through clearing banks

Clearing members are required to open a separate bank account with NSCCL designated clearing bank for F&O segment

The clearing and settlement consists of the following main activities Clearing Settlement Risk management

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Clearing and Settlement

Clearing mechanism involves working out of open

positions and obligations of clearing members

Daily margin and exposure is worked out based on the

position

All futures and option contracts are cash settled

The settlement amount is netted across all clients based

on their obligations on Marking to Market, premium and

exercise settlements

Futures contracts can be settled on a continuous basis at

the end of each day (MTM settlement) and the final

settlement on the last trading day of the futures contract

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Margin Trading

Margin trading is purchasing securities by borrowing a portion of transaction value and using the securities in the portfolio as collateral.

Corporate brokers with networth of at least Rs 3 crore are eligible for providing Margin trading facility to their clients subject to their entering into an agreement to that effect.

Margin trading facility is available for Group 1 securities and those securities, which are offered in the initial public offers and meet the conditions for inclusion in the derivatives segment of the stock exchanges

Funding for margin trading should be own resources or borrowed from banks or NBFCs regulated by RBI

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Margin Trading The `total exposure' of the broker towards the margin trading

facility should not exceed the borrowed funds and 50 per cent of his `net worth

The broker has to ensure that the exposure to a single client does not exceed 10 per cent of the `total exposure' of the broker

Initial margin has been prescribed as 50 per cent and the maintenance margin has been prescribed as 40 per cent.

A broker has to disclose to the stock exchange details on gross exposure including name of the client, unique identification number and name of the scrip.

Wherever the broker had borrowed for providing margin, the name of the lender should be disclosed to the stock exchange.

The arbitration mechanism of the exchange would not be available for settlement of disputes, if any, between the client and broker, arising out of the margin trading facility.

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Functions of Departments/Offices

Functions of Regional Offices Liaison between Head Office and branches Monitoring the decision making at branch levels Alerting the branches with margin requirements, Pay-in targets

for the months Employee appraisals in branches etc.

Functions of Branches Direct contact with the customers Execution of clients’ orders Maintenance of clients’ accounts

Functions of Head Office Finance Management Risk Management

Capital adequacy, margining, exposure and turnover limits Compliance with the regulations prescribed by SEBI

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Pay-in / Pay-out

Timely pay-in and pay-out is important for a broking company

A team of officials receives pay-in

The payments according to the payment dates of different stock exchanges are made promptly

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Settlement Funds clearing

Since the participants are having accounts with different

banks, funds have to be routed through the clearing

mechanism of RBI

Clearing of securities Clearing Corporation determines the funds/ securities

obligation

The clearing banks and depositories provide the

necessary interface between the custodians/clearing

members (CM) for settlement of funds/ securities

obligations of trading members

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Clearing and Settlement Process at NSE

NSE

DEPOSITORIES NSSCL CLEARING BANK

CUSTODIANS/ CMS

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5

86

210

1

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97

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1. NSE informs trade details to NSCCL.

2. Completed trade details are informed by NSCCL to clearing members/custodians and the Clearing Members/Custodians will affirm back to NSCCL. Based on the confirmation, multilateral netting is applied by NSCCL and thereafter obligations are determined.

3. Obligations and Pay-In-Advise of funds/securities are downloaded by the Custodians.

4. Custodians/CMs instruct Clearing Banks to have funds available in time.

5. Custodians/CMs direct depositories to make securities available by pay in time.

6. NSCCL recommends depository to withdraw pool account of custodians/CMs and to credit its account and the depository functions properly as directed.

7. Clearing Banks are advised by NSCCL to debit accounts of custodians/CMs and credit its account and Clearing Bank will do the task immediately.

8. NSCCL advises depository to credit pool account of custodians/CMs by pay-out of securities and debit its account.

9. NSCCL advises Clearing Banks to credit account of custodians/CMs and debit its account and Clearing Banks does it.

10.Depository will inform Custodians/CMs via depository participants.

11. Custodians/CMs are informed by the Clearing Banks.

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Trading Nationwide online fully automated screen-based

trading system (SBTS)

SBTS electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk or error, as well as on fraud resulting in improved operational efficiency

Large number of participants can see the full market on a real-time basis

SBTS enabled increased trading volume, efficiency, transparency and liquidity in the exchanges

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Definition

Portfolio means total holding of securities

belonging to any person

A Portfolio Manager means any person, who

pursuant to a contract or arrangement with a

client, advises or directs or undertakes on

behalf of the client, the management or

administration of portfolio of securities or the

funds of the client.

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Definition

A Discretionary Portfolio Manager means a

portfolio manager who exercises or may

under a contract relating to portfolio

management exercises any degree of

discretion as to the investment or

management of the portfolio of securities or

the funds of the client as the case may be.

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Who can render PMS?

SEBI authorised category I and II merchant bankers

SEBI authorised portfolio managers

Discretionary Portfolio Managers

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Objectives

Safety of Investment of Funds

Marketability

Liquidity

Reasonable Return

Appreciation in Capital

Tax Planning

Risk Avoidance

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Obligations

Must accept money or securities from clients for a period

more than 1 year

Shall not deploy the clients’ funds in bill discounting or

badla financing or for lending to corporate or non-

corporate bodies

Shall not indulge in speculative activities

Shall not keep open position

shall keep client’s funds and portfolio of securities

separate from own funds and securities

Shall maintain books of accounts as specified by SEBI

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Obligations

Shall submit half-yearly audited financial result to SEBI

Shall submit periodical report to SEBI

Funds of each client shall be managed individually and independently in accordance with the needs of the client in the case of discretionary portfolio manager and as per the directions of the clients, in the case of non-discretionary portfolio manager.

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Obligations Shall act in a fiduciary capacity with regard to the client’s

funds

Shall transact in securities within the limitations placed by

the client himself with regard to dealing in securities under

the provisions of Reserve Bank of India Act,1934

Shall not derive direct or indirect benefit out of the client’s

funds or securities

Shall not pledge or give loan on securities held on behalf of

the clients to a third person without obtaining a written

permission from his client

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Obligations He shall ensure proper and timely handling

of complaints from his clients and take appropriate action immediately

He shall abide by the code of conduct as specified in Schedule iii of the Regulations.

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Basic Principles of PMS

Effective investment planning

Constant review

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Handling IPO's and Public Issues

Fixed Price Method

In the fixed-price issue method, the issuer fixes the

issue price well before the actual issue.

Book Building Method

Under book building process the price is fixed based

on the bids received from the prospective investors.

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SEBI Stock Brokers and Sub-Brokers Rule, 1992

Registration with SEBI is compulsory

Registration is granted subject to the following conditions:

A. STOCK BROKERS Membership in any stock exchange Should abide by the rules, regulations and bye-laws of the

stock exchange. Change of constitution requires prior approval of SEBI Prescribed registration fee has to be paid Establish grievance redressal mechanism to redress the

complaints from investors within one month and report to SEBI.

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SEBI Stock Brokers and Sub-Brokers Rule 1992

B. SUB-BROKERS

All Rules prescribed for stock brokers are

applicable to sub-brokers also

In addition, sub-brokers should hold an

authorisation in writing issued by a stock

broker

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SEBI Regulations for Stock Brokers and Sub-brokers

Brokers and sub-brokers should register with SEBI

Application for registration for brokers should be

submitted in the prescribed form (Form A)

The application will be considered only if the

broker/sub-broker fulfill the following requirements: Membership in stock exchange Infrastructure and trained manpower Adequate past experience Fit and proper person

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SEBI Regulations for Stock Brokers and Sub-brokers

Certificate of registration will be issued in Form D

Stock brokers should abide by the code of conduct prescribed by SEBI.

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SEBI Regulations for Stock Brokers and Sub-brokers

Sub-brokers should submit the application in

Form B

Application should be accompanied by a

recommendation in Form C by a stock broker.

Application should be submitted to the stock

exchange where the stock broker to which the

sub-broker is affiliated is a member

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SEBI Regulations for Stock Brokers and Sub-brokers

The Sub-broker should fulfill the following eligibility criteria: Should be above 21 years of age Should not be convicted of any offence involving fraud or

dishonesty Should have passed at least 12th standard or equivalent

examination from institution recognized by the Government. Should be a fit and proper person All the partners of a partnership firm should comply with these

requirements

Stock exchange should verify the eligibility and the application and forwards with their recommendations to SEBI

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SEBI Regulations for Stock Brokers and Sub-brokers

SEBI will issue registration certificate in Form

E

All clearing and trading members of a

derivatives exchange or derivatives segment

should register with SEBI

Application in Form AA should be submitted

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SEBI Regulations for Stock Brokers and Sub-brokers

The following eligibility criteria should be

complied with The applicant should be eligible to be admitted as a

trading member of a derivative exchange or derivative

segment or a stock exchange or clearing corporation

house.

Should own necessary infrastructure and manpower

Should not be under disciplinary proceedings

Prescribed fee has to be paid

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SEBI Regulations for Stock Brokers and Sub-brokers

The Trading member/ Clearing member has to

abide by the following code of conduct. The code of conduct prescribed by brokers is applicable

for Trading/Clearing member also.

They should abide by the code of conduct prescribed by

the derivative exchange/ derivative segment.

The risk inherent in trading in derivatives should be

disclosed to the clients

Should deposit the prescribed margin and operate within

the exposure limit specified by the board or exchange.

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General Obligations and Responsibilities

Maintenance of the books of accounts and records as prescribed by SEBI

Appointment of a compliance officer

Production of records to the officers of SEBI at the time of inspection

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Code of Conduct for Brokers

Integrity

Exercise of due skill and care

Malpractices

Compliance with statutory requirements

Execution of orders

Issue of contract note

Breach of trust

Business and Commission

Business of defaulting clients

Fairness to clients

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Code of Conduct for Brokers Investment advice

Investment advice in publicly accessible media

Competence of stock broker

Should co-operate with other stock brokers

Protection of clients’ interest

Transaction with stock broker

Advertisement and publicity

Inducement of clients

False or Misleading statements

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Code of Conduct for Sub-brokers

Integrity

Exercise of due skill and care

Execution of orders

Issue of purchase and sale notes

Breach of trust

Business and Commission

Business of defaulting clients

Fairness to clients

Investment advice to clients

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Code of Conduct for Sub-brokers Investment advice in publicly accessible media

Competence of sub-broker

Should co-operate with the stock broker to which he

is affiliated

Protection of clients’ interest

Should not fail in meeting obligation with the broker

Execute legal agreement with the broker

Advertisement and publicity

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Code of Conduct for Sub-brokers Inducement of clients

Should not indulge in dishonorable, disgraceful,

disorderly or improper conduct in stock

exchange.

Failure to give information

Failure to mis-leading return

Manipulation

Malpractices

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Capital Adequacy Norms

Minimum capital to be deposited with Mumbai and Calcutta Stock Exchanges Rs. 5 lakhs, Delhi and Ahmedbad - Rs/3.5 lakhs and other stock exchanges Rs. 2 lakhs.

Form of maintenance of minimum capital: 25% in cash with the exchange, 25% deposit with a bank with lien to the stock exchange and remaining in the form of securities with 30% margin. The securities should be pledged in favour of the stock exchange.

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Capital Adequacy Norms

Additional optional capital related to business Margin requirements Monitoring arrangements Penalties Business exempt from capital requirements Requirement of capital adequacy as an

underwriter

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DP Functions As Depository Participants (DP), brokers are

maintaining the D-mat accounts of their clients

DPs are connected with NSDL

DPs are to be registered with SEBI

Registration with SEBI requires compliance with

the following conditions:

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DP Functions The applicant should belong to

a public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);

a bank included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

a foreign bank operating in India with the approval of the Reserve Bank of India;

a state financial corporation established under the provisions of section 3 of the State Financial Corporations Act, 1951 (63 of 1951);

an institution engaged in providing financial services, promoted by any of the institutions mentioned in sub clause (i), (ii), (iii), (iv) jointly or severally;

a custodian of securities who has been granted a certificate of registration by SEBI under sub- section (1A) of section 12 of the Act;

a clearing corporation or a clearing house of a stock exchange;

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DP Functions a stock broker who has been granted a certificate of

registration  by SEBI under sub-section (1) of section 12 of the Act: Provided that:

the stock-broker shall have a minimum net worth of Rs. 50 lakhs and the aggregate value of the portfolio of securities of the beneficial owners held in dematerialised form in a depository through him, shall not exceed 100 times of the net worth of the stock broker

if the stock broker seeks to act as a participant in more than one depository, he shall comply with the criteria specified in the first proviso separately for each such depository; or

where the stockbroker has a minimum networth of Rupees Ten crore, the limits on the aggregate value of the portfolio of securities of the beneficial owners held in dematerialized form in a depository through him shall not be applicable.

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DP Functions

a non-banking finance company, having a net

worth of not less than rupees fifty lakhs. Such

company shall act as a participant only on

behalf of itself and not on behalf of any other

person. A non-banking finance company may

act as a participant on behalf of any other

person, if it has a net worth of Rs. 50 crores in

addition to the net worth specified by any other

authority;

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DP Functions a registrar to an issue or share transfer agent who has

a minimum net worth of Rs.50 lakhs and who has been granted a certificate of registration by the Board under sub – section (1) of Section 12 of the Act.

the applicant is eligible to be admitted as a participant of the depository through which it has made the application to the Board;

the applicant has adequate infrastructure, systems, safeguards and trained staff to carry on activity as a participant;

the applicant is a fit and proper person. the grant of certificate of registration is in the

interests of investors in the securities market

The applicant has to remit the prescribed registration charges and annual renewal fees

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Rights and Obligations of DP

Agreement by participant

Separate accounts

Statement of accounts

Transfer or withdrawal of beneficial owner

Connectivity

Monitoring, reviewing and evaluating internal systems and controls

Reconciliation of accounts with depository

Submission of periodical returns to SEBI

Maintenance of records of services

Manner of keeping records

Maintenance of depository-wise records

Prohibition of assignment systems