By Shweta Bambuwala

B R O K IN G S ER V IC ES

D efi
nition & 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

2

Registration Requirem ents

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

brokers 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

3

O pening ofStock 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.
4

O rganizationalStructure
Managing
Director

VP Finance

AGM
Risk/settlement

VP
Distributions

AGM
Distribution

VP Operations

AVP
OPERATIONS
(RESEARCH
DEPT.)

VP
Systems

AGM
systems,
Internet
trading

HR

AGM
Training
Developme
nt

VP
Compliances

AGM
Legal
Co.
Secretary

AGM, GM, CM and

RMs OPERATIONS

BRANCH MANAGERS

Assist. Manager, Business

Relationship Manager
Dealers, Channel
Distribution

M em
ber
shi
p
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.

Role ofClearing 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
7

Clearing and Settlem ent

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
8

M argin 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

9

M argin 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.
10

Functions ofD epartm ents/O f c

i
fes
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
11

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

12

Settlem ent
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
13

Clearing and Settlem ent Process at N SE

NSE

NSSCL

8
6

DEPOSITORIES

10

9
7

CLEARING BANK

11

5
CUSTODIANS/ CMS

14

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.

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

16

D efi
nition
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.

17

D efi
nition
A Discretionary Portfolio Manager means a

portfolio manager
under

contract

management
discretion

as

who exercises or may

relating

exercises
to

the

any

to

portfolio

degree

investment

of
or

management of the portfolio of securities or

the funds of the client as the case may be.

18

W ho can render PM S?
SEBI authorised category I and II merchant

bankers
SEBI authorised portfolio managers
Discretionary Portfolio Managers

19

O bjectives
Safety of Investment of Funds
Marketability
Liquidity
Reasonable Return
Appreciation in Capital
Tax Planning
Risk Avoidance
20

O bligations
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 noncorporate bodies

Shall not indulge in speculative activities
Shall not keep open position
shall keep clients funds and portfolio of securities

separate from own funds and securities

Shall maintain books of accounts as specified by SEBI

21

O bligations
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.
22

O bligations
Shall act in a fiduciary capacity with regard to the clients

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 clients

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

23

O bligations
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.

24

Basic Principles ofPM S

Effective investment planning
Constant review

25

H andling 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.

26

SEBIStock 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.
27

SEBIStock 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

28

SEBIRegulations for Stock Brokers and Subbrokers

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
29

SEBIRegulations for Stock Brokers and Subbrokers

Certificate of registration will be issued in

Form D
Stock brokers should abide by the code of

conduct prescribed by SEBI.

30

SEBIRegulations for Stock Brokers and Subbrokers

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

31

SEBIRegulations for Stock Brokers and Subbrokers

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
32

SEBIRegulations for Stock Brokers and Subbrokers

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

33

SEBIRegulations for Stock Brokers and Subbrokers

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

34

SEBIRegulations for Stock Brokers and Subbrokers

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.

35

G eneralO bligations 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

36

Code ofConduct 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
37

Code ofConduct 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

38

Code ofConduct for Suboker

s
br
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
39

Code ofConduct for SubInvestment

brokersadvice 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

40

Code ofConduct for Sub Inducement of clients

brokers
Should not indulge in dishonorable, disgraceful,

disorderly or improper conduct in stock

exchange.
Failure to give information
Failure to mis-leading return
Manipulation
Malpractices

41

CapitalAdequacy N orm s
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.
42

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

underwriter

43

D P 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:

44

D P 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;
45

D P 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 exceed100 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.

46

D P 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;

47

D P 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
48

Rights and O bligations ofD P

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
49