Measures taken by BSE for risk management

Certain steps or measures are taken by BSE towards the reduction of risks of stock brokers.

Know your client (KYC)

According to know your client scheme the member brokers of the exchange are

required to obtain detailed information of clients prior to commencement of any transactions

with new clients. A similar procedure is also to be followed for existing clients. This information

is to be made available to the exchange authorities whenever called for. In case the member

broker fails to furnish the same, it may result in penalties to the member brokers.

Surveillance / Inspection

Surveillance / Inspection department carries out inspection of the member brokers

records and keep a regular check on the activities of member brokers as well as sub brokers as

regards the compliance of the risk management procedures.

Insurance

The exchange presently has in place insurance policies to protect itself in the

event of losses on account of fire, damage to computer systems and a comprehensive policy that

covers risks faced by the exchange, its member brokers and the clearing houses.

The risks covered under the basic cover of the policy are detailed as below.

» Loss of member on account of fake / forged / stolen shares being introduced by

the clients.

» Loss to members on account of fraud by employees.

» Direct financial losses suffered by the member broker on account of physical loss,

destruction, theft or damage to securities and cash.

» Loss on account of securities lost in transit.

» Loss suffered on account of incomplete transaction.

» Loss on account of errors and omission.

Verification of shares members’ office

The exchange has outlined the process i.e. in case the transaction in a script with

one particular client in a settlement exceeds Rs. 10 lacs then the member has to send the

photocopies of the transfer deeds and the share certificates to the company / registrar for

verification of the material particulars. The basic idea behind the introduction of this procedure is

to prevent the fake / forged / stolen shares from being introduced in the market.

Measures taken by SEBI

The Securities and Exchange Board of India (SEBI) along with Government have

been stressing upon the need for strict regulation of secondary market and bringing the

transparency on the floor of stock exchanges. The steps taken by the SEBI and Government in

order to regulate and control the activities of stock exchanges and reduce the risk of investors

and stock brokers are as follows.

Uniform Trading hours at all the stock exchanges in the country to check the arbitrage.

Registration of all market players such as brokers, sub brokers, registrars to issues,

merchant bankers, portfolio managers, underwriters, debenture trustees, custodians etc so

as to have access/inspection of their books, records and verification of transactions.

Regulation on insider trading with the object to curb it completely and punish the guilty.

Compulsory audit of accounts of all member brokers and registered intermediaries by

practicing chartered accountants.

Indirect supervision through stock exchanges in day-to-day business by fixing margins,

imposing curbs, penalties and fines etc.

Systematization and computerization in order to reduce the paper work and ensure

transparency in transactions.

Mentioning of brokerage separately in broker contract notes.

Brokers have to notify all transaction to the stock exchanges including off the floor

trades.

Uniform good/bad delivery norms.

Capital adequacy norms prescribed for brokers.

Brokers have to keep the clients’ money in a separate bank account.

Forward trading being banned on stock exchanges.

Derivative trading in index based futures of 1, 2 or 3 months.

Dematerialization of almost all the securities.

Total transparency and automation of stock exchanges.

Effective margin system for smooth settlement.

Circuit breaker system to check volatility of particular scrip and the exchange.

Introduction of Internet and online trading.

Recent steps taken by SEBI

Compliance Officer

Each company is required to appoint the compliance officer who would be able to

verify the rumors and information floating in the market about the company and inform the same

to the stock exchanges. This will help reduce the encouragement to rumors about companies,

which aids in price control and stability.

Streamlining Investor protection fund

The committee set up by SEBI to review the sources and utilization of investor protection fund

of stock exchanges has made following recommendations

» Funds should be on trust structure and set upon under Indian Trust Act, 1882 with

independent trustees.

» Regular contributions from active member brokers and stock exchanges.

» Fund to be utilized only for investor claims and not for broker claims.

» Trustees to ensure that fund is not deployed in risky instruments or for the benefit

of any member but only in prescribed avenues.

» Time schedule to be specified while setting investor claims.

Appointment of administrators

To get rid of bad deliveries, SEBI has decided to appoint administrator to

implement the signature guarantee and certificate authentication programs. The administrators

appointed by SEBI act on behalf regulator in resolving problems arising out of signature

mismatch.

Service centers for investors

SEBI has directed all stock exchanges to constitute service centers for investors to

enable the investors to have a form for recording and counseling of their grievances as well as

access financial and other information of companies on government norms, policies, rules,

regulations, etc.

Investor Education

SEBI has taken steps to educate the investors through various awareness

programmes and publications etc.

Corporate Governance

SEBI has prescribed the corporate governance norms for all listed companies to

ensure transparency and better disclosure practices.