INTRODUCTION

TO SECURITIES
MARKET AND
TRADING
MEMBERSHIP

Unit 1
WHAT'S A
TRADING
MEMBERSHIP?
 • Security market provides channel for
allocation of savings to those who have
Security a productive need for them.

Market
• Divided into two interdependent &
inseparable segments:

segments i. Primary Market

ii. Secondary Market

What is Primary Market & Secondary Market?

• Primar y market provides an opportunity to the issuers of

securities, both government and corporations, to raise resources
to meet their requirements of investment.

• Public issues or Private Placement

• Secondar y market refers to a market where securities are traded

after being off ered to the public in the primary market or listed on
the Stock Exchange.

• Over-the-Counter and Exchange Traded market

Key 1. Index

2. Market Capitalization
Indicators
3. Market Capitalization
of a Ratio
Securities 4. Turnover

Market 5. Turnover Ratio

Index
• Used to give information about the price
movements of products in the fi nancial,
commodities or any other markets.

• Meant to capture the overall behaviour of

the equity markets.

• Bluechip index of NSE is CNX NIF TY.

Market Capitalization & Market Capitalization Ratio

• Defi ned as value of all listed shares on the country’s exchanges.

• Computed on daily basis

• MC of a company = No of shares outstanding x closing price of the

share

Market Capitalization Ratio = Market capitalization of stocks / GDP

 Used as a measure of stock mar ket size

Turnover and Turnover Ratio

Turnover of a share is computed by multiplying the traded quantity

with the price at which the trade takes place.

• Turnover of the companies listed on the exchange = Aggregate

of traded value of all the companies traded on the exchange

Turnover Ratio: total value of shares traded on a countr y ’s stock

exchange for a par ticular period

= Turnover at exchange / Market capitalization at exchange

• Used as a measure of trading activity or liquidity in the stock

markets.
Products of Financial Market

• S avin gs a re lin ke d to inve stme n ts by a varie ty o f in te rme diarie s th ro u gh Broadly

3
a ra n ge o f c o mple x fi n an c ial pro du c ts calle d “ S e c u ritie s”.
Categories
• Un de r the S ecurit i es Co nt rac t Reg ul at i o ns Ac t ( S CRA), 1 95 6 ,
1. E q u i t y
“se c urit i e s” in c lu de 2. D e b t
3. D e r i va t i ve s
i. S h a re s , bo n ds , sc rips, sto cks o r o th e r marke table s e c u ritie s o f like
n a t u re in o r o f any in c o rpo rate c o mpany o r bo dy co rpo rate

ii. Gove rn m e n t s e c u ritie s

iii. D e rivat ive s o f se c uritie s

iv. Un it s o f c o lle ctive inve stme n t sc h e me

v. I n t e re s t a n d righ ts in s e cu ritie s an d se c u rity re ce ipt o r any o th e r

in s t ru me n t s s o de c lare d by th e c e ntral gove rn me n t.
 Par ticipants:

i. Investors
Securities ii. Issuers

iii. Intermediaries
Market
Participants Regulators:

iv. Securities and Exchange Board of India

&
(SEBI)

v. Reser ve Bank of India (RBI)

Regulators vi. Minisitr y of Corporate Aff airs (MCA)

vii. Depar tment of Economic Aff airs of the

Ministr y of Finance (DEA)
 Investors
Issuers
Individual, Corporate, Foreign
Corporates, Companies
Venture Capital Investors, FIIs

Intermediaries
Depositories, Custodians, Brokers, Corporate brokers, sub-
brokers, Stock exchange, Portfolio managers, RTAs, Primary
Dealers, Merchant Bankers, Bankers to an issue, Debenture
trustees, Underwriters, Venture Capital Funds, Mutual funds,
Collective Investment Schemes
For MCQ: Which market
segment was introduced Market
first at NSE? Segments

Currency
Wholesale Debt Capital Market Futures & Options
Derivatives
Market Segment (F&O) Segment
Segment (CDS)

June 1994 November 1994 June 2000 29th August, 2008

with USD-INR
currency futures
trading

Equity shares, Index futures, Index

T-Bills, PSU Bonds, warrants,
Corporate Debentures, options, Stock options,
debentures etc. and stock futures Euro-INR, Pound
Commercial Papers, sterling-INR, Japanese
Certificate of Deposits Yen-INR in February
etc. 2010.
Market has grown exponentially in terms of resource mobilization,
intermediaries, the no of listed stocks, market capitalization, turnover and
investor population.

1. Creation of Market Regulator

• SEBI Act 1992
• Protection of investors’ interests, Promoting development of securities
market, Regulating securities market

2. Screen Based Trading

• Open outcr y system- ineffi cient and time consuming, inability to provide
immediate matching or recording of trades
• SBTS – provides effi ciency, liquidity, and transperancy
3. Reduction of Trading cycle:
• Earlier used to var y between 14 days to 30 days and settlement another
fortnight.
• Exchanges followed diff cycles which was later mandated to follow uniform
weekly trading cycles
• In December 2001, all scrips moved to rolling settlement.
• Rolling settlement was reduced progressively from T+5 to T+3 days.
• From April 2003, T + 2 cycle

Note: From 26 th Jan, 2023 T+1 cycle

4. Equity Derivatives Trading
• SC(R) Act was amended in 1995 to lift ban on options in securities.
• Trading in derivatives began in 2000 with Index futures
• Index futures, Index options, Single Stock futures & Single Stock
options
5. Demutualization
• Governance structure of stock exchange where Ownership,
Management and Trading lies with diff erent sets of people
• All the exchanges in India have demutualized set-up.
6. Dematerialization
• To avoid time lag for settlement and physical movement of paper
based securities
• Depositories Act, 1996 established two depositories in India
• NSDL/CDSL
7. Clearing Corporation:
• Credit risk of the counter-par ty necessitated some innovation
• NSE set up fi rst clearing corporation NSCCL (National Securities Clearing
Corporation Ltd.) which commenced its operations in April 1996.
8. Investor Protection
• Central govt (Ministr y of Corporate Aff airs) established the Investor
Education & Protection Fund (IEPF) in October 2001.
• Exchanges and SEBI also maintain Investor Protection fund, Investor
Grievance Cell for grievance redressal
9. Direct Market Access
• In April 2008, SEBI allowed DMA facility to institutional investors.
• DMA allows brokers to off er their respective clients, direct access to
exchange trading system through broker ’s infrastructure without manual
inter vention by the broker.
10. Globalization:
• Indian companies permitted to raise resources overseas through issue of
ADRs, GDRs, FCCBs and ECBs
• FIIs have been permitted to invest in all types of securities, including govt
securities (Can invest in a company under portfolio route up to 24% of the
paid-up capital)
• Indian stock exchanges have been permitted to setup trading terminal
abroad.
• RBI permitted two-way fungibility for ADRs /GDRs – Foreign institutional
or domestic investors who hold ADR/GDR can cancel them and sell
underlying shares in the market.
11.Launch of India (VIX)
• Volatility index is a measure of market ’s expectations of volatility over the near
term
• Measures the amount by which an underlying Index is expected to fl uctuate in the
near term, based on the order book of the underlying index options.
• India VIX (Based on the Nif ty 50 Index option prices) was launched by NSE in
April 2008.
• VIX is a trademark of Chicago Board Options Exchange (CBOE)
12.Launch of Securities Lending & Borrowing Scheme
• Allowed in April 2008, Shor t positions became possible eff ectively with less cost
13.ASBA
14.Launch of Interest rate futures (31st August 2009)
15.Launch of currency futures (29TH August 2008)
• USD-INR pair for the fi rst time in India
• Euro-INR, Pound Sterling-INR, Japanese Yen-INR (March 2010)
16. Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009
• Disclosure and Investor Protection (DIP) Guidelines 2000 was replaced for
ICDR.
• Govern all disclosure norms regarding issue of securities
 Recap

1. What is Primar y Market & Secondary Market?

2. What are key indicators of securities market?

3. Defi ne Index, Market Capitalization & Turnover of stock exchange.

4. What does Market Capitalization ratio measure? How ’s it calculated?

5. What does Turnover ratio measure? How ’s it calculated?

6. What is Direct Market Access?

7. What does India VIX measure?

8. Explain reform of Demutualization.

 Who is a Stock Broker?

• A stockbroker is a licensed professional with the

authority to buy and sell stocks for other
investors.

• According to SEBI (Stockbrokers and sub-

brokers) Regulations, 1992, a stockbroker is
member of a stock exchange and requires
certifi cate of registration from SEBI in order to
buy, sell or deal in securities.
 • Stockbrokers give accurate advice on
buying and selling stocks and other
securities.
Services a • Buy and sell shares on behalf of their
clients and keeps all records.
stockbroker • Manages the client’s investment

provides por tfolio and provides regular updates.

• Informs their client about any new

(Not in investment opportunity

Textbook) • Stockbroker also helps a client to make

changes in investment strategies
depending on the market conditions.
SEBI grants a certifi cate to a stockbroker - conditions

• Membership of any stock exchange;

• Should abide by the rules, regulations and bye-laws of the stock exchange

• Should obtain prior permission of SEBI to trade in case of any change in

the status and constitution;

• Should pay fees for registration in the prescribed manner; and

• Should take adequate steps for redress of grievances of the investors

within one month of the date of the receipt of the complaint and keep
SEBI informed about the number, nature and other par ticulars of the
complaints.
Stockbroker : Criteria for consideration of application

• Eligible to be admitted as a member of stock exchange

• Has necessar y infrastructure like adequate offi ce space, equipment

and manpower

• Has past experience in the business of buying, selling or dealing in

securities

• Should not be subjected to any discipline proceedings under the

rules, regulations and bye-laws of a stock exchange with respect his
business as a stockbroker involving himself or any of his partners,
directors or employees.
New Membership of Stock Exchange

• No entr y or exit barriers

• Anybody can become a member by complying

with prescribed criteria

• Admitted as members subject to provisions of

the Securities Contracts (Regulation) Act,
1956, the SEBI Act, 1992 and rules,
regulations and byelaws of the Exchange.
Benefits to Trading members of NSE

• Access to a nationwide trading facility for equities, debt and hybrid

instruments /products

• Ability to provide a fair, effi cient and transparent securities market

to the investors

• Use of the state-of-the ar t electronic trading systems and

technology

• Dealing with an organization that follows strict standards for

trading & settlement
New Membership (persons eligible )

a. Individuals;

b. Par tnership fi rms registered under the Indian Par tnership Act, 1932;

c. Limited Liability Par tnerships registered under the Limited Liability

Par tnership Act, 2008;

d. Institutions, including subsidiaries of banks engaged in fi nancial

ser vices

e. Banks for Currency Derivatives Segment;

f. Body corporates (Companies Act, 2013)

Membership for Diff erent Segments at
NSE(Segment groups)

a. Wholesale Debt Market (WDM) Segment

b. Capital Market (CM) segment

c. Capital Market and Wholesale Debt Market segment

d. Capital Market and Futures & Options (F&O) segment

e. CM , F&O, Wholesale Debt Market segment

f. Currency Derivatives (CD) segment with or without

the above-mentioned segments.

g. Clearing Membership of (NSCCL) as a Professional

Clearing Member (PCM)
Two Types Normal: Unrestricted Business
Expansion
of
Membership Alpha: For focused proprietary
trading with limited clientele
offered are:
 Categories of Normal
Membership

Trading Cum
Trading Cum Self Professional
Trading Member Clearing
Clearing Member Clearing Member
Member
Category of membership

Membership can be taken for any segments individually or in

combination.

1. Trading Member:

• execute trades on his own account as well as on account of his

clients

• Clearing & settlement would be done by Trading-cum CM or PCM

2. Trading-cum self Clearing Member:

• can execute trades and to clear and settle the trades executed on
his own account as well as on account of his clients.
Category of membership

3. Trading-cum Clearing Member:

• execute trades on his own account as well as on account of his

clients and to clear and settle trades executed by themselves as
well as by other trading members.

4. Professional clearing member (PCM):

• clear and settle trades of such members of the Exchange who

choose to clear and settle their trades through this member.
 Categories available under Normal Membership

Futures & Currency

Types of
Cash segment options derivatives Debt segment
Membership
segment segment

Trading Member V V V V

Trading Cum Self V V V V

Clearing Member

Trading Cum - V V V
Clearing Member

Professional - V V V
Clearing Member
 Types of Cash Futures & options
Membership segment segment

Trading V V
Member ALPHA
Trading Cum
Self Clearing
V V
MEMBERSHIP
Member

Trading Cum - V
Clearing
Member
 1. Who is a Stockbroker?

2. What are the conditions subject to which

stockbroker is granted certifi cate by
SEBI?

3. What are the criteria which SEBI checks

out while considering Stockbroker ’s

Recap application?

4. Who can become a member of NSE?

5. State few advantages of Trading Members

of NSE will have.

6. What are the two types of membership

off ered by NSE?

7. What are diff erent categories of

membership available under Normal
What does this picture
say about nature of
stock market?
STOCK
MARKET IS
VOLATILE.
Eligibility Criteria for
Membership at NSE

Standards for admission for members are laid

down by the exchange in terms of

• Corporate structure (share holding pattern)

• Capital adequacy

• Net wor th

• Track record

• Education

• Experience etc.
 Corporate Structure (Shareholding Pattern)

One of the risk containment tool is the concept of ' Dominant Promoter/Shareholder
Group’.

The shareholders holding the majority of shares have a dominant role in the affairs of
the company.

In case of any default by the broking entity, the Exchange should be able to identify
and take action against the persons who are behind the company.

Need to assess background, financial soundness & integrity of the shareholders having
controlling interest

DPG - Called for an interview by MRC at the time of admission.

 Corporate Structure (Shareholding Pattern)

• Dominant Promoter norms are applicable to all trading members.

• Norms relating to dominant promoters falls in diff erent categories such as:

i. Unlisted Corporate Trading Member

ii. Listed Corporate Trading Member

iii. Corporate Shareholders

iv. Banks, Central or State Government owned Finance /Development

Institutions

v. Foreign Entities
Corporate Structure (Shareholding Pattern)

Unlisted Corporate Trading Member

Conditions for TM to be eligible as DPG

a. If a person holds 51% of shares in the trading member corporate on his

own or together with his relatives as defi ned under Companies Act
2013.

b. Person(s) falling within the defi nition of 'control'* under the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations,
1997.*Here 'control' means the right to appoint majority of directors or
to control the management or policy decisions by virtue of the
shareholding or management rights.

c. The support of strategic investors in such corporate trading member.

Corporate Structure (Shareholding Pattern)

Listed Corporate Trading Member:

• In case of listed corporate trading members,

• any person(s) identifi ed as promoter in the off er document or in any

document for off er of securities to the public or existing
shareholders

• or in the shareholding pattern disclosed by the corporate trading

member under the provisions of the Listing Agreement, whichever is
later, would be eligible to constitute dominant promoter group.
Corporate Structure (Shareholding Pattern)

Corporate Shareholders to be identified as Dominant

Shareholders

• Corporate shareholder is allowed to be identifi ed as dominant

shareholders (Dominant Promoter Group - DPG) of a corporate
trading member provided that the corporate shareholder identifi es
any person or persons as their dominant promoter group as per the
aforesaid norms applicable to the corporate trading member.

• In case the dominant promoter group consists of more than one

corporate shareholder, the dominant promoter group should be
identifi ed separately for each such corporate shareholder.
Corporate Structure (Shareholding Pattern)

Banks, Central or State Government owned Finance and/or

Development Institutions:

The following entities are allowed to be identifi ed as dominant

shareholder(s) provided they have a net worth of at least Rs.5O
crores:

• Scheduled Banks;

• Central or State Government owned Finance and /or Development

Institutions;

• Any fi nancial institution registered and regulated by any regulator y

authority such as RBI, SEBI, IRDAI;

• Any other entity that is fi t to be identifi ed as dominant shareholder in

the opinion of relevant authority.
Corporate Structure (Shareholding Pattern)

Foreign Entities

Foreign entities are allowed to take trading membership through their Indian
subsidiar y under the automatic approval route subject to compliance with the
following guidelines of the RBI in this regard.

The promoting foreign entity or its subsidiar y should be

a. Either a bank or insurance organisation regulated by the Central Bank or such

other appropriate regulator y authority of that countr y. OR

• Broking house / par ticipant in the securities market that is registered or

regulated by the relevant regulator y authority of that countr y and that the
relevant authority should be a member of International Organisation of
Securities Commission (IOSCO). OR

• Whose domestic arm or subsidiar y is registered with SEBI for par ticipation in
Corporate Structure (Shareholding Pattern)

Foreign Entities (contd.)

b. The promoting foreign entity shall hold, directly or indirectly not

less than 51 % of the controlling stake in the applicant company
proposing to take the trading membership of the Exchange.

c. The net wor th of the entity having controlling stake in the applicant
company or the promoting foreign entity should be at least Rs. 50
Crores.
Miscellaneous points on DPG
• Change in shareholding pattern of Corporate Trading member is allowed so
long it ’s within the above norms and DPG continues to hold controlling
interest + Prior approval of Exchange is obtained.

• Once DPG is identifi ed at admission, the same has to be maintained at all

times.

• In case of change in DPG, fresh approval of the exchange to be taken same

as time of admission.

• Failure to maintain controlling interest by DPG is treated as breach of

membership norms.
 Disciplinary action

 Wi t h d raw a l o f t ra d i n g f a c i l i t y
 • The net worth of the member is
calculated as summation of Capital and
free reserves less non allowable assets.
Net Worth • Non allowable assets include fi xed assets,
pledged securities, member's card, non-
Requirements allowable securities (unlisted securities),
bad deliveries, doubtful debts and
advances, prepaid expenses, intangible
assets and 30% of marketable securities.
 For Corporate/Limited Liability Partnership

Deposit &
Net worth
requirement
 For Individual / Partnership Firmns

Deposit &
Net worth
requirement
 Two types of Deposit requirements

1. Interest Free Security Deposit (IFSD) : has to be

in liquid cash

2. Collateral Security Deposit (CSD): can be in cash

Deposit or non-cash form.

• Cash component means cash, bank guarantees,

Requirements fi xed deposit receipts, units of money market
mutual fund and gilt funds and any other form of
collateral as may be prescribed from time to
time.
Admission Procedure for New Membership

Admission is a two-stage process

1. Applicant requiring to go through an examination of (a module of NCFM)
relevant segment
• Sole proprietor /one of the designated par tners /one of the designated
director /compliance offi cers
• Securities Market (Basic) Module or Compliance Offi cers (Brokers) Module
or relevant module as below:
• Capital Market (Dealers) Module
• Derivatives Market (Dealers) Module
• National Institute of Securities Markets (NISM) Series I - Currency
Derivatives Cer tifi cation Examination.
2. An inter view with the Membership Recommendation Committee
Admission Procedure
for New Membership

Dealers of par ticular segment

need to clear relevant module
which is a pre-requisite for user-
ids.
Admission Procedure for New Membership

1. Applicants are required to submit the application form to the exchange.

2. Application is for warded to Membership Recommendation Committee

consisting of exchange offi cials.

3. MRC conducts inter view of relevant applicants.

(dominant shareholder and designated directors, in case of individuals

individual himself, two designated par tners in case of par tnership fi rms.)

Purpose of inter view : Info about capability & commitment, fi nancial standing and
integrity

4. MRC recommends the names for admission of trading members to the

Membership Selection Committee. MSC af ter taking into consideration the
recommendations of the MRC either approves or rejects the applications
Admission Procedure for New Membership

5. On getting approval from MSC (NSEIL/NSCCL), an admission on a provisional

basis is provided. (relevant fees, deposit s, and document s for warded to SEBI
for registration)

6. Documents are for warded to SEBI for regist rat ion

7. Af ter compliance with the prescribed norms, SEBI grant s a Regist rat ion
Cer tifi cate in the name of the applicant .

8. Trading member has to satisfy the Exchange and NSCCL regarding all t he
formalities and requirements such as payment of fees /deposits for enablement.

9. User-IDs are issued subject to clearing modules of relevant segment .

10. Ensuring completion of all formalities wit h regard to exchange /NSCCL, TM is

enabled to trade on the NEAT system.
Eligibility
Criteria for
Membership
at NSE
 • TM can apply for surrender of their trading membership once
admitted to the exchange

• Permitted after fulfilling certain conditions by the members such as,

Surrender • Clearing off all the dues to the Exchange and NSCCL.
• Notifying all other TMs of the approval of surrender

of Trading Issuance of a public notification in leading dailies

•

• Deposits would be released by Exchange/NSCCL after a prescribed

Membership lock-in period. lock-in period

not applicable

• TM who are SEBI registered but not enabled

• TM who are SEBI registered and enabled, not traded at all
 Surrender of Trading Membership

Norms a nd procedures r elated to the sur render of member ship.

a. TM is r equir ed to send r equest in writing in prescribed for ma t.

b. TM needs to comply with the pr erequisites. Aspects to be covered in

applica tion from T M:
• Who haas been suspended /disciplinary action taken by the Exchange /SEBI

• Against whom any investigation /action for default taken by the Exchange /SEBI

• W h o i s f a l l i n g w i t h i n c a t e g o r y o f ‘a s s o c i a t e s ’ a s d e fi n e d b y S E B I

• Who owes dues to the Exchange /NSCCL

• A g a i n s t w h o m c l a i m s b y i n v e s t o r s o f va l u e o f R s . 1 0 l a k h o r m o r e a r e p e n d i n g

• Against whom any other claim /complaint is pending in opinion of Exchange /NSCCL

• Whose turnover fees liability to SEBI is still outstanding

 Surrender of Trading Membership
N o r m s a n d p r o c e d u r e s r e l a t e d t o t h e s u r r e n d e r o f m e m b e r s h i p.

c. N o T M w h o h a s s u r r e n d e r e d i s e l i g i b l e t o b e r e -a d m i t te d i n a ny fo r m m e m b e r s h i p o f
t h e E xc h a n g e fo r a p e r i o d o f 1 ye a r

d. Submission of original SEBI r e g i s t ra t i o n c e r t i fi c a te s of r e l e va n t segments,

s u b m i s s i o n o f s u b - b r o ke r r e g i s t ra t i o n c e r t i fi c a te s a s s o c i a te d w i t h T M

e. Re q u e s t e xc h a n g e t o d i s m a n t l e & r e c o ve r a l l t h e l e a s e d l i n e s / V S AT ( s ) a n d o t h e r
equipment

f. A n o t i c e t o p u b l i c by way o f p u b l i c n o t i fi c a t i o n i n n e w s p a p e r s

g. A l e t t e r t o S E B I t o s e e k p e n d i n g d u e s i f a ny

h. A m o u n t p aya b l e b y T M t o wa r d s i nve s t o r s ’ c l a i m s to b e a p p r o p r i a te d a g a i n s t T M ’s
d e p o s i t s ava i l a b l e w i t h E xc h a n g e / N S C C L . ( I f a m o u n t p aya b l e i s m o r e t h a n d e p o s i t s
t h a n a m o u n t s h d b e p a i d b a c k b y T M w i t h i n 2 1 d ay s o f i n t i m a t i o n )
WHAT IF BROKERS
CHEAT INVESTORS
OR
INTERMEDIARIES?
 • The Exchange may expel or suspend , fi ne under

Suspension censure, warn, withdraw any of the membership rights

of a trading member if it is guilty of contravention,

and non-compliance, disobedience, disregard or evasion of

any of the bye-laws, rules and regulations of the

expulsion of Exchange or of any resolutions, orders, notices,

directions or decisions or rulings of the Exchange or

Membership the relevant authority.

Basis of Suspension of Membership

1. Misconduct

2. Un-business-like conduct

3. Unprofessional conduct

4. Trading member’s responsibility for

partners, agents and employees

5. Suspension on failure to provide margin

deposit/capital adequacy requirements
Basis of Suspension of Membership

1. Misconduct:
• F r a u d o r f r a u d u l e n t a c t o r i f h e i s c o n v i c t e d o f a c r i m i n a l o ff e n c e .
• Vi o l a t i o n o f t h e p r o v i s i o n s o f a n y s t a t u t e g o v e r n i n g t h e a c t i v i t i e s , b u s i n e s s a n d o p e r a t i o n s o f
the Exchange.
• I mp r o p e r c o n d u c t .
• Failure to submit to or abide by arbitration.
• Failure to testify or give information sought by the Exchange or any committee or any other
person authorized on that behalf.
• Failure to submit special returns in such form as the relevant authority may from time to time
prescribe.
• Failure to submit audited accounts.
• F a i l u r e t o c o m p a r e o r s u b mi t a c c o u n t s w i t h d e f a u l t e r.
• Failure to submit or make any false or misleading returns.
• Ma k e v e x a t i o u s , m a l i c i o u s o r f r i v o l o u s c o m p l a i n t s .
 Basis of Suspension of Membership (Contd.)

2. Un-business-like conduct:
• Tran s acti o n o r b u s i n es s deal i n gs i n fi cti ti o u s names .

• C i r cu l ati o n o f r u mo ur s .

• Any u n fai r d eal i n g i n s ecu r i ti es whi ch do es n ot r efl ect th e tr ue mar ket val u es .

• M ar ket man i p u l ati o n an d r i ggi ng .

• Unwar ran tab l e bus i n es s whi ch eff ects pu r chas es o r s al es fo r i ts acco u nt o r any acco u nt
r el ated to th e tradi n g member.

• I f a trad i n g member accepts l es s than a fu l l an d bo n afi de mo ney pay ment i n s ettl ement
o f a d eb t d u e b y ano th er tradi ng member ar i s i ng o ut o f a tran s acti o n i n s ecu r i ti es .

• Di s h o n o u r ed ch eq ue.

• Fai l u r e to car r y ou t trans acti on s wi th co ns ti tu en ts

 Basis of Suspension of Membership (Contd.)

3. Unprofessional conduct:
• Business in securities in which dealings not permitted

• Business for defaulting constituent who failed to carr y out engagements

relating to securities and is in default to another trading member

• Transacts in business with an insolvent without obtaining the consent of

the relevant authority even if the individual has obtained his fi nal
discharge from an insolvency cour t

• Carr ying out his business during his suspension period

• Business with suspended, expelled and defaulter trading members

• Business for employees of other trading members

 Basis of Suspension of Membership (Contd.)

3. Unprofessional conduct: (Contd.)

• Bu sin ess fo r Exc h an g e emp loyees if it makes a sp ec u lat ive t ran sac t io n in w h ic h
an employee o f t h e Exc h an g e is direc t ly o r in d irec t ly in terested

• If it adver t ises fo r b u sin ess p u rpo ses or issu e reg u larly c irc u lar or o t h er
b u sin ess c o mmu n ic at io n s to perso n s o t h er t h an it s o w n c o n st it u en t s, t radin g
memb ers of the Exc h an g e, b an k s an d jo in t sto c k c o mp an ies or p u blish es
p amp h let s, c irc u lar o r any o t h er literat u re o r repo r t o r in fo rmat io n relat in g to
t h e sto c k market s w it h it s n ame at t ac h ed

• Evasio n o f marg in requ iremen t s

• Evasio n o f b ro kerage c h arges

• D ealin gs w it h en t it ies p ro h ibited b y SEBI to b u y o r sell o r deal in sec u rit ies

market
Basis of Suspension of Membership (Contd.)

4. Trading member's responsibility for the acts of partners, agents

and employees which are against rules and regulations.

5. Suspension on failure to provide margin deposits and /or capital

adequacy requirements until meet necessary requirements in
regard of both.
 Suspension of business in part or whole

What is under following conditions:

Suspension 1.Prejudicial business

2.Unwarrantable business
of Business 3.Unsatisfactory fi nancial condition
 What is Suspension of Business

1.Prejudicial business:
• Trading member conducts business in a manner prejudicial to the Exchange by
dealing in securities or off ering to deal in securities to upset the equilibrium of
the market or

• bringing about a condition of demoralisation in which prices will not fairly refl ect
market values.

2.Unwarrantable business:
• Trading member engages in unwarrantable business or eff ects purchases or
sales for its constituent's account or for any account which are excessive in
view of its constituent's or its own means and fi nancial resources or in view of
the market for such security,
What is Suspension of Business

3.Unsatisfactor y fi nancial condition:

• Trading member is in a bad fi nancial condition, and it cannot be permitted
to do business with safety to its creditors or the Exchange.
What are the Consequences of Suspension?

Suspension of Rights of creditors

Fulfilment of contracts
membership rights unimpaired

Trading members not

Further business
to deal with suspended
prohibited
trading member
Removal of Suspension
• Suspension continues until the TM has been
allowed by the relevant authority.

• May be done on paying of such deposits or doing

such act or providing such thing as the relevant
authority may require.
Consequences of Expulsion

Trading membership Rights of creditors

Fulfilment of contracts
rights forfeited unimpaired

Trading members not Consequences of

Office Vacated to deal with suspended declaration of defaulter
trading member to follow
 How Trading Member will be declared defaulter?

If Trading Member fails,

a. To fulfi l his obligations ;

b. He discloses his inability to discharge his duties, obligations and liabilities; or

c. To pay within the specifi ed time the damages and the money diff erence due on
a closing-out eff ected against him

d. To pay any sum due to the exchange or to submit or deliver to the exchange on
the due date, deliver y and receive orders, statement of diff erences and
securities,

e. To submit balance sheet and such other clearing forms and other statements as
prescribed
 How Trading Member will be declared defaulter? (contd.)

f. To pay to the defaulters' committee all monies, securities and other assets
due to a trading member who has been declared a defaulter

g. To abide by the arbitration proceedings as laid down under the bye laws, rules
and regulations.

h. If TM an individual /par tnership fi rm /company, fi les a petition before a cour t

of law for adjudication of himself as an insolvent or for its winding up. .

i. If TM is either expelled or declared a defaulter by any other recognised stock

exchange or if the registration cer tifi cate is cancelled by SEBI, af ter providing
an oppor tunity of being heard to such trading member.

j. af ter the receipt of information of expulsion /default by any other stock

exchange or cancellation of registration cer tifi cate by SEBI.
 • Trading members can appoint authorised persons
in the Capital Market, Futures & Options and
Currency Derivatives Segments.

Authorised • Authorised Person is " Any person- individual,

par tnership fi rm, Limited Liability Par tnership
Person (LLP) or body corporate who is appointed as such
by a stockbroker (including trading member) and
who provides access to trading platform of a stock
exchange as an agent of the stockbroker ."
Authorised Person
i. AP can receive remuneration - fees, charges, commission, salary, etc.
for his services only from the stockbroker and shall not charge any
amount from the clients.

ii. Accordingly, stockbroker can share brokerage with the Authorised

Person but shall not charge any amount directly from the clients.

iii. The clients introduced by the authorised person should have a direct
relationship with the trading member i.e. the member-constituent
agreement, know your client forms, risk disclosure document, etc.
are executed between the client and the trading member.
Authorised Person
iv. The trading member should issue the contract notes and bills directly
to the client i.e., the authorized person should not have trading
relationship and not issue contract notes, confi rmation memo and /or
bills in their name.

v. The clients introduced by the authorised person are required to

deliver securities and make payments directly in the trade name of
the trading member (as appearing on the SEBI registration
certifi cate). Similarly, the trading member should deliver securities
and make payments directly in the name of the clients.
 • Sub-broker is an important intermediary between
stock broker and client in capital market
segment.

Who is Sub-
• The trading members of the Exchange may

broker? appoint
concerned
sub-brokers
trading
to
member
act as
for
agents of
assisting
the
the
investors in buying, selling or dealing in
securities.
 T h e s u b - b r o ke r s a r e affi l i a te d to th e tra d i n g m e m b e r s
a n d a r e r e q u i r e d to b e r e g i s te r e d w i th S E B I . A s u b -
b r o ke r i s a l l o w e d to b e a s s o c i a te d w i t h o n l y o n e tra d i n g
m e m b e r o f t h e E xc h a n g e .

T M a p p o i n t i n g s u b - b r o ke r s a r e r eq u i r e d to s u b m i t th e
fo l l o w i n g d o c u m e n ts to th e m e m b e r s h i p d ep a r tm e n t o f
t h e e xc h a n g e :
• C o p y o f s u b - b r o k e r - b r o k e r a g r e e m e n t d u l y c e r t i fi e d b y t h e
trading members

• Application form for registration as a sub-broker with SEBI (form

Sub-broker b)

• Recommendation letter to be given by the trading member with

w h o m t h e s u b - b r o k e r i s a ffi l i a t e d ( f o r m c )

• Reference letter from the applicant's banker

• Reference letter from any other third party (such as CA/CS/

lawyer/notary or other stock broker

• Declaration from sub-broker about non-conviction or presently

n o t u n d e r t r i a l f o r a n y o ff e n c e ( o n t h e l e t t e r h e a d o f t h e s u b
broker)
 Sub-broker

(C ont d.)

• Undertaking from sub-broker about dealing directly with investors and not
with any unregistered intermediary. (On the letterhead of the sub broker)

• Confi rmation from sub-broker that he has not applied through any other TM &
also he is not a member Sub-broker of any of the commodity exchange (on the
letterhead of the sub broker)

• Registered partnership deed and registered partnership certifi cate / MOA &
AOA along with the certifi cate of incorporation

• List of directors of sub broker as on specifi c date to be certifi ed by CA/CS

 Sub-broker

NSE’s KYC Requirements:

1. Individual Client Registration Application Form

2. Non-Individual Client Registration Application Form

3. Sub-broker client agreement

What is the Eligibility to be a Sub-Broker?

• They should not be less than 21 years of age;

• They should not have been convicted of any off ence involving fraud
or dishonesty;

• They should have either passed 12 th standard equivalent

examination from an institution recognized by the government or
10 th standard with 2 years of work experience in securities market.

• They should not have been debarred by SEBI

 • Sub-brokers are required to obtain
cer tifi cate of registration from SEBI in
accordance with SEBI (Stock Brokers &
Sub-brokers) Rules and Regulations,
1992,
Registration Conditions :
• Pay the fees in the prescribed manner
process for
Sub-Broker • Redress of grievances of the investors
within one month of the date of the
receipt of the complaint and keep SEBI
informed about the number, nature and
other particulars of the complaints
received.
 • In case of any change in the status and
constitution, obtain prior permission of

Registration SEBI to continue trading.

process for • He should be authorised in writing , by a

stock-broker for affi liating himself in

Sub-Broker dealing in securities.

(Contd.) • Submit the required d ocuments to the

stock exchange with the
recommendation of a trading member.
 • Request letter of the Trading member
for surrender of sub-broker
registration (on the letter head of
TM).

Cancellation • Undertaking from the Trading

Member (on the letter head of TM).
of
• Application from Sub-Broker for
Registration surrender of registration (Annexure
II), if the sub broker is traceable. If
the sub broker is non-traceable then
a copy of termination notice served
to the sub broker along with the
proof of delivery by the Trading
 • Copy of public notifi cation (newspaper)
intimating the investors /general public
regarding the surrender of registration of sub

Cancellatio broker.

n of • SEBI registration cer tifi cate of the sub broker

in original .

Registratio • Incase original is lost, submit FIR copy along

with affi davit on stamp paper (Rs.100) by both

n TM and sub broker.

(Contd.) Under taking from the member that SEBI has

•
not taken any action against him.

• PAN card of sub broker cer tifi ed by the trading

member.
BROKER-CLIENT
RELATION

Client Registration Documents

• KYC

• MCA

• RDD
Description of broker – client relation

MCA (Member Constituent Agreement)

• TM is required to enter into agreement with the client in the NSE

specifi ed format on non-judicial stamp paper duly signed by both
par ties.

• Copy of it has to be kept with TM permanently.

• Agreement should contain all clauses as mentioned in the Uniform

Documentar y Requirement (UDR).

• In case of Internet Trading, in addition to clauses in UDR, clauses

related to internet trading should also be mentioned.

• TM segregate mandator y and voluntary documents in separate docket.

Client Registration Documentation

Know Your Client (KYC):

a) Investor Risk profi le

b) Financial profi le

c) Investor identifi cation details

d) Address details

e) Income , PAN, Employment, Age, Photo, identifi cation proof

f) Investment experience

g) Trading preference

h) In – person verifi cation

Client Registration Documentation

Member Constituent Agreement (MCA):

TMs are required to make the constituents /clients aware of:

a) trading segment to which TM is admitted.

b) Par ticulars of SEBI registration number

c) Precise nature of TM’s liability for business to be conducted.

d) Basic risks involved in trading on the Exchange. Including

the liability and the capacity in which TM acts.
Client Registration Documentation

Risk Disclosure Document (RDD):

TM is required to issue RDD to assess the risk involved in trading in

prescribed format duly signed.

• There is no limit on the number of clients for a TM.

• Copy of the client registration documents is required to be sent to

the clients.

• Trading member must ensure periodic review of client's fi nancial

information & client database.
 • Mandator y for all trading members to use
Unique Client Codes for all clients.

Brokers are required to

• Collect and maintain the Permanent Account

Number (PAN) for all their clients.

Unique • Verify the documents with respect to the

unique code and retain a copy of the

Client Code document.

• Provide the PAN and UCC of their clients to the

(UCC) stock exchanges /clearing corporations

• The stock exchanges maintain a database

of client details submitted by brokers.
 • Margins are a mount collected from clients by the TM
to have a prudent system of risk management to
protect themselves from client default.

• The policy of risk management addressing the

margin requirements should be well documented
and be made accessible to the clients and the stock
exchanges.

• In capital market segment, the quantum of margins,

the form and the mode of collection are lef t to the
Margins from discretion of the members.

• The margin so collected is kept separately in the

the Clients client bank account /client benefi ciar y account.

• In case of default, they are utilized for making

payment to the clearing corporation for margin and
settlement with respect to that client.
 • A n o r d e r t o b e p l a c e d o r m o d i fi e d a f t e r t h e o r d e r h a s e n t e r e d
t h e s y s t e m b u t h a s n o t b e e n t ra d e d , t h e T M m a y o b t a i n o r d e r
p l a c e m e n t / m o d i fi c a t i o n details in writing from the
constituent.

• TM should provide order c o n fi r m a t i o n / m o d i fi c a t i o n slip

Execution of a c c o r d i n g l y.

• I f c o n s t i t u e n t wa n t s a n o r d e r t o b e c a n c e l l e d , o r d e r h a s b e e n
e n t e r e d i n t h e s y s t e m b u t h a s n o t b e e n e xe c u t e d , T M m a y
Orders obtain the order cancellation details in writing.

• T M s h o u l d p r o v i d e o r d e r c a n c e l l a t i o n d e t a i l s a c c o r d i n g l y.

• T M s h o u l d d u l y n o t i f y i f o r d e r r e s u l t s i n t ra d e , r e q u e s t f o r
m o d i fi c a t i o n / c a n c e l l a t i o n c a n n o t b e c a r r i e d o u t .
• The contract note should contain name and
address (registered offi ce address as well as
dealing offi ce address) of the TM, the SEBI
registration number of the TM, details of
trade viz. order number, trade number,
order time, trade time, security name,
quantity, trade price, brokerage, settlement
number and details of other levies.

• As per Regulation 18 of SEBI (Stock-Brokers

& Sub-Brokers) Regulations, 1992, the TM
should preserve the duplicate copy of the
contract notes issued for a minimum of 5
years.

https://www.chittorgarh.com/article/zerodha-contract-note-expl
ained/524/
The TM should ensure that:

• Contract Note is issued to a client within 24

hours and should be signed by the trading
member or by an authorized signator y trading
member.

• Contract Notes are in the prescribed format.

• Stamp duty is paid

• All statutor y levies are shown separately in

the Contract Note
What is the duration
• TM should make payment or deliver the
for
securities purchased withing 1 working
Payments /Delivery
day of pay-out unless the client has
of Securities to the
requested otherwise.
Clients?
 • The m a xi m um b r o kera g e cha r g ea bl e b y TM i n C M seg m ent
is fi xed at 2.5% of the contra ct pr i ce, excl usi ve of
sta tuto r y l ev i es.

What is •

•
Thi s m a xi m um br o kera g e i s i ncl usi ve of sub -b r o kera g e.

The b r okera g e sho ul d be i nd i ca ted sep a ra tel y f r om the

p r i ce, i n the co ntra ct note.
Brokerage? • The TM m ay not sha r e b r okera g e wi th a p er son who i s a TM
or i n em p l oy m ent of a no ther TM .
Why is a • Separate bank account: The TM should
maintain separate bank accounts for client's
separate funds and own funds. It is compulsory for all
TMs to keep the money of the clients in a
Bank separate account and their own money in a

Account separate account.

• Separate DEMAT account: The trading

needed for members should keep the dematerialised
securities of constituents in a separate
Clients and benefi ciary account distinct from the
benefi ciary account maintained for holding their
Brokers? own dematerialised securities.
 • Tripartite Agreement needs to include
stock broker specifying the scope of

Nature of rights and obligations of the sub-

broker, the stock-broker and such client

Sub-broker- of the sub-broker as per the norms

prescribed by SEBI.
Client
Relationships • Sub-broker to assist client redressal of
grievances, or faster settlement of any
arbitration.
 • Investor complaints received against the trading
members / companies in respect of claims / disputes for
transactions executed on the Exchange are handled by
the Investor Ser vice Cell (ISC).

The complaints are forwarded to TMs for resolution and

Investor
•
seeking clarifi cations.

Service Cell The ISC follows-up with the TMs and makes eff or ts to
•
resolve the complaint expeditiously.

• When it is not possible to administratively resolve the

complaint, investors are advised to take recourse to
the arbitration.
 • Arbitration, a quasi-judicial process, is an alternate
dispute mechanism prescribed under the Arbitration and
Conciliation Act, 1996.

• Exchange bye-laws prescribe the provisions and

procedure of Arbitration.

Arbitration
• The reference to Arbitration should be fi led within 6
months from the date when the dispute arose.

• Time taken by ISC is excluded by the arbitrator.

 What are the features of the

Code of Advertising ?
• Trading Members of the Exchange while
issuing advertisements in the media have to
comply with the Code of Advertisement
Code of prescribed by the Exchange.

Advertising • In pursuance of that, a copy of an

adver tisement has to be submitted to the
Exchange to get a prior approval before its
issue in publication /media.

• Application for approval in prescribed format.

• Non-compliance may result in disciplinary

proceedings.
 The Code of Advertisement is as follows:

1. Adver tisement shall include all forms of communications issued by or on

behalf of Stock Broker in publicly available media that may infl uence
investment /sale decisions of any investor /prospective investors.

2. Forms of communications shall include , form of document, pamphlets,

circulars, brochures, notice or any research repor ts or any other literature or
information, material published, or designed for use in a newspaper, magazine,
SMS or other periodical, radio, television, telephone or tape recording, video
tape display, signs or bill boards, motion pictures, telephone directories (other
than routine listings) or other public media including websites or emails,
whether in print or audio visual form or used in workshop /seminar or public
speaking or in any other manner.
The Code of Advertisement is as follows:

3. Advertisement /Material shall contain….

4. Advertisement /Material shall NOT contain…..
5. Compliance and other requirements
3. Advertisement /Material shall contain:

1. Name of the Sto ck Bro ker, registered o ffi ce address o f the member, SEBI Registration
No (all registration numbers and names o f the Exchanges in case of multiple
memberships)/ Stock Broker ID allotted by Exchange and lo go of the Stock Broker, if
any.

2. Info rmatio n which is accurate, true, fair, clear, complete, unambiguous and concise.

3. Standard warning in legible f onts (minimum 10 f ont size) which states ' investments
in securities market are subject to market risks, read all the related documents
carefully before investing.' No addition or deletio n o f wo rds shall be made to the
standard warning.
• In audio-visual media ­ based adver tisements, the standard warning in visual and
accompanying voice over reiteration shall be audible in a clear and understandable
manner. (17 wo rds running fo r at least 5 seconds may be considered as clear and
understandable)
 3. Advertisement /Material shall contain:

4. In ca se t h e m o de o f adver t isem en t i s S MS / M essa ge / Po p- u p, et c. a n d t h e det a i ls su ch a s

fu ll n a m e, lo go, fu l l regi st ered o ffi ce a ddress, S E B I regi st ra t i o n n u m bers a n d st a n da rd
di scl ai m er are n o t m en t io n ed, th e n o ffi c ial we b s ite hy p e r lin k h as to b e p r ov id e d in
s u c h S M S/ M e s sag e / Po p -u p, e tc . an d t h e websi t e m u st co n t a i n a l l su ch det a i ls.

5. If t h ere is m en t i o n i n g o f c o n te n t p e r tain in g to any o t h er b u s in e s s ac tiv ity su ch a s

Mu tu al Fu n ds, IP O, In su ra n ce, C o m m o dit i es, B o n ds, F ixed D epo si t s, L o a n s, et c., i n t h e
a dver ti sem en t , th en r e sp ec tive r e g istrat io n n u mb er (s ) wh ere a ppl i ca ble sh o u l d be
m en ti o n ed.

6. If t h e m em ber i s o n l y a di st ri bu to r /s fo r a ny o f t h e pro du ct s m en t i o n ed i n t h e
a dver ti sem en t , di scl ai m er th at th ey are o n ly d is t r ib u to r / s o f s u c h p r o d u c t s s h o u ld
b e sp e c ifi c ally me n tio n e d in th e d isc laime r.
 3. Advertisement /Material shall contain: (Contd.)

7. In ca se a ny sp eci fi c secur i ty /secur i ti es are d i sp l ayed in the a d ver ti sem ent as

exa m p l es, d i scl a i m er tha t "T he s e cur itie s quote d a r e e xe mpla r y a nd a r e not
r e comme nda tor y" sho ul d b e m enti oned .

8. If the a d ver ti sem ent conta i ns p r epa i d B r okera g e schem es, Excha ng e ci r cul a r (r ef. no.
N SE/IN SP/2 6 2 5 2 d a ted M a r ch 24, 2014) r eg a r d i ng pr e- p a i d schem es shoul d be
com p l i ed wi th. In ca se a ny thi ng r el a ted to the b r o kera g e ra tes off er ed b y the m em b er
i s m enti oned i n the a d ver ti sem ent, then a d i scl a i m er sta ti ng tha t the "Br oke ra ge w ill
not e xce e d the SE BI pr e s cr ibe d limit" s hould be me ntione d.
 4. Advertisement /Material shall not contain:

1. A nythi ng whi c h i s other w i s e prohibite d for public a tion unde r the re le va nt Ac t,

unwa rra nted, or ma ke a ny promi s es .

2. Sta tements w hi c h a re f a lse , mis le a ding, bia sed or de c e ptive , bas ed on as s umpti ons
projec ti ons .

3. Sha l l not c onta i n a ny misle a din g or de c e ptive te stimonia ls.

4. Sta tements w hi c h di rec tl y or by i mpl i c a ti on or by omi s s i on may misle a d the investor.

5. A ny s ta tement des i g ned a s like ly to be misunde rstood or l i kel y to di s gui s e the

s i g ni fi c a nc e of the s ta tement.

6. A ny s ta tement des i g ned to e xploit t h e la c k of e xperie nc e or knowle dge of the

i nves tors .
 4. Advertisement /Material shall not contain: (contd.)

7. Exaggerated or unwarranted slogan, inconsistent with or unrelated to the nature

and risk and return profi le of the product.

8. Promise or guarantee of assured return to the general investors.

9. Statement which discredits other adver tisements or stockbroker or make unfair

comparisons.

10. Representations made about the per formance unless suppor ted by data. +
Disclosure that “Such representations are not indicative of future results.”

11. Superlative terms, such as best, No. 1, one of the best, among market leaders

12. Recommendations such as BTST (Buy Today and Sell Tomorrow), ATST (Acquire
Today and Sell Tomorrow)
5. Compliance and other requirements

1. Prior approval for the advertisement /material from the exchange.

2. No celebrities shall form part of advert or material.

3. Statistical information to be supported by source.

4. Advertising claims stated to be based on independent research should

be supported by source.

5. Suspended stockbroker can not advertise singly or jointly along with

other stockbroker during the period of suspension.

6. In the even of proceeding or action against stockbroker by any other

regulatory body, Exchange shall reserve the right to prohibit stockbroker
from advertising.
5. Compliance and other requirements (contd.)

7. Shall not involve or engage in games, leagues, schemes, competitions

etc which may involve distribution of prize monies, medals, gifts etc.

8. These norms shall be applicable to any other investment, consultancy

agencies associated with stock broker concerned and advertisement
wherein the stockbroker name is mentioned.

9. Copy of the adver tisement shall be submitted to the Exchange at

least 7 days before its issue.

10. Members need to submit updated undertaking along with

advertisement for approval .
THE END