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.