A note of SEBI circular dated 3rd December 2009

What was the circular all about?

On 3rd December 2009, SEBI issued a circular no. MIRSD/ SE /Cir-19/2009 with an
objective to further regulate the transactions & dealings between stock brokers & their clients
and to further protect the interests of clients. SEBI in its circulars right from the year 1993 has
been directing the stock brokers and exchanges on the norms to be maintained while dealing with
the clients.

The circular talked on the 6 important points explained in short as follows:

1. Client Registration procedure – For this purpose the broker is supposed to make
available a book/folder containing all the documents necessary for account opening, the
documents being segregated into two parts – mandatory and non-mandatory.

2. Mandatory documents – The circular required brokers to collect the following

documents and clarification from their clients mandatorily:

(i) Member Client Agreement (MCA)/Tripartite Agreement

(ii) Know Your Client (KYC) Form

(iii) Risk Disclosure Document (RDD)

(iv) Indication of Stock exchange and market segment where the client wishes to trade

(v) Identity and the address of the introducer

(vi) Documentary evidence of financial details provided by the clients

(vii) Details of action taken against a client by SEBI or other authorities during the last 3

years.

(viii) Documentation on policies and procedures related to each of the following–

a. Refusal of orders of penny stock

b. Clients exposure limits

c.Applicable brokerage rates

d. Penalty and delayed payment charges – The rate and the period

e.Right to sell clients’ securities in case of non-payment of dues by clients

 f. The policy and procedure for settlement of shortages in obligations arising out of internal

netting of trades

g. Conditions under which a client may not be allowed to take further position or
the broker
may close the existing position of a client,
h. Temporarily suspending or closing a client’s account at the client’s request, and
i. Deregistering a client

3. Non Mandatory documents – Documents other than mandatory documents required by

the brokers, which are not in contravention of any of the clauses in the mandatory documents, as
also the Rules, Regulations, Articles, Byelaws, circulars, directives and guidelines of SEBI and
Exchanges

4. Running account authorization – In case of running account,

(i) The authorization to maintain a running account given by a client should be dated and should
be renewed at least once in a year,
(ii) Client has right to revoke it at any time,
(iii) Broker has a right to retain the funds to cover the obligations of the client on the settlement
date as well as obligations of the next 5 trading sessions.
(iv) There should be compulsory transfer of funds by broker to the client at least once a month or
once a quarter.
(v) Transfers of funds should be made within one day of client’s request
(vi)There shall be no inter-client adjustments for the purpose of settlement of the ‘running
account
(vii) These conditions shall not apply to institutional clients settling trades through custodians.

5. Authorization for Electronic Contract Notes (ECN) – A client can be sent an

Electronic Contract only if the client gives a consent and ECN can be sent only to an e-mail id
created by the client himself, and any change in email id can be communicated by the client
through a physical letter or through an online request in case of internet clients

6. General instructions – Apart from these, the brokers were also directed on general
points like documents font size, providing a free copy of documents to clients, displaying
policies and procedures of brokers’ website, change in terms of agreement, policy regarding
treatment of inactive accounts, delivering statements of balance of funds and securities on 31st
March every year.

The stock brokers were directed to take necessary steps to implement this circular immediately
and ensure its full compliance in respect of all clients – existing or new – at the latest by 31 st
March 2010.

Possible reasons behind the step

 1. Protecting interests of the clients by increasing transparency through more information sharing
from both the broker’s end and the client’s end

2. To curb malpractices such as misuse of funds lying in clients’ account

Was it the first time SEBI came up with guidelines to protect client’s interests
and to increase transparency in dealings between clients and broking houses?

Before this circular, there has been number of circulars by SEBI to protect the interests of
investors in the last two decades issuing guidelines to broking houses and stock exchanges. A
gist of few of these circulars is as follows:

Circular Circular ref no. Subject/Issue Key guidelines

date addressed
18-Nov- SMD/SED/CIR/93/23321 Regulation i. Member brokers should keep the money of the clients in a
93 Of separate account and their own money in a separate account.
Transactions Ii. Member broker needs to keep books of accounts showing
Between payments to and receipts from client
Clients And iii. Obligation to pay money into "clients’ accounts".
Brokers iv. Member brokers should keep separate accounts for
client’s
securities and to keep books of accounts to distinguish such
securities from his/their own securities.
v. Member Brokers shall make payment to their clients
within two working days of pay-out unless the client has
requested otherwise
vi. Member Brokers shall buy and sell securities on behalf of
client only on receipt of margin of minimum 20 percent on
the price of the securities proposed to be purchased.
vii. Member brokers shall issue the contract note for
purchase/sale of securities to a client within 24 hours of the
execution of the contract.
vii. Member brokers can sell on behalf of clients in case of
non-payment of dues or buy securities in case of inability to
deliver securities for delivery
26-Aug- SEBI/MIRSD/DPS-1/Cir- Uniform The following model documents were issued:
04 31/2004 Documentary i. Client Registration Form
Requirements ii. Member Clients Agreements
for trading. iii. Model Tripartite Agreement
iv. Uniform Risk Disclosure Documents
v. Broker Sub broker agreement
15-Dec- SMDRP/Policy/Cir- Electronic Brokers are allowed to issue contract notes authenticated by
00 56/2000 issuance of means of digital signatures provided that the broker has
9-Apr-03 SEBI/SMD/SE/15/2003/29/04 contract notes obtained digital signature certificate f\rom Certifying
Authority under the IT Act, 2000.

8-Sep-05 MRD/DoP/SE/Cir-20/2005 Electronic i. Issuing ECNs when specifically consented

issuance of ii. The usual mode of delivery of ECNs to the clients shall be
contract notes through e-mail
– Additional iii. All ECNs sent through the e-mail shall be digitally signed
conditions iv. There should be appropriate acknowledgement, proof of
delivery and log reports
v. In addition to e-mails, member brokers can provide the
contract notes through website
vi. Those who do not wish to receive contract notes
electronically, need to be mailed the copy in physical form.
What was required from broking houses after the circular was issued?

The guidelines issued in the circular required broking houses to work on the following tasks:

1. Amending the account opening and KYC procedure as per the new guidelines

2. Collecting documents of the existing clients related to financial information at the time of
annual document updation

3. Documenting and intimating the policies and procedures on the points mentioned in the
circular. For that each of the brokers needed to work on following points

a. Defining penny stock and what penny stock really means?

b. Since there is a practice in broking industry to charge different rates of brokerage to

different clients, determining a policy around fixing brokerage rate and publishing it would be a
difficult task

c. Taking a firm stand on practices such as selling client’s securities in case of non-
repayment of dues.

4. In case of clients with running accounts, maintaining funds for margin money as per SEBI
guidelines and transferring funds at least once every quarter were the two main issues.

Issues faced by broking firms reported in media –

1. Added work pressure chasing clients and their details for successful implementation of
new norms.
2. Paying out large amount of funds and securities and also ensure that these are brought
back in timely manner to allow fresh positions for the client.
3. Paying out funds would mean losing low cost short term funds.
4. Use of font size 11 would increase the printing and stationary cost of the brokers.
Directions by BSE

Following the circular, there was a clarification issued by BSE on how to implement the
directions in circulars. This document clarified on the implementation of the circular with respect
to existing and prospective clients. Main points to be noted from the BSE document are as
follows:

1. Segregation of documents as mandatory and non-mandatory should be done only with

prospective clients. For existing clients, whatever documents are not available should be
collected.

2. All the mandatory documents should be in the format prescribed by SEBI.

3. Existing clients must be notified about the information on exchanges/segments they deal
in, through the quarterly statements. For new clients, this information should be taken in writing
as prescribed in the circular

4. For financial details, illustrative list of documents is given as follows:

• Copy of ITR Acknowledgement

• Copy of Annual Accounts

• Copy of Form 16 in case of salary income

• Net worth certificate

 • Salary Slip

• Bank account statement for last 6 months

• Copy of demat account Holding statement.

• Any other relevant documents substantiating ownership of assets.

• Self-declaration along with relevant supporting.

5. It’s the primary responsibility of clients to declare the actions taken by SEBI on the
clients; however the Trading member should use all the information from public sources to
verify the information.

6. For policies and procedures, the brokers need to:

i. intimate the existing clients the policies and procedures,
ii.define what is ‘penny stocks’, necessary before outlining the policy for purchase of penny
stock.
7. Under guidelines for Running account authorization, to calculate funds to be retained for next
trading sessions, broker can
i. Maintain funds enough for margin liability on the date of settlement as well additional margins
(maximum up-to 75% of margin requirement on the day of settlement) to take care of any margin
obligation arising in next 5 days, in case of derivatives segment.

ii. For cash segment, trading member may retain entire pay-in obligation of funds & securities
due from clients as on date of settlement.

8. If the trading member has generated e-mail id for an existing client, trading member would be
required to obtain duly signed physical confirmation letter confirming the e-mail id and
exercising choice to receive documents on this e-mail id. For all prospective clients, e-mail id
should be created / provided by the investor only.
Was the circular implemented in time as prescribed by SEBI?
Few months later to the circular, there were reports in media that that broking houses are
not yet able to implement some main requirements of the circular. The requirement to transfer
funds to the account of clients’ account once a quarter was a most common one not adhered with.
Later the representatives of broking houses such as Association of National exchange Members
of India (ANMI) and BSE Brokers Forum requested SEBI to extend the timeline because of
various issues faced by them in implementing the circular. Before the official news, there were
news already in the media that deadline would be extended upto as long as 6 months.

In response to the request, SEBI issued a circular for extending the timeline on 31st March.
The circular no. MIRSD/ SE /Cir- 5/2010 declared the extension in timeline till June 31st 2010.
 Along with the extension in deadline, SEBI directed stock exchanges to inform brokers
about the circular, publish the circular on website, make necessary amendments to the relevant
bye-laws, rules and regulations for the implementation of the decision in circular, keep on
updating SEBI about the developments on implementation of the circular.