SEBI : Defaulting member – distribution of assets

Securities and Exchange Board of India (SEBI)

SR. EXECUTIVE DIRECTOR

To,

The Presidents/Executive Directors of
Bombay/Madras/Delhi/Calcutta/Ahmedabad/
Bangalore/Bhubaneshwar/Cochin/
Coimbatore/Gauhati/Hyderabad/
Jaipur/Ludhiana/Madhya Pradesh/
Magadh/Mangalore/Pune/Saurashtra
Kutch/ Uttar Pradesh/ Vadodara/OTC Exchange of India

Dear Sir

Defaulting member – distribution of assets

We invite your attention to Bye-Law No. 342 and Rule No. 16 Of the Bombay Stock Exchange relating to application of assets/auction money realised from sale of membership rights of the defaulting member as also similar provisions in the bye-laws/rules of other stock exchanges. Many investor associations have strongly represented to us that the said bye-law/rule, as it stands, heavily weighs against the investors of defaulting members. As you would observe from the said bye-law/rule, the net assets of the defaulting member shall be first utilised for meeting the claims of the exchange and the clearing house and thereafter distributed rateably against the claims of the other members against the defaulting member arising out of the contracts entered into in the market with the defaulting broker. It has been represented to us that no provision has been made in the bye-laws/rules for meeting the claims of the investors against the defaulting member. Although the defaulting members’ clients can approach the stock exchange for arbitration in respect of their claims against the defaulting member, the claims of these investors are given the last priority in the matter of the settlement of claims. This is inequitable.

The matter was also raised in SEBI’s Secondary Markets Advisory Committee and the Committee was of the view that all the above claims against the defaulting member should be ranked on par and rateably distributed. You are therefore requested to take up the question of suitable amendments to the bye-laws of your stock exchange and carry out the amendments if the Governing Boards so agree. In case there is no agreement , your views may be communicated to us within two months of the receipt of this letter.

Please acknowledge receipt.

Yours faithfully,
sd/-
C. B. BHAVE