Standard operating Procedure case of Trading Member / Clearing Member leading to default.
Relevant Circular: SEBI Circular No. SEBI/HO/MIRSD/DPIEA/CIR/P/2020/115 dated 01.07.2020
To Protect the of non-defaulting clients of a Trading members/Non defaulting Clients/TMs of the Clearing Members in the likely event of default by TM/CM, there is a need for Standard Operating System or procedure.
It is enumerating the steps to be taken by the SEs/ CCs/ Depositories in such case where SE/CC is of the view that TM/CM is likely to default in repayment of funds or securities to its client.
To bring Harmonization
In order to harmonize the action amongst all SEs /CCs/ Depositories in a time bound manner this SoP has been prepared in consultation with SEs, CCs, and depositories so as to achieve uniformity in implementation of actions.
The SOP lays down the actions to be initiated by the SEs/ CCs / Depositories within a time frame after detection of the early warning signals as laid out in this circular an d other trigger as laid down in circular until declaration of default of TM/CJM by the SE /CC.
Once the TM declare defaulter, the proceedings shall be in Compliance with the bye laws, rules and regulations of SE/ CC respectively.
Actions to be take after analysis of early warning signals
The following actions shall be taken by Initiating Stock exchange/SEs/CCs and Depositories as per the time line given below.
| Seek documents / explanation or Meeting with designated directors of TM. | Within 3 trading days of trigger |
| A limited purpose joint inspection of TM shall be initiated. ISE along with other SEs shall send a team of officials for taking possession of the copy of the books of accounts and other relevant records including but not restricted to securities register, trial balance, client master, bank books, debtors and creditors ledger (preferably in electronic mode) for the last 3 years (if available) | Within 3 trading days of the meeting / explanation with the designated directors |
| a) The explanations offered by the designated director(s) of the TM shall be analysed by the ISE and based on the information available, to protect the interest of non-defaulting clients, as an interim measure, the trading terminal of the TM may be directed to be disabled by the Managing Director of the ISE for reasons to be recorded in writing.
b) A preliminary assessment of assets and liabilities of the TM shall be completed by the ISE. |
Within 7 trading days of above point |
| ISE shall issue a notice / circular informing the disablement of the TM in all segments. | Within 1 day of disablement |
| ISE shall communicate the decision of disablement of the trading terminal(s) of the TM along with detailed reasons for disablement to the TM and CM(s) with an advice to CM(s) to square-off open positions of TM and its clients | Within 1 trading day of disablement |
| ISE shall inform the Depositories about the disablement immediately and advice Depositories to freeze the demat accounts of the TM (including TM Pool Accounts). (ISE shall give specific instructions along with PAN to the Depositories). Any debit in the demat account of TM shall be made under supervision of ISE | Within 1 trading day of disablement |
| ISE shall inform other SEs about the disablement immediately and the other SEs shall disable the said TM on receipt of information and the other SEs shall Issue a notice / circular in this regard. | Within 1 trading day of receipt of intimation of disablement from ISE |
| TM may also stand suspended to act as a client with any other TM / CM in any other segment / SEs. | Within 1 trading day of the date Page 3 of 10 of receipt of information of disablement from ISE |
| In case of open positions of clients / TM, CM shall liquidate / square off the open positions | Within 15 trading days from the date of receipt of information by the CM |
| a) All SEs shall immediately direct other TM / CM so as not to alienate the unencumbered surplus funds / securities held by them for such TM registered as a client.
b) CM shall invoke the BGs of TM and all unencumbered funds of TM to be transferred to SE on demand. CM shall also ensure that the BG do not expire in the intervening period else they shall invoke even before the receipt of instructions from SE. |
Within 1 trading day of the date of receipt of information of disablement from ISE Upon instructions from SE |
| All SEs shall inform the CM / CC regarding pay-out proceeds due to the TM which shall be credited to the settlement account of the TM. | As and when payout is made |
| If the open position of clients of TM could not be liquidated / squared off, the re-pledged securities of the client of the TM lying with the CM in the Client Securities Margin Pledge Account and other identifiable collateral of the client of TM such as cash / Bank Guarantee (BG) / Fixed Deposit Receipts (FDR) / Mutual Fund Units shall be taken / encashed over by CM wherever possible in accordance with guidelines issued in this regard from time to time. | Within 15 trading days from the date of receipt of information by the CM |
| All the securities lying in client unpaid securities account of the TM (CUSA) shall be liquidated by CM / CC / ISE and the sale proceeds shall be credited to respective client’s financial ledger. In this situation depository shall not levy any penalty on such transactions | Within 15 trading days from receipt of information of disablement from ISE |
| a) ISE, in consultation with SEs / CCs, shall appoint a forensic auditor to conduct forensic audit of books of accounts of the concerned TM. All SEs shall obtain details of the free securities / collateral available with their respective CM and CC and provide to the forensic auditor.
b) An assessment of assets and liabilities of the TM shall be undertaken by the forensic auditor. The liabilities to the clients for funds and securities shall be established with demarcation of securities belonging to the fully paid clients or partly paid / unpaid clients. |
Within 15 trading days of disablement
Within 3 weeks of appointment of forensic auditor |
| ISE shall also provide a report to SEBI on the reasons for trigger, the meetings held with directors of the TM / CM and the outcomes of limited purpose inspection, the details of actions taken and proposed to be taken under the SoP and any other information that the ISE may deem relevant. | Within 30 trading days from the date of trigger |
| Depositories to freeze the demat accounts of the TM (including TM Pool Accounts) | Within 1 trading day from the receipt of information of disablement |
| Depositories shall not allow new account opening by the DP (Defaulting TM / CM) and shall suspend all Power of Attorney in favour of the defaulting TM given by its clients. | Within 1 trading days from the date of receipt of information of disablement |
| If the TM is also a Depository Participant (DP), the Depositories shall depute its officials / auditor to monitor the transactions in demat securities of the clients of TM and / or transfer the demat accounts of the clients to another DP | Within 3 trading days from the date of receipt of information of disablement |
| Depositories shall initiate concurrent audit for 100% verification of debit transfers executed from the client accounts and account closures processed by the DP. | Within 7 trading days from the date of receipt of information of disablement |
| Depositories shall provide the details of pledges that were invoked by Banks/ NBFCs with whom TM’s own securities were pledged in the previous 30 days to the SE / CC. | Within 15 trading days from the date of receipt of information of disablement |
| Issuance of instruction to the banks that the balance in all the bank accounts of TM / CM shall be frozen for debits by Banks. | Within 1 trading day of receipt of information of disablement |
| SEs to direct CCs / CM to invoke the unencumbered collateral deposits including BGs / FDRs | Within 1 trading day from disablement |
| CCs / CM shall secure the unencumbered collateral deposits, electronic balances in the depository accounts of the TM / CM, including BGs as per the directions received from SEs | Within 1 trading day on receipt of information of disablement |
With regard to the restoration of securities of clients lying with the CM, post crystallization of balances in the financial ledger of clients by forensic auditor or as per the Auditor’s certificate as may be provided by Member:
In this regard, the related parties of the trading member shall not be considered for settlement, for which the TM shall provide an undertaking to the SEs / CC. |
Within 30 trading days from crystallization of balances |
| ISE / SEs / CCs shall endeavour to settle the claims of maximum number of clients by way of interim measures, under their supervision prior to issuing show cause notice (SCN) for declaring the TM a defaulter. The TM shall be instructed to pay small investors out of available funds and own resources (movable and immovable) under the supervision of the ISE / SEs. Further, the unencumbered deposits available with the SEs / CCs, after adjusting for any dues of the SE / CC and maintaining the minimum BMC, shall also be utilised for settling the credit balance of investors starting from the smallest amount. Also any surplus available with any SEs / CCs, shall be utilised for settling the credit balances of clients with respect to other SEs. BGs of the TM shall be invoked and also the FDRs shall be encashed for utilisation. SEs / CC may settle such clients in tranches. For this purpose, the balances of client will be netted across exchanges to arrive at the final credit balance due to such client. The TM shall furnish the proof of payment to the clients, to the SEs. In this regard, the related parties of the TM shall not be considered for settlement, for which the TM shall provide an undertaking to the SEs / CC. TM to provide indemnity to the SEs to make available the funds to meet any shortfall in meeting investor’s claim (other than those who have withdrawn their claim). Clients withdrawing their claim will have to submit unconditional withdrawal letter to the SEs. | Within 30 trading days from crystallization of balances |
| Issuance of SCN for declaration of TM as a defaulter and the list of members to whom the notice is issued shall be placed on the website of the SE and on such other place, as the relevant authority may deem fit. | After finalization of assets and liabilities as per forensic audit or audit by SEs |
| SEs shall intimate the clients about the issuance of the notice / SCN to declare the TM as defaulter including through email / SMS. | Within 3 trading days of the issuance of SCN |
The above action shall equally apply to a likely event of default by a CM who is also a TM. However, in case of likely default of a Professional CM, the action to be initiated by the CM shall fall upon the CC.
Powers of SEs/CCs/ Depositories
Stock Exchanges, Clearing Corporations and Depositories are directed to:
a) bring the provisions of this circular to the notice of their members and participants, as the case may be, and also disseminate the same on their websites;
b) make necessary amendments to their bye-laws, rules, regulations as may be necessary;
c) communicate to SEBI, the status of the implementation of the provisions of this circular in their monthly development report.
Relaxation from compliance to REITs and InvITs
Relevant Date: 01.07.2020
Relevant Circular: SEBI Circular No. SEBI/HO/DDHS/DDHS/CIR/P/2020/114 Dated 01.07.2020
What is New
As per the Circular it has been decided to further extend the due date for regulatory filling and compliances for REIT and InvIT for the period ending on 31st March 2020 by a month over and above the extended timelines specified vide the Circular dated 23rd March 2020.
Author Bio
