SR. EXECUTIVE DIRECTOR

SMD/SED/CIR/93/22570
October 21, 1993

To,

All the Presidents/Executive Directors
of all Stock Exchanges

Dear Sir,

Capital Adequacy Norms For Brokers

This has reference to SEBI’s letter No. SMD-I/11087/92 dated 4th November, 1992. On receiving the comments from various stock exchanges on the norms circulated by us it has been decided that the norms as set out in the annexure shall be made applicable to the stock brokers in all the stock exchanges. You are, therefore, hereby directed to make the necessary provisions in Your Bye-laws and Regulations for the purpose. The amendments to be made to the Bye-laws and Regulations should be forwarded to us for formal approval.

As may be seen from the annexure, the norms are required to made applicable to all stock brokers with effect from December 1, 1993 onwards and will be gradually enhanced to the final limit by December 1, 1994. You are, therefore, requested to take urgent steps to get the Bye-laws and Regulations of the Exchange amended at the earliest.

Yours faithfully,
sd/-
C B BHAVE

encl: a/a

CAPITAL ADEQUACY NORMS FOR STOCK BROKERS

The Capital Adequacy requirements shall consist of the following two components:

A. BASE MINIMUM CAPITALAn absolute minimum of Rs 5 lakhs as a deposit with the exchange shall be maintained by member brokers of the Bombay and Calcutta Stock Exchange, and Rs 3.5 lakhs by the Delhi and Ahmedabad Stock Exchanges. In case of the other stock exchanges the minimum required shall be Rs 2 lakhs. This requirement is irrespective of the volume of business of an individual broker. The security deposit kept by the members in the exchanges shall form part of the base minimum capital.

FORM IN WHICH BASE MINIMUM CAPITAL TO BE MAINTAINED

25% of the base minimum capital shall be maintained in cash with the Exchange. Another 25% shall remain in the form of a long term (3 years or more) fixed deposit with the bank on which the stock exchange has given a completely unencumbered and unconditional lien. The remaining shall be maintained in the form of securities with a 30% margin. The portion of the base minimum capital in the form of securities, shall comprise securities standing in the name of members. The securities deposited in this regard shall be pledged in favour of the exchange, with the member and the exchange jointly apprising the companies concerned regarding the fact of pledges. The value of the securities shall be reviewed by the Exchange at least every two months keeping in view the market fluctuations and the exchange can call for additional securities if necessary.

B. ADDITIONAL OR OPTIONAL CAPITAL RELATED TO VOLUME OF BUSINESS

The additional or optional capital required of a member shall at any point of time be such that together with the base minimum capital it is not less than 8% of the gross outstanding business in the exchange. The gross outstanding business would mean aggregate of upto date sales and purchases by a member broker in all securities put together (including inter-client business not executed on the floor of the exchange) at any point of time during the current settlement.

Explanation:- No netting of sales and purchases made on behalf of clients will be permitted. However, sales and purchases made by the broker on his own behalf in the same security will be allowed to be netted and his exposure will be limited to the price differential.

The requirement of 8% of the gross outstanding business for base minimum capital together with the additional capital may be phased in the following manner:

a. A requirement of 3% being enforced from December 1, 1993.b. The requirement being enhanced to 5% from June 1, 1994.

c. The requirement of full 8% being enforced from December 1, 1994.
On enforcement of full norms the “gross outstanding” business of a member at any point of time shall not exceed 12.5 times of his base and additional capital requirements.On the outstanding business reaching 10 times base and additional capital, it shall be the responsibility of the member to intimate the exchange.

If the outstanding business reaches 12.5 times base and additional capital, the member shall not increase his outstanding business until additional capital has been brought into business and the stock exchange is satisfied that the member could be allowed to trade further.

In the interim period in which the norms of 8% has not been enforced proportionate ratios would be applied.
1) CALCULATION

The capital of a member shall be computed as follows:-

Capital + Free Reserves
Less non-allowable assets viz.,

a. Fixed Assets,
b. Pledged Securities,

c. Member’s card

d. Non-allowable Securities,

e. Bad Deliveries,

f. Doubtful Debts and Advances,*

g. Prepaid Expenses,

h. Intangible Assets,

i. 30% of Marketable securities
* Explanation:- Includes debts/advances overdue for more than three months or given to Associates.

The members who do not maintain proper books of accounts or do not submit copies of their audited accounts in the stipulated time shall be liable to be asked to deposit the additional capital in the form of cash with the exchange. An auditors certificate shall be submitted by each member every quarter indicating the net liquid capital with the member/member firm.

2) MARGIN REQUIREMENTS

The Stock exchange shall suitably modify the daily carry forward and renewal margin so as to ensure that the working capital of the members is not unduly locked up. However, the stock exchange shall continue to have the authority to impose suitable margins as per their judgement in the context of the market situation.

3) MONITORING REQUIREMENTS

It shall be the responsibility of the member to inform the exchange regarding compliance with the additional capital maintained in the business. It shall also be the duty of the member broker to intimate the stock exchange on reaching a gross outstanding position of 10 times his base and additional capital

For every quarter (ending March 31, June 30, September 30 and December 31) from the date in which the capital adequacy norms come into force, the members who maintain the additional capital in their books, would have to furnish to the exchange an auditor’s certification to the effect that the additional capital required as per the capital adequacy norms have been maintained in the business and that the member has complied with the requirement of informing the exchange on reaching the limits stated above. Such certification will be provided within one month of the end of the quarter.

4) PENALTIES

Failure to comply with the capital adequacy norms will invite penalties including fines and suspension from trading. Failure to inform the Stock Exchange on reaching the prescribed limits will also be punishable under the Bye-laws of the Stock Exchange.

5) BUSINESS EXEMPT FROM CAPITAL REQUIREMENTS

Transactions in which the broker deposits delivery within 48 hours with the stock exchange/clearing house/or a designated depository.

6) REQUIREMENTS FOR CAPITAL ADEQUACY AS AN UNDERWRITER

The capital adequacy requirement for members doing underwriting business will be separately prescribed by SEBI as per the provisions of SEBI (Underwriters) Regulations, 1993.

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