Securities and Exchange Board of India
Circular No. FITTC/CUST/08/1999
December 22, 1999
All Custodians of Securities,
Foreign Institutional Investors,
Stock Exchanges, Depositories
SUB: Hand Delivery Trades
Please refer to SEBI press release No. 218/99 dated September 23, 1999 proposing to restrict ‘Hand Delivery Trades’ (HDT) for institutional investors like Foreign Institutional Investors (FIIs) and Mutual Funds w.e.f. January 15, 2000. Subsequent to the above press release SEBI had received representations from some FIIs requesting SEBI to reconsider the decision as this system was akin to the ‘Delivery versus Payment’ (DVP) prevalent abroad. It was also mentioned that some of the FIIs were legally prevented from dealing except on DVP basis.
A meeting with some representatives of FIIs, custodians of securities, major stock exchanges, clearing houses and large brokers was held on December 10, 1999 to reconsider the issue of restricting Hand Delivery Trades. It was clarified that SEBI had never decided to disallow the DVP trades. The earlier decision of SEBI was meant to stop HDTs which were different from the DVP trades executed in the developed markets. In the DVP trade, delivery and payment are supposed to be simultaneous whereas in HDT this synchronisation was absent.
Besides, from the data made available by the custodians it was noticed that through the mechanism of hand delivery trades a large number of trades involving substantial funds remained unsettled for a long time. It was also pointed out that the cost of transactions involving hand delivery trade was higher that the cost incurred for a transaction conducted through clearing house/ corporation. SEBI also voiced its concerns regarding instances of delayed settlement of HDT as compared to clearing house deals and expressed its commitment to timely settlement of all deals.
After discussion with the various intermediaries, it was decided that FIIs may be allowed to settle the transactions through hand delivery mode subject to the following conditions:
1. The HDTs would be subject to the Rules, Bye-laws and Regulations of the stock exchange where the trades are executed.
2. In order to bring these trades under similar time schedule as the trades settling through Clearing House, all HDTs will have to be compulsorily settled with the clients’ custodians within two working days of the pay-out date for that settlement at that stock exchange.
3. However, if the trade is partly settled in the Clearing House (i.e. full delivery is not received on the due date) and therefore, involves auction / close -out procedures, then such trades should be settled with the clients’ custodians within two working days of the completion of the auction / close-out process for that settlement at the respective stock exchange.
4. With a view to monitor the settlement of HDTs, all custodians are required to submit a monthly report in this regard in the enclosed format within one week of the beginning of the next month.
5. SEBI would take a serious note of delay in settlement of trades and impose penalties on the defaulting intermediaries.
6. This system is to be implemented with effect from the first settlement beginning after January 01, 2000 at the various stock exchanges.
7. It is proposed to review the position regarding HDTs in first week of April 2000.
You are advised to bring the contents of this circular to the notice of your constituents.