Securities and Exchange Board of India (SEBI)
August 5, 1993
The President/ Executive Director,
Bombay, Calcutta, Delhi,
Madras, Stock Exchanges.
As you are aware we had circulated a Consultative Paper on ‘Market Makers’ and your comments thereon were invited. After taking into account the comments received from various participants in the market the Securities and Exchange Board of India (SEBI) has decided to introduce the concept of market making in your exchange as per the scheme attached. The Reserve Bank of India is separately issuing guidelines to commercial banks to enable the market makers approved by SEBI to avail of bank credit. I would request you to circulate this scheme amongst your members and inform them that they could apply to SEBI through the Exchange for acting as a market maker.
C B BHAVE
cc: The President/Executive Directors of
Ahmedabad, , Bhubaneshwar, Cochin, Coimbatore, Gauhati,
Hyderabad, Madhya Pradesh Bangalore, Ludhiana,
Pune, Mangalore, Magadh, Jaipur, Uttar Pradesh,
Saurashtra Kutch and Vadodara Stock Exchange and OTC for their information.
GUIDELINES FOR MARKET MAKERS
SEBI had issued in April 1993, a preliminary paper proposing to encourage market making in less liquid scrips. Comments and suggestions have been received from some Stock Exchanges, Chambers of Commerce, Investors’ Associations, Brokers and others. After considering them carefully the following guidelines for market makers are issued.
1. Market makers may be introduced in a phased way in the Stock Exchanges and to begin with, market making would be introduced only in the Stock Exchanges of Bombay, Calcutta, Delhi and Madras.
2. Market makers will be approved by the SEBI on the recommendation of the Stock Exchange and after taking into account criteria such as financial strength as per the audited balance sheet and the profit and loss account for the latest period, the volume of transactions done in the last year by the member in the scrips for which he chooses to be market maker, his total turnover for the corresponding period, turnover as a jobber if he is operating as a jobber in any of the scrips, defaults by the member, timely payment of margins, disciplinary action, pending arbitration etc.
The list of scrips for which he chooses to act as a market maker should be furnished to and also approved by the SEBI
3. Each such market maker approved by the SEBI should make a market for a minimum of 5 scrips(Equity Shares). Initially market making would be introduced only for those scrips which are not included in the BSE National Index. Each market maker shall be required to acquire at least 30,000 shares in each of the scrips. SEBI may vary the minimum number of shares required to be acquired based on the face value of the share, average delivery per settlement, floating stock of the company etc.
4. Initially not more than two market makers in each stock exchange would be permitted for the same scrip. The jobbers working at present in different scrips could continue to do so.
5. The market maker shall execute contracts in the designated scrips on a delivery and payment basis in the same settlement(but not on the basis of badla). In order to get his shares transferred in his name, if he so requires, he will be permitted to stop making the market for designated periods prior and subsequent to the record date after due notice to the market and with the prior approval of SEBI.
6. Under the scheme, the market maker would be required to give a continuous two-way quote along with the depth(Number of tradable lots) for the scrips in which he has been authorised to operate as a market maker. The market maker will not be allowed to vary his quote on any day unless he has concluded at least one trade of marketable lot in the preceding quotation given by him during the day. The buying and selling spreads would be determined by the supply and demand conditions prevailing in the market. Restrictions on the spread may be imposed, if necessary at a later date after observing the functioning of the market making mechanism.
7. Separate trading counters will be provided to the market makers on the floor of the exchange.
8. The market maker will function within the Bye-Laws Rules, Regulations of the Stock Exchanges.
9. If the market maker acts as a broker as well, he will have to maintain separate books of accounts for the transactions in his role as a market maker and separately for his role as a broker. The two sets of transactions will have to be reported daily to the Stock Exchange in a segregated manner.
10. The Market maker will be exempt from the margin requirements for trading in the scrips in which he is making the market.
11. Market making would require financial resources. For this purpose, the commercial Banks would provide suitable bank credit to market makers approved by SEBI with a margin on the scrips for which they make the market against security and collateral as the banks normally take for their commercial lending. RBI will issue separate guidelines for the same.
12. The market maker is required to give a month’s notice to SEBI if he wants to terminate the market making in any of the scrips, and SEBI may withdraw his recognition as a Market maker if it is found that the market maker is either not abiding by the conditions laid down above, or is interrupting his activities as a market maker without justifiable reasons. Banks will have the right to recall the loan on either of these two circumstances.
13. Members of Stock Exchanges of Bombay, Delhi, Calcutta, and Madras may apply to SEBI through their respective stock exchanges indicating their SEBI registration number, the scrips in which they wish to make market, their turnover in 1991-1992 on the basis of which they have paid SEBI registration fee.