Securities and Exchange Board of India (SEBI)

Ref : SE/10277
October 14, 1992


All the Presidents/Executive Director
of all stock exchanges

Dear Sir,

Minutes of the meeting of September 25, 1992

Please find enclosed a copy of the minutes of the meeting of SEBI and stock exchanges held on September 25, 1992. The action taken/proposed to be taken with a definite timetable on various points discussed in the meeting may be intimated to us in a fortnight.

Yours faithfully,


Encl : a/a




A meeting of the Presidents and Executive Directors/Secretaries of the Stock Exchanges convened by SEBI was held at Bombay on September 25, 1992 to discuss mainly the following issues :-

i. capital adequacy norms for brokers

ii. shortening of settlement cycles

iii.uniform and longer trading hours

iv. faster settlement of arbitration proceedings

v. infrastructural difficulties of stock exchanges and brokers

vi. maintenance of books by members and inspection of their books by stock exchanges

vii. timely redressal of investor grievances

viii. revamping of governing boards and committees of stock exchanges

ix. prevention of insider trading and price manipulation

x. working of defaults committee, etc.

The meeting was presided by Shri G V Ramakrishna, Chairman, SEBI. A list of participants who attended the meeting is given in Annexure I.

Chairman’s Address :

Shri G V Ramakrishna welcomed the representatives of stock exchanges. In his opening address he observed that Indian economy is in the process of transition from a controlled to a liberalised economy in which capital markets have a very vital role to play. The capital market is at the centre of developments taking place in the country. He stated that the SEBI Act, 1992 has been passed by the Parliament and the Control of Capital Issues Act, 1947 has been repealed. SEBI has been made responsible for the growth of the capital markets and for investor protection. Foreign investment institutions have been permitted to invest in Indian capital markets subject to certain guidelines. SEBI has undertaken registration of foreign investment institutions. As against less than Rs. 100 crores raised from the new issues in 1979-80, resources raised during the quarter April-June 1992 are Rs. 4,300 crores and the resources expected to be mobilised from the primary market during the year 1992-93 are expected to be around Rs. 15,000 crores. Besides, disinvestment of equity by public sector undertakings and trading in shares of such undertakings is going to contribute significantly to the trading activity at the stock exchanges. He envisaged bright prospects for the growth of the Indian capital markets. He observed that there are 21 stock exchanges in operation with about 15 million investors and equity cult has been growing very fast. However, stock exchanges have not introduced enough reforms and changes in procedures to keep pace with growth in number of investors and volume of business. He stated that protection of investors was not being given due attention by the stock exchanges. He stated that apart from duty towards investors and brokers, the governing councils of the stock exchanges have national responsibility to inspire investor confidence into working of stock exchanges. He stated that we are in a glass cage and the world is watching us. He, cautioned that foreign investment institutions will invest in India only when stock markets are efficient, transparent and conditions are conducive and compare favorably with other countries. We have to upgrade the capital markets upto international standards. With Indian capital markets becoming global, he emphasised there is all the more need for improvements in practices and procedures of stock exchanges. So far the progress in implementation of the reforms and Government directives by the stock exchanges has been slow and tardy.

SEBI is an apex regulatory body in the capital markets and, interalia has been entrusted with the responsibility of overseeing the working of the stock exchanges. SEBI and the stock exchanges have to work together. He emphasised the need of dialogue between stock exchanges and SEBI to discuss various issues.

SEBI Chairman observed that a recent international study has shown that self regulatory organisations like stock exchanges function responsibly only when they are supervised by a regulatory body. He further stated that India is ahead of many countries in the area of number of listed companies, market capitalisation and resource mobilisation. However, we are far behind in investor service, transparency and quickness in execution and settlement of deals etc. He then narrated the recent developments relating to announcement by the Government regarding establishment of a National Stock Exchange, establishment of OTC Exchange of India, where trading will be screen based, and also licensing of spot dealers (share shoppes) in securities. These, he mentioned, will provide competition to the existing stock exchanges. Business will move to better managed exchanges. Therefore, the business interest, also requires the stock exchanges to improve their functioning. He exhorted the stock exchanges to implement the various measures aimed at improving their working. Stock exchanges should act as responsible self-regulatory bodies which work in larger national interest.

Mr. G B Desai, President, Bombay Stock Exchange assured on behalf of all stock exchanges that they would not let down the Government and SEBI in implementation of reforms in the stock exchanges and they are well aware of their responsibility towards the country.

Mr. M R Mayya, Executive Director, Bombay Stock Exchange stated that they have not been able to introduce many reforms in the functioning of stock exchanges mainly because of lack of adequate infrastructure, telecom facilities, depository etc. Chairman, SEBI, while accepting the need of Government support for infrastructure emphasised that the stock exchanges should not mix the two points and must take action on the Government’s directives quickly. Thereafter the individual items listed on the agenda were taken up for discussion.

Capital adequacy norms for stock exchanges :

Shri C B Bhave, Head, Secondary Market Department, SEBI while introducing the first item on the agenda, viz., capital adequacy norms for members of stock exchanges, observed that the present system of reckoning capital of broking firms by way of security deposit, margin and value of card and office, etc. is inadequate. He observed that while running a business, the membership card has no real value. It is valuable only when business is closed and the card is to be sold. The business of the members, he observed, should relate to the deposit kept by him with the Exchange. He also observed that corporate membership is becoming a reality. This will facilitate observing of capital adequacy norms based on net capital with the firm which is difficult in the case of individuals or partnership firms with unlimited liability. He felt that it should be obligatory on the part of the member broker to report to the stock exchange when he reaches 80-85% of his limit of business. Then stock exchanges must put the account of such a member on watch. The deposit to be kept with the Exchange should be 75% in the form of cash and 25% in the form of securities with adequate margins. The representatives of the stock exchanges agreed that suitable capital adequacy norms having a direct bearing on the operations of a member to his net worth need to be worked out and the capital fixed for a member has to be deposited with the stock exchange in an escrow account. The collection of deposit from the brokers according to their volume of business would also remove the need of collecting daily margins from them which is a difficult process. Bombay Stock Exchange while supporting the concept of reporting by brokers to the stock exchange when they reach a specific limit of their business desired that the deposit to be maintained by the brokers may be 50% in cash and 50% in securities with suitable margin. There was a feeling that uniform capital adequacy norms for brokers of all stock exchanges may not be practical proposition as may stock exchanges do not have carry forward trading system. These stock exchanges need to have different capital adequacy norms for brokers. Vadodara Stock Exchange opined that the notional losses of the stock brokers on day to day basis due to fluctuations in share prices should also be taken into account for deciding capital adequacy norms. Summing up the discussions, SEBI Chairman Shri G V Ramakrishna observed that need for capital adequacy norms has been underscored. All suggestions have been noted and SEBI will prepare a paper on the subject and circulate the same to the stock exchanges for their comments before the proposals in this regard are implemented.

Shorter Settlement Cycles :

Introducing the next item on the agenda, viz., shorter settlement cycles, Shri Bhave of SEBI observed that longer settlement cycles result in unacceptable delays in receiving either securities or payment and this is highly unsatisfactory from the investor’s view point. He suggested that there is a need to have a trading cycle for `B’ group shares for all stock exchanges preferably of 5 days (Monday to Friday) and pay out should take place on the following Friday. In this connection, certain difficulties like large volumes, non-availability of depository facilities, dated transfer deeds, delay in clearing of cheques by banks etc. were cited by the Presidents of stock exchanges. They, however, agreed that trading cycle in non-specified securities at all the stock exchanges would be reduced from the present two weeks in vogue in certain stock exchanges to one week in all stock exchanges. It was stated that steps to reduce paper work relating to settlements need to be taken up urgently. In this connection it was agreed that setting up of depositories and removal of validity period for transfer deeds (by amending Sec 108 of Companies Act) needed urgent attention.

Shri G V Ramakrishna observed that while introducing weekly settlement for `B’ group shares, investors who wish to take delivery or give delivery of `A’ group scrips should not face delays. He felt that such investors should be given facility of proposed weekly settlement. He further stated that we should first introduce weekly settlement for `B’ group or non-specified shares. Later, we can consider whether `A’ group shares can be traded on a weekly settlement basis. In this connection, representatives of stock exchanges felt that studies to start futures and options in respect of shares in specified group should be initiated and measures to ensure that genuine investors dealing in shares in specified or `A’ group are not denied the benefit of shorter weekly settlement cycle are also taken. It was agreed that the stock exchanges need to introduce adequate computerisation to handle the settlement work. The stock exchanges agreed that steps to start weekly trading cycles would be taken in two months.

Uniform longer trading hours:-

As regards the uniform and longer trading hours, the representatives of stock exchanges agreed that trading hours needed to be extended. It was accordingly, decided to have uniform trading hours from 12.00 noon to 3.00 pm in all the stock exchanges across the country barring OTC Exchange of India, where trading is screen based, which will have trading hours from 9.30 a.m. to 11.30 a.m. The Gauhati Stock Exchange, because of its geographical location, agreed to have trading hours from 12.30 pm to 3.30 pm.

Faster settlement of arbitration proceedings :-

As regards the faster settlement of arbitration proceedings and expeditious implementation of arbitration awards, it was agreed by the representatives of the stock exchanges that there is a need to expedite the arbitration proceedings to give speedy justice to the investors as well as brokers. In this connection, it was suggested that the arbitration panels should be widened by including the partners of members and retired judges, etc. For this the Bye-laws and Rules of the Exchanges will have to be amended. In this connection, SEBI Chairman advised the participants to amend their bye-laws and SEBI is prepared to consider granting expeditious approvals to such proposals received from stock exchanges. It was also agreed that the arbitration awards would be implemented by the stock exchanges expeditiously.

Infrastructure of stock exchanges :-

The SEBI Chairman, pointed out that the size of staff of stock brokers has not increased in proportion to growth in volume of their business. He suggested that support staff may be placed at a premises other than in the stock exchange. Bombay Stock Exchange expressed difficulties of shortage of space as a major portion of the stock exchange building is occupied by banks/institutions. Some of stock exchanges requested that the state governments should provide land to stock exchanges at a cheaper rate and telecommunication facilities should be provided to stock brokers on a priority basis. SEBI Chairman expressed the need of better project planning by stock exchanges and advised that there may be 3 types of standard pattern of stock exchanges with minimum facilities. The exchanges should work out cost, sources of revenue including funds to be raised from member brokers, etc.

Maintenance of Books by stock brokers and their inspection by stock exchanges :-

Shri C B Bhave suggested a 2 tier system of inspection of books of stock brokers by the stock exchange authorities. While a detailed inspection may be carried out once in 4-5 years, each broker’s books should be inspected at least once in a year for ensuring compliance with certain basic requirements. The stock exchanges were also of the view that members should maintain proper books and documents and their inspection should be conducted on regular basis so that at least once a year every member of the exchange comes within the ambit of inspection. While discussing which type of books must be maintained by stock brokers, SEBI Chairman advised the stock exchanges to make a list of such books and submit to SEBI. He suggested that deterrent penalty should be imposed on brokers for violation of directives of the stock exchanges and for irregularities detected in inspection. He also advised the stock exchanges to report to SEBI if they find that auditor’s report about brokers’ books is not correct so that matter may be taken up with the Institute of Chartered Accountants of India.

Redressal of Investors’ Grievances :-

SEBI Chairman emphasised the need of reorganising the investors’ grievance handling system of stock exchanges and that small brokers also should be given representation in these cells. The stock exchanges agreed that greater attention should be paid to redress the grievances of investors. In case of rejection of transfers by companies on account of signature differences, SEBI Chairman suggested that companies should accept the signatures as valid if attested and indemnified by the seller broker. The stock exchanges supported the suggestion. While discussing complaints against companies the stock exchanges suggested that they should have the power to fine the officers in default of such companies who delay the transfer of shares. It was also suggested that the companies having paid-up capital of Rs. 5 crores should have investor grievance cells. SEBI Chairman also cautioned the stock exchanges that there is a move on the part of companies to request the Government to increase the period of two months for transfer as provided in the Companies Act. The stock exchange presidents stated that they were of the opinion that the time limit of two months for transfer of securities as provided in the Companies Act should be brought down to one moth in conformity with listing agreement.

Revamping of Boards of stock exchanges and other committees :-

On the question of composition of the Governing Boards of the stock exchanges, Shri Ramakrishna clarified that the letter addressed by SEBI to all the stock exchanges was only a consultative paper and there was no intention to nationalise the stock exchanges. He also pointed out that most of the non-member directors will be drawn from the investors, professionals, etc. He stated further that SEBI had yet to receive response from some of the Exchanges and would take a view after considering responses from all stock exchanges.

Insider Trading and Manipulation of share prices :-

There was an agreement that there should be specific laws to check insider trading. Regarding manipulation of stock prices, Mr Bhave of SEBI emphasised the need of implementation of bye-laws of stock exchanges. He said that because of manipulation of share prices :

i. genuine investors suffer as they buy shares at higher prices in the market ; and

ii. the companies charge higher premium for public/rights issues

The stock exchanges agreed that insider trading and manipulation of share prices need to be tackled with seriousness.

Working of Default Committees :-

SEBI Chairman said that the delay in declaring a member broker as a defaulter has a snowballing effect. Such cases should be dealt with at an early stage and internal procedures should be worked out by the stock exchanges in this respect. He further suggested that a period of six months to the defaulter member to clear his dues as provided in the bye-laws should be reduced. Contradictory views were expressed whether on auction of the membership card of a defaulter broker the surplus, if any, after meeting all the liabilities can be retained by the stock exchange or should be returned to the defaulter member. The president of Jaipur Stock Exchange stated that it would be fair to hand over the surplus to the broker so that the tendency to obtain a stay order against the implementation of the decision of the stock exchange would be reduced. It was agreed that the possibility of amending the bye-laws of stock exchange should be explored.

Another suggestion was to appoint a tribunal to decide inter market disputes. Bombay Stock Exchange agreed to provide background papers for establishment of the tribunal to decide on inter-market cases to SEBI, which would look into the issue.

Other matters discussed :-

It was agreed that the names of investors who cheat the stock brokers should be circulated suitably by stock exchanges amongst members and no broker should do any transaction with him.

The presidents felt that the minimum offer of 20% of the issued capital of a company to get its securities listed on the stock exchange needed to be raised to at least 40%, in the larger interest of widening the shareholder population in the country and also to minimize the scope for manipulation of prices. Chairman SEBI suggested that the important issue was availability of tradable stocks and the ways of ensuring such availability could be discussed further. He further said that there are many companies in which the holding with the public is not more than 20%.

The presidents also felt that Companies Act, 1956, permitting companies to send abridged balance sheets to the shareholders needed to be amended forthwith, preferably by way of an Ordinance, to ensure that all shareholders were supplied with the full copy of the balance sheets.

At the end, Chairman SEBI thanked the stock exchanges for their suggestions on various issues. He stressed that the stock exchanges should take action quickly on the various points discussed in the meeting. The stock exchanges expressed that there was unanimity of opinion on the issues between SEBI and the exchanges and desired that such meetings should be conducted on half-yearly basis.


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