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SECURITIES AND EXCHANGE BOARD OF INDIA
SECONDARY MARKET DEPARTMENT
Mittal Court, A Wing, Gr. Floor,
224, Nariman Point, Mumbai 400 021

SMDRP/POLICY/CIR- /99
May 04, 1999

To,

The President/Executive Director/Managing Director
of All the Stock Exchanges.

Dear Sir,

Sub: Proceeds of Auction/Close-out

At the end of the settlement period, the settlement has to be done by the brokers by making pay-in of the securities and funds. If a selling broker fails to make pay-in of the securities on the stipulated day, the outstanding position is auctioned by the stock exchange. The outstanding position at the end of the auction, where no offers have been received are compulsorily closed out as per the standardised procedures specified in our circular dated December 09, 1996.

In the process of auction and close-out, the defaulting selling broker may stand to gain in cases where the auction or close-out price is less than the transaction price, for example, if a broker has sold 1000 shares of A @ Rs. 100/- and fails to deliver the shares on the pay-in day, then the position is auctioned or closed out against him. If the market falls by that time, the exchange may be able to procure 1000 share of A in auction @ say, Rs.98/-. In this case, the defaulting broker would stand to gain Rs. 2 per share.

It has been observed that different stock exchanges treat this profit in different ways. While some stock exchanges credit the difference to the selling member, the other exchanges credit the same to the Investor Protection Fund.

A member defaulting in meeting its obligation, should not be permitted to make virtue out of its own default. Hence, the selling broker who has failed to meet its settlement obligation to the stock exchange, and is thus defaulting to that extent, should not be allowed to make profit out of its own default. The Stock Exchanges are hereby advised that in such cases, the difference amount should be credited to the Investor Protection Fund instead of crediting the account of defaulting seller broker.

The Exchanges are advised to implement it with immediate effect.

Yours faithfully,

P.K.BINDLISH
Division Chief
Secondary Market,Depository
Research and Publications Dept.
E-mail: pkb@sebi.gov.in

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