Securities and Exchange Board of India
DEPUTY GENERAL MANAGER
SECONDARY MARKET DIVISION
SMD/POLICY/CIR-4/2003
February 11, 2003
To,
Managing Directors/Executive Directors/ Administrators
of all Stock Exchanges
Dear Sirs,
Restructuring of the Subsidiary Management
The small stock exchanges were permitted to promote / float a subsidiary / company vide SEBI Circular no. SMD-II/Policy/Cir-37/99 dated November 26, 1999. SEBI has inspected subsidiary companies and has reviewed their functioning. SEBI is of the view that the Management Structure of the subsidiaries needs to under go change in order enable them to be able to provide a safe and transparent market and effectively discharge their responsibilities towards investor protection.
On a review of the functioning of the subsidiaries, it has been decided that the subsidiary company shall be required to comply with minimum requirements in order to ensure that the transactions in subsidiaries are conducted in a manner which are not detrimental to the interest of the investors and also to enable the subsidiaries to provide a safe and transparent mechanism for transactions in securities.
The small stock exchanges are, therefore, directed to carry out the following changes in management structure of their subsidiaries.
Chief Executive Officer
The subsidiary company shall appoint a Chief Executive Officer (CEO) who shall not hold any position concurrently in the stock exchange (parent exchange). The appointment, the terms and conditions of service, the renewal of appointment and the termination of service of CEO shall be subject to prior approval of SEBI.
Reconstitution of Governing Board
The Governing Board of the subsidiary company shall have the following composition:
a) The CEO of the subsidiary company shall be a director on the Board of Subsidiary. The CEO shall not be a sub-broker of the subsidiary company or a broker of the parent exchange.
b) At least 50% of Directors representing on the Governing Board of subsidiary company shall not be sub-brokers of the subsidiary company or brokers of the promoter / holding exchange (parent exchange). These directors (excluding CEO) shall be called the Public Representatives.
c) The Public Representatives shall be nominated by the parent exchange (subject to prior approval of SEBI).
d) Public Representatives to be nominated as directors of subsidiary company shall be from amongst the persons of integrity having necessary professional competence and experience in the areas related to securities market.
e) For purpose of nomination as Public Representatives the Governing body of parent exchange may forward the names of the persons to the SEBI for its approval. The SEBI shall, however have the right to nominate persons, whose names have not been forwarded by the governing body of the stock exchange.
f) The Public Representatives to be appointed as directors shall hold the office for a period of one year from the date of assumption of the office or till the Annual General Meeting of subsidiary company whichever is earlier.
g) There should be a gap of at least one year after a consecutive period of three years before re-nomination of any person for the post of non-member director.
h) The parent exchange may appoint a maximum of two directors who are officers of the parent exchange. Such directors shall be in addition to 50% non member directors (public representatives) mentioned above.
Staff of the Subsidiary
The subsidiary company shall have its own staff none of whom shall be concurrently working for or holding any position of office in the parent exchange.
Responsibilities of Parent Exchange towards Subsidiary Company
The parent exchange shall be responsible for all risk management of the subsidiary company and shall set up appropriate mechanism for the supervision of the trading activity of subsidiary company. Such mechanism shall include:
a) Verification of compliance of margin payments and other risk management measures applicable to the subsidiary company as a broker member of another exchange.
b) Reporting requirements between the subsidiary and exchange, such as placing quarterly reports on the financial and accounts of the subsidiary and on review of operations of the subsidiary before the Governing Board of exchange at its meetings.
c) Conducting of half-yearly inspections of the subsidiary and 20% of its sub-brokers and placing such reports before the Governing Board of exchange.
d) Handling of investor complaints of sub-brokers of the subsidiary company.
You are advised to bring the requirements of this circular to your subsidiary company for compliance and also to ensure the compliance latest by February 28, 2003 and send a report to SEBI on the compliances.
Yours faithfully,
PARAG JAIN
