Meeting of FIIs, Brokers and Custodians held on
December 10, 1999
A meeting was held to review the SEBI decision regarding restriction
on ‘Hand Delivery ‘ trades for Foreign Institutional Investors and Mutual
Funds. The meeting was attended by representatives of Foreign Institutional
Investors, major institutional brokers, Bombay Stock Exchange (BSE), National
Stock Exchange, National Securities Clearing Corporation Ltd, BOI Shareholding
Ltd (clearing house of BSE), National Securities Depository Limited and
At the outset it was clarified that SEBI had never decided to disallow
the DVP trades. The earlier decision of SEBI was meant to stop hand delivery
trades which were different from the DVP trades executed in the developed
markets. In the DVP trade delivery and payment are supposed to be simultaneous
where as in the hand delivery trade 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.
On the other hand some of the participants were of the opinion that
some funds, particularly pension funds were required to trade through the
DVP system because of legal constraints. The hand delivery system as prevalent
in India, though not equivalent to DVP was legally acceptable. The other
reasons which were cited for delayed settlement of hand delivery trades
It was also pointed out that there has been a considerable reduction in
these problems with dematerialisation of securities and it was felt that
with the introduction of rolling settlement these problems would further
Mismatch of the transactions.
Miscommunication between the client, broker and custodian.
Refusal by the clients to take partial delivery.
Non-market related inefficiencies.
After considerable deliberations the following decisions were taken
During the last two years especially with the introduction of dematerialization,
margin systems and the stock exchanges setting up trade settlement guaranty
funds there has been a substantial reduction in market risks and transaction
costs. This fact has also been borne out by a study conducted by SEBI.
Some of the participants highlighted the positive impact of these changes
in the Indian securities market. However, it was felt that a conscientious
effort by the participants and SEBI should be made to make the FIIs and
other global players aware of these reforms.
The hand delivery trades may be continued beyond January 15, 2000.
The hand delivery trades would be subjected to the same restrictions and
time frames as for the transactions settled through the clearing house
mechanism. These trades would also be subject to the Rules, Bye-laws and
Regulations of the exchange where the transactions were executed. In order
to bring these transactions under similar time schedule as the transactions
settling through Clearing House, all hand delivery trades 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. However,
if the transaction is partly settled in the Clearing House and therefore
involves auction / close -out procedures, then such transactions 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.
It was also decided to review the status of these trades in the first week
of April next year.