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Press Release
December 10, 1999
Ref.No.PR 283/99
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 major custodians.

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 were :

  1. Mismatch of the transactions.
  2. Miscommunication between the client, broker and custodian.
  3. Refusal by the clients to take partial delivery.
  4. Non-market related inefficiencies.
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 fade away. 

After considerable deliberations the following decisions were taken :

  1. The hand delivery trades may be continued beyond January 15, 2000.
  2. 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.
  3. It was also decided to review the status of these trades in the first week of April next year. 
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.