Request for Interpretive Letter - Kotak Securities Ltd

Apr 16, 2004
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Informal Guidance

An application made under SEBI (Informal Guidance) Scheme, 2003 by  M/s Kotak Securities Ltd

6th February 2004 

Mr. V.S. Sunderesan

Deputy General Manager – Market Regulation Department

Securities and Exchange Board of India

Mittal Court, B Wing, First floor,

224, Nariman Point, Mumbai 400 021

Dear Sir,

SUB.:  REQUEST FOR INTERPRETIVE LETTER UNDER THE SEBI (INFORMAL GUIDANCE) SCHEME, 2003. INTERPRETATION OF “OWN SHARES” UNDER SEBI CIRCULAR NO.SEBI/SMD/SE/CIR-22/2003/11/06 DATED 11TH JUNE 2003.

  1. We are, inter alia, a trading and clearing member of the National Stock Exchange of India Limited (“NSE”) and the Bombay Stock Exchange (“BSE”) on the cash and the Futures and Options Segments.
  2. As a member broker, we have to give base capital and additional base capital to the exchanges for exposure and margin purposes. The capital can be by way of cash, bank guarantees and prescribed securities.
  3. In case securities are given (to NSE), we have to sign a pledge agreement with NSCCL, copy of which is attached.
  4. We need to collect margin from our clients for exposure taken by the clients on the exchanges, in accordance with SEBI circular no.SMD/POLICY/CIR-12/2002 DATED 17TH MAY 2002, in the form of cash, bank guarantees, FDRs and approved securities.
  5. Our clients deposit margins with us inter alia, in the form of securities.
  6. Our clients authorize us to give as margin to the exchange(s), the securities deposited by them as margin, after transferring the same in the name of Kotak Securities Limited, to be subsequently given to the clearing corporation concerned by marking a lien in favour of clearing corporation concerned.
  7. We seek a clarification regarding the interpretation of the provision in the SEBI circular relating to securities offered as additional capital, based on the following:
    1. Our clients place with us securities, as margin to be appropriated in accordance with relevant regulations.
    2. These securities placed by the clients are transferred to a DP account titled “Kotak Securities Limited”.
    3. We are required to place margin with the exchanges, by marking a lien in favour of the clearing corporation concerned.
    4. We seek your interpretation on whether we can offer to the exchanges, as securities of the client placed with us as margins.

 

  1. We understand that other member brokers are offering to the exchanges, as margin, securities of the clients placed with the brokers.
  2. We shall greatly appreciate your clarification on the above queries.
  3. We have also enclosed a demand draft of Rs.25,000/- bearing reference number 579542 dated 6th February 2004 drawn on HDFC Bank Limited favouring “Securities & Exchange Board of India, Mumbai “ towards fee as required under the SEBI (Informal Guidance), Scheme 2003.
  4.  We look forward to your response.

 

Yours faithfully,

For Kotak Securities Limited

 

Priya Subbaraman

Compliance Officer

 

Enclosures:

  1. Demand draft as aforesaid.
  2. Copy of the agreement executed with NSCCL.

Reply of Division of Policy, Market Regulation Department, SEBI

Deputy General Manager

Market Regulation Department – Policy

Email:-sundaresanvs@sebi.gov.in

Tel : 22164465; Fax: 22164482

SEBI/MRD/IGS/SK/ 7520/2004

April 16, 2004  

Ms Priya Subbaraman,

Compliance Officer,

Kotak Securities Ltd,

Bakhtawar, 1st Flr,

229, Nariman Point,

MUMBAI - 400 021.

Sub: Request for Interpretive Letter under the SEBI (Informal Guidance) Scheme, 2003

Ref : Letter ref no nil dated 6th February 2004 for and on behalf of Kotak Securities Ltd (KSL)

Dear Madam,

1.      Please refer to the letter quoted above, seeking ‘Interpretive Letter’ under SEBI (Informal Guidance) Scheme, 2003. The Interpretive letter is sought on the issue as to –

  1.  
    • whether Securities given as Margin by client to broker can be transferred by the broker to his own name and then can it be considered as his own shares and given as margin to the stock exchange by marking a lien in favour of the exchange clearing house / clearing corporation concerned.

2.      It is, inter-alia, informed by you, vide the letter under reference, that –

a)     KSL is registered as Trading member and Clearing member on the Cash and F&O Segment of NSE and BSE and as member broker are required to provide base capital and additional base capital (by way of cash, bank guarantees and prescribed securities) to the exchanges for exposure and margin purposes.

b)     In case securities are given (to NSE), the broker members have to sign a pledge agreement with NSCCL (copy of the agreement attached).

c)      KSL is required to collect margins from their clients for exposure taken by the clients on the exchanges, in accordance with SEBI circular no SMD/POLICY/CIR-12/2002 dated 17th May 2002 , which may be in the form of cash, bank guarantees, FDR’s and approved securities.

d)     KSL’s clients deposit margins with them inter alia in the form of securities. KSL’s clients authorizes KSL to give as margins to the exchange(s), the securities deposited by the clients as margins after transferring the same in the name of Kotak Securities Ltd, to be subsequently given to the clearing corporation concerned by marking a lien in favour of clearing corporation concerned.

e)     KSL has sought a clarification regarding the interpretation of the provision in the SEBI Circular no SEBI/SMD/SE/CIR-22/2003/11/06 dated 11th June 2003 relating to securities offered as additional capital, based on the following:

                                                  i.      The clients place with M/s Kotak Securities Ltd securities, as margins to be appropriated in accordance with relevant regulations.

                                                ii.      These securities placed by the clients are transferred to a DP account titled “Kotak Securities Ltd”

                                              iii.      M/s Kotak Securities Ltd is required to place margins with the exchanges, by marking a lien in favour of the clearing corporation concerned.

                                               iv.      M/s Kotak Securities Ltd have sought clarification / interpretation on whether they can offer to the exchanges, as securities of the clients placed with them as margins

3.      Without necessarily agreeing with your analysis, it is observed from your submissions that KSL is seeking interpretation of the issue as mentioned in para 1. Our interpretation of the same is as under

a)     To create a valid pledge, the beneficial ownership of the property being pledged must vest in the pledger. Hence, one of the terms of the pledge agreement, given by broker to the Clearing House of the exchange, is that the clearing member declares and assures that all the securities being pledged with the exchange are in existence, owned by him and free form any prior charge, lien or encumbrance.

b)     When client gives or deposits securities to the broker as margin it is to mitigate the risk of settlement default by the clients and is in the form of collateral which can be utilised by the broker only in the event of default by the client. The beneficial ownership of securities therefore continue to be with the clients and the broker only holds a lien thereon and in case the client were to default on his commitments, then only can the broker after giving a notice of demand/sale utilise the securities to recover the dues.

c)      If the broker wishes to allow his client to give margins in the form of securities, then the same should not be by way of transfer of such demat securities to the broker’s beneficiary account but by way of marking a lien in the favour of broker in the depository system. Thus, the beneficial ownership of the shares continues to vest in the client and the broker gets a right to utilize these securities only in the event of default by the clients after giving a notice of demand/sale. As a result, clients will also continue to receive corporate actions, if any, also in their beneficiary account.

d)     In light of the above, securities deposited by the clients cannot be given by the broker to the stock exchange/clearing corporation by way of pledge.

4.      The above clarifications are based on the representation made to the Department in your aforesaid letter. Different facts or conditions might require a different result. This letter does not express decision of the Board on the questions referred.

5.      You may note that the above views are expressed only with respect to the clarification sought on applicability of SEBI circulars SEBI/SMD/SE/CIR-22/2003 dated June 11, 2003 read with SMD/POLICY/CIR-12/2002 dated  May 17, 2002 which are pertaining to the cash market and do not affect the applicability of any other law.

 

Yours faithfully,

V S SUNDARESAN