Ref . SMD-1/23341
November 18, 1993
To,
The Presidents/Executive Directors
of all recognised Stock Exchanges in India
Dear Sir,
Regulation of transaction between clients and members
I am enclosing with this letter a note listing a set of precautions to be exercised by the member-brokers of recognised Stock Exchanges while selling shares on behalf of clients, entertaining new clients, etc. We are of the opinion that the cautions listed in the enclosed note, if exercised by the member-brokers of the Exchanges, will benefit them as well as investors immensely and also contribute to the healthy working of the Secondary Market.
It is requested that the enclosed note be placed before the Governing Board of your Exchange at their next meeting and their suggestions / views in this regard communicated to us by January 1, 1994. This will enable us to finalise the set of guidelines for incorporating the same in the relevant rules, regulations and bye-laws of the different Stock Exchanges in the country to ensure uniformity in dealings with the clients.
Yours faithfully,
sd/-
( C. B. BHAVE )
Sr. Executive Director
Encl :a/a
cc : Regional Offices
SECURITIES AND EXCHANGE BOARD OF INDIA
Precautions to be exercised by member-brokers of recognised Stock Exchanges while selling shares on behalf of clients, entertaining new clients, etc.
It is expected that the member-brokers of Stock Exchanges know their clients through a proper introductory procedure and exercise due precaution while dealing with the clients. However, it is observed that in certain recent cases, such precautions in dealing with the clients have not been exercised by a few member-brokers resulting in serious problems for the market as well as investors. It is, therefore, considered necessary that these precautions may be listed so as to be uniformly followed by member-brokers of all the recognised Stock Exchanges across the country. This will protect the interests of the member-brokers, instil transparency and discipline in the deal between clients and brokers and will contribute to the healthy working of the Secondary Capital Market. Some of the precautions to be exercised by the member-brokers are listed below. These precautions are classified into two categories as [a] Mandatory and [b] precautions by way of a guideline.
SEBI is of the view that member-brokers of the Exchanges should compulsorily follow the precautions suggested in Part [a] below which should form a part of their operating system, whereas those suggested in Part [b] may be treated as guidelines and followed as and when circumstances warrant.
[a] Mandatory -
(i) Ensure that the client is personally known to the member-broker or has been introduced to him by a person known to him.
(ii) A record of introduction of all clients may be kept by member-brokers and they should insist on their sub-brokers also to maintain a similar record. The following data on the clients can be maintained :
a) Name, address, telephone number, age
b) Status - whether in employment / business.
c) If in business - Nature of business and business address.
d) Banker & bank account numbers through which operations are to be done.
e) Name, address of contact through whom client has been introduced.
f) Names of all persons on whose behalf the client is operating and necessary legal documents authorising the client to act on behalf of such persons.
g) In case a private limited company or a public company or a trust is a client, the details such as its authorised / subscribed capital, total trust funds and the resolution duly authorising the person acting on behalf of the company.
(iii) A satisfactory bank reference of client may be insisted upon before doing business on behalf of new clients.
(iv) Due care may be exercised when a member-broker is introducing / delivering broker for shares in the market. In all such cases, the transferor(s) or seller(s) signature(s) should be witnessed either by the member-broker himself or by any of his SEBI authorised sub-brokers through whom concerned sale has been effected. If transfer deeds are witnessed by a third party, insist on signature of sellers being witnessed by the concerned sub-broker also. Do not make payment by issuing a cheque in a name other than the name of the shareholder when a member-broker is an introducing broker.
(v) Proper enquiries may be made when the names of the selling clients and names appearing on share certificates delivered against sales are different. Proper record should be kept for explaining the reasons for difference.
(vi) If shares given by a client are frequently received under objection, there is a need for more caution. The member-broker should inform the Stock Exchange authorities, names of such clients, who, in turn, will communicate such names to other member-brokers.
(vii) List of names of black-listed / defaulter clients may be forwarded to the Stock Exchange authorities for communicating such names to other member-brokers of the Exchange as well as other Stock Exchanges.
(viii) Member-brokers should insist on clients to return the duplicate copy of contract notes duly signed by them in token of their having received the contract notes.
(ix) No adjustment between one client account to another should be made unless express authority has been obtained from the clients. Such authority should be preserved by the broker.
[b] Guidelines :
(i) Each client must give full particulars in writing including the member(s) through whom he is currently / was previously operating in the market in the prescribed form. The broker should contact the previous broker to get an opinion from him about the dealings of the client.
(ii) Member-brokers may insist on getting additional details such as Income Tax PAN G.R. No. Etc., on the clients placing large orders (i.e. more than Rs. 1,00,000/-) even if they are clients of his sub-brokers or have been introduced by him.
(iii) Member-brokers may exercise due caution while executing big orders on behalf of clients at the initial stage of their introduction.
(iv) Extra caution may be exercised when clients are dealing with more than one broker.
(v) If a client frequently delays payments and / or disputes the deals put on his behalf, further caution needs to be exercised while dealing with him. In case a client habitually delays the payment, member-broker must insist on advance payment or larger cash margin before executing his orders.
(vi) Member-brokers should not accept cash for purchases of securities and / or give cash against sales of securities. All payments received / made should be strictly by "Crossed - Payee A/c" cheques.