Enhancing efficiency and transparency in
the stock exchanges

• Negotiated deals to result in delivery

  To prevent certain irregularities and to improve the percentage of deliveries to the total turnover, stock exchanges were required to introduce a system of compulsory delivery of the transactions covered under negotiated deals with effect from June 1, 1997.
  
  

• Uniform norms for good and bad delivery

  SEBI prescribed uniform norms for good and bad deliveries which are now followed by all market participants. This has significantly reduced the number of disputes and ensured smooth and speedy resolution of bad deliveries.
  
  

• Establishment of bad delivery cell (BDC)

  The process of rectification of bad deliveries from broker to broker was lengthy and gave rise to problems especially in cases of trades involving brokers from different exchanges. Also, there was no time limit in which the investor was assured of rectification/replacement of his shares as the stock exchanges were not handling the bad deliveries.
  
  SEBI has required all stock exchanges to establish BDCs and has prescribed the operational procedure for the functioning of BDCs. This procedure has made possible the rectification/replacement of shares within 21 days of receipt of bad deliveries by the introducing member. In case the rectified shares come under objection for the second time, the transaction is closed out. A training program for the officers of the stock exchanges was also conducted by SEBI to train them for the smooth functioning of the BDCs.
  
  

• Weekly settlement cycle and auction

  The stock exchanges were required to necessarily complete their settlements within seven days and to conduct the auction immediately i.e. not later than eight days, after the completion of the relevant trading period, in those cases where members have failed to give the delivery. Most of the stock exchanges have implemented this during the year. The remaining stock exchanges would also do so within a specified period keeping in view their problems and computerisation programme.
  
  

• Uniform close-out procedure

  The stock exchanges have been required to uniformly amend their bye-laws relating to close out procedures for short deliveries pertaining to the settlement. The revised close out procedure ensures that the auctions would now completed on the eighth day from the last day of the trading period. In case the shares are not available through the auction conducted at the exchange, the transaction will be closed out.
  
  

• Know your client

  It was decided "in-principle" that stock exchanges would be required to ask their member-brokers to maintain a database of their clients. SEBI has designed a suitable client introduction form for this purpose. The implementation of the principle of "know your client" is a prudential business practice, to further enhance the safety of the market.
  
  

• Declaration of short sales/long purchases

  SEBI appointed a committee under the chairmanship of Shri B D Shah (former chairman and managing director, New India Assurance Company Limited and former managing director, General Insurance Corporation of India) to examine and recommend suitable modalities for the proper regulation of `short selling'. The committee was of the view that short selling provided liquidity and helped establish fair prices in the market and as such there was no need to impose a blanket ban on short sales, as was the practice followed in other markets. However, it was recognised that excessive short sales had negative effects in depressed market conditions and adversely affected investors at large. With a view to increasing transparency in the market, the committee recommended that all stock exchanges would mandatorily require their member-brokers to declare their scrip wise net short sale position to the exchange at the end of each trading day. In addition, the committee felt that disclosure of all long purchases would further enhance transparency in the markets. It was also recommended that stock exchanges might charge differential margins on purchases and sales of securities depending on existing market conditions. The committee's recommendations on disclosure of short sales and long purchases were implemented by all stock exchanges and the details of outstanding positions were being published in financial dailies.
  
  

• Data base of member-brokers

  All stock exchanges have been advised to create a database of all broker members which would include details of operational history such as their asset base, capital and net worth, volumes, defaults and investor complaints. This would facilitate an evaluation of their performance and compliance with applicable laws.
  
  

• Administration of the stock exchanges

  Eligibility criteria for membership of corporate members of governing bodies of the stock exchanges
  
  Eligibility criteria for the corporate membership of governing bodies of stock exchange have now been prescribed, to enable corporate members to be elected to the governing bodies of the stock exchanges.
  
  

• Arbitration mechanism

  In order to expedite the settlement of disputes, all stock exchanges have been advised to review the position of the pending arbitration cases in every meeting of the governing body and to ensure that cases are disposed of within the stipulated period of 4 months.
  
  With the promulgation of the new Arbitration Act, all stock exchanges have been advised to amend their bye-laws relating to arbitration proceedings in line with the new Act.