Tag Archives: securities

alternative investment funds

SEBI has vide its notification dated 19th October, 2020 amended the SEBI (Alternative Investment Funds) Regulations, 2012 as follows:

Alternative Investment Fund (AIF) is a fund incorporated in India in form of a trust or company or LLP or body corporate which is basically a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign for investing in accordance with its defined investment policy and objectives and which is not a mutual fund or a collective investment scheme.

Regulation 4(g) has been amended as follows. Regulation 4 pertains to eligibility criteria while granting certificate of registration to the AIF:

“(g) The key investment team of the Manager of Alternative Investment Fund has –
(i) adequate experience, with at least one key personnel having not
less than five years of experience in advising or managing pools of
capital or in fund or asset or wealth or portfolio management or in
the business of buying, selling and dealing of securities or other
financial assets; and
(ii) at least one key personnel with professional qualification in
finance, accountancy, business management, commerce,
economics, capital market or banking from a university or an
institution recognized by the Central Government or any State
Government or a foreign university, or a CFA charter from the
CFA institute or any other qualification as may be specified by the
Board:
Provided that the requirements of experience and professional
qualification as specified in regulation 4(g)(i) and 4(g)(ii) may also
be fulfilled by the same key personnel.”

What has been highlighted has been amended. Earlier it stipulated that the key personnel should have relevant professional qualification. Now what kind of professional qualification in which areas of expertise has been explicitly mentioned.

A new clause has been added in regulation 20 after sub-clause (5). Regulation 20 pertains to the general obligations, responsibilities and transparency of the AIF.

“(6) The Manager shall be responsible for investment decisions of the
Alternative Investment Fund:
Provided that the Manager may constitute an Investment Committee (by
whatever name it may be called), to approve investment decisions of the
Alternative Investment Fund, subject to the following:
(i) The members of Investment Committee shall be equally responsible as
the Manager for investment decisions of the Alternative Investment
Fund.
(ii) The Manager and members of the Investment Committee shall jointly
and severally ensure that the investments of the Alternative Investment
Fund are in compliance with the provisions of these regulations, the
terms of the placement memorandum, agreement made with the
investor, any other fund documents and any other applicable law.
(iii) External members whose names are not disclosed in the placement
memorandum or agreement made with the investor or any other fund
documents at the time of on-boarding investors, shall be appointed to
the Investment Committee only with the consent of at least seventy five
percent of the investors by value of their investment in the Alternative
Investment Fund or scheme.
(iv) Any other conditions as specified by the Board from time to time.”

Manager in an AIF has been defined as “any person or entity who is appointed by the Alternative Investment Fund to manage its investments by whatever name called and may also be same as the sponsor of the Fund;”

“Investment Committee” has not been defined anywhere in the regulations.

Leave a comment

Filed under securities laws

faqs on Indian Stamp Act amendments

Frequently Asked Questions (FAQs) on Indian Stamp Act, 1899 Amendments and Rules made thereunder

  1. Why amendments in the Indian Stamp Act, 1899 have been made?
    Answer: The amendments have been carried out with respect to securities market transactions. The present system of collection of stamp duty on securities market transactions has led to multiple rates for the same instrument, resulting in jurisdictional disputes and multiple incidences of duty, thereby raising the transaction costs in the securities market and hurting capital formation.
  2. What is the basic framework being created through the amendments to the Indian Stamp Act, 1899?
    Answer: Through the said amendments, the Central Government has created the legal and institutional mechanism to enable States to collect stamp duty on securities market instruments at one place by one agency (through the Stock Exchanges or Clearing Corporations authorised by the Stock Exchange or by the Depositories) on one instrument. A mechanism for appropriate sharing the stamp duty with relevant State Government based on State of domicile of the buying client has also been included. In the extant scenario, stamp duty was payable by both seller and buyer whereas in the new system it is levied only on one side (payable either by the buyer or by the seller but not by both, except in case of certain instrument of exchange where the stamp duty shall be borne by both parties in equal proportion).
  3. What are the expected key benefits of amendments in the Indian Stamp Act, 1899?
    Answer: The amendments in the Indian Stamp Act, 1899 and Rules made thereunder will facilitate ease of doing business and will bring in uniformity and affordability of the stamp duty on securities across States and thereby build a pan-India securities market. Further, cost of collection would be minimised while revenue productivity is enhanced. Further, this system will help develop equity markets and equity culture
    across the length and breadth of the country, ushering in balanced regional development.
  4. The amended provisions of the Stamp Act and Rules made thereunder will come into force from which date?
    Answer: The amended provisions of the Indian Stamp Act, 1899 brought through Finance Act, 2019 and Rules made thereunder shall come into force w.e.f 1st July,
  5. What all instruments are covered under Part AA of Chapter II of the amended Stamp Act and the Rules made thereunder?
    Answer: Each security is charged with a duty as specified in Schedule I of the amended Stamp Act. Securities are defined to include all those instruments specified in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956; a “derivative” as defined in clause (a) of Section 45U of the Reserve Bank of India Act, 1934; a certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity up to one year as the Reserve Bank of India may specify from time to time; repo on corporate bonds; and any other instrument declared by the Central Government, by notification in the Official Gazette, to be securities for the purposes of this Act.
  6. Who will collect the Stamp Duty on behalf of the State Government?
    Answer: The stamp-duty on sale of securities, transfer of securities and issue of securities shall be collected on behalf of the State Government by the Stock Exchange or Clearing Corporation authorized or Depositories (authorized collecting agents). The Central Government has also notified the Clearing Corporation of India Limited (CCIL) and the Registrars to Issue and / or Share Transfer Agents to act as collecting agents.
  7. What is the manner of collection of stamp duty under new system?
    Answer: For all exchange based secondary market transactions in securities, Stock Exchanges shall collect the stamp duty; and for off-market transactions (which are made for a consideration as disclosed by trading parties) and initial issue of securities happening in demat form, Depositories shall collect the stamp duty.
  8. When and how will the stamp duty be transferred to each State?
    Answer: The collecting agents shall within three weeks of the end of each month and in accordance with the Rules made in this behalf by the Central Government, transfer the stamp-duty collected to the State Government where the residence of the buyer is located and in case the buyer is located outside India, to the State Government having the registered office of the trading member or broker of such buyer and in case where there is no such trading member of the buyer, to the State Government having the registered office of the participant. The collecting agent shall transfer the collected stamp-duty in the account of concerned State Government with the Reserve Bank of India or any scheduled commercial bank, as informed to the collecting agent by the
    Reserve Bank of India or the concerned State Government.
  9. What would be the fees for the collecting agent?
    Answer: The collecting agent may deduct 0.2 per cent of the stamp-duty collected on behalf of the State Government towards facilitation charges before transferring the same to such State Government.
  10. How the State Government will communicate regarding stamp duty matter?
    Answer: The State Government shall appoint a nodal officer for all official communications with the principal officers (appointed representatives of collecting agents) for the purposes of collection of stamp-duty in accordance with stamp duty Rules.
  11. What if collecting agents fails to transfer the duty to the State Government within the time period specified in the Stamp Act and Rules made thereunder?
    Answer: The collecting agents have to transfer collected stamp duty to the State Government within three weeks of the end of each month. Any collecting agent who fails to collect the stamp duty or fails to transfer stamp duty to the State Government within fifteen days of the expiry of the time specified, shall be punishable with fine which shall not be less than one lakh rupees, but which may extend up to one per cent of the collection or transfer so defaulted.
  12. Will any information be provided to the State Government in respect of the stamp duty collected?
    Answer: The collecting agent shall submit a return of stamp-duty collected on various transactions to the State Government including details of defaulters in the prescribed format on a monthly basis to be furnished manually or electronically within seven days of the succeeding month. Further, the collecting agent shall furnish a consolidated return of stamp-duty collected during a financial year manually or electronically on or before the 30th June immediately following that financial year to the concerned State Government and the Accountant General of each State. The State Government may provide an online facility by which a collecting agent shall upload State wise monthly and yearly returns. Further, if a collecting agent fails to submit details of transactions to the Government or submits a document or makes a declaration which is false or which such person knows or believes to be false, shall be punishable with fine of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
  13. Can collecting agents utilise amount collected on behalf of States for any other purpose?
    Answer: The stamp-duty collected on behalf of the State Government shall not be utilized by any collecting agent for any other purpose and shall be transferred to the State Government along with interest earned on such amount, if any.
  14. Who will collect the stamp duty in case of private placements/ e-IPOs through Stock Exchange platform?
    Answer: As per section 9A(1)(c), stamp duty shall be collected by the Depository on any creation or change in the records of a Depository, pursuant to issue of securities. This should be followed even in case of private placements/ e-IPOs through stock exchange platform.
  15. Whether stamp duty is applicable on bonus issue of shares?
    Answer: In case of bonus issue, there is no consideration which means bonus shares are issued free to existing shareholders. Section 21 of the Amended Indian Stamp Act read with sub-section 16B of Section 2 clearly indicates that stamp duty is to be collected on market value which is based on price or consideration involved.
  16. Whether stamp duty is applicable on units of Mutual Fund?
    Answer: Sub-Section 23A of Section 2 of the Indian Stamp Act, 1899 defines securities as including securities defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (SCRA). Further, it may be noted that clause (h)(id) of Section 2 of SCRA, 1956, which defines “securities” includes “units or any other such instrument issued to the investors under any mutual fund scheme” under its ambit. Therefore, units of Mutual Fund Schemes are to be considered as securities for the purpose of applicability of stamp duty also
  17. Which section of amended Indian Stamp Act, 1899 (section 9A or 9B) is applicable for Mutual Funds for the purposes of collection and transfer of stamp duty to States/UTs?
    Answer: Since RTI and/or STA of Mutual Funds have been declared as Depositories under the Stamp Act vide gazette notification dated 8th Jan, 2020, the entire mutual fund business gets covered under Section 9A of the Indian Stamp Act. Section 9B is not applicable to them. RTAs have to function like a Depository in respect of collection of Stamp Duty on issue and sale or transfer of mutual funds in SoA form. The extant Stamp Rules applies to them as well i.e. the operational clause for them is Section 9A and not 9B of the Indian Stamp Act.
  18. Who will collect and transfer the Stamp duty to States in case of transactions in units of Mutual Funds and AIFs in Statement of Account/ Physical (non-demat form)?
    Answer: To provide for collection of Stamp Duty on transactions in mutual fund and AIF units in the statement of account/physical (non-demat) form, RTI and/or STA have been notified (vide Gazette Notification dated 8th January, 2020) as a “Depository” for the limited purposes of acting as a “collecting agent” under the said Act and the Rules made thereunder. Accordingly, for non-demat Mutual Fund and
    AIF transactions, collection of stamp duty by RTAs shall be governed by the provisions of Section 9A(1)(b) and 9A(1)(c) and the transfer of stamp duty to the respective States shall be governed by the provisions of Section 9A (4). Thus, the transfer of collected stamp duty to respective States/UTs by RTAs also is governed by buyer-based principle as covered in Section 9A(4) and not on the basis of registered office of the issuer.
  19. Who will collect the Stamp duty in case of Mutual Fund and AIF transactions (sale, transfer and issue of units in demat mode) through recognized Stock Exchange or Depository?
    Answer: As clear from the Act that in case of Mutual Fund and AIF transactions (sale, transfer and issue of units in demat mode) through recognized Stock Exchange or Depository as defined under SCRA, 1956 and Depositories Act, 1996 respectively, the respective Stock Exchange/ authorized Clearing Corporation or a Depository is already empowered to collect stamp duty as per Amended Indian Stamp Act and Rules made thereunder.
  20. On transfer of units of Mutual Funds and AIFs held in physical form stamp duty is to be collected from the transferor. As these transfers happen outside the purview of RTAs what will be process of collection and remittance of stamp duty?
    Answer: Stamp duty has to be collected and remitted only by collecting agents (RTA for physical units and Depositories for demat units). Where Mutual Fund and AIF units are issued in physical form, stamp duty has to be collected and remitted by RTA. Accordingly, when the transferee approaches RTA for effecting the transfer in their books, RTA will be collecting the stamp duty from the transferor before effecting the transfer which will then be remitted to the state of domicile of the transferee.
  21. How stamp duty is calculated in case of issuance of Mutual fund Units?
    Answer: Stamp duty is imposed on the value of units excluding other charges like service charge, AMC fee, GST etc. If the units are issued for Rs.1 crore then Rs.500 would be the stamp duty to be remitted to States.
  22. Whether switching in Mutual fund attract stamp duty?
    Answer: The issue of fresh units in the switched scheme would also attract stamp duty even though there is no physical consideration paid or transfer of ownership. This is because the new units are deemed to have been purchased with the NAV realized from the sale of earlier units.
  23. Whether stamp duty is applicable on redemption of Mutual Fund units?
    Answer: Redemption is not liable to duty as it is neither a transfer nor an issue nor a sale.
  24. Whether stamp duty will be charged on off-market transfer of securities without consideration such on gift, legacy transfer etc.?
    Answer: No. Section 21 of the Amended Indian Stamp Act read with sub-section 16B of Section 2 clearly indicates that stamp duty is to be collected on market value which is based on price or consideration involved.
  25. Whether stamp duty is applicable at multiple levels of a single transaction (on account of procedural requirements) and to which State Government the stamp duty amount be transferred in such cases?
    Answer: It should be ensured that double incidence of stamp duty doesn’t occur on any transaction. Where, before being credited in the buyer’s demat account, the securities are transferred from the demat accounts of issuer to clearing corporation, member, etc., the stamp duty shall be transferred to the State Government where the residence of the buyer is located.
  26. Whether stamp duty will be applicable in case of creation of segregated portfolio?
    Answer: No. Since no consideration is received from the investors and the mechanism is only to facilitate mutual funds to deal with liquidity risk leading to equal treatment of all investors, issuance of units in segregated portfolio is not liable to stamp duty.
  27. Whether stamp duty will be applicable in case of conversion of holding from Dematerialisation into Statement of Account (SoA) form and vice versa?
    Answer: No. Conversion of existing mutual fund units held in SoA mode to demat mode or vice-versa does not tantamount to issuance or transfer of mutual fund units and it only reflects the change in mode of holding without any change in beneficiary ownership. Accordingly, stamp duty is not applicable on such conversions.
  28. What are the stamp duty rates being implemented through the Amended Indian Stamp Act?
    Stamp Duty Rates w.e.f. 1st July 2020
    Instrument Rate
    Issue of Debenture 0.005%
    Transfer and Re-issue of debenture 0.0001%.
    Issue of security other than debenture 0.005%
    Transfer of security other than debenture on delivery basis; 0.015%
    Transfer of security other than debenture on non-delivery basis 0.003%
    Derivatives––
    (i) Futures (Equity and Commodity) 0.002%
    (ii) Options (Equity and Commodity) 0.003%
    (iii) Currency and Interest Rate Derivatives 0.0001%
    (iv) Other Derivatives 0.002%
    Government Securities 0%
    Repo on Corporate Bonds 0.00001%

Leave a comment

Filed under Uncategorized

SEBI – relaxations

https://www.sebi.gov.in/legal/circulars/mar-2020/-further-relaxations-from-compliance-with-certain-provisions-of-the-sebi-listing-obligations-and-disclosure-requirements-regulations-2015-lodr-and-the-sebi-circular-dated-january-22-2020-relatin-_46436.html

Further relaxations made by SEBI in compliance matters because of the Covid crisis.

Reg 40(9) certification has been relaxed by one month.

reg 44(5) – holding of AGM by top 100 market listed entities – should have been done within 5 months from the closure – now one month extra has been given

conduct of various committee meetings in a financial year – nomination cum remuneration committee, stakeholders committee, risk management committee, – they are supposed to hold at least one meeting during the financial year. If they have not met, then they can meet upto june 2020.

Standard Operating Procedure i/r of fines and other enforcement actions for non compliances – action will be deferred and will be applicable only for compliances for the period ending 30th june, 2020.

reg 47 – publication of advertisement in newspapers in respect of board meetings and other matters is being exempted since many newspapers are not bringing out their print version of the newspapers.

Still the regulation 76 of the SEBI (Depositories) Act regarding reconcilation of share capital audit is not covered in these circulars.

 

Leave a comment

Filed under Uncategorized

acquisition – exemption

https://www.sebi.gov.in/enforcement/orders/feb-2020/exemption-order-under-regulation-11-of-sebi-sast-regulations-2011-in-the-matter-of-mps-limited_45985.html

Note on Exemption Order under Regulation 11 of SEBI (SAST) Regulation, 2011 in the matter of MPS Limited:-

  • Target Company: MPS Limited.
  • Acquirer’s: Nishita Arora Family Trust (NAFT) and

Neha Family Trust (NFT).

  • As per the application made to SEBI for granting exemption under regulation 11, it states that ADI BPO Services Limited (ADI BPO) is the promoter of the Target Company and holds 67.77% of shares in the Target Company.
  • Also ADI Media Private Limited (ADI Media) holds 8.43% of shares in ADI BPO.
  • Both Nishith Arora and Anju Arora are the promoters of ADI BPO and ADI Media. In order to facilitate succession planning, Nishith Arora has created Acquirer Trust 1 to streamline family’s shareholding in ADI BPO. Further, Nishith Arora and Anju Arora have also created Acquirer Trust 2 to streamline family’s shareholding in ADI Media.
  • Proposed acquisition involves settlement of equity shares of ADI BPO which constitutes 90.72% stake held by Nishith Arora to the acquirer trust 1 and also the settlement of equity shares of ADI Media which constitutes 99.99% stake held by Nishith Arora and Anju Arora to the acquirer trust 2.
  • Also the shares of ADI BPO and ADI Media would be transferred without any consideration.
  • The proposed acquisition of the Target Company by the acquirer’s will results into indirect acquisition of control over the target company.
  • Grounds on which the application was made to seek exemption under regulation 11 is as under:-
    • The settlement of shares held by the settlers in the respective acquirer trust will take place with respect to a private family arrangement.
    • Also regulation 10 provides for exemption from making an open offer in case of such type of indirect acquisition.
    • Proposed indirect acquisition is a non- commercial transaction which will not affect the interest of public shareholding of Target Company.
    • There shall be no real change in the shareholding and control of the  Target Company through acquirer.
    • The propose settlement of shares held by promoters in ADI BPO and ADI Media is just an internal reorganization of target company. Further such transfer would not results into any increase or decrease in the holding of the promoter group of the Target Company.
  • Acquirer’s has made an application to SEBI and also provide confirmation to comply with the guidelines mention in SEBI circular dated on 22 Dec, 2017.
  • It is noted that there is no change in in the public shareholding and control of Target Company after the acquisition.
  • But the Target Company shall continue to be in compliance with the minimum public shareholding as required.
  • After considering the application made to SEBI and considering the above facts the SEBI has granted exemption under regulation 11 subject to certain conditions which are as follows:-
    • The proposed acquisition shall be in accordance with the requirements of Companies Act, 2013.
    • After the post-acquisition the acquirer shall file a report within 21 days.
    • The acquirer shall comply with the provisions of SEBI Circular dated on 22 Dec, 2017.
    • It is to be noted that the exemption granted as above shall be limited to the requirements of making open offer and shall not be construed as exemption from the disclosure requirements as per SEBI Regulations.

Leave a comment

Filed under Uncategorized

depositories

Decisions at SEBI board meeting dated 17th February, 2020

Amendment to SEBI (Depositories and Participants) Regulations, 2018 to enable re-pledge of securities pledged in dematerialized form
The Board approved insertion of a suitable Explanation to Regulation 79 (Manner of
creating pledge in Depository) under SEBI (Depositories and Participants) Regulations, 2018, that the word “pledge” shall include re-pledge of securities for margin and / or settlement obligations of the client or such other purposes as specified by the Board from time to time.

Leave a comment

Filed under Uncategorized

portfolio managers

SEBI has vide its circular dated 13th February 2020 revised its guidelines for Portfolio Managers.

https://www.sebi.gov.in/legal/circulars/feb-2020/guidelines-for-portfolio-managers_45981.html

Gist of the revisions are given below:

  • Date of circular was on 13th Feb, 2020.
  • It is relating to guidelines issued by SEBI that are mandatory required to be followed by Portfolio Managers.
  • The provisions of this Circular shall be applicable with effect from May 01, 2020.
  • The guidelines are issued by SEBI based on the recommendations of a Working Group and also some inputs from public consultation.
  • SEBI has reviewed the framework for regulation of Portfolio Managers and the SEBI (Portfolio Managers) Regulation, 2020 has been notified on 16th Jan, 2020.
  • As per the circular there has been modification made in Fees and Charges which are charged by Portfolio Managers and are mentioned below:-
    • Regulation 22 (11) of the PMS Regulation states that no advance fees shall be charged by the Portfolio Managers either directly or indirectly, to the clients.
    • Also brokerage at actual cost shall be charged as expense to clients and not any other costs shall be added.
    • It is to be noted that Operating expenses excluding brokerage , over and above the fees charged by Portfolio Managers for the service shall not go beyond 0.50% per annum of the clients daily Asset Under Management.
    • In case the client wishes to redeem its investments in full or in part before the agreed period of time than in such case the exit load shall be charged as under:-
      • In the 1st year of investment = maximum 3% of amount redeem.
      • In the 2nd year of investment = maximum 2% of amount redeem.
      • In the 3rd year of investment = maximum 1% of amount redeem.
      • After the period of 3 years from the date of investment, no exit load shall be charged.
  • Also the charges for all the transactions in a financial year including broking, demat, custody, etc. incurred by self or by associates shall not exceed 20% per service.
  • In case of direct on-boarding of clients by Portfolio Managers the following points need to be kept in mind which are mentioned as below:-
    • In case of distribution of services the Portfolio Managers shall provide an option to client to be on-boarded directly without involving any intermediary.
    • Portfolio Managers shall clearly disclose in its Disclosure Documents and also on its website about the option for direct on-boarding.
    • It is to be noted that only statutory charges shall be charged in case of direct on-boarding of clients.
  • All the information with respect to Investment Approaches offered by Portfolio Managers shall be uniform across all types of regulatory reporting, client reporting, disclosure document, marketing materials and any such document which relates to services offered by Portfolio Managers.
  • Any description of investment  approach provided by Portfolio      Managers shall, includes the following:-
    • investment objective
    • description of types of securities e.g. equity or debt, listed or unlisted, convertible instruments, etc.
    • basis of  selection  of  such  types  of  securities  as  part  of  the investment approach
    • allocation of portfolio across types of securities(v)appropriate benchmark  to  compare  performance  and  basis  for choice of benchmark
    • indicative tenure or investment horizon
    • risks associated with the investment approach
    • other salient features, if any.
  • Portfolio Managers shall report to SEBI on periodical basis as per the provisions of circular dated on 18th Nov, 2003 which is relating to ‘Improvement in Corporate Governance’ that is on annual basis.
  • SEBI has also clarified that with effect from financial year 2019-20 Portfolio Managers is required to submit the following information to the Board:-
    • A certificate by CA duly certifying the net worth as on March 31st every year based on audited account within 6 months from the end of financial year.
    • Also a certificate of compliance with PMS Regulations and circulars issued thereunder, duly signed by the Principal Officer within 60 days of end of each financial year.
  • Further, Portfolio Managers shall submit a monthly report regarding their activities on SEBI Intermediaries Portal within 7 working days of the end of each month as per Annexure A.
  • Also Portfolio Managers shall furnish a report in the format provided at Annexure B to their clients on a quarterly basis.
  • According to the Regulation 22 (4) (e) of PMS Regulations, it is clarified that the Portfolio Managers shall:-
    • Consider all cash holdings and investments in liquid funds, for calculation of performance.
    • Report performance data net of all fees and all expenses (including taxes).
    • Clearly disclose any change in investment approach that may impact the performance of client portfolio, in the marketing material.
    • Ensure that performance reported in all marketing material and website of the Portfolio Manager is the same as that reported to SEBI.
    • Ensure that  the  aggregate  performance of the  Portfolio  Manager (firm-level performance) reported in any document shall be same as the  combined  performance  of  all  the  portfolios  managed  by  the Portfolio Manager.
    • Provide a disclaimer in all marketing material that the performance related information provided therein is not verified by SEBI.
  • The performance data of Portfolio Managers shall be audited annually and the same shall be reported to SEBI within 60 days of end of each financial year. Also the said report shall be certified by Manager, Partners of the Portfolio Managers.
  • Further to Regulation 23 (10) of PMS Regulations, it is clarified that Portfolio Managers shall:-
  • Utilize services of only such distributors who have a valid AMFI Registration Number or have cleared NISM-Series-V-A exam.
  • Pay fees or commission to distributors only on trial-basis. Further, any fees or commission paid shall be only from the fees received by Portfolio Managers.
  • Ensure that prospective clients are informed about the fees or commission to be earned by the distributors for on-boarding them to specific investment approaches.
  • Ensure that distributors abide by the Code of Conduct as specified in Annexure C.
  • Have mechanism to independently verify the compliance of its distributors with the Code of Conduct.
  • Ensure that, within 15 days from the end of every financial year, a self-certification is also received from distributors with regard to compliance with Code of conduct.

2 Comments

Filed under Uncategorized

misuse of clients’ securities

SEBI press release dated 13th february 2020

In the recent past years, it has been observed that some brokers have misused clients’ securities received as collateral to meet their own settlement obligation or obligations of other clients.  Some brokers have also misused clients’ securities by pledging them with the banks and NBFCs to raise funds for their own use. Though the Depositories Act provides for acceptance of client securities as collateral by way of pledge, the collateral of securities is accepted by way of title transfer of securities by brokers.  The client providing collateral in the form of securities needs to transfer his securities in the name of the broker and once the securities move out of the demat account of the client, it is not possible for him to keep a track of use/ misuse of those securities by the broker.

A few brokers have been declared defaulter by the Exchange not on account of failure to meet settlement obligation but in failing to meet liabilities/ dues to the clients.  The available assets of the broker were found short to meet the clients’ funds and securities obligations.  In order to prevent the misuse of clients’ securities by broker, SEBI has taken a number of policy measures including laying down early warning mechanism to detect diversion of clients’ funds and securities, restricting broker to pledge clients’ securities even with the consent of the client, securities to be transferred to Client account or Client Unpaid Securities Account (CUSA) within 24 hours of payout, mapping of Unique Client Code with demat account of the client to detect diversion of payout of securities.  SEBI has also directed Clearing Corporations to share client level pay-in and pay-out obligations with Depositories, and Depositories are required to check the corresponding debit or credit in the demat account of client and report mismatches to the Exchanges. This has detected the diversion of clients’ securities received in payout.

SEBI has developed an in – house online system by which it would be able to prepare client level securities holding register of the brokers. SEBI collects the details of the clients’ securities submitted in weekly report filed by brokers with the Exchanges and updates the same with trades conducted in the accounts of said clients using the data available with SEBI in DWBIS as well as data provided by Exchanges, Clearing Corporations and Depositories pertaining to auction trades, corporate actions, SLBM transfers, off market trades etc. The securities holding balance computed is matched with the actual clients’ securities holding in the demat account and submission made by the broker for the next day. Any mismatch in data is flagged as an alert for Exchanges.

As such, SEBI has developed the in – house capabilities to online track the movement of client securities collected by broker as collateral and raise alerts with Exchanges if diversion of clients’ securities is noticed. These reports are being generated by SEBI on a weekly basis and three such mismatch reports have already been forwarded to Exchanges for reconciliation with members.  This system is likely to timely detect the misuse of clients’ securities collected by brokers as collateral or received in pay-out of securities.

Leave a comment

Filed under Uncategorized