Thursday, October 18, 2007

SEBI Stock Broker Regulation - Part-2

CHAPTER IV
GENERAL OBLIGATIONS AND RESPONSIBILITIES

To maintain proper books of accounts, records etc.

17

(1) Every stock-broker shall keep and maintain the following books of accounts,
records and documents namely; -
(a) Register of transactions (Sauda Book);
(b) Clients ledger;
(c) General ledger;
(d) Journals;
(e) Cash book;
(f) Bank pass book;
(g) Documents register containing, inter-alia, particulars of securities received
and delivered in physical form and the statement of accounts and other records
relating to receipt and delivery of securities provided by the Depository
Participants in respect of dematerialized securities.
(h) Members' contract books showing details of all contracts entered into by him
with other members of the same exchange or counterfoils or duplicates of memos of confirmation issued to such other member;
(i) Counterfoils or duplicates of contract notes issued to clients;
(j) Written consent of clients in respect of contracts entered into as principals;
(k) Margin deposit book;
(l) Registers of accounts of sub- brokers;
(m) an agreement with a sub- broker specifying the scope of authority and
responsibilities of the Stock-Broker and such sub- broker.
(n) An agreement with the stock broker and with the client of the sub-broker to
establish privity of contract between a stock broker and the client of the subbroker.

(2) Every stock-broker shall intimate to the Board the place where the books of
accounts, records and documents are maintained.

(3) Without prejudice to sub- regulation (1), every stock- broker shall, after the close of each accounting period furnish to the Board if so required as soon as possible but not later than six months from the close of the said period a copy of the audited balance sheet and profit and loss account, as at the end of the said
accounting period:

Provided that, if it is not possible to furnish the above documents within the time
specified, the stock-broker shall keep the Board informed of the same together
with the reasons for the delay and the period of time by which such documents
would be furnished.

Maintenance of books of accounts and records

18. Every stock broker shall preserve the books of account and other records maintained under regulation 17 for a minimum period of five years.

Appointment of compliance officer

18A (1) Every stock broker shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines instructions, etc, issued by the Board or the Central Government and for redressal of investors grievances.

(2) The compliance officer shall immediately and independently report the Board any
non-compliance observed by him

Stock broker not to deal with unregistered stock broker.

18B The stock broker shall not deal with any person as a sub-broker unless such person has been granted certificate of registration by the Board under sub-regulation(1) of Regulation 12.




CHAPTER V

PROCEDURE FOR INSPECTION

Board's right to inspect.

19 (1) Where it appears to the Board so to do, it may appoint one or more persons as
inspecting authority to undertake inspection of the books of accounts, other
records and documents of the stock- brokers for any of the purposes specified in
sub-regulation (2).
(2) The purposes referred to in sub-regulation (1) shall be as follows, namely:
(a) to ensure that the books of accounts and other books are being maintained in
the manner required;
(b) that the provisions of the Act, rules, regulations and the provisions of the
Securities Contracts (Regulation) Act and the rules made thereunder are being
complied with;
(c) to investigate into the complaints received from investors, other stock brokers,
sub-brokers or any other person on any matter having a bearing on the
activities of the stock- brokers; and
(d) to investigate suo-moto, in the interest of securities business or investors'
interest, into the affairs of the stock- broker.

Procedure for inspection.

20. (1) Before undertaking any inspection under regulation 19, the Board shall give a
reasonable notice to the stock- broker for that purpose.
(2) Notwithstanding anything contained in sub-regulation (1), where the Board is
satisfied that in the interest of the investors or in public interest no such notice
should be given, it may by an order in writing direct that the inspection of the
affairs of the stock broker be taken up without such notice.
(3) On being empowered by the Board, the inspecting authority shall undertake the
inspection and the stock-broker against whom an inspection is being carried out
shall be bound to discharge his obligations as provided under regulation 21.
Obligations of stock - broker on inspection by the Board.
21. (1) It shall be the duty of every director, proprietor, partner, officer and employee of the stock-broker, who is being inspected, to produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with the statements and information relating to the transactions in securities market within such time as the said officer may require.

(2) The stock-broker shall allow the inspecting authority to have reasonable access
to the premises occupied by such stock- broker or by any other person on his
behalf and also extend reasonable facility for examining any books, records,
documents and computer data in the possession of the stock- broker or any other
person and also provide copies of documents or other materials which, in the
opinion of the inspecting authority are relevant.

(3) The inspecting authority, in the course of inspection, shall be entitled to examine or record statements of any member, director, partner, proprietor and employee of the stock- broker.

(4) It shall be the duty of every director proprietor, partner, officer and employee of the stock broker to give to the inspecting authority all assistance in connection
with the inspection, which the stock broker may be reasonably expected to give.
Submission of Report to the Board.

22. The inspecting authority shall, as soon as may be possible, submit an inspection
report to the Board.

Action on inspection or investigation report

23. The Board shall after consideration of inspection or investigation report take such action as it may deem fit and appropriate including action under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and
Imposing Penalty) Regulations, 2002, Chapter VIA of the Act or section 24 of the
Act.



24. Notwithstanding anything contained above, the Board may appoint a qualified auditor to investigate into the books of account or the affairs of the stock-broker:
Provided that, the auditor so appointed shall have the same powers of the inspecting
authority as mentioned in regulation 19 and the obligations of the stock- broker in
regulation 21 shall be applicable to the investigation under this regulation.


CHAPTER VI

PROCEDURE FOR ACTION IN CASE OF DEFAULT

25. Liability for contravention of the Act, rules or the regulations – A stock
broker or a sub-broker who contravenes any of the provisions of the Act, rules or
regulations framed thereunder shall be liable for any one or more of the following actions

(i) Monetary penalty under Chapter VIA of the Act.
(ii) Penalties as specified under Securities and Exchange Board of India
(Procedure for Holding Enquiry Officer and Imposing Penalty) Regulation,
2002 including suspension or cancellation of certificate of registration as a
stock broker or a sub-broker.
(iii) Prosecution under section 24 of the Act.
26. Liability for monetary penalty – A stock broker or a sub-broker shall be liable
for monetary penalty in respect of the following violations, namely -
(i) Failure to file any return or report with the Board.
(ii) Failure to furnish any information, books or other documents within 15 days
of issue of notice by the Board.
(iii) Failure to maintain books of accounts or records as per the Act, rules or
regulations framed thereunder.
(iv) Failure to redress the grievances of investors within 30 days of receipt of
notice from the Board.
48 Regulations 25to 28 substituted for regulation 25 by the SEBI (Stock Brokers and Sub-brokers)
(Amendment) Regulations, 2003, w.e.f. 20-11-2003. Prior to substitution, these were read as,
“ Liability for action in case of default – (1) A sub-broker who
(a) fails to comply with any conditions subject to which registration has been granted;
(b) contravenes any of the provisions of the Act, rules or regulations;
(c) contravenes the provisions of the Securities Contracts (Regulation) Act or the rules made
thereunder;
(d) contravenes the rules, regulations or bye-laws of the stock exchange;
shall be liable to any of the penalties specified in sub-regulation (2).
(2) The penalties referred to in sub-regulation (1) may be either—
(a) suspension of registration after the inquiry, for a specified period; or
(b) cancellation of registration.
(v) Failure to issue contract notes in the form and manner specified by the stock
exchange of which sub broker is a member.
(vi) Failure to deliver any security or make payment of the amount due to the
investor within 48 hours of the settlement of trade unless the client has agreed
in writing otherwise.
(vii) Charging of brokerage which is in excess of brokerage specified in the
regulations or the bye-laws of the stock exchange.
(viii) Dealing in securities of a body corporate listed on any stock exchange on his
own behalf or on behalf of any other person on the basis of any unpublished
price sensitive information.
(ix) Procuring or communicating any unpublished price sensitive information
except as required in the ordinary course of business or under any law.
(x) Counseling any person to deal in securities of any body corporate on the basis
of unpublished price sensitive information.
(xi) Indulging in fraudulent and unfair trade practices relating to securities.
(xii) Execution of trade without entering into agreement with the client under the
Act, rules or regulations framed thereunder or failure to maintain client
registration form or commission of any irregularities in maintaining the client
agreement.
(xiii) Failure to segregate his own funds or securities from the client’s funds or
securities or using the securities or funds of the client for his own purpose or
for purpose of any other client.
(xiv) Acting as an unregistered sub-broker or dealing with unregistered sub-brokers.
(xv) Failure to comply with directions issued by the Board under the Act or the
regulations framed thereunder.
(xvi) Failure to exercise due skill, care and diligence.
(xvii) Failure to seek prior permission of the Board in case of any change in its
status and constitution.
(xviii) Failure to satisfy the net worth or capital adequacy norms, if any, specified by
the Board.
(xix) Extending use of trading terminal to any unauthorized person or place.
(xx) Violations for which no separate penalty has been provided under these
regulations.

27. Liability for action under the Enquiry Proceeding Regulations – A stock
broker or a sub-broker shall be liable for any action as specified in the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and
Imposing Penalty) Regulations, 2002 including suspension or cancellation of his
certificate of registration as a stock broker or a sub-broker, as the case may be, if he-
(i) ceases to be a member of a stock exchange; or
(ii) has been declared defaulter by a stock exchange and not readmitted as a
member within a period of six months; or
(iii) surrenders his certificate of registration to the Board; or
(iv) has been found to be not a fit and proper person by the Board under these or
any other regulations ; or
(v) has been declared insolvent or order for winding up has been passed in the
case of a broker or sub-broker being a company registered under the
Companies Act, 1956; or
(vi) or any of the partners or any whole time director in case a broker or subbroker
is a company registered under the Companies Act, 1956 has been
convicted by a court of competent jurisdiction for an offence involving moral
turpitude; or
(vii) fails to pay fee as per Schedule III of these regulations; or
(viii) fails to comply with the rules, regulations and bye-laws of the stock exchange
of which he is a member; or
(ix) fails to co-operate with the inspecting or investigating authority; or
(x) fails to abide by any award of the Ombudsman or decision of the Board under
the Securities and Exchange Board of India (Ombudsman) Regulations, 2003;
or
(xi) fails to pay the penalty imposed by the Adjudicating Officer; or
(xii) indulges in market manipulation of securities or index; or
(xiii) indulges in insider trading in violation of Securities and Exchange Board of
India (Prohibition of Insider Trading) Regulations, 1992; or
(xiv) violates Securities and Exchange Board of India (Prohibition of Fraudulent
and Unfair Trade Practices relating to Securities Market) Regulations, 2003;
or
(xv) commits violation of any of the provisions for which monetary penalty or
other penalties could be imposed; or
(xvi) fails to comply with the circulars issued by the Board; or
(xvii) commits violations specified in regulation 26 which in the opinion of the
Board are of a grievous nature.

28. Liability for prosecution – A stock broker or a sub-broker shall be liable for
prosecution under section 24 of the Act for any of the following violations, namely:-
(i) Dealing in securities without obtaining certificate of registration from the
Board as a stock broker or a sub-broker.
(ii) Dealing in securities or providing trading floor or assisting in trading outside
the recognized stock exchange in violation of provisions of the Securities
Contract (Regulation) Act, 1956 or rules made or notifications issued
thereunder.
(iii) Market manipulation of securities or index.
(iv) Indulging in insider trading in violation of Securities and Exchange Board of
India (Prohibition of Insider Trading) Regulations, 1992.
(v) Violating the Securities and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003.
(vi) Failure without reasonable cause(
a) to produce to the investigating authority or any person authorized by him
in this behalf, any books registers, records or other documents which are
in his custody or power; or
(b) to appear before the investigating authority personally or to answer any
question which is put to him by the investigating authority or
(c) to sign the notes of any examination taken down by the investigating
authority.
(vii) Failure to pay penalty imposed by the adjudicating officer or failure to comply
with any of his directions or orders.]
49[*********]
49 Regulations 26 to 32 had been omitted by the Securities and Exchange Board of India (Procedure for
Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 w.e.f. 27-9-2002. Prior to
this these regulations were read as under:
“Suspension, cancellation of registration, etc.
26. (1) A penalty of suspension of registration of a stock- broker may be imposed if:-
(i) the stock-broker violates the provisions of the Act, rules and regulations;
(ii) the stock-broker does not follow the code of conduct annexed at Schedule II;
(iii) the stock-broker –
(a) fails to furnish any information related to his transactions in securities as required by the
Board;
(b) furnishes wrong or false information,
(c) does not submit periodical returns as required by the Board;
(d) does not co-operate in any enquiry conducted by the Board;
(iv) the stock-broker fails to resolve the complaints of the investors or fails to give a satisfactory
reply to the Board in this behalf;
(v) the stock-broker indulges in manipulating or price rigging or cornering activities in the market;
(vi) the stock-broker is guilty of misconduct or improper or unbusinesslike or unprofessional
conduct;
(vii) the financial position of the stock broker deteriorates to such an extent that the Board is of the
opinion that his continuance in securities business is not in the interest of investors and other
stock- brokers;
(viii) the stock-broker fails to pay the fees;
(ix) the stock-broker violates the conditions of registration;
(x) the membership of the stock- broker is suspended by the stock exchange:
Provided that the Board for reasons to be recorded in writing may in case of repeated
defaults of the type mentioned above impose a penalty of cancellation of registration of the
stock-broker.
(2) A penalty of cancellation of registration of a stock-broker may be imposed if:-
(i) the stock-broker violates any provisions of insider trading regulations or take-over
regulations;
(ii) The stock-broker is guilty of fraud, or is convicted of a criminal offence; and
(iii) cancellation of membership of the stock-broker by the stock exchange.
Manner of order of suspension or cancellation

27. No order of penalty of suspension and cancellation shall be imposed except after holding an enquiry in
accordance with the procedure specified in regulation 28.
a*[Provided that the holding of such an enquiry shall not be necessary in cases where the stock
broker:
(a) ceases to be a member of a recognised stock exchange; or
(b) is declared defaulter by the stock exchange and is not readmitted to the membership of the
exchange within a period of six months from such declaration ;or
(c) surrenders the membership of the stock exchange; or
(d) is declared insolvent by a Court; or
(e) fails to pay the registration or annual fees to the Board in the manner specified in the regulations;
or
(f) voluntarily surrenders certificate to the Board; or
(g) is wound up by an order passed by the Court.
Provided further that no action shall be taken against the stock broker without giving an
opportunity of hearing to the stock broker].
a. Proviso to regulation 27 was inserted by the SEBI (Stock Brokers and Sub Brokers)
(Amendment) Regulations, 1999 published in the Official Gazette of India dated 06.07.1999.

Manner of holding enquiry

28. (1) For the purpose of holding an enquiry under regulation 27, the Board may appoint an enquiry
officer.
(2) The enquiry officer shall issue to the stock-broker a notice at the registered office or the principal
place of business of the stock-broker.
(3) The stock-broker may, within thirty days from the date of receipt of such notice, furnish to the
enquiry officer a reply together with copies of documentary or other evidence relied on by him or
sought by the Board from him.
(4) The enquiry officer shall, give a reasonable opportunity of hearing to the stock-broker to enable
him to make submissions in support of his reply made under sub-regulation (3).
(5) Before the enquiry officer, the stock-broker may either appear in person or through any person
duly authorised on his behalf:
Provided that no lawyer or advocate shall be permitted to represent the stock-broker at the
enquiry:
Provided further that where a lawyer or an advocate has been appointed by the Board as a presenting officer under sub- regulation (6), it shall be lawful for the stock-broker to present his case through a lawyer or advocate.
(6) If it is considered necessary, the enquiry officer may request the Board to appoint a presenting
officer to present its case.
(7) The enquiry officer shall, after taking into account all relevant facts and submissions made by the
stock-broker, submit a report to the Board and recommend the penalty to be awarded as also on
the justification of the penalty proposed in the notice.
Show-cause notice and order

29. (1) On receipt of the report from the enquiry officer, the Board shall consider the same and issue a show-cause notice as to why the penalty as it considers appropriate should not be imposed.

(2) The stock-broker shall within twenty-one days of the date of the receipt of the show- cause send a reply to the Board.

(3) The Board after considering the reply to the show-cause notice, if received, shall as soon as possible but not later than thirty days from the receipt of the reply, if any, pass such order as it deems fit.

(4) Every order passed under sub- regulation (3) shall be self- contained and give reasons for the conclusions stated therein including justification of the penalty imposed by that order.

(5) The Board shall send a copy of the order under sub- regulation (3) to the stock- broker, stock exchange of which the stock-broker is the member, a*[******].

(5) The Board shall send a copy of the order under sub- regulation (3) to the stock- broker, stock exchange of which the stock-broker is the member, a*[******].
a. "and to the Central Government" omitted by the SEBI (Stock Brokers and Sub brokers)Amendment Regulations, 1999 published in the Official Gazette of India dated 06.07.1999.

Effect of suspension and cancellation of registration of stock-broker.

30. (1) On and from the date of the suspension of broker he shall cease to buy, sell or deal in securities as a stock-broker during the period of suspension.

(2) On and from the date of cancellation, the stock-broker shall with immediate effect cease to buy sell or deal in securities as a stock-broker.

Publication of order of suspension

31. The order of suspension or cancellation of certificate passed in sub- regulation (3) of regulation 29 shall be published in at least two daily newspapers by the Board be published in at least two daily newspapers by the Boards.

Appeal to the Securities Appellate Tribunal

32. a*[Any person aggrieved by an order of the Board made, on and after the commencement of the Securities Laws (Second Amendment) Act, 1999, (i.e., after 16th December 1999), under these regulations may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter]
a. Substituted for the following provision by the SEBI (Appeal to the Securities Appellate Tribunal) (Amendments) Regulations, 2000 published in the Official Gazette of India dated 28.03.2000
"Any person aggrieved by an order of the Board may prefer an appeal to the Central
Government"

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