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REFERENCER ON INTERNAL AUDIT OF STOCK BROKERS

1

INTRODUCTION

Stock Broker plays an important role in helping both the seller and the buyer of the securities to enter into a transaction. The buyer and seller may be either a broker or a client. The transaction so entered cannot be annulled except in the case of fraud, willful misrepresentation or upon prima-facie evidence of a material mistake in the transaction, in the judgment of the authorities.

The stock broker, while executing a order, may on behalf of his client buy or sell securities from his own account i.e. as a principal or an agent. For each transaction the stock broker has to issue necessary contract note indicating whether the transaction has been entered into by him as a principal or as an agent for another. While buying or selling securities as a principal, the stock broker has to obtain the consent of his client and the prices charged should be fair and justified by the conditions of the market.

A stock broker, thus, being a vital link between the regulators, issuers and investors, any aberrations in the capital markets has presumably direct bearing on the stock brokers, his governance processes and practices which in turn affect the confidence of the markets and investors. It is, therefore, convincingly argued that the persons who operate in the market are required to maintain high standards of integrity, promptitude and fairness in the conduct of their business dealings. It is, therefore, necessary that stock brokers put in place processes to ensure good governance practice and also to have constant monitoring and surveillance on the acts of intermediaries.

Who can undertake Internal Audit of Stock Brokers?

SEBI authorized the Practising Company Secretaries, amongst other professionals to carry out complete internal audit of stock brokers/stock broker/trading members/clearing members on a half yearly basis. 1

Stock broker/trading members and clearing members in any of the segments are required to carry out internal audit in respect of their operations on any exchange and submit exchange wise and segment wise [Capital market (Cash), F & O, Currency Futures and Wholesale Debt Market (WDM)] report on half yearly basis. The first half year period would start from October 2008.

Scope of Internal Audit

The scope of this internal audit is wide enough and covers, inter alia, existence, scope and efficiency of the internal control system and compliance with the provisions of the SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, circulars issued by SEBI, agreements, KYC requirements, Bye Laws of the Exchanges, data security and insurance in respect of the operations of stock brokers/clearing members.

1 Circular MRD/DMS/Cir-29/2008 dated October 21, 2008

1

Objectives of internal audit

The objective of internal audit of stock brokers is—

(i)

to ensure that the books of account, records (including telephone records and electronic records) and documents are being maintained in the manner required under SEBI Act, 1992, SCR Act, 1956 and SEBI (Stock brokers and Sub- brokers) Regulations, 1992.

(ii)

to ascertain as to whether adequate internal control systems, procedures and safeguards have been established and are being followed by the intermediary to fulfill its obligations within the scope of the audit.

(iii)

to ascertain as to whether any circumstances exist which would render the intermediary unfit or ineligible

(iv)

to ascertain whether the provisions of the securities laws and the directions or circulars issued thereunder are being complied with

(v)

to ascertain whether the provision of stock exchange bye-laws, notices, circulars, instructions or orders issued by stock exchanges are being complied with

(vi)

to inquire into the complaints received from investors, clients, other market participants or any other person on any matter having a bearing on the activities of the stock broker.

How to prepare for Audit?

It is advisable for an auditor to collect/study the following information, before taking up the audit of an entity:

Place where the books of accounts are maintained

Details of membership of different exchanges and segments

List of the terminals of the exchanges, their locations and authorized persons

Details of the sub-brokers and remisers

Details of branch office and in-charge/branch head

Shareholding pattern and details of dominant promoters

Names of the chairman, MD, whole time directors, CEO, COO, designated directors, and compliance officer

Details of investor complaints received, resolved and pending during the inspection period.

Latest Annual Reports.

Previous audit reports and compliances / comments of previous inspections.

Information from the website of stock broker for group details, products offered, geographical spread, other activities, stock broker's client funding and other details.

Study the SEBI Act, SCRA Act, SCRR, SEBI (Stock broker and Sub-brokers) Regulations, circulars, stock exchange bye-laws, notices and directions relevant to stock broker audit from the website of SEBI and stock exchange.

Formats for member client agreements, client registration forms, risk disclosure documents, contract note, STT annexure, register of securities, etc.

Trading pattern of stock broker to understand the proportion of proprietary trading, retail clients trading, institutional clients trading and internal clients trading.

2

Documents/Records to be checked

(i)

Financial statements:

— Balance Sheet

— Profit & Loss Account

— Funds Flow Statement

— Cash flow statement

— General ledger, journal vouchers and trial balance

— Bank books

— Cash books

— Bank statements

— Branch reconciliations

Back office statements/reports

Transaction (Sauda) register and security register

(ii)

Regulatory documents:

— SEBI Registration Certificate

— List of sub- brokers

— List of branches

— Membership letters of the exchanges and the segments operated in

(iii)

Records

— List of clients

— KYC forms

— Member constituent agreements

— Risk disclosure documents

— Branch accounts

— Proprietary accounts

3

2

REGULATORY FRAMEWORK GOVERNING STOCK BROKERS

The following discussions will provide the overall regulatory framework, the stock brokers are subject to and an insight in to the various compliances required to be made by the stock brokers.

LEGISLATIONS

The main legislations governing the securities market are:

(i)

Securities Contracts (Regulation) Act, 1956, providing for regulation of transactions in securities through control over stock exchanges;

(ii)

SEBI Act, 1992 establishing SEBI to protect investors and develop and regulate securities market;

(iii)

Depositories Act, 1996 providing for electronic maintenance and transfer of ownership of dematerialised securities; and

(iv)

Prevention of Money Laundering Act, 2002 imposing obligation on intermediaries to verify identity of clients, maintain certain records and furnish certain information to the relevant authority;

(v)

Companies Act, 1956 setting out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issues.

RULES AND REGULATIONS

(i)

Securities Contracts (Regulation) Rules, 1957, for carrying out the purposes of Securities Contracts (Regulation) Act, 1956.

(ii)

SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992, to regulate the affairs, functioning of stock brokers. It has also made certain code of conduct to be followed by members.

(iii)

SEBI (Insider Trading) Regulations, 1992, prohibits the insider trading and considers it an offence. This regulation defines various terms such as insider, connected person, deemed to be connected person, price sensitive information etc. An intermediary is covered under the definition of ‘deemed to be connected person’. The definition of ‘insider’ covers the person who is ‘deemed to be connected’ and accordingly an intermediary is an insider who should not contravene the provisions of this regulation. Certain disclosures are also required to be made under these regulations.

(iv)

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 1995, enables SEBI to investigate into cases of market manipulation and fraudulent and unfair trade practices. The regulations specifically prohibit market manipulation, misleading statements to induce sale or purchase of securities, unfair trade practices relating to securities. SEBI can conduct investigation, suo moto or upon information received by it, by an investigating officer in respect of conduct and affairs of any person dealing, buying/selling/dealing in securities.

4

(v)

SEBI circulars and directives, various circulars are issued by SEBI from time to time for issuing directives to market participants.

BYE LAWS, RULES AND REGULATIONS OF STOCK EXCHANGES

(i)

Bye-laws, the bye laws of stock exchanges basically deal with payment of fees, code of advertisement, arbitration, dealing with sub-brokers and other intermediaries, sharing brokerage; in respect of trading and/or clearing members.

(ii)

Rules, the rules of stock exchanges basically cover aspects such as eligibility, admission of trading/clearing members, termination of membership, re-admission of defaulters, disciplinary proceedings, misconduct etc.

(iii)

Regulations, cover aspects such as requirements about maintenance of books and other documentary requirements, in dealing with clients, in dealing with sub-brokers, in issuing contract notes etc.

(iv)

Circulars, the stock exchanges issue directives to their trading/ clearing members through circulars from time to time.

A stock broker is thus subject to various securities laws and is under an obligation to adhere to various compliances.

5

3

COMPLIANCE CHECKLIST FOR NSE TRADING MEMBERS*

Submission of Requirements

 

Periodicity

Time of Submission

Department

Annual submissions including Audited financial statements, Net worth certificate. Membership in other stock exchanges, Details of directors/ proprietor, Shareholding/sharing pattern, Dominant/original shareholders/partners, Undertaking by relatives/ corporate shareholders supporting dominant shareholders/ partners, Details of stock exchanges in which member corporate is listed. Annual submissions are mandatory both in physical form as well as by way of upload in electronic format through ENIT using digital signature (NSE/COMP/10774 dated May 30, 2008) (NSE/MEMB/7835, 06/09/2006)

Yearly

Within 6 months from the end of accounting year of the member

Membership

Proof of Insurance cover

 

Yearly

By 31 st July

 

Membership

(NSE/MEMB/7504,

 

19/05/2006)

Annual

Compliance

Report

Yearly

Within

3 months

Inspection

(NSE/INSP/7494, 16/05/2006)

from

the

end

of

 

the financial year April-March

SSL certificate for IBT Services (NSE/CMTR/7636, 28/06/2006), (NSE/CMTR/01642, 12/05/2000)

 

Yearly

By 31 st July

 

Capital Market

 

Trade

System

Audit

Report

Yearly

By 31 st July

 

Capital Market

(NSE/CMTR/7634, 28/06/2006),

   

Trade

(NSE/CMTR/8195,

11/12/2006),

(NSE/CMTR/6128,

10/05/2005),

(NSE/CMTR/8089, 10/11/2006)

 

Net

worth

certificate

 

Half yearly

Within 3 months from the end of half year

 

Membership

(NSE/MEMB/8166, 04/12/2006)

Auditor'

compliance certificate &

Half yearly

Within one month

Membership

Net worth certificate by members

from

the

end

of

providing margin trading

facility

March

&

(NSE/MEMB/4973, 07/04/2004), (NSE/MEMB/4972, 07/04/2004)

September

 

* Compiled and updated on the basis of the checklist prepared by Shri J Ravichandran, Director, Finance & Accounts, Legal & Secretarial, National Stock Exchange of India Ltd.

6

Monthly disclosure

of client

Monthly

Within

seven

Capital Market

funding (NSE/CMTR/6963, 19/12/2005), (NSE/CMTR/6962, 19/12/2005),

days from the

Trade

end

of

the

(NSE/CMTR/6373, 13/07/2005), (NSE/CMTR/8454, 31/01/2007)

month

Internet trading statistics

 

Weekly

By Monday of the following week

Capital

 

Market. Trade

Reporting bulk/block deal details (in case of any mismatch in the indicative report of the Exchange). (NSE/CMTR/7864, 13/09/2006)

 

Daily

Before 6 : 00 pm on the trade day

Capital Market

Trade

Single bulk deal immediately upon execution of the order. (NSE/CMTR/4808 16/02/2004) (NSE/CMTR/7864, 13/09/2006)

 

Daily

Within one hour of closure of trading hours

Capital Market

Trade

Upload of daily margin trading file (Disclosure of exposure to margin trading facility) (NSE/MEMB/4972, 07/04/2004), NSE/MEMB/4973, 07/04/2004), (NSE/CMTR/4974, 07/04/2004), (NSE/ CMTR/5420, 09/09/2004), (NSE/ CMTR/5914, 10/03/2005), (NSE/ MEMB/5917, 11/03/2005), (NSE/ CMTR/7898, 21/09/2006).

Daily

 

Capital

Before 9 : 00 pm on the trade day

Market Trade

Upload

of

OTR

file

(Obligation

Daily

On T day, I upload

NSCCL-

Transfer

Request

allocation

of

6.00

pm, II upload

Securities

INST

trades)

(NSE/CMPT/1640,

6.30

pm, On T+1

11/05/2000),

(NSE/CMPT/5817,

day, III upload

09/02/2005),

(NSE/CMPT/6653,

9.00

am

16/09/2005)

   

Upload

of

CP

file

(CP

Code

Daily

On T day by 4.45 pm

NSCCL-

Modification)

(NSE/CMPT/0750,

Securities

30/12/1998),

NSE/CMPT/5817,

 

09/02/2005),

(NSE/CMPT/6119,

09/05/2005)

 

Upload of RC file (Reallocation of custodial trades) (NSE/CMPT/6653, 16/09/2005), (NSE/CMPT/6656,

19/09/2005)

Daily

On T+1 day by

NSCCL-

9.30

am

Securities

 

Upload

of

CC

file

(Custodial

Daily

On T day, I upload

NSCCL-

Participant Contractions)

 

6.30

pm, On T+1

Securities

(NSE/CMPT/6323,

 

01/07/2005),

day, II upload 9.30 am

(NSE/CMPT/6653, 16/09/2005)

 

Upload

of

CLD

file

(Client

Code

Daily

On T day by 4.45 pm

NSCCL-

Modification) (NSE/CMPT/02822, 31/08/2001), (NSE/CMPT/5591,

Securities

11/11/2004)

   

Upload of

CEP file (Early Pay

IN

Daily

On T+2 day up to 10.30 am

NSCCL-

Client-wise

 

allocation)

Securities

(NSE/CMPT/6481, 05/08/2005)

   

Upload

of

CPD

file

(Client

Direct

Daily

On T+2 day by

NSCCL-

Payout)

(NSE/CMPT/4006,

9.30

am

Securities

13/03/2003)

   
 

7

Pay

in

of

Securities

Daily

On T+2 day by

NSCCL-

(NSE/CMPT/4991, 16/04/2004)

 

10.30

am

Securities

Pay in of Funds (NSE/CMPT/4991,

Daily

On T+2 day by

NSCCL-

16/04/2004)

 

10.30

am

Securities

Reporting settlement of trade for trade transactions (Market type – Z series—BT)

Daily

Upon settlement of the trades

NSCCL-

Securities

Upload of Client Margin Report for F & O segment (NSE/CMPT/4206, 17/06/2003), (NSE/CMPT/7825,

Daily

Within two days from trade date

NSCCL-Risk

05/09/2006)

 

Reporting of WDM trades not executed on Neat system

Daily

Upon issue of contract notes

WDM

Reporting cancellation

/

Daily

By the scheduled settlement date

WDM

modification / reschedule of WDM

trades

 

Reporting settlement of WDM trades

Daily

Upon settlement of trades

WDM

Change in status and constitution of the member (NSE/MEMB/4299,

One time / need based submissions

Prior Approval

Membership

required

25/07/2003)

 

Appointment of Authorized Person in F & O segment (NSE/MEMB/6882, 21/11/2005), (NSE/MEMB/6769, 14/10/2005), (NSE/MEMB/6882,

21/11/2005)

One time / need based submissions

Prior Approval

Membership

required

Appointment

 

and

change

of

One time / need based submissions

Intimation to

Membership

Compliance

 

Officer

Exchange

(NSE/MEMB/3441, 14/06/2002)

 

Advertisements

(Rule

(5)

(h)

of

One time / need based submissions

Advertisement to be submitted & written permission to be obtained before publication

Membership

Chapter

IV

of

the

Rules

of

the

Exchange)

 

Commencing Margin Trading Facility in CM Segment (NSE/MEMB/4973,

One time / need based submissions

Prior Approval

Membership

required

07/04/2004)

 

Application

for

Approval

of

User

One time / need based submissions

Prior Approval

Membership

(NSE/MEMB/3576,

29/08/2002),

required

(NSE/MEMB/3655,

04/10/2002),

NSE/MEMB/7992, 10/10/2006)

   

Application for using CTCL facility (NSE/CMT/1641, 12/05/2000),

 

One time / need based submissions

Prior Approval

Capital Market

required

Trade

(NSE/CMTR/3896,28/01/2003),

(NSE/CMTR/6386, 15/07/2005),

 

(NSE/CMTR/6552,24/08/2005)

 

(NSE/FAOP/7798, 25/08/2006)

Upload of CTCL terminal details (Activation /Deactivation/Shifting of CTCL terminals) (NSE/MEMB/7913, 25/09/2006), (NSE/MEMB/7992,

One time / need based submissions

Before activations of any new CTCL terminal / Immediately upon deactivation / shifting of existing terminal

Membership

10/10/2006)

 

Application

for

providing

Internet

One time / need based

Prior Approval

Capital Market

Based

trading

 

facility

required

Trade

8

(NSE/CMTR/6552,

24/08/2005),

submissions

   

(NSE/CMTR/7797,

25/08/2006),

(NSE/MEMB/7913,

25/09/2006),

(NSE/CMTR/8089, 10/11/2006)

 

Activation

/

Deactivation

of

One time / need based submissions

Prior Approval

Capital Market Trade / F & O Operations

Proprietary

trading

facility

required

(NSE/CMTR/7650,

04/07/2006),

(NSE/FAOP/7652, 04/07/2006)

     

Application for dealing with broker or sub-broker of same / another Exchange (NSE/CMTR/4757, 22/01/2004), (NSE/FAOP/4758,

22/01/2004)

One time / need based submissions

Prior Approval

Capital Market Trade/ F &O operations

required

Upload

of

unique

client

code

file

One time / need based submissions

Prior to commencement of trading for a client

Investigation

(NSE/INVG/7117,

31/01/2006),

(NSE/INVG/8152, 30/11/2006) (NSE/INVG/8310, 29/12/2006) (NSE/INSP/10239, 11/02/2008) (NSE/INSP/10367, 28/02/2008)

 

Extension of NEAT trading terminals

One time / need based submissions

Prior Approval

Membership

required

ANNUAL COMPLIANCE REPORT FOR CAPITAL MARKET SEGMENT

COMPLIANCE CHECKLIST FOR NSE TRADING MEMBERS

Sr.

Rule/Bye Law / Regulation/ circular of the Exchange

Particulars

 

No.

 
 

Books of Accounts, Records and Documents

 

1

Regulation 6 of the Regulations of the Exchange

All Books of accounts, registers and records as required under the regulations and showing exchange-wise segregation of transactions are being maintained and preserved for the prescribed period in respect of the Head office and branches

2

Regulation

6.1.3A

(e)

of

the

Register

of

Securities,

client

wise

and

Regulations of the Exchange and

security

wise,

giving

inter

alia

the

Exchange's

circular

 

no.

following has been maintained

 

NSE/INSP/2004/28 (download ref.

(a)

date of receipt / delivery of security

 

no.

NSE/INSP/4986) dated 16th

(b)

quantity received / delivered

 

April 2004

 

(c) party from whom

received / to whom

   

delivered

(d)

purpose of receipt / delivery

 

3

Regulation;

4.3.1

 

of

the

Member Constituent Agreements, containing all provisions specified by the Exchange, have been entered into with all the active constituents, before accepting or placing orders on their behalf.

Regulations of the Exchange and

Exchange's

circular

 

no.

NSE/INSP/2004/31 (download

ref.

no.

1NSE/INSP/5387)

dated

27th

August 2004

   

4

Exchange's circular

 

no.

Whether mandatory and voluntary documents/ clause are segregated in the client registration docket

NSE/INSP/7657 dated July 5, 2006

9

5

Exchange's

 

circular no.

Agreements internet trading

entered

with

clients

for

NSE/CMO/0009/2000 (download ref.

 

no.

NSE/CMT/1532) dated 16th

 

March 2000

 

6

Exchange's circulars no. 55 dated

Client registration forms in respect of all active clients completed in all respects with necessary supporting documents have been obtained

(download

 

reference

no.

NSE/MEMB/0245)

2nd

May

1997

 

and

no.

 

NSE/INSP/2004/31

(download

reference

no.

1NSE/INSP/5387)

dated 27th August 2004

 

7

Regulation 3.14 of Capital Market trading regulations, circular NSE/INVG/2006/7673 dated July 13, 2006, circular no. NSE/INVG/2006/7944 dated September 28, 2006 and circular NSE/INVG/2006/8056 dated October 27, 2006

Whether trading member has obtained PAN in respect of all active clients

8

Exchange's

 

circulars

no.

All constituents have been issued a copy of the Risk Disclosure Document as specified by the Exchange.

NSE/CMO/0060/2003

(download

reference

no.

NSE/CMTR/4468)

dated

8th

October

2003

and

 

no.

NSE/INSP/2004/31

(download

 

reference

no.

1NSE/INSP/5387)

dated

27th

August 2004

 
 

Banking Operations

 

1

Regulation

 

6.1.5

of

the

Books of accounts, as are necessary, to show

Regulations of the Exchange

and distinguish, client funds and own funds in

 

connection with

our

business

as

Trading

Member

of

the

Exchange

have

been

maintained.

2

Regulation

 

6.1.5

of

the

Funds of the constituents have always been kept in a separate account and operation of such account has been as per provisions of Regulation 6.1.5

Regulations of the Exchange

3

Regulation 6.1.5 (c)

of

the

No transfer

/

withdrawal

from

clients'

Regulations of the Exchange

account is made except

under

the

 

circumstances enumerated in Regulation 6.1.5

 

Dealings With Clients

 

1

Regulation 4.5.3

(e)

of

the

Funds/ securities of constituents have not been improperly used by us or any person associated with us.

Regulations of the Exchange

2

Regulation

 

3.6.3

of

the

Brokerage has been charged separately and indicated separately, in the contract note.

Regulations of the Exchange

3

Regulation 3.6.2 of

the

Brokerage has always been charged at rate not exceeding the rate prescribed i.e.2.5%

Regulations of the Exchange and

Exchange's

 

circular

no.

 

NSE/CMT/001 dated 28th October

1994.

10

4

Regulation

4.4.15

of

the

Full payment of funds / full delivery of securities has been made to all constituents within one working day of receiving the relevant pay out from the Exchange

Regulations of the Exchange

5

Regulation

6.1.5

(d)

of

the

Statement of accounts for funds / securities (with error reporting clause) has been sent to all the clients, with periodicity not exceeding three months

Regulations of the Exchange and

Exchange's

circular

 

no.

NSEIL/LEGAL/6806

dated

24th

October 2005

   

6

Exchange's circular

 

no.

Unique client codes have been allotted to all clients and the correct client codes have been entered in the system while placing orders on behalf of clients which have been correctly mapped to the back office accounts. Client details as required have been maintained and have been provided to the Exchange / Clearing Corporation as required.

NSE/INVG/2002/3690 dated 18th October 2002

7

Regulation

6.1.4 of

the

Mapping of the client codes used at the time of order entry in the trading system with unique code codes is maintained as prescribed by the Exchange

Regulations of the Exchange

8

Exchange's circular

 

no.

UIN under MAPIN database has been used as unique client code in respect of all specified intermediaries and their related persons and corporate clients

NSE/INVG/2004/010. (Download

reference

no. NSE/INVG/2004/

5271) dated 20th July 2004 and NSE/MEM/5338 dated 17th August

2004

 

9

Exchange's circular

 

no.

No cash dealings are undertaken

 

NSE/INSP/2003/21 (download reference no. NSE/INSP/4377) dated 1st September 2003)

 

10

Exchange's circular

 

no.

Pay-in of funds and securities due from clients are received from the respective clients only

NSE/INSP/2003/21 (download reference no. NSE/INSP/4377) dated 1st September 2003)

11

Exchange's circular

 

no.

Payout of funds and securities due to the clients are made to the respective clients only

NSE/INSP/2003/21 (download reference no. NSE/INSP/4377) dated 1st September 2003)

12

Regulation

6.1.5

(f)

of

the

Separate beneficiary account exclusively to be opened for holding the securities of the constituents

Regulations of the Exchange

13

Regulation

6.1.5

(f)

of

the

Securities of the constituents have always been kept in a separate constituent beneficiary demat account and operation of such account has been as per provisions of Regulation 6.1.5(f)

Regulations of the Exchange

 

Dealing with Intermediaries

 

1

Exchange’s

circulars

 

no.

No

dealings

are

done

through

unregistered

NSE/MEMB/0275

dated

12 th

June

intermediaries.

 

1997

and

no.

185

(download

 

reference

no.

NSE/MEMB/2284)

dated January 31, 2001

 
 

11

2.

Clause 33 (a) of Chapter Byelaws of the Exchange

IX

of

Brokerage has not been shared with another Trading Member of the Exchange or an employee of another Trading Member or a person with whom Trading Members are forbidden to do business under the Rules, Bye Laws and Regulations of the Exchange.

3

Clause 33 (a) of Chapter

IX

of

Brokerage has been shared only with registered sub brokers.

Byelaws of the Exchange and

 

no.333

 

Exchange’s circulars (download

reference

no.NSE/MEM/4082) dated 10 th April

2003 and no.485 (download reference no.NSE/MEM/6378)dated 14tgh July 2006

4

Rule 5(e) of Chapter IV of Rules of the Exchange

Brokerage has not been shared with and/or business has not been transacted with any of the suspended or expelled or defaulting Trading Members

5

Exchange’s

circulars

At least 10%of the active sub-brokers/10% of the active branches are inspected every year and each active sub-broker/branch is inspected at least once in every five years, to ensure that the sub-brokers/branches function and conduct themselves in accordance with SCRA, 1956, SCRR,1957, SEBI Act, Rules, Byelaws, Regulations etc. of the Exchange / NSCCL

no.NSE/MEM/275 dated 12/06/1997

and

NSEIL/INSP/3685

dated17/10/2002

6

Rule 5 of Chapter IV of the Rules of the Exchange

No business has been done with or for the trading members who are prohibited to transact, including suspended/expelled/defaulter trading members; defaulting constituents and employees of other trading members

 

Contract Notes

1.

Regulation 3.5.1, 3.5.2 and 3.5.3 of the Regulations of the Exchange and Exchange’s circulars no. NSE/CMT/001 dated 28 th October 1994; no.NSE/CMT/005 dated 12 th

Contract notes have been issued to all constituents within 24 hours of execution of contract in the prescribed format, with all relevant details filled in, bearing signature of the authorized signature, bearing a running serial number which is initiated at the beginning of each financial year

December

1994

and

no.NSEIL/LEGAL/7036 dated 5 th January 2006 and NSE/INSP/7330 dated 30/03/2006

2

Regulation 6.1.17 of the Regulations of the Exchange

Copies / duplicates of Contract Notes issued by the Trading Member are maintained.

3

Exchange’s

circular

Contract Notes are authenticated by digital signatures only after obtaining digital signature certificate from a Certifying Authority under the IT Act, 2000 and more of confirmation by the client is specified in the agreement between the member and the client.

no.NSE/CMO/003/2001 (download reference no.NSE/CMT/2279) dated 30 th January, 2001

4

Exchange’s circular

 

no.

Whether client has specifically consented to receive the electronic contract note (ECN)

NSE/INSP/2005/41 (download reference no.NSE/INSP/6623) dated 9 th September 2005

12

5

Exchange’s

circular

Log report for Proof of delivery of ECN and rejected or bounced mails to be maintained

no.NSE/INSP/2005/41 (download reference no. NSE/INSP/6623) dated 9 th September 2005

6

Exchange’s circular

no.

Physical copy of contract note to be sent where ECN could not be delivered

NSE/INSP/2005/41 (download reference no. NSE/INSP/6623) dated 9 th September 2005

7

Exchange’s circular

no.

Simultaneously publish the ECN on its website and provide secured access to the respective client

NSE/INSP/2005/41 (download reference no. NSE/INSP/6623) dated 9 th September 2005

8

Exchange’s circular

no.

No off market deals have been executed

NSE/CMO/22/99 (download reference no. NSE/CMT/1230) dated

8 th October 1999

 

9

NSCCL

circular

no.

Trades executed for a constituent have not been subsequently transferred to another constituent

NSCC/CM/C&S/207

dated

31 st

August, 2001

 

10

NSCCL

circular

no.

Trades executed for own account have not been subsequently transferred to a constituent and vice versa

NSCC/CM/C&S/207 dated 31 August,

2001

11

Exchange's circular no. NSE/INVG/2003/4601 dated 28th November 2003

Trades on own account have been executed under PRO code only

12

Exchange's circular no. NSE/INVG/2004/009 (download reference no. NSE/INVG/2004/ 5216) dated 30th June 2004

 

All Institutional trades have been routed through STP system and the prescribed identification codes for transactions routed through STP system have been used

 

Risk Management System

1

NSE/CMPT/5868 dated February 24, 2005

 

Whether a system of risk management to protect from client default is in place. Whether margins is an important element of such a risk management system.

2

NSE/CMPT/5868 dated February 24, 2005

 

Whether risk management system is well documented and was made accessible to the clients and the Stock Exchanges.

 

Membership Requirements

1

Exchange's circular

no.

56

We have not engaged in any fund based activities.

(download

reference

no.

NSE/

MEMB/261) dated 27th May '97

2

Exchange's

circular

no.

Not involved in financing clients direct!} 7 or indirectly except in accordance with the provisions of Margin Trading facility

NSE/INSP/2005/42

(download

reference

no.

NSE/INSP/6938)

dated 9th December 2005

   

13

3

Exchange's

circular

no.

68

No change

in

share holding / profit sharing

(download

reference

no.

pattern

of

the

corporate

/

firm

has

been

NSE/MEM/00310 dated 23rd J u l y

undertaken

without

prior

approval

of

the

1 9 9 7

a n d

t h e

Membership

Exchange.

 

Undertaking

   

4

Exchange's

circular

no.

355

No change in directors / partners of the corporate / firm has been undertaken without prior approval of the Exchange.

(download

reference

no.

NSE/MEM/4299) dated 25th July

2003

 

5

Rule (5)(h) of Chapter IV of the Rules of the Exchange

No advertisements have been released for business purposes without prior approval of the Exchange.

6

Bye Law 7 of Chapter VII of the Bye laws and Regulation 2.1.11 of the Regulations of the Exchange

We have not acted through or on behalf of another trading member/sub broker either for proprietary trading or for trading on behalf of clients without the prior approval of the Exchange in writing

7

Regulation

2.1.12

of

the

We have not dealt with more than one broker / sub-broker of another Exchange for

Regulations of the Exchange

8

Regulation 2.1.12 of Regulations of the Exchange

the

Our dealing with a broker / sub-broker of another Exchange for proprietary trading has been done after intimating the name of such broker / sub-broker to the Exchange

9

Regulation 2.1.12 of Regulations of the Exchange

the

Dealings on behalf of constituents with a broker of another Exchange has been done only after necessary registration as a sub-broker

 

Office Management

 

1

Exchange's

circular

no.

163

Trading

terminals

are

operated

by

the

(download reference no. NSE/

respective

approved

users

/

approved

MEM/1591 dated 20th April

2000

persons only.

 

2

Exchange's circulars no. 163 (download reference no. NSE/ MEM/1591 dated 20th April 2000; no. 282 (download reference no. NSE/MEM/3574) dated 29th August 2002; no. 292 (download reference no. NSE/MEM/3635) dated 25th September 2002; no. 435 (download reference no. NSE/MEM/5664) dated 15th December 2004 and all related circulars issued w.r.t. the same

Neat terminals have not been extended / CTCL terminals have not been installed without the approval of the Exchange.

14

3

Exchange's circulars no. 163 (download reference no. NSE/ MEM/1591 dated 20th April 2000; no. 282 (download reference no. NSE/MEM/3574) dated 29th August 2002; no. 292 (download reference no. NSE/MEM/3635) dated 25th September 2002; no. 435 (download reference no. NSE/MEM/5664) dated 15th December 2004 and all related circulars issued w.r.t. the same

The required information in respect of all the CTCL terminals (including view only / admin /

test

/

etc

)

have

been

uploaded

to

the

Exchange

 

4

Exchange circulars

 

no. 163

Notice

board

as

prescribed

by

the I

(download reference no. NSE/MEM/1591) dated 20th April 2000 and no. 501(download reference no. NSE/MEM/6706) dated

Exchange

 

has

been

displayed

at

a

prominent

place

in

the

main

office

and

branch offices and the

registered sub-

brokers' offices.

 

28/09/2005.

 

5

Exchange's circular (download reference

no.

163

Copy of registration certificate issued by SEBI is displayed at the main office

no.

NSE/

MEM/1591)

dated.

20th

April

 

2000

6

Exchange's circular

no

Own trading is carried out at permitted locations only. Trades on own account have been executed under PRO code only.

NSE/CMTR/4460 dated 3rd October

2003

7

Exchange's circular no NSE/CMTR/4460 dated 03/10/ 2003

Client

trades

not

executed

through

terminal

earmarked

for

executing

 

PRO

 

trades

8

Exchange's circular no. NSE/ INVG/2003/4590 dated 25/11/2003

Own trading, if any has been disclosed to the clients

9

Exchange's circular no. 309 (download reference no. NSE/MEM/3740 dated. 13/11/2002; NSE/MEM/7992 dated 10/10/2006

Whether all the NEAT/ CTCL approved users/

approved

persons

are

NCFM certified as

required by the Exchange

10

Regulation

2.2.8

(d)

of

the

No former trading member or a user of such trading member has been appointed as a user by us without the approval of the Exchange.

Regulations of the Exchange

11

Regulation 2.2.15 of Regulations of the Exchange

the

Trading system of the Exchange has not been accessed through any other trading member or any other user id not allotted to us

12

Regulation 2.2.16 of Regulations of the Exchange

the

We have not aided nor facilitated to access the trading system from a location other than our approved location, without the approval of the Exchange

13

Regulation

4.1.1

of

the

No activity connected to or pertaining to our operations as Trading Member of the Exchange has been carried on in any office or premises without intimating to the Exchange the full address of such office or premises with details of the activity proposed to be carried on therein and the person in whose supervision and control it is to be so carried on.

Regulations of the Exchange

15

14

Exchanges circular no NSE/CMT/4525 dated 31/10/2003

Data feed made available by the Exchange is used essentially for building tools for analysis, risk management and decision support for our own trading activities and it has not been used for any commercial purposes. The feed has not been used to provide input for any software outside our premises and not been made available to anv other entitv even as view terminals.

15

Exchange's

circular

no.

Met with compliances with respect to dealings by branches, intermediaries etc.

NSE/INSP/2005/39

(download

reference

no.

NSE/INSP/6334)

 

dated 06/07/2005

 
 

Margin Trading

1

Exchange's circular no. 396 (Download reference no. NSE /MEM/4973) dated 07/04/ 2004

Margin trading facility has been provided to the clients only after obtaining prior permission of the Exchange

2

Exchange's circular no. 395 (download reference no. NSE /MEM/4972) dated 07/04/2004

Agreements, containing all provision specified by the Exchange, have been entered into with all the constituent availing margin trading facility.

3

Exchange's circular no. 395 (download reference no. NSE/ MEM/4972) dated 07/04/2004

Declaration from clients, giving details of margin trading facility availed from any broker in any exchange / rejection of the client's request for margin trading with any broker / etc. has been obtained

4

Exchange's

circulars

no.

395

Unique Identification Number under MAPIN database has been obtained in respect of clients availing margin trading facility

(download

reference

no.

NSE/MEM/4972) dated 7th April

2004

and

no.

 

NSE/CMO/0103/2004

(download

reference

no. NSE/CMTR/4974)

dated 7th April 2004

 

5

Exchange's

circular

no.

395

Separate demat account for every client for holding client wise securities purchased under margin trading facility has been maintained and the clients are able to observe the movement of securities from his / her demat account through internet

(download

reference

no.

NSE/MEM/4972) dated 7th April

2004

6

Exchange's

circular

no.

395

Separate record of details (including the sources ) of funds used for the purpose of margin trading has been maintained

(download

reference

no.

NSE/MEM/4972) dated 7th April

2004

 

7

Exchanges circular

no.

395

Margin trading facility has been provided using own funds and / or borrowings from scheduled commercial banks and NBFC's regulated by RBI

(download

reference

no.

NSE/MEM/4972) dated 7th April

2004

 

8

Exchange's circular

no.

395

Total indebtedness for the purpose of margin trading does not exceed 5 times of our net worth, calculated as prescribed by SEBI

(download

reference

no.

NSE/MEM/4972) dated 7th April

2004

 

16

9

Exchange's

circular

no.

395

Funds belonging to any client has not been used to provide margin trading facility to another client even if authorized by the client

(download

reference

no.

NSE/MEM/4972) dated 7th April

2004

 

10

Exchange's circulars no.

395

Adequate initial margin and maintenance margin in cash or cash equivalents has been collected from the clients availing margin trading facility.

(download reference no. NSE/MEM/4972) dated 7th April 2004 a rid no . 459 (download reference no. NSE/MEM/5917) dated 11th March 2005

11

Exchange's circular

no.

395

Maximum allowable exposure for margin trading does not exceed the borrowed funds plus 50% of our net worth.

(download reference

no.

NSE/MEM/4972) dated 7th April

2004

 

12

Exchange's

circular

no.

395

Exposure to any single client at any point of

(download

reference

no.

time

does

not

exceed

10%

of

the

lendable

NSE/MEM/4972) dated 7th April

resource.

2004

13

Exchange's

circulars

no.

395

Margin trading facility has been provided to the clients only in securities specified from time to time

(download

reference

no.

NSE/MEM/4972)

dated

7th

April

2004;

 

no.

 

NSE/CMO/0131/2004

(download

reference

no.

NSE/CMTR/5420)

dated 9th September 2004 and no.

NSE/CMO/0183/2005

(download

reference

no.

NSE/CMTR/5914)

dated 10th March 2005

 
 

Others

1

Exchange's circular no

NSE/

Compliance officer has been appointed

 

MEM/3441 dated 14th June 2002

 

2

Exchange's

circular

no

No

trade

in

securities

 

outside

the

NSE/INSP/2003/18

(download

established

trading

system

 

of

the

reference

no.

NSE/

INSP/4225)

recognized

stock

exchanges

by

taking

share

dated 26th June 2003

prices

disseminated

on-line

by

the

 

Exchange as reference prices has been done

3

Exchange's

circular

no

Trades done for non institutional clients have not been reported as NCIT trades

NSE/CMPT/2241

dated

16th

January 2001

   

4

Regulation

6.1.12

of

the

After the closing of any constituents account all records which relate to the terms and conditions with respect to the opening and maintenance of such account, date of entering into agreement with the constituents, date of modification thereof, date of termination and representatives of such constituents who signed in each case are being maintained for a period of not less than six years.

Regulations of the Exchange

5

Regulation

6.1.8

of

the

Records of all relevant particulars of persons who are approved as users by the Exchange have been maintained.

Regulations of the Exchange

17

6

Regulation 4.2.l(c)

of

the

All persons who are transacting on our behalf have been specifically authorized in writing to do so and such power of attorney has been made available to the Exchange before such person transacts any business on the Exchange

Regulations of the Exchange

7

Regulation

4.2.2

of

the

Internal review of our business, to assist in detecting and preventing violations of and achieving compliance with Rules, Bye Laws and Regulations of the Exchange, has been undertaken.

Regulations of the Exchange

8

Regulation 6.1.15 of Regulations of the Exchange

the

Record

of

all

written

complaints

of

constituents

showing

the

name

and

 

reference

number

of

constituent,

date,

particulars of the complaint, action taken by

us

and

if

the

matter

is

referred

to

arbitration

to

the

Exchange,

the

particulars

thereof,

etc.

have

been

maintained

 

9

Regulation

4.4.3

of

the

Management of discretionary accounts for and on behalf of constituents has been done as per provisions of SEBI (Portfolio Managers) Rules and Regulations, 1993 in this regard

Regulations of the Exchange

10

Exchange's

circulars

no.

Underwriting commitments as per the provisions of Securities and Exchange Board of India (underwriting) Rules and Regulations, are adhered to

NSE/CM/6768

and

no.

NSE/CMT/055

dated

15th

February 1996

11

Exchange's circular

 

no.

We have provided Internet trading facility to the clients after obtaining prior approval of the Exchange and complied with all other applicable provisions including periodic uploads to the exchange related to internet trading

NSE/CMO/002/2000 (download reference no NSE/CMT/1424) dated 31st January 2000

12

Exchange's

circulars

no.

Principal officer has been appointed

 

NSE/INVG/2006/09 (download reference no. NSE/INVG/2006/ 7102) dated 25th January 2006 and no. NSE/INVG/2006/33 dated 24th March 2006

 

13

Exchange's

circulars

no.

Adopted written procedures to implement the anti money laundering provisions as envisaged under the- Anti Money Laundering Act, 2002

NSE/INVG/2006/09 (download reference no. NSE/INVG/2006/ 7102) dated 25th January 2006 and no. NSE/INVG/2006/33 dated

24th March 2006

   

18

14

Exchange's

circular

 

no.

The client information periodically reviewed and updated on an ongoing basis in view of the current trading activity of the client.

NSE/INVG/2006/31

 

(download

reference,

no.

NSE/INVG/2006/

7236) dated 3rd March 2006

   

15

Exchange's

circular

 

no.

The

client

database

 

is

periodically

NSE/INVG/2006/31

 

(download

reviewed

to

ensure

its

completeness and

reference,

no.

NSE/INVG/2006/

accuracy.

 

7236) dated 3rd March 2006

   

16

NSE/MEMB/C/20070565 download ref no. NSE/MEMB/8352 dated January 09, 2007

Whether an exclusive email ID to to enable the investors to register their complaints is designated

 

ANNUAL COMPLIANCE REPORT FOR FUTURES AND OPTIONS SEGMENT

 

Sr.

Rule/Bye Law / Regulation/ circular of the Exchange

Particulars

 

No.

 
 

Books of Accounts, Records and Documents

 

1

Regulation 6

 

All Books of accounts, registers and records as required under the regulations and showing, exchange-wise segregation of transactions are being maintained and preserved for the prescribed period in respect of the Head office and branches

2

Regulation

17(1)

of

SEBI (Stock

Register of Securities, client wise and security wise, giving inter alia the following has been maintained a) date of receipt / delivery of security b) quantity received / delivered c) party from whom received / to whom delivered d) purpose of receipt / delivery

brokers

and

sub-brokers)

Regulations

1992

and

the

Exchange's

circular

 

no.

NSE/INSP/2004/28

 

(download

reference

no.

NSE/INSP/4986)

dated 16th April 2004

   

3

Regulation

4.3.1 of

the

Member Constituent Agreements, containing all provisions specified by the Exchange, have been entered into with all the active constituents, before accepting or placing orders on their behalf.

Regulations of the Exchange

4

Exchange's

circular

 

no.

Whether mandatory and voluntary documents/ clause are segregated in the client registration docket

NSE/INSP/7657

dated

July

5,

2006

5

Exchange's

circular

 

no.

Agreements

entered

with

clients

for

 

NSE/F&O/005/2000 (download

internet trading

 

reference

no

NSE/

F&O

/ 1877)

 

dated 24th August 2000

6

Regulation 4.3.2 of Regulations of the Exchange

the

Client

registration

forms

in

respect

of

all

active

clients

completed

in

all respects

 

with

necessary

supporting documents have

been obtained

 
 

19

7

Regulation 4.3.2 of the Regulations of the Exchange

Approved board resolutions permitting trading in derivatives from non-individual constituents have been obtained

8

Exchange's circular

 

no.

   

NSE/INVG/2005/6690 dated September 23, 2005 and circular NSE/INVG/2006/8056 dated October 27, 2006

Whether trading member has obtained PAN in respect of all active clients

9

Regulation 4.3.3 of the Regulations of the Exchange

All constituents in the F&O segment of the

 

Exchange have been issued a copy of the Risk

 

Disclosure Document Exchange

as specified by the

 
 

Banking Operations

 

1

Regulation

6.1.6.1

of

the

Books of accounts, as are necessary, to show and distinguish, client funds and own funds in connection with our business as Trading Member of the Exchange have been maintained.

Regulations of the Exchange

2

Regulation 6.1.6.1 of the Regulations of the Exchange

Funds of the constituents have always been kept in a separate account and operation of such account has been as per provisions of Regulation

6.1.5

3

Regulation 6.1.6.2 of the Regulations of the Exchange

No transfer / withdrawal from clients' account is

made except

under

the

ci r c um s t a n c e s

 

e n um e r a t e d i n Regulation 6.1.6.2

 
 

Dealings With Clients

 

1

Regulation 4.5.3 (e)

of

the

Funds/ securities of constituents have not been improperly used by us or any person associated with us.

Regulations of the Exchange

2

Regulation

3.6.1 of

the

Brokerage has been charged separately and indicated separately, in the contract note.

Regulations of the Exchange

3

Circular no NSE/F&O/1688 dated 08/06/2000 and NSE/F&O/2596 dated 05/06/2001

Brokerage has always been charged at rate not exceeding the rate prescribed i.e. 2.5%

4

Exchange's

circular

no.

Brokerage on option contracts is charged only on premium (traded price)

NSE/FAOP/5978