Securities Market Intermediaries – Securities Laws and Capital Markets Important Questions

Securities Market Intermediaries – Securities Laws and Capital Markets Important Questions

Question 1.
Write a short note on Custodian of Securities [Dec. 2008 (3 Marks)]
Answer:
Usually, large investors (particularly’ Foreign international investors do not keep the securities in their own custody and do not look after routine work in respect of securities. This work is handed over to Custodian for safe custody

A Custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client.

A Custodian has to be registered with the SEBI under the SEBI (Custodian) Regulations, 1996.

Custodial services mean safekeeping of securities or goods or gold or gold-related instruments or title deeds of real estate assets and providing incidental services and include:
1. Maintaining accounts of securities or goods or gold or gold-related instruments or title deeds of real estate assets of a client.

2. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of Indian Depository Receipts) Rules, 2004.

3. Collecting the benefits or rights accruing to the client in respect of securities or gold or gold-related instruments or title deeds of real estate assets.

4. Keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client.

5. Maintaining and reconciling records of the services.

6. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of IDRs) Rules, 2004.

7. Keeping the client informed of the actions taken or to be taken with respect to the goods held on its behalf.

Every custodian should have adequate facilities, sufficient capital and financial strength to manage the custodial services.

Question 2.
Distinguish between: Merchant Banker and Portfolio Manager [June 2010 (3 Marks)]
Answer:
Following are the main points of difference between merchant banker & portfolio manager:

Points Merchant Banker Portfolio Manager
Meaning ‘Merchant Banker’ means any person engaged in the business of issue management. Portfolio manager means any person who pursuant to contract or arrangement with the client, advises or directs or undertakes on behalf of the client the management or administration of a portfolio of securities or the funds of the clients as the case may be.
Regulation Merchant Bankers are regulated by the SEBI (Merchant Bankers) Regulations, 1992. Portfolio Managers are regulated by the SEBI (Portfolio Managers) Regulations, 1993.
Type of intermediary Merchant Bankers mostly acts as primary capital market intermediary. Portfolio Managers are secondary capital market intermediary.
Acts on behalf of Merchant Bankers act on behalf of the issuer company. Portfolio Managers acts on behalf of their client ie. investors.
Nature of work Merchant Bankers most of the work is to comply with the SEBI Act, 1992 and Rules and Regulations made thereunder. Portfolio Managers has to handle the portfolio of his client and try to increase market value by buying, holding and selling securities.
Capital adequacy The capital adequacy Merchant Banker is a net worth of not less than X 5 Crore. The capital adequacy requirement for portfolio managers is a net worth of not less than X 2 Crore.

Question 3.
Write a short note on Portfolio Manager [Dec. 2010 (3 Marks)]
Answer:
Meaning of Portfolio: The term portfolio means a basket or combination of securities. Thus, if a person invests in more than security, he is creating a portfolio.

Meaning of Portfolio Manager: Portfolio manager means any person who pursuant to contract or arrangement with the client, advises or directs or undertakes on behalf of the client the management or administration of a portfolio of securities or the funds of the clients as the case may be.

There are two types of portfolio managers:
1. Discretionary portfolio manager: Discretionary portfolio manager is one who exercises any degree of discretion as to the investment or manage¬ment of the portfolio of the securities or the funds of the client.

2. Non-discretionary portfolio manager: Non-discretionary portfolio manager manages the funds with the discretion of the client.

A portfolio manager plays important role in deciding the best investment plan for an individual as per his income, age, and ability to undertake risks.

A portfolio manager makes aware his client regarding various investment tools available in the market and the benefits associated with each plan.

After the investment, the portfolio manager also advises his client whether to hold the security or sell as per the movement in the stock market.

A portfolio manager is responsible for designing customized investment solu-tions for the clients according to their financial needs.

Regulatory Framework: SEBI regulates the activities of ‘portfolio managers’ under the SEBI Act, 1992 and SEBI (Portfolio Managers) Regulations, 1993.

Question 4.
Write a short note on: Debenture Trustees [Dec. 2011 (4 Marks)]
Answer:
Since it is not possible for each debenture holder to execute security, ‘debenture trustee’ has to be appointed. Often, banks or financial institution are appointed as debenture trustee.

‘Debenture Trustee’ means a trustee of a trust deed for securing any issue of debentures of a body corporate. Thus, debenture trustees are appointed to protect the interest of debenture holders.

As per Section 71(2) of the Companies Act, 2013, appointment of debenture trustees is mandatory if a company wants to issue prospectus or make an of¬fer to public or its members exceeding 500. Such appointment must be made before issue of debentures.

The company shall appoint debenture trustees, after complying with the fol-lowing conditions:
1. Names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders.

2. Before appointment a written consent from the debenture trustee shall be taken and a statement to that effect shall appear in the letter of offer.

3. The Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the remaining trustee may act. When such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders.

4. Any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less than 3/4th (75%) in value of the debentures outstanding, at their meeting.

Role and Functions of debenture trustees:

  • Call for periodical reports from the issuer of debentures.
  • Take possession of trust property in accordance with the provisions of the trust deed.
  • Enforce security in the interest of the debenture holders.
  • Ensure that the property charged to the debenture is available and adequate at all times to discharge the interest and principal amount payable in respect of the debentures.
  • Property charged is free from any other encumbrances.
  • Exercise due diligence to ensure compliance by the issuer company with the provisions of the Companies Act, 2013, the listing agreement or the trust deed.
  • To take appropriate measures for protecting the interest of the debenture holders as soon as any breach of the trust deed or law comes to his notice.
  • To ascertain that the debentures have been converted or redeemed as per applicable law.
  • Inform the Board immediately of any breach of trust deed or provision of any law.
  • Appoint a nominee director on the board of the body corporate when required.

Regulatory Framework: SEBI regulates the activities of ‘debenture trustees’ under the SEBI Act, 1992 and SEBI (Debenture Trustees) Regulations, 1993.

Eligibility for being debenture trustee [Regulation 7]: only following persons are entitled to act as a debenture trustee:

  • A scheduled bank carrying on commercial activity or
  • A public financial institution or
  • An insurance company or
  • Body corporate.

Capital Adequacy Requirement [Regulation 7A]: The capital adequacy requirement for debenture trustee is a net worth of not less than ₹ 2 Crore.

Question 5.
Explain briefly the role of the following in capital market.
(i) Merchant Bankers
Answer:
‘Merchant Banker’ means any person engaged in the business of issue management. Merchant Bankers are generally engaged in following activities:

  • Making arrangements regarding selling buying or subscribing to securities.
  • Acting as manager/consultant/advisor.
  • Rendering corporate advisory services.

Merchant bankers are the key intermediary between the company and issue of capital.

(ii) Bankers to an issue [Dec. 2012 (2 X 2 = 4 Marks)]
Answer:
The Bankers to an issue are engaged in activities such as acceptance of applications along with application money from investors in respect of issues of capital and refund of application money.

Only ‘Scheduled Bank’ ie. banks approved by RBI and listed in Second Schedule can act as ‘Banker to an Issue’.

Bankers to the issue carry out all the activities of ensuring that the funds are collected and transferred to the Escrow Accounts.

Question 6.
What do you understand by ‘registrars to an issue? State the various activities carried out by registrars to an issue. [Dec. 2013 (4 Marks)]
Answer:
The Registrar to an Issue and Share Transfer Agents undertake the fol-lowing activities with respect to issue:
Pre-Issue Work

  • Finalization of bankers to issue, list of branches, controlling and collecting branches.
  • Design of application form, bank schedule, pre-printed stationery.
  • Preparing and issuing detailed instructions on procedure to be followed by collecting and controlling branches.
  • Arranging, despatch of application schedule for listing of applications to collecting and controlling branches.
  • Placing of orders for and procuring pre-printed stationery.

During the issue:

  • Collection of daily figure from bankers to the issue.
  • Expediting despatch of applications, final certificate to the controlling branches.
  • Collection of application along with final certificate and schedule pages from controlling branches of bankers to the issue.

Post-Issue Work:

  • Informing Stock Exchange/SEBI and providing necessary certificates to Lead Manager on closure of issue.
  • Preparing ‘Obligation of Underwriters statement’ in the event of under subscription and seeking extension from stock exchange for processing.
  • Scrutiny of application received from bankers to issue.
  • Numbering of application and banks schedule and batching them for control purposes.
  • Transcribing information from documents to magnetic media for com¬puter processing.
  • Reconciliation of number of applications, securities applied and money received with final certificate received from bank.
  • Identify and reject applications having technical faults.
  • Prepare statement for deciding basis of allotment by the company in consultation with the Stock Exchange.
  • Finalizing basis of allotment after approval of the stock exchange.
  • Seeking extension of time from SEBI.
  • Allotment of shares on the formula derived by stock exchange (In the case of allotment to employee it shall be ensured that only full time employee actually on rolls are given the allotment on the basis of list of employees furnished under the signature of MD/Company Secretary).
  • Obtaining certificate from auditors that the allotment has been made as per the basis of allotment.
  • Preparation of reverse list, list of allottees and non-allottees as per the basis of allotment approved by stock exchange.
  • Preparation of allotment register cum return statement register of mem-bers, index register.
  • Preparation of list of brokers to whom brokerage is to be paid.

Question 7.
Investment Advisor provides guidance about financial obligations and investment. Comment on this statement and state the role of investment advisors in capital market. [June 2015 (5 Marks)]
Answer:
An investment adviser is an individual or a firm that is in the business of giving advice about securities to clients. For instance, individuals or firms that receive remuneration for giving advice on investing in stocks, bonds, mutual funds, or exchange traded funds are investment advisers. Some investment advisers manage portfolios of securities.

In terms of the SEBI (Investment Advisers) Regulations, 2013, a person cannot act as an investment adviser unless he has obtained a certificate of registration from the SEBI or he is specifically exempt.

The Applicant for grant of registration as an Investment Adviser should make an application to SEBI in Form A as provided in the Regulations along with all the necessary supporting documents.

Generally on receipt of application, the applicant will receive a reply from SEBI within one month. However, the time taken for registration depends on how the applicant fulfils all the registration requirements and provides the complete information in all respects.

Question 8.
“Merchant bankers are the key intermediary between the company and issue of capital.” Comment. [June 2016 (5 Marks)]
Answer:
‘Merchant Banker’ means any person engaged in the business of issue management. Merchant Bankers are generally engaged in following activities:

  • Making arrangements regarding selling buying or subscribing to securities or
  • Acting as manager/consultant/advisor or
  • Rendering corporate advisory services Merchant bankers are the key intermediary between the company and issue of capital.

Making public issue of shares is a highly specialized, job which involves tremen¬dous and time bound work. Organizations undertaking this task are called as Merchant Bankers. Most of the leading banks and financial institutions have formed Merchant Banking Division’ specializing in this work. They have to register with SEBI and hence called Registered Merchant Bankers.

SEBI has little control over the companies making public issue as they are not registered with SEBI and SEBI does not have any legal powers to control them. Hence, SEBI casts all responsibility on Merchant Bankers in respect of public issue. Merchant Bankers are also known as Lead Managers.

Who can be a merchant banker: Only body corporate is allowed to function as merchant bankers.

Activities of Merchant Bankers: SEBI has advised that merchant bankers shall undertake only those activities which relate to securities market. These activities are;

  • Managing of public issue of securities
  • Underwriting connected with the aforesaid public issue management business
  • Managing/Advising on international offerings of debt/equity ie. GDR, ADR, bonds and other instruments
  • Private placement of securities
  • Primary or satellite dealership of government securities
  • Corporate advisory services related to securities market including take-overs, acquisition and disinvestment
  • Stockbroking
  • Advisory services for projects
  • Syndication of rupee term loans
  • International financial advisory services.

Regulatory Framework: SEBI regulates the activities of ‘merchant bankers’ under the SEBI Act, 1992 and SEBI (Merchant Bankers) Regulations, 1992.

Question 9.
‘Custodian of securities’ means any person who carries on or proposes to carry on the business of providing custodial services. [June 2016 (4 Marks)]
Answer:
Usually, large investors (particularly’ Foreign international investors do not keep the securities in their own custody and do not look after routine work in respect of securities. This work is handed over to Custodian for safe custody

A Custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client.

A Custodian has to be registered with the SEBI under the SEBI (Custodian) Regulations, 1996.

Custodial services means safekeeping of securities or goods or gold or gold related instruments or title deeds of real estate assets and providing incidental services and includes –
1. Maintaining accounts of securities or goods or gold or gold related in-struments or title deeds of real estate assets of a client.

2. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of Indian Depository Receipts) Rules, 2004.

3. Collecting the benefits or rights accruing to the client in respect of securi¬ties or gold or gold related instruments or title deeds of real estate assets.

4. Keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client.

5. Maintaining and reconciling records of the services.

6. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of IDRs) Rules, 2004.

7. Keeping the client informed of the actions taken or to be taken with respect to the goods held on its behalf.

Every custodian should have adequate facilities, sufficient capital, and financial strength to manage the custodial services.

Question 10.
Write a short note on Syndicate Member [Dec. 2017 (4 Marks)]
Answer:
Meaning of syndicate: Syndicate is a professional financial services group formed temporarily for the purpose of handling a large transaction that would be hard for the entities involved to handle individually. Syndication allows companies to pool their resources and share risks. There are several different types of syndicates, including underwriting syndicates, banking syndicates and insurance syndicates.

Example of ‘Underwriter Syndicate’: Underwriter syndicate is a temporary group of investment banks and broker-dealers who come together to sell new offerings of equity or debt securities to investors. The underwriter syndicate is formed and led by the lead underwriter for a security issue. An underwriter syndicate is usually formed when an issue is too large for a single firm to handle.

Syndicate in IPO: The Book Runner may appoint those intermediaries who are registered with the SEBI and who are permitted to carry on certain activities in relation to IPO as syndicate members. The syndicate members are mainly appointed to collect and entire the bid forms in a book built issue.

Role of ‘Syndicate Members’ in IPO Processing: Syndicate members are the broking houses responsible for distributing IPO applications, receiving filled applications from investors and timely update the data on the stock exchange j IPO shares bidding platform (NSE/BSE).

Question 11.
Write a short note on Portfolio Managers and Custodian [June 2018 (4 Marks)]
Answer:
Meaning of Portfolio Manager: Portfolio manager means any person who pursuant to contract or arrangement with the client, advises or directs or undertakes on behalf of the client the management or administration of a portfolio of securities or the funds of the clients as the case may be.

A portfolio manager plays important role in deciding the best investment plan for an individual as per his income, age, and ability to undertake risks.

A portfolio manager makes aware his client regarding various investment tools available in the market and benefits associated with each plan.

After the investment, portfolio manager also advise his client whether to hold the security or sell as per the movement in stock market.

A portfolio manager is responsible for designing customized investment solutions for clients according to their financial needs.

Regulatory Framework: SEBI regulates the activities of ‘portfolio managers’ under the SEBI Act, 1992 and SEBI (Portfolio Managers) Regulations, 1993.

Custodian of Securities:
Usually, large investors (particularly Foreign Institutional Investors) do not keep the securities in their own custody and do not look after routine work in respect of securities. This work is handed over to Custodian for safe custody.

A Custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client.

A Custodian has to be registered with the SEBI under the SEBI (Custodian) Regulations, 1996.

Every custodian should have adequate facilities, sufficient capital, and financial strength to manage the custodial services.

Question 12.
Write a short note on: Registrar & Share Transfer Agent [June 2018 (4 Marks)]
Answer:
Registrar to an Issue: ‘Registrar to an Issue’ means the person appointed by a body corporate or any person or group of persons to carry on the following activities on its or his or their behalf i.e

  • Collecting application for the investor in respect of an issue.
  • Keeping a proper record of applications and monies received from investors or paid to the seller of the securities.
  • Assisting body corporate or person or group of persons in determining the basis of allotment of the securities in consultation with the stock exchange.
  • Finalizing the list of persons entitled to allotment of securities.
  • Processing of allotment letters, refund orders or certificates, and other related documents in respect of the issue.

Thus, Registrar to an Issue do all processing of share applications form receipt g till the issue of shares/sending refund orders.

Regulatory Framework: SEBI regulates the activities of ‘Registrar to an Issue under the SEBI Act, 1992 and SEBI (Registrar to an Issue & Share Transfer Agents) Regulations, 1993.

Share Transfer Agent: Share Transfer Agent means:
1. Any person who on behalf of anybody corporate, maintains the records of holders of securities issued by such body corporate and deals with all matters connected with the transfer and redemption of its securities;

2. The department or division of a body corporate performing the activities as share transfer agents if at any time the total number of holders of its securities issued exceeds one lakh.

Regulatory Framework: SEBI regulates the activities of ‘Share Transfer Agents’ under the SEBI Act, 1992 and SEBI (Registrar to an Issue and Share Transfer Agents) Regulations, 1993.

Question 13.
Write short note on Bankers to an issue [Dec. 2018 (3 Marks)]
Answer:
The Bankers to an issue are engaged in activities such as acceptance of applications along with application money from investors in respect of issues of capital and refund of application money.

Only ‘Scheduled Bank’ Le. banks approved by RBI and listed in Second Schedule can act as ‘Banker to an Issue’.

Bankers to the issue carry out all the activities of ensuring that the funds are collected and transferred to the Escrow Accounts.

To carry on the activities as a banker to an issue, a person must obtain a certificate of registration from the SEBI. The SEBI grants registration on the basis of all the activities relating to banker to an issue in particular with reference to the following requirements:
1. The applicant has the necessary infrastructure, communication and data processing facilities and manpower to effectively discharge his activities.

2. The applicant/any of the directors of the applicant is not involved in any litigation connected with the securities market/has not been convicted of any economic offence.

3. The applicant is a scheduled bank and the grant of a certificate is in the interest of the investors.

A banker to an issue can apply for renewal of his registration 3 months before the expiry of the certificate.
Regulatory Framework: SEBI regulates the activities of ‘Bankers to an Issue’ under the SEBI Act, 1992 and the SEBI (Bankers to an Issue) Regulations, 1994.

Question 14.
Credit Rating Agencies may not be taking cognizance of information for delays in servicing debt obligations while reviewing its ratings. What are the material events requiring a review by the Credit Rating Agencies as per SEBI’s circular? [Dec. 2018 (5 Marks)]
Answer:
As per Master Circular for Credit Rating Agencies (CRA) [SEBI/HO/ MIRSD/DOP2/CIR/P/2018/76] CRAs have to be proactive in the early detection of defaults/delays in making payments. In this regard, CRAs are required to track the servicing of debt obligations for each instrument rated by them, ISIN-wise, and look for potential deterioration in financials which might lead to defaults/delays, particularly before/around the due date(s) for servicing of debt obligations, on the basis of monitoring of indicators including, but not restricted to, the following:

  • Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) not being sufficient to meet even the interest payments for last 3 years.
  • Deterioration in liquidity conditions of the Issuer.
  • Abnormal increase in borrowing cost of the Issuer.
  • Any other information indicating deterioration in credit quality/debt servicing capability of the Issuer.
  • The CRA shall also monitor the Exchange website for disclosures made by the Issuer in this regard.

Material Events requiring a review:

CRAs shall carry out a review of the ratings upon the occurrence of or announce¬ment/news of material events including, but not restricted to, the following:

  • Quarterly/Half-yearly/Annual results
  • Merger/ Demerger/ Amalgamation/Acquisition
  • Corporate debt restructuring, reference to BIFR, and winding-up petition filed by any party/creditors.
  • Significant decline in share prices/bond prices of the issuer or group companies which is not linked to overall market movement.
  • Significant increase in debt level or cost of debt of the issuer company.
  • Losses, sharp revenue de-growth, etc. based on publicly disclosed financial statements, which are not in line with CRA’s earlier estimates.
  • Granting, withdrawal, surrender, cancellation, or suspension of key licenses or regulatory approvals.
  • Disruption/commencement/postponement of operations of any unit or division of the listed entity.
  • Any attachment or prohibitory orders against the Issuer.
  • Any rating action taken by an International Rating Agency with respect to rating assigned to the Issuer/Instruments issued by the Issuer.

Question 15.
Explain the provisions for compulsory internal audit of Registrars to an Issue/Share Transfer Agents (RTAs). [Dec. 2018 (5 Marks)]
Answer:
Efficient internal control systems and processes are pre-requisite for good governance. Governance being a dynamic concept requires constant evaluation and monitoring of the systems and processes. In the context of Capital Markets, capital markets intermediaries are an important constituent of the overall governance framework.

Being an important link between regulators, investors, and issuers, they are expected to ensure that their internal controls are so efficient that ensure effective investor service at all times and provide regulators comfort as to the compliance of regulatory prescription. It is in this direction that SEBI has authorized Practicing Company Secretaries to undertake an internal audit of various capital market intermediaries including Registrars to an Issue and Share Transfer Agent.

SEBI Circular dated 20.4.2018 provides for the compulsory audit which are discussed below:
1. All RTAs are required to carry out internal audit on annual basis by independent qualified Chartered Accountants or Company Secretaries or Cost and Management Accountants and Certified Information Systems Auditor (CISA) who don’t have any conflict of interest.

2. Eligibility of auditors for conducting the Internal Audit of the RTA
(a) The audit firm shall have a minimum experience of 3 years in the financial sector.
(b) An auditor shall be appointed for a maximum term of 5 years, with a cooling-off period of 2 years.

3. The audit shall cover all aspects of RTA operations including investor grievance redressal mechanism and compliance with the requirements stipulated in the SEBI Act, Rules and Regulations made thereunder, and guidelines/circulars issued by SEBI from time to time. The scope of the audit shall cover all issues concerning the functioning of RTA.

4. The report shall state the methodology adopted, deficiencies observed, and consideration of response of the management on the deficiencies.

5. The report shall include a summary of operations and of the audit, covering the size of operations, number of transactions audited and the number of instances where violations/deviations were observed while making observations on the compliance of any regulatory requirement.

6. The report shall comment on the adequacy of systems adopted by the RTAs for compliance with the requirements of regulations and guidelines issued by SEBI and investor grievance redressal.

7. The RTA shall submit a copy of report of the internal audit to Issuer Company within three months from the end of the financial year. Copy of the same shall also be preserved by the RTA.

8. The Governing Council (Le. Board of Directors, Board of Partners, prop-rietor etc. as applicable) of the RTA shall consider the report of the internal auditor and take steps to rectify the deficiencies, if any. The RTA shall send the Action Taken Report to Issuer Company within next one month and a copy thereof shall be maintained by the RTA.

9. The audit observations along with the corrective steps taken by the RTA shall be placed before the Board of Directors of the Issuer Company.

10. The Issuer Companies shall satisfy themselves regarding the adequacy of the corrective measures taken by the concerned RTA. If not satisfied with the corrective measures, Issuer Company may ask RTA to take more stringent corrective measures.

Question 16.
Write short note on Custodian of Securities [June 2019 (3 Marks)]
Answer:
Usually, large investors (particularly’ Foreign international investors do not keep the securities in their own custody and do not look after routine work in respect of securities. This work is handed over to Custodian for safe custody

A Custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client.

A Custodian has to be registered with the SEBI under the SEBI (Custodian) Regulations, 1996.

Custodial services mean safekeeping of securities or goods or gold or gold-related instruments or title deeds of real estate assets and providing incidental services and include:
1. Maintaining accounts of securities or goods or gold or gold-related instruments or title deeds of real estate assets of a client.

2. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of Indian Depository Receipts) Rules, 2004.

3. Collecting the benefits or rights accruing to the client in respect of securi¬ties or gold or gold related instruments or title deeds of real estate assets.

4. Keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client.

5. Maintaining and reconciling records of the services.

6. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of IDRs) Rules, 2004.

7. Keeping the client informed of the actions taken or to be taken with respect to the goods held on its behalf.

Every custodian should have adequate facilities, sufficient capital, and financial strength to manage the custodial services.

Question 17.
“SEBI has amended the provisions related to registration of Sub-Broker to act as a market intermediary”. Elucidate the statement and discuss the migration path for existing registered Sub-Brokers. [June 2019 (5 Marks)]
Answer:
SEBI in its meeting held on June 21, 2018, decided to discontinue Sub-Broker as an intermediary to be registered with SEBI.

In view of the same, the need for the category of Sub-Broker as a market intermediary may no longer be required. Therefore, it is decided that:
(a) No fresh registration shall be granted to any person as Sub-Broker. Any pending applications for registration as Sub-Brokers under process shall be returned to the concerned Stock Exchanges for onward transmission to the applicant.

(b) The registered Sub-Brokers shall have time till March 31, 2019 in order to migrate to act as an AP and/or Trading Member (TM). The Sub-Brokers, who do not choose to migrate into AP and/or TM, shall deem to have  surrendered their registration with SEBI as Sub-Broker, w.e.f. March 31, 2019.

(c) Consequent upon migration/deemed surrender, the certificate of regis¬tration granted to the Sub-Brokers by SEBI shall stand withdrawn.

(d) The migration path for existing registered Sub-Brokers, shall be as under:
1. In case of a registered Sub-Broker who is already approved to act as AP in Derivatives Segment of the Exchanges, he shall be registered with the Exchange to continue activities of Sub-Broker as an AP in Cash Segment.

2. In case of a registered Sub-Broker who is not approved by Stock Exchanges to act as AP in Derivatives Segment, Exchanges shall register them as AP in Cash Segment, to continue their operations without disruption.

3. The existing Sub-Broker has an option to become a Trading Mem¬ber, if the Sub-Broker meets the eligibility criteria prescribed under | Stock Exchange Bye-laws and SEBI Regulations and by complying j with these Regulations.

(e) All the existing sub-brokers shall be required to pay renewal fees to SEBI up to the financial year 2018-2019, and renewal fees paid by Sub-Broker for the financial years beyond 2018-2019 shall be refunded on receipt of a recommendation from the respective Stock Exchange.

(f) The Stock Exchanges shall put in place an appropriate process for surrender or migration of Sub-Broker to AP/TM.

Securities Laws and Capital Markets Questions and Answers

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