Settlement at BSE - System & Procedure

Rectification of Bad Delivery

One of the problem faced by the investors in the secondary market, when the securities purchased by them are delivered to them in physical form, is that of bad delivery. The bad delivery arises out of rejection of shares sent in physical form to companies by the transferees (buyers) for registration in their names. In order to tackle this problem, the Exchange, as per the directive received from SEBI had set up a separate Bad Delivery Cell (BDC) in December, 1996. However, since the number of cases relating to bad delivery has declined considerably negligible, this work is now handled by the Clearing & Settlement Dept. (CSD), along with its other settlement related activities. The CSD handles Intra-Exchange as also Inter-Exchange cases of bad delivery.

The processing of Intra-Exchange and Inter-Exchange Bad Deliveries at the Exchange is fully computerised.

As per SEBI directives, even the Custodians have been allowed to participate in the process of settlement of bad deliveries at the Exchange w.e.f. April 1997. This is highly beneficial to the clients of custodians who get direct access to speedy and expeditious resolution of bad deliveries.

As per the Guidelines issued by SEBI and procedure prescribed in this regard, the receiving members of the securities are required to lodge claims for bad deliveries on the introducing members, who delivered the securities first time in the market. The introducing members are required to rectify /replace bad deliveries within a period of 21 days from the date of receipt of the documents under objection. If a claim has been wrongly reported against an introducing member, he is required to return back the documents to the receiving member within the stipulated period after obtaining an award for invalid objection from the Exchange. If a member fails to obtain the award and return back the documents to the buyer within stipulated period, it is presumed that he has accepted the claim.

Similarly, on receipt of the rectified /replaced securities from the introducing member, if the receiving member finds that securities are not proper, he has to obtain an award for invalid rectification from the Exchange officials within the stipulated period and return back the documents to the introducing member.

All the unrectified bad delivery claims as well as invalid rectifications of bad deliveries go for auction or close out as the case may be as per the Rules of the Exchange and the receiving members receive either the securities in auction or an amount representing close out of transactions relating to bad delivery.

The receipt and delivery of the securities by the members and custodians relating to bad deliveries is handled through the Clearing House.

The shares which have been returned to the transferee under objection by a company for the second time, can be reported as bad delivery as Second Time Objection. The seller in this case is not given a chance to rectify the objections and the claim is directly closed out on the 10th day of reporting of the objection to the Exchange.

In case of objection reported to the Exchange as Fake/Forged and Missing/Lost/Stolen shares, the rectification is allowed only in demat mode.

The Exchange in order to prevent circulation of bad securities in the market maintains a database of missing/lost/stolen/fake/forged shares on the basis of information received from the companies pursuant to the clause 47-D of the Listing Agreement. It also maintains the client caution database whereby it publishes the names of the clients / sub- brokers who are involved in introduction of fake/ forged/ missing /lost/stolen shares above a certain value through the member-brokers of the Exchange.

SEBI has gradually mandated that the trading of the securities of all companies listed on the Exchanges should be settled compulsorily in dematerialized form. In view of the progressive increase in dematerialisation of securities, the problem of bad delivery faced by the investors of late has considerably reduced.