Regulation of Stock exchanges - Powers of SEBI

Powers vested with SEBI for regulation of stock exchanges include-

1. regulating the business in stock exchanges and any other securities markets;

2. Approving/permitting amendments to the Rules and bye-law of stock exchanges

3. to call for periodic and annual returns from stock exchanges

4. registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner.

5. prohibiting fraudulent and unfair trade practices relating to securities markets;

6. prohibiting insider trading in securities;

7. calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges

The powers of the stock exchange are to be exercised as per provisions in its bye-law. As per SCRA Act Any recognised stock exchange may, subject to the previous approval of the[Securities and Exchange Board of India make bye-laws for the regulation and control of contracts. The bye-laws can provide for the exercise of following powers by the stock exchange

1. the opening and closing of markets and the regulation of the hours of trade;

2. set up a clearing house for the periodical settlement of contracts and differences thereunder, the delivery of and payment for securities, the passing on of delivery orders and the regulation and maintenance of such clearing house;

3. the regulation or prohibition of blank transfers;

4. the regulation, or prohibition of badlas or carry-over facilities;

5. the fixing, altering or postponing of days for settlements;

6. the determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities;

7. the terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing; ,

8. the regulation of the entering into, making, performance, rescission and termination, of contracts, including contracts between members or between a member and his constituent or between a member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members who are not parties to such contracts;

9. the regulation of taravani business including the placing of limitations thereon;

10. the listing of securities on the stock exchange, the inclusion of any security for the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities;

11. the method and procedure for the settlement of claims or disputes, including settlement by arbitration;

12. the levy and recovery of fees, fines and penalties

13. the regulation of the course of business between parties to contracts in any capacity;

14. the exercise of powers in emergencies in trade(which may arise, whether as a result of pool or syndicated operations or cornering or otherwise) including the power to fix maximum and minimum prices for securities;

15. the regulation of dealings by members for their own account;

16. the separation of the functions of jobbers and brokers;

17. the limitations on the volume of trade done by any individual member in exceptional circumstances;

18. Fixing the obligation of members to supply such information or explanation and to produce such documents relating to the business as the governing body may require.

The governing body of the stock exchange can comprise of elected representatives of the members of the stock exchange, nominated public representatives and/or professional directors. The governing body has powers, subject to SEBI approval, to make amend and suspend the operation of the Rules, Bye Law and Regulations of the stock exchange besides have jurisdiction over all its members. The governing body is specially empowered to admit or expel members and their subordinates.

Only members of the stock exchange (also called stock brokers) can transact business at the exchange. A member can enter into transactions either on his own account or on behalf of a client. A member can have membership in multiple trading segments such as Equity Market segment, Wholesale Debt Segment, Derivatives Segment.

A securities trade in the exchange may be-

• listed with the exchange

• Permitted to be traded without being listed

• Government dated securities

To safeguard the interest of the investors, and in order to restrict excessive speculation, members are required to keep certain deposits with the clearinghouse. These deposits are termed 'margins'. The members are required to collect the margin from their clients, wherever applicable, and to deposit the amount collected with the clearinghouse. The stock exchange collects three types of margin in the equity segment, namely-

1. Mark-to-Market Margin (MTM Margin)
   Mark to market margin is computed on the basis of mark to market loss of a member. Mark to market loss is the notional loss which the member would incur in case the cumulative net outstanding position of the member in all securities, at the end of the relevant day were closed out at the closing price of the securities as announced at the end of the day by the NSE. Mark to market margin is calculated by marking each transaction in a scrip to the closing price of the scrip at the end of trading. In case the security has not been traded on a particular day, the latest available closing price at the NSE is considered as the closing price.

2. Volatility Margin
   Volatility Margin is imposed whenever there is excess volatility in the market.

3. Gross Exposure Margin
   Gross Exposure Margin shall be computed on the aggregate of the cumulative net outstanding positions (purchases or sales) in each security for TM clearing member. TM clearing members shall be subject to gross exposure limits, gross exposure being the aggregate of the cumulative net outstanding positions (purchases or sales) in each security of TM clearing member at any time.

4. Special Margin
   Where price manipulation is suspected

The procedure followed by different stock exchanges relating to trading, settlement systems and risk management vary, as specified in their respective bye laws. These are discussed with reference to the two major stock exchanges, NSE & BSE in respective articles dealing with the stock exchanges