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Procedure & Safeguards to be Observed
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Investment & Portfolio Management Investment Basics
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Module: 3 - Investment Basics - Investment Procedure & Safeguards to be Observed
Procedure for Buying & Selling If a client desires to buy or sell shares & securities, he has to transact in the secondary market i.e. through the stock exchange. He cannot do so directly, but has to deal through a broker recognised by SEBI He has to enlist the service of a SEBI registered trading member or SEBI registered sub-broker of a trading member of a registered Stock Exchange. Different stock exchanges have different bylaws though they all exhibit common safeguards and precautions. In our study we restrict to overview the system adopted in National Stock Exchange (NSE) and The Stock Exchange Mumbai (BSE) the leading stock exchanges of India, which together cover over 75% of the transactions. After approaching the broker/sub-broker of NSC/BSE to ensure verification of bonafide membership investor may ask the broker/sub-broker to furnish documents such as SEBI registration certificate, Registration with NSE/BSE etc to verify the antecedents of the person. He can also approach the exchange to counter check whether the person holds the valid registration. When a client instructs his broker to enter into a transaction, he may ask him to buy or sell at the best price and leave the matter to broker's judgement or he may specify reasonable price limits. For instance, The client may specify " Buy at 110 max." In such a case, The broker may not be able to execute the order even though the quotations of the day would be "Rs110, 111,112,113" as jobber's spread of say Rs.2 would make the share available for purchase at a price not lower than Rs. 112. All Indian Residents/Corporates, Non Indian residents, overseas corporate bodies and FII's are also eligible to trade through the Internet. RBI has given guidelines for Internet Banking, in addition to applicability of SEBI guidelines with regard to security transactions. Procedure for Dealing through a Stock Exchange We have seen that a client deciding to operate through an exchange, has to avail the services of a SEBI registered broker/sub-broker. He has to enter into a broker-client agreement and file a client registration form. Upon getting instructed by the client, his broker is supposed to give him a contract note having details of the transaction as directed by the client. Since the contract note is a legally enforceable document, the client should insist on receiving it. The client has the obligation to deliver the shares in case of sale or pay the money in case of purchase within the time prescribed. If he has opted for transaction in physical mode, in case of bad delivery of securities by him, he has the responsibility to rectify them or replace them with good ones. For Securities in Physical Mode - How Does Transfer of Securities Take Place? To effect a transfer in the physical mode the securities should be sent to the company along with a valid, duly executed and stamped transfer deed duly signed by or on behalf of the transferor (seller) and transferee (buyer). It would be a good idea to retain photocopies of the securities and the transfer deed(s) when they are sent to the company for transfer. It is essential that the client sends them by registered post with acknowledgement due and watches out for the receipt of the acknowledgement card. If he does not receive the confirmation of receipt within a reasonable period, he should immediately approach the postal authorities for confirmation. Sometimes, for his own convenience, the client (while buying securities) may choose not to transfer the securities immediately. This may facilitate easy and quick selling of the securities. In that case he should take care that the transfer deed remains valid. However, in order to avail the corporate benefits like the dividends, bonus or rights from the company, it is essential that he gets the securities transferred in his name. Procedure to be Followed for Transfer of Securities On receipt of the client's request for transfer, the company proceeds to transfer the securities as per provisions of the law. In case they cannot effect the transfer, the company returns back the securities giving details of the grounds under which the transfer could not be effected. This is known as Company Objection. What to do in case of Company Objection When you receive a company objection for transfer, the client should proceed to get corrected the errors/discrepancies mentioned by the company. He may have to contact the transferor (the seller) either directly or through his broker for rectification or replacement with good securities. Then he can resubmit the securities and the transfer deed to the company for effecting the transfer. In case he is unable to get the errors rectified or get them replaced, he has recourse to the seller and his broker through the stock exchange to get back your money. However, if he had transacted directly with the seller originally, he has to settle the matter with the seller directly. In Case of Loss/Misplacement of Securities If securities are lost or misplaced, the investor should immediately request the company to record a 'stop transfer' of the securities and he should simultaneously apply for issue of duplicate securities. For effecting stop transfer, the company may require the investor to produce a court order or the copy of the FIR filed by you with the Police. Further, to issue duplicate securities to the investor, the company may require him to submit indemnity bonds, affidavit, sureties etc. besides issue of a public notice. The investor has to comply with these requirements in order to protect his own interest. Sometimes, it may so happen that the securities in physical form are lost in transit either from the investor to the company or from the company to the investor. The investor has to be on your guard to write to the company within a month of his sending the securities to the company. The moment it comes to his notice that either the company has not received the securities that the investor sent or he did not receive the securities that the company claims to have sent to him, the investor should immediately request the company to record stop transfer and proceed to apply for duplicate securities.
Advantages Derived by Investor in Dealing through a Recognised Stock Exchange Trading through the stock exchange is not only compulsory, but it is also safe and risk-free for the investor. If he chooses to deal (buy or sell) directly with another person, he is exposed to counter party risk, i.e. the risk of non-performance by that party. However, if he deals through a stock exchange, this counter party risk is reduced due to trade/settlement guarantee offered by the stock exchange mechanism. Further, the investor also has certain protections against defaults by your broker. When the investor operates through an exchange, he has the right to receive the best price prevailing at that time for the trade and the right to receive the money or securities on time. He also has the right to receive a contract note from the broker confirming the trade and indicating the time of execution of the order and other necessary details of the trade. If the investor has opted for transaction in physical mode, he also has the right to receive good delivery and the right to insist on rectification of bad delivery. If he happens to have a dispute with your broker, the investor can resolve it through arbitration under the aegis of the exchange. The exchange can ensure settlement and handle disputes/claims arising out of only those trades, which are executed, on it through registered trading members/registered sub-brokers. Hence for all trades done on stock exchanges through an entity who is not registered, the investor has no recourse through the exchange in case of non-settlement or a claim/dispute arising out of the same Formalities for Registering as a Client of a Trading Member/SEBI Registered Sub-Broker An investor should register himself with registered trading members/sub-brokers of NSC/BSE by:
Settlement procedure at National Stock Exchange (NSE) There are two types of settlements:
Weekly settlement starts on Wednesday and ends on Tuesday. Rolling settlement transactions are squared on daily basis. In the weekly settlement which ends on Tuesday the investor shall receive the clear payment by the following Monday in his account. For the rolling statement the investor shall receive payment within two days of the trade He will get his funds in his account on next Friday i.e. ten days after the end of the settlement in which he had sold his shares. In case of rolling settlement he will get the funds within 7 days of the sale. The investor, who has purchased the shares, can either take the delivery, or he can choose to sell the share before the end of settlement cycle. However, once the settlement cycle is over he is obliged to take delivery by paying for it. Similarly when he sells shares through the NSE, the seller may either give delivery of the shares, or he may choose to buy the share before the end of settlement cycle. However, once the settlement cycle is over the seller is obliged to give delivery of shares from his demat account. Instances when after buying shares the shares do not come to investor's demat account The shares should normally come into the investor's demat account once the settlement takes place. Hence, generally he can expect the shares to come into your demat account every Thursday following the end of NSE settlement cycle. In case the investor does not receive the shares, it may be due to the stock being in ' No Delivery' period. In this case the shares will come from the exchange after the 'No Delivery period' is over which could be two -three weeks away. Alternatively, it is possible that the shares may not have come from the exchange because of shortage. In this case, the exchange conducts an auction and the shares may be received a few days later. If the shares could not be bought in an auction that is if the shares were not offered for sale in the auction, the exchange squares up the transaction as per SEBI guidelines. The guideline enforce stipulates that the transaction is squared up at the highest price on the NSE from the relevant trading till the auction day or 20% above the last available closing price on the NSE, whichever is higher. The pay-in and pay-out of funds for auction square up is held along with the pay-out for the relevant auction. If you the investor is short on Tuesday, he can borrow the Scrips on Wednesday under ALBM session. ALBM session is available on Wednesday in the selective Scrips. Documents that Investor should receive from the Registered Broker/the Sub-Broker- Pertaining to his Trade
In case of Discrepancies in the Contract/Purchase /Sale Notes Order/Trades The investor should counter check the details contained in the contract/purchase/sale notes with those on the order and trade confirmation slip. Check whether the order member, trade member and other details on the trade confirmation slip match either those on the contract/purchase/sale notes. In case of any discrepancy, you should bring the same to the notice of the trading member/ sub-broker immediately by way of written communication duly acknowledged by the trading member/sub-broker, clearly mentioning the deals, which do not pertain to him. What is a contract note and why is it essential It is a confirmation of trades done on a particular day or and on behalf on a client. A contract note issued in the format and manner described by the NSE establishes a legally enforceable relationship between the trading member and the client in respect to settlement of trades executed on the exchange as stated in the contract note. Contract notes are made in duplicate, for the member and client both keep one copy each. The said contract notes should be signed by a trading member or by an authorized signatory of the trading member. After verifying the details contained therein, the 2nd copy of the contract note should be returned to the trading member duly acknowledged by the client. Importance of getting contract/purchase/sale notes for trading executed These documents are very important to enforce the deals transacted through the trading member or sub-broker. In case of disputes/claims/differences, these documents would help the investor to prove that the transactions have been executed on the exchange through the NSE TM/registered sub-broker. These documents are prerequisites for filling a complaint or arbitration proceeding against TM/registered sub-broker. To ensure that contract note issued to the investor by the trading member is a valid one, he must verify the following details:
How to check the validity of the purchase/sale note?
The maximum brokerage that a NSE trading member/registered sub-broker can charge as per SEBI Stipulations.
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