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A guide for investors

The Bombay Stock Exchange and Money Today bring you an easy to understand guide on the stock markets which every individual investor must read.

Print Edition: October 30, 2008

Bombay Stock Exchange Limited is the oldest stock exchange in the country with a rich heritage. Popularly known as BSE, it was established as ‘The Native Share & Stock Brokers Association’ in 1875. It is the first Stock Exchange in the country to receive permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act 1956. The Exchange’s pivotal and pre-eminent role in the development of the Indian capital market is widely recognised, and its index, Sensex, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now a demutualised and corporatised entity incorporated under the provisions of the Companies Act 1956, pursuant to the BSE (Corporation and Demutualisation) Scheme 2005, notified by the Securities and Exchange Board of India (Sebi).

The Exchange not only provides an efficient market but also upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or its trading members. It strives to educate and enlighten the investors by making available to them the necessary information.

DEPARTMENT OF INVESTOR SERVICES

Protecting the interest of investors dealing in securities is one of the main objectives of the Exchange. In pursuit of this objective, the Department of Investor Services (DIS) was set up in 1986. The grievances of investors against listed companies and trading members are redressed by the Exchange. It also assists in the arbitration process between the trading members as well as between non-trading and trading members. The capital market can grow only when the investors find it safe to invest and are assured that the rules governing the market are fair and just for all the players.

To ensure speedy and effective resolution of claims, differences and disputes between the trading and non-trading members, the Exchange has laid down a set of procedures for arbitration. These procedures are duly embodied in the rules, bye-laws and regulations of the Exchange and have been duly approved by the Government of India/Securities and Exchange Board of India.

SAFEGUARDS FOR INVESTORS
These are some of the safeguards that need to be adhered to by the investors before trading in the securities market.

1. While selecting broker/sub-broker
Deal only with Sebi-registered broker/sub-broker after due diligence. The brokers’ list can be procured from the Members List published by the Exchange, and from the Website, www.bseindia.com.

2. While entering into an agreement
Fill in a client registration form with the broker/sub-broker.

• Every prospective client should read and understand the Risk Disclosure document specified by the Exchange before trading in the equities (cash) or derivatives segments. The trading member should obtain a signed copy of the same from all the clients.

• Enter into the broker/sub-broker-client agreement. This agreement is mandatory for all investors for registering as clients of a BSE trading member. The client should ensure the following before entering into an agreement:

— Carefully read and understand the terms and conditions of the agreement before executing the same on a valid stamp paper of the requisite value.

— The agreement has to be signed on all pages by the client and the member or his representative, who has the authority to sign the agreement. The agreement should also be signed by the witnesses along with their names and addresses.

3. While transacting
• Specify to the broker/sub-broker the Exchange through which your trade is to be executed and maintain a separate account per Exchange.

• Obtain a valid contract note issued by the trading member of the Exchange within 24 hours of the execution of the trade.

Contract note is a confirmation of trade(s) conducted on a particular day for and on behalf of a client in a format prescribed by the Exchange. It establishes a legally enforceable relationship between the trading member and client with respect to the settlement of trades executed on the Exchange as stated in the contract note.

Contract notes are made in duplicate, and both the trading member and the client keep a copy. The client(s) are expected to sign the duplicate copy of the contract note for having received the original

a) Contract note-cum-bill-Form A & AA: Contract note issued where trading member is acting for constituents as broker and agent.

b) Contract note-Form B: Contract note issued by trading member dealing with constituents as principals.

Ensure the following in a contract note:
• It should contain the Sebi registration number of the trading member.

• It should have details like order no., trade no., trade time, quantity, price, brokerage, settlement number and details of other levies.

• The trade price should be shown separately from the brokerage charged. The maximum brokerage that can be charged is Rs. 0.25 per share/debenture or 2.5% of the contract price per share/debenture, whichever is higher. Any additional charges that the trading member can levy include the securities transaction tax, service tax on brokerage, etc, as may be applicable from time to time.

• The brokerage and service tax are required to be indicated separately in the contract note.

• It should carry the signature of the authorised representative.

• The arbitration clause stating that the trade is subject to the jurisdiction of Mumbai must be present on the face of the contract note.

Sub-brokers
Sub-broker is not a trading member of the Stock Exchange and acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through stock brokers. No sub-broker can buy, sell, deal in securities unless he holds a certificate granted by Sebi. Sebi states that the trading members are responsible for the acts and deeds of the sub-brokers affiliated to the Exchange.

4. Ensuring settlement
• Ensure delivery of securities/payment of money to the trading member immediately upon getting the contract note for sale/purchase, but in any case, before the prescribed pay-in-day.

• The trading member should pay the money or securities to the investors within 24 hours of the pay-out.

• Open a demat account.

• Preferably opt to buy and sell demat shares.

• For delivery of shares from demat account, give the depository participant (DP) ‘delivery out’ instructions to transfer the same from the beneficiary account to the pool account of trading member through whom shares/securities have been sold.

• The following details are to be given to the DP: details of the pool account of trading member to whom the shares are to be transferred, details of scrip, quantity etc. As per the requirements of depositories, the delivery out instruction should be given at least 48 hours prior to the cutoff time for the prescribed securities pay-in.

• For receiving shares in your demat account, give the DP ‘delivery in’ instructions to accept shares in the beneficiary account from the pool account of trading member through whom shares have been purchased.

• If physical derivatives are received, check the deliveries received as per good/bad delivery guidelines issued by Sebi.

• Bad delivery cases should be sorted out through the Exchange machinery immediately.

• The investor should tally the account with the trading member at least once in six months.

• The investors may verify their trades done on BSE through Trade Confirmation System at www.bseindia.com if they have a contract note for the concerned trade.

• All registration of shares for ownership of physical shares should be executed by a valid, duly completed and stamped transfer deed.

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