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Total Number of Subscribers: 464 |
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Date: 1st Aug 09 |
Compiled by: M Sathya Kumar |
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Introduction The stock markets in There are stock exchanges recognized under Securities Contract
(Regulation) Act, 1956 which are the exclusive centres for trading of
securities. Most of the stock exchanges in Brokers deal with secondary markets for the sale and purchase of
securities such as stocks and bonds. Trading is done in various ways such as
it may occur on a continuous auction basis; it may involve brokers buying
from and selling to dealers in stock markets. The stock exchanges differ from
country to country in eligibility requirements and in the degree to which the
govt. participates in their management. ‘Broker’ as defined in the Concise Law Dictionary means “a middleman or agent who, for a commission on the value of the
transmission, negotiates for others the purchase or sale of stocks, bonds,
commodities or property of any kind, or who attends to the doing of something
for another.[1] Thus, brokers are the people who deal in shares and whose
business includes the procuring of subscribers for shares. They are basically
intermediaries in the secondary market and are middlemen between the
investors and stock exchanges. They reflect the deal by transferring the
stock and shares. They bring funds from investors to the stock exchanges. One
category of intermediaries are stock brokers and sub brokers. Securities Exchange Act, 1934 defines the term “Broker” as anyone, other than a bank, engaged in the business of effecting
securities transactions for the account of others.[2] In other words, brokers
form a sub-class of dealers and include anyone who is in the business of
effecting securities transactions as agents for others. Broker is an
intermediary who is associated with securities market and is registered under
Section 12 of the SEBI Act, 1992. Unlike other brokers, stock broker is frequently entrusted with
the possession of securities and may even take and transfer them without the
name of the principal appearing in the transaction. He often pays the price
in advance and then receives payment from the client. Thus, stock broker acts
as a bailee as well as an agent. SEBI requires that the agreement between a
stock broker and an investor is to be in writing and the agreement should be
executed on stamp paper of atleast Rs.20. In K. Appa Rao v. Gopal Doss[3] it
was held by the Madras HC that when an agent is authorized to negotiate and
complete a sale for a specified price within a particular time, it gives him
an authority to enter into a contract for sale, whether for movable or
immovable property. Further, ‘Brokerage’ is a commission paid to a bank,
stock-broker, or other marketing intermediary for placing shares on a best
effort basis or for inducing a broker’s clients or
customers to subscribe for the company’s shares or
other securities and is lawful if reasonable in amount.[4] In other words,
brokerage is a fee or commission given to or charged by a broker.[5] When the
owner of the property employs a broker to find a purchaser and he agrees to
compensate him therefor, the consideration is known as “Brokerage Commission”. The listed companies can only pay brokerage
of 5% on private placement of capital. However, the expenses incurred by the
broker for getting hold of subscribers would be borne by the share broker
himself.[6] Brokerage can only be paid for the services rendered under a
contract with the company. Stock Broker “Stock Broker” is one who deals in stocks of monied
corporations and other securities. He for a commission attends to the
purchase and sale of stocks or shares, of the Government or other securities,
on behalf of and for the accounts of their clients.[9] He is a person who has
either made an application for registration or is registered as a stock
broker or sub broker, in accordance with the rules and regulations made under
the SEBI Act, 1992.[10] His functions are broader than the ordinary brokers,
since he is entrusted with the possession of the property for which he acts
and may even take and transfer it without the name of his principal appearing
in the transactions. In In secondary market, brokers and sub brokers play a vital role.
SEBI, as a regulator of the capital market has recognized their role and has
thus permitted them to act as underwriters, without getting registered with
SEBI pursuant to SEBI (Underwriters) Rules & Regulations, 1993. But this
is subject to the condition that they hold a valid registration certificate
from SEBI under SEBI (Stock Brokers and Sub Brokers) Rules & Regulations,
1992. However, he has to comply with all the obligations stipulated
thereunder. He is also required to obtain the permission of the concerned
Stock Exchange of which he is a member, so as to act as an underwriter for
each and every issue. Brokers send out regulatory newsletters to their clients giving
them details of primary and secondary markets, particularly of new issues
with their recommendation. Some of them undertake Portfolio Management for
their valued clients. The brokers and sub brokers are even registered with
leading merchant bankers, who handle large number of public issues. A stock broker invests in the stock market for individuals or
corporations. Only members of the stock exchange can conduct transactions, so
whenever individuals or corporations want to buy or sell stocks they must go
through a brokerage house. Stock brokers often advise and counsel their
clients on appropriate investments. Brokers explain the workings of the stock
exchange to their clients and gather information from them about their needs
and financial ability, and then determine the best investments for them. The
broker then sends the order out to the floor of the securities exchange by
computer or by phone. When the transaction has been made, the broker supplies
the client with the price. The buyer pays for the stock and the broker
transfers the title of the stock to the client and performs clearing and
settlement procedures. The Central Government in A person who is willing to operate as a stock broker can make an
application for it under the SEBI (Stock Brokers and Sub-Brokers)
Regulations, 1992. The stock broker has to get himself registered under the
SEBI Act, 1992. He has to act as per the conditions of the certificate of
registration obtained from the SEBI in accordance with regulations framed
under the SEBI Act, 1992, otherwise he cannot deal with securities market and
cannot even buy, sell or deal in securities.[14] But he should be eligible as
a member of the stock exchange, i.e., he should be a fit and proper
person.[15] This is based on an objective test, i.e., whether or not the
person has been involved or has a pending enquiry against him for some
malpractice in the stock exchange in any segment of the market. Persons who
operate in the securities market are required to maintain high standards of
integrity, promptitude and fairness in the conduct of the business dealings.
People who indulge in manipulative, fraudulent and deceptive transactions or
abet the carrying out of such transactions, which are fraudulent and
unreliable, are not considered fit or proper persons to operate in the
market. There are certain conditions provided under Rule 4 of SEBI
(Stock Brokers and Sub-Brokers) Rules, 1992, which are to be fulfilled before
the grant of a certificate to a stock broker.[16] The SEBI Act, 1992
prohibits stock broker from buying, selling and dealing in securities unless
he holds a certificate granted by the Board under the SEBI (Stock Brokers and
Sub-Brokers) Rules and Regulations, 1992.[17] Existing brokers of the
concerned stock exchanges were allowed to continue their business, if they
made an application for such registration within a period of 3 months from
the establishment of the Board, till the disposal of the application.[18] An
interesting aspect of the relationship between a brokers and stock exchange
is that the stock brokers are required to pay registration fees for the grant
of certificate as prescribed by Schedule III.[19] But if they fail to pay,
then the Board may suspend the registration certificate, which implies that
the stock broker shall cease to buy, sell or deal in securities as a stock
broker.[20] In National Stock Exchange Members’ Association v.
UOI,[21] the petitioner, which was an association of the trading members of
the National Stock Exchange, dealt with the sale and purchase of the shares
and securities in India. Upon payment of fee, the members were registered
under SEBI (Stock Brokers and Sub Brokers) Regulations, 1992. A circular was
issued by SEBI by way of clarification requiring separate registration fee to
be paid for multiple registration with the SEBI. Then a writ petition was filed by the petitioners where they
contended that the methodology adopted by SEBI for charging multiple
registration fees was contrary to Schedule III to the SEBI (Stock Brokers and
Sub Brokers) Regulations, 1992. The Delhi High Court held that there was no
concept of quid pro quo in view of the nature of regulatory functions
performed and the mode and manner of levy of fee to be adopted by the SEBI. Once
the power of SEBI was accepted, there could not be a challenge to the
methodology adopted for quantification of the fee. The circular was intra
vires the regulation and clarified the mode and manner of the calculation of
the fee. In BSE Brokers Forum v. SEBI,[22] the validity of Regulation 10
read with Schedule III of the SEBI (Stock Brokers and Sub-Brokers)
Regulation, 1992 was held intra vires the SEBI Act, 1992. But the imposition
was held to be a fee and not a tax and was held not to be a condition
precedent for the levy to constitute fee. In due course, a number of brokers, proprietor firms and
partnership firms have converted themselves into corporates. Out of 9,519
brokers registered with SEBI at the end of March, 2003, 3, 835 brokers
accounting for nearly 40% of the total were corporate entities. At the end of
March, 2003, there were 13,291 sub brokers registered with SEBI.[23] A stock broker is required to pay to SEBI a registration fee of
Rs.5,000 for every financial year, if his annual turnover exceeds Rs.1 crore.
If this is so, he has to pay Rs.5,000 plus one-hundredth of 1% of the
turnover in excess of Rs.1 crore. after the expiry of 5 years from the date
of initial registration as a broker, he has to pay Rs.5,000 for a block of 5
financial years.[24] The a trading member can levy a maximum brokerage in
respect of securities transactions is 2.5% of the contract price, exclusive
of statutory levies like SEBI fee, service tax and stamp duty. Brokerage
charges can be as low as 0.15% and maximum brokerage is inclusive of
brokerage charged by the sub broker which shall not exceed 1.5% of the
contract price. The brokers of the various stock exchanges filed writ petitions
in various High Courts challenging the imposition of fees on turnover to be
paid by the brokers under the Securities and Exchange Board of India (Stock
Brokers and Sub-Brokers) Regulations, 1990, which were subsequently
transferred to the Supreme Court. The petitions were filed on the ground that
it is a tax on the guise of the fee and is excessive or arbitrary. One of the
case filed was of SEBI v. BSE Brokers Forum[25] in which the validity of the
Securities and Exchange Board of India (Stock Brokers and Sub-Brokers)
Regulation, 1992 was challenged. Supreme Court directed SEBI to amend the
regulations following the recommendations of R. S. Bhatt Committee, which had
given recommendations in respect of the computation of turnover of brokers
under the regulations. There are certain duties and responsibilities casted upon the
stock broker who should maintain the books of accounts, records and
documents.[26] Every stock broker has a duty to intimate to SEBI, the place
where the books of accounts, records and documents are maintained.[27] Stock
broker after the close of each accounting period, shall furnish to SEBI a
copy of the audited balance sheet and profit and loss account as soon as
possible but not later than 6 months from the close of said period.[28] If it
is not possible for the stock broker to furnish the documents required under
Regulation 17 (1) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992
within the required time, than he shall inform SEBI of the same along with
reasons for delay and the time period by which such documents would be
furnished. Stock broker has the responsibility of maintaining the books of
accounts and other records for a minimum period of 5 years.[29] There is an
obligation casted upon the stock broker to allow the inspecting authority to
have reasonable access to the premises occupied by the stock broker or any
other person on his behalf. He shall extend reasonable facility for examining
any books, records, documents and computer data which are in his possession.
He shall provide copies of documents or other materials relevant to the
inspecting authority. A stock broker should follow code of conduct prescribed under
SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.[30] As per code of
conduct, he should maintain high standard of integrity. He should exercise
due skill and care and should not indulge in manipulation or malpractices. He
should execute the orders from his clients’ at best
possible price. The member brokers of the stock exchange should issue
contract notes to their clients for the securities sold and purchased by them
on behalf of the clients. The contract note should state that the rate of
brokerage charged is not exceeding the official scale of the brokerage fixed
by the stock exchange. He should maintain confidentially in respect of
information about his client’s transactions. He should not give
advice to his clients unless he reasonably believes that the recommendation
is suitable to his client.[31] A stock broker should not deal with any outside party which has
failed to honour its business obligations with any other stock broker of any
other stock exchange. So, the names of the defaulting clients should be
reported by the member of the stock exchange authorities.[32] When the stock broker deals with his clients, he should observe
certain precautions to avoid problems for the market as well as investors.
This would protect the interests of the stock brokers, instill transparency
and discipline in the dealings between the brokers and the clients and would
contribute in the healthy working of the secondary capital market. These
precautions are listed into two categories: (a) mandatory and (b) precautions
by way of a guideline.[33] SEBI is of the view that member brokers should
strictly follow the mandatory precautions and the precautions by way of
guidelines should be followed when circumstances demand. Complaints can also
be reported against the stock brokers by the stock exchanges. The concerned
stock exchange shall send a Monthly Status Report of Complaints against
brokers, instead of sending replies on a case to case basis. Stock brokers
sometimes trade on their own behalf as a principal. In such cases, the term
broker makes little sense and the individuals or firms trading in a principal
capacity sometimes call themselves dealers, stock traders or simply traders. Sub – Broker Sub Broker is any person, not being a member of a stock
exchange. He acts on behalf of a stock broker as an agent or otherwise for
assisting the investors in buying, selling or dealing in securities through
such stock brokers.[34] He is further an agent of the broker and carries out
actual transactions for the broker. He is one who has either made an
application for registration or is registered as a sub broker under SEBI Act,
1992.[35] The members of the stock exchange who execute transactions of
their clients through the members of other stock exchanges are treated as “Sub Brokers”. Any person who not being a member of a stock exchange, acts on
behalf of a stock broker as an agent for assisting the investors in buying,
selling or dealing in securities through such stock brokers is called as a
sub broker. He is associated with securities market and should not buy, sell
or deal in securities unless he has complied with the conditions of the
certificate of registration obtained from SEBI issued in accordance with Rules
and Regulations.[36] If he is associated with securities market before the
establishment of the SEBI, then he may continue to do business but upon an
application made for registration within a period of 3 months from the
establishment of SEBI, till the disposal of such application.[37] There are certain conditions provided in Rule 5 of SEBI (Stock
Brokers and Sub-Brokers) Rules, 1992, which are to be fulfilled before the
grant of a certificate to a sub-broker.[38] If the stock broker/sub broker
fails to comply with the conditions subject to which he is been granted
registration, then he would be penalized and his registration would be
suspended or cancelled.[39] A sub broker should co-operate with his broker in the
transactions. He should not knowingly and willfully deliver documents which
constitute bad delivery. He should also co-operate with other contracting
party for prompt replacement of the documents which are declared as bad
delivery. Further, he should extend his full co-operation to his stock broker
in protecting the interests of his clients regarding their rights to
dividends, bonus rights, rights shares and any other right relatable to such
securities.[40] Further, sub brokers, who act on behalf of their principal
broker, are required to issue to their clients purchase or sale notes for all
the transactions entered into by them on behalf of their clients. While
performing this function, the sub brokers act as an agent of the principal
broker.[41] He is also required to be registered with the concerned stock
exchange.[42] The business of the stock brokers and sub brokers is too much
interlinked, so, for properly monitoring their activities separate
registration procedure is provided. The sub broker owes obligations not only
to the client but also to the stock broker. The sub broker enters into a
tripartite agreement with the main broker and his client. He assists his
clients in obtaining the contract note from the main broker. But he cannot
issue the note or make payments through cheques directly, as that has to be
done by the main broker.[43] Relation Between Stock Broker And The
Client The relationship between a stock broker and a client is that of
a principal and agent.[44] SEBI requires that the agreement between the stock
broker and an investor is to be in writing. It has to be executed on a stamp
paper of Rs. 20. Due to the nature of trading activity at NSE and BSE, every
stock broker can be considered as a del credere agent.[45] There also exists
a bailor-bailee relationship between the two.[46] There relation is also held
to be of fiduciary nature. Still the broker is bound to exercise his
functions with due diligence as stated in SEBI Code of Conduct for
Brokers.[47] In Sharedeal Financial Consultants (P) Ltd. v. SEBI[48] it was
held that ‘due diligence’ required is not that of an ordinary or prudent person but that of a stock broker
who would be required to perform his duties towards his client using his
skill and reasonable care. The investor has to deliver the shares to the stock broker so
that he can sell them in the stock exchange. In case stock broker cannot sell
them, then those shares have to be delivered back to the investor. Thus, a
stock broker becomes a bailee and operates on certain responsibilities in
that capacity.[49] The relation between the stock broker and the investor is
that of fiduciary nature, which is founded on trust, reliance, dependence or
confidence rested by the investor in the reliability and faithfulness of the
stock broker who is in a position of relative dominance and influence. In
Kennedy v. Budd[50] it was held by the court that when we consider the broker’s duties as to the performance of the contract after the
purchase has been made, he was bound to act solely for the benefit of his
customer and bound to give his best judgment and to take no advantage of his
customer, it was quite clear that to that extent he acts in a fiduciary
capacity. Even in State ex rel. Paine Webber, Inc. v. Voorhees[51] the Judge
observed that the broker had an implicit obligation which arose in connection
with his fiduciary duty to the customer, which was to disclose to the
customer the material facts. This duty does not, however, include the
obligation to discuss prominent written provisions with the competent party.
When broker is disloyal and betrays the trust and confidence of his
client/investor, than he could be held liable for damages. If a broker
misrepresents or fails to provide information regarding an investment or
transaction, the client/investor may have a potential claim against that
broker to recover losses. When a client operates through a stock exchange, he has the
right to receive the best price prevailing at that time for the trade, the
money or shares on time, contract note from broker confirming the trade and
indicating the necessary details of the trade, good delivery and right to
insist on rectification of bad delivery. The broker has a number of rights that he can claim over his
clients. A broker who has carried out his instructions is entitled to full
indemnity from his client against any losses or liability incurred by him for
having entered into the transaction. He shall be at full liberty to close out
the contract when the client fails to make payment to him within 2 days of
issuance of contract note and sell or purchase the securities. SEBI has issued mandatory guidelines to be followed by the stock
brokers before they agree to act on behalf of their clients. An important
duty of the stock broker towards his client is that of confidentiality. Under
SEBI guidelines, the broker is not supposed to disclose either personal or
financial details of his clients to anyone. The broker has a corresponding
duty to ensure that he maintains separate accounts for his clients and pays
them regularly the required amounts. The clients are also issued ID’s[52] in case they need to be traced if they fail to make
payments. Conclusion To conclude, it is submitted that SEBI has modernized the stock
exchanges. An active effort made by stock exchanges is that of making the
clients aware of their rights and liabilities. Even today, the stock broker
continues to command an immense power in the stock exchanges. A vast majority
of securities transactions are handled by stock brokers or dealers who act as
agents for principal willing to buy or sell securities. But technological
developments in 21st century have greatly influenced the nature of trading.
The increased access to internet and the proliferation of electronic
communications networks altered the investment world. Through e-trading, the
customer enters an order directly on-line and software automatically matches
orders to achieve the best price available without the intervention of
specialists or market makers or stock brokers. This has gradually reduced the
need of intermediaries like stock brokers to deal between the client and the
stock exchange. Article by Neha Bahl, Professor Nalsar university of Law |
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