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Control Procedures Broker Protection

Following is the mechanism to provide the necessary protection to Brokers


against non-receipt of clients payments.
1. Participant be allowed to transfer the securities to their Special Purpose
Account by using a specified Reason Code under intimation to respective
client through fax, e-mail, call through properly recorded telephone line or
personal delivery method.
2. Participants to serve notice to the client through fax, e-mail, call through
properly recorded telephone line or personal delivery method, advising
him to make payment by the close of banking hours on the next business
day after the settlement day, failing which the broker would reserve the
right to dispose off the securities at clients risk and cost.
3. All such transfers would be immediately reported to relevant Exchange
through a letter by the concerned Participant.
4. Parking of such securities in the Special Purpose Account would be
allowed only for three settlement days, within which either such securities
would need to be underlined for transferring them to the House Account
of the broker or transfer back to the sub- account of the client.
5. Pledging facility to Banks would be made available from the Special
Purpose Account, to enable the broker to meet his immediate cash
settlement obligations.
6. CDC would make available an online report to the relevant Stock
Exchanges highlighting such transfers by their respective Brokers.
Following are some additional controls designed to prevent misuse of the
mechanism.

CDC will monitor such movements to the Special Purpose Account,


periodically on a sample basis and, as far as possible in the absence of
an ageing mechanism, try to ensure that securities should not remain
in the Special Purpose Account for more than three settlement days. In
cases where securities are found to be parked in the Special Purpose
Account for more than three settlement days, the following action will
be taken against the non-compliant participant:
1. A penalty of 1.0% of the market value of securities or Rs. 25,000/(which ever is higher) subject to a maximum penalty of Rs. 100,000
would be levied on the non-compliant participant.
2. Participant would be asked to regularize the transaction within two
days, either by moving back the securities to the Sub Account or
transferring them to his House Account through an Off-market
transaction. Failure to comply would lead to suspension.

In cases where a Participant repeats such non-compliance, a penalty,


as specified above, would be levied. A third instance of non-compliance
would immediately lead to suspension of the participant, together with
imposition of the penalty as mentioned above.

CDC will develop a mechanism whereby movements of securities from


the clients accounts will be restricted to the extent of relevant balance
order of that client and electronic reporting of the closure of such
transactions on or before due date.

In a calendar month 1 instance per UIN would be allowed to each


Broker Participant. Efforts will be made to complete, prior to
implementation
of
the
Automation
project,
the
necessary
developments to restrict more numerous instances through the
system.

Broker Participants would be allowed to transfer securities only to the


extent of the transaction volume for which the clients payment is
outstanding. In cases where securities are moved beyond the requisite
transaction volume, before the implementation system based
restriction, the earlier mentioned penalty regime would be applied on
extra moved securities. This control would be implemented by the
relevant Stock Exchange.

In addition to the aforementioned penal actions, Participants would also


be required to comply with the following procedural requirements:
1. In addition to the electronic reporting of such movements, the Broker
Participants Letter to the Exchange should explain the specific reason
for utilizing the Special Purpose Account for holding Clients securities
and should be accompanied by the following documents:
a. Non-Payment Notice served to the client advising him to make
payment by the close of banking hours on the next business day
after the settlement day or otherwise to dispose of the required
Securities to cover the shortfall in the Clients Account at his risk
and cost.
b. Clients Sub-Account and Special Purpose Account Activity Report
of movement date.
c. Documentary evidence substantiating the genuineness and
circumstances of the reason for non-payment by the client which
may include failure of client to pay in time due to non-clearance

of clients cheque, any natural calamity, law and order situation,


non or delayed functioning of an automated procedure, eg., NIFT.
2. On the basis of above documents, relevant Stock Exchange will decide
if the requisite documents substantiate Broker Participants movement
of Clients Securities and shall maintain a database of such
transactions.
3. Once non-compliance on part of Broker Participant is established, he
would be liable to pay a penalty as per the penalty regime mentioned
earlier.
4. All actions taken by the Broker Participant must be supported by his
Back-office records which will always be available for inspection,
investigation and/or audit by any entity(ies) authorized to do so.
5. Monitoring of Compliance with above said mechanism by the Broker
Participants and the related penal provisions will also be covered under
the scope of System Audit Regulations of the respective Exchanges
and the CDC Regulations, wherever applicable. Further, stock
exchanges should propose amendments in their regulations to
empower them carry out inspections or special audit with respect of
said transactions.