CHAPTER 3: INTRODUCTION TO SECURITIES BROKING OPERATIONS

LEARNING OBJECTIVES

After studying this chapter, you should know about:

• Concept of securities trade life cycle

• Front Office, Middle Office and Back Office Operations of a stock broking firm
• Information Technology and Business Continuity Plan of a stock broking firm

3.1 Introduction to the Securities Trade Life Cycle

In financial market, “trade” means to buy and/or sell securities/financial products. To
explain it further, a trade is the conversion of an order placed on the Exchange into a pay-in
and pay-out of funds and securities. Trade ends with the settlement of the order placed.
Every trade placed on the stock market has a cycle which can be broken down into pre-trade
and post-trade events. Trading of securities involves multiple participants like the investors,
brokers, Exchanges, Clearing agency/corporation, Clearing banks, Depository Participants,
Custodians etc.
The following steps are involved in a trade’s life cycle:
1. Placing of an Order by the investor / client / broker
2. Risk management and routing of order through the trading platform
3. Matching of order and its conversion into trade
4. Confirmation of trades
5. Clearing and Settlement of trades
The above mentioned steps in a trade ‘s life cycle can easily be categorized into front office,
middle office and back office operations of broking firms wherein the placing of an order by
the investor / client / broker, matching of order and its conversion into trade and routing of
order through the trading platform are generally the front office functions; Risk
management is the middle office function; Confirmation of trades and Clearing and
Settlement of trades are the back office functions.
In this chapter we discuss these various steps involved in a trade life cycle. Figure 3.1 gives
a pictorial representation of the typical trade life cycle for cash/equity/capital segment.

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Figure 3.1: A Typical Securities Trade Life Cycle

3.1.1 Placing of order

[Link] Trader Workstation

The trader workstation (TWS) is the terminal from which the member accesses the trading
system of Exchange. From TWS member entered order into the Exchange trading system.
Exchange provides own trading platforms to its member. Each trader has a unique
identification by way of Trading Member ID and User ID through which they are able to log
on to the system for trading or inquiry purposes.

TWS provides mainly two kinds of information which are:

Trading member’s own transaction Information:

• Order entered
• Order Modified
• Outstanding Order
• Order Log
• Trade details

Market Information:
• Order book
• Securities / contract price information
• Securities / contract trade information
• Additional information

Exchanges have allowed members to develop their customized trading workstation as per
their requirements and connect to Exchange trading system. Under this facility, the
Exchanges has made available product such as Computer to Computer Link (CTCL) / Internet
based trading (IBT) / Direct Market Access (DMA) / Security trading thought wireless
technology facility (STWT) / Automated / Algorithm Trading (ALGO) / Smart order router

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(SOR) to the Trading Members. Trading member can connect to the system by various mode
such as lease line, VSAT, co-location24 etc.

[Link] Placing of client orders

The Broker accepts orders from the client and sends the same to the Exchange after
performing the risk management checks. Clients have the option of placing their orders
through various channels like internet, phone, direct market access (DMA) (for institutional
clients), Securities trading using wireless technology facility (STWT)/ Automated /Algorithm
Trading (ALGO)/ Smart order router (SOR) etc. To strengthen the regulatory provisions
against un-authorized trades and to harmonise the requirements across equity &
derivative market, all brokers shall execute trades of clients only after keeping evidence
of the client placing such order, it could be, inter alia, in the form of: (a) Physical record
written & signed by client, (b) Telephone recording, (c) Email from authorized email id, (d)
Log for internet transactions, (e) Record of SMS messages, (f) Any other legally verifiable
record. When a dispute arises, the broker shall produce the above mentioned records for
the disputed trades. However, for exceptional cases such as technical failure etc. where
broker fails to produce order placing evidences, the broker shall justify with reasons for the
same and depending upon merit of the case, other appropriate evidences like post
trade confirmation by client, receipt/payment of funds/ securities by client in respect of
disputed trade, etc. shall also be considered. The Brokers are required to maintain the
records for a minimum period for which the arbitration accepts investors’ complaints as
notified from time to time (which is currently three years). However, in cases where dispute
has been raised, such records shall be kept till final resolution of the dispute. If SEBI desires
that specific records be preserved, then such records shall be kept till further intimation by
SEBI.

Placing of orders through the internet/phone means the facility provided by stock brokers,
whereby the client can place order(s) over the phone/internet for transactions in securities,
to be executed on behalf of clients by the broker.
Here, the dealer shall refer to the Dealing Desk Executive appointed by the call centre(s) for
the purpose of providing this facility.
• For the purpose of availing of this service, the Client is required to call on the specific
numbers intimated or notified from time to time by the stock broker for the said purpose
by means of an email and/or by putting up such numbers on the website or otherwise.
• In case the Client opts for this service, he may be required to provide accurate answers
to the questions asked by the Dealing Desk Executive, including the Client’s user id and
TPIN, for ascertaining the genuineness of the caller. Once this is done, the order can be
placed and will be processed in the normal course.

24
The facility of co-location or proximity hosting (or by whatever name called) is offered by the stock
exchanges to stock brokers and data vendors whereby their trading or data-vending systems are allowed to
be located within or at close proximity to the premises of the stock exchanges, and are allowed to connect to
the trading platform of stock exchanges through direct and private network

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SEBI further instructed that wherever the order instructions were received from clients
through the telephone, the stock broker shall mandatorily use telephone recording
system to record the instructions and maintain telephone recordings as part of its records.25

Internet trading can take place through order routing systems, which will route client orders
to exchange trading systems for execution. Thus, a client sitting in any part of the country
would be able to trade using the Internet as a medium through brokers' Internet trading
systems. SEBI-registered brokers can introduce internet based trading after obtaining
permission from respective Stock Exchanges. SEBI has stipulated the minimum conditions
to be fulfilled by trading members to start internet based trading and services. Broker can
provide Securities Trading through Wireless medium on Wireless Application Protocol
(WAP) platform. Some additional requirements are to be met by the broker for providing
securities transaction through WAP.
Direct Market Access (DMA) is a facility which allows brokers to offer clients direct
access to the exchange trading system through the broker’s infrastructure without
manual intervention by the broker. Some of the advantages offered by DMA are direct
control of clients over orders, faster execution of client orders, reduced risk of errors
associated with manual order entry, greater transparency, increased liquidity, lower
impact costs for large orders, better audit trails and better use of hedging and arbitrage
opportunities through the use of decision support tools / algorithms for trading. SEBI in
2008, introduced Direct Market Access (DMA) and permitted institutional investors to use
DMA facility. The facility of the DMA provided by the stock broker shall be used by the client
or an investment manager of the client. A SEBI registered entity is permitted to act as an
investment manager on behalf of institutional clients. In case the facility of DMA is used by
the client through an investment manager, the investment manager is required to execute
the necessary documents on behalf of the client(s). Exchange can also specify the categories
of investors to whom the DMA facility can be extended. SEBI-registered brokers can
introduce DMA facility to their clients after obtaining permission from respective Stock
Exchanges. Brokers must specifically authorize clients or investment managers acting on
behalf of clients for providing DMA facility, after fulfilling KYC requirements, documentation
and carrying out necessary due diligence, records of which should be properly maintained.
Another feature which has been introduced in the Indian securities market is Algorithmic
Trading and High Frequency Trading. Algorithmic Trading – Any order that is generated
using automated execution logic shall be known as algorithmic trading 26. Automated
Trading” shall mean and include any software or facility by the use of which, upon the
fulfillment of certain specified parameters, without the necessity of manual entry of orders,
buy/sell orders are automatically generated and pushed into the trading system of the
Exchange for the purpose of matching.
SEBI has advised the stock exchanges to ensure that all algorithmic orders are necessarily
routed through broker servers located in India and the stock exchange has appropriate risk
controls mechanism to address the risk emanating from algorithmic orders and trades. The
minimum order-level risk controls shall include price check, quantity limit check, order value

25 SEBI Circular Ref No.: SEBI/HO/MIRSD/DOP1/CIR/P/2018/54Dated March 22, 2018.

26
SEBI Circular Ref. no. CIR/MRD/DP/09/2012 Dated March 30, 2012.

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check etc. Stock exchange shall ensure that the stock broker shall provide the facility of
algorithmic trading only upon the prior permission of the stock exchange. SEBI also advised
stock exchanges to ensure fair and equitable access to their co-location facility. The stock
broker, desirous of placing orders generated using algos, shall satisfy the stock exchange
with regard to the implementation of the minimum levels of risk controls at its end as
specified by SEBI and Exchanges from time to time. The stock brokers that provide the
facility of algorithmic trading shall subject their algorithmic trading system to a system audit
every six months in order to ensure that the requirements prescribed by SEBI / stock
exchanges with regard to algorithmic trading are effectively implemented.27 Such system
audit of algorithmic trading system shall be undertaken by a certified system auditor.
High frequency trading (HFT) is a type of algorithmic trading which is latency sensitive and
is characterized by a high daily portfolio turnover and high order-to trade ratio (OTR).
Once the orders are received by the broker, it is confirmed with the client and then entered
into the trading system of the Exchange. The Exchange gives confirmation of the order and
time stamps it. An order generally comes with certain conditions which determine whether
it is a market order, limit order etc. (discussed in section 3.2.2). These specify the terms and
conditions at which the client wants his/her order to get executed.
3.1.2 Risk Management and Order Routing

An efficient risk management system is integral to an efficient settlement system. The goal
of a risk management system is to measure and manage a trading firm's exposure to various
risks identified as central to its operations. The implementation of strong and effective risk
management and controls within stock brokers promotes stability throughout the entire
financial system. Specifically, internal risk management controls provide four important
functions:
• to protect the firm against market, credit, liquidity, operational, and legal risks;
• to protect the financial industry from systemic risk;
• to protect the firm’s customers from large non-market related losses (e.g., firm failure,
misappropriation, fraud, etc.); and
• to protect the firm and its franchise from suffering adversely from reputational risk.

The broker should have online risk management system (including upfront real-time risk
management) in place for all orders placed on exchange trading system. The system should
have pre-defined limits / checks such as Order Quantity and Value Limits, Symbol wise User
Order / Quantity limit, User / Branch Order Limit, Order Price limit, etc. are in place and only
such orders which are within the parameters specified by the RMS are allowed to be
pushed into exchange trading engines.

3.1.3 Order Matching and Conversion into Trade

All orders which are entered into the trading system of the Exchange are matched with
similar counter orders and are executed. The order matching in an Exchange is done on a

27
SEBI Master Circular dated December 30, 2024, “Master Circular for Stock Exchanges and Clearing
Corporations, Chapter 2 - Trading Software and Technology”.

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price time priority basis. The best price orders are matched first. If more than one order is
available at the same price, then they are arranged in ascending time order. Best buy price
is the highest buy price amongst all orders and the best sell price is the lowest price of all
sell orders. This has been discussed in detail in section [Link].
Once the order is matched, it results into a trade. As soon as the trade is executed, a trade
confirmation message is sent to the broker who had entered the order. The broker in turn
lets the client know about the trade confirmation through a contract note and messages.
(To understand about a contract note read Box 3.1).
All orders which have not been executed, partly or fully can be modified or cancelled during
the trading hours. Trades done during the day can also be cancelled by mutual consent of
both the parties subject to approval of the Exchange and as per the trade annulment policy
prescribed by SEBI and Exchanges from time to time. These generally occur due to order
entry errors and are not a common practice.
3.1.4 Affirmation and Confirmation (For Institutional Clients)

Institutional clients trading in the Indian securities market use the services of a custodian to
assist them in the clearing and settlement of executed trades in cash/equity segment.
Custodians are clearing members of the Exchange. On behalf of their clients, they settle the
trades that have been executed through brokers. A broker assigns a particular trade to a
custodian for settlement by entering custodian participant code at the time of order entry.
Upon confirmation by the custodian whether he would settle the trade, the clearing
corporations assigns the obligation to the custodian. The overall risk that the custodian is
bearing by accepting the trade is constantly measured against the collateral that the
institution (who trades) submits to the custodian for providing this service. While confirming
the trade Custodian verifies security details, side of the trade, price range etc. as specified
by the institutional client.

In 2004, SEBI had mandated that all the institutional trades executed on the Stock Exchanges
should be processed through the Straight through Processing (STP) system. 28 STP is a
mechanism that automates the end-to-end processing of transactions of the financial
instruments. It involves use of a single system to process or control all elements of the work-
flow of a financial transaction, including what is commonly known as the Front, Middle, and
Back office, and General Ledger. In other words, STP can be defined as electronically
capturing and processing transactions in one pass, from the point of first ‘deal’ to final
settlement. STP thus streamlines the process of trade execution and settlement and avoids
manual entry and re-entry of the details of the same trade by different market
intermediaries and participants. Usage of STP enables orders to be processed, confirmed,
settled in a shorter time period and in a more cost effective manner with fewer errors. Apart
from compressing the clearing and settlement time, STP also provides a flexible, cost
effective infrastructure, which enables e-business expansion through online processing and
access to enterprise data.

28 SEBI Circular Ref. No. DNPD/Cir- 22 /2004 dated April 1, 2004, DNPD/Cir-25/04dated June 10, 2004.

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Box 3.1: What is a Contract Note?

Contract note is the legal record of any transaction carried out on a stock exchange through a stockbroker.
It serves as the confirmation of trade done on a day on behalf of a client on a stock exchange. Every stock
broker shall issue a contract note to its clients for trades executed in such format as specified by the
Exchanges. It establishes a legally enforceable relationship between the stock broker and the client in
respect of settlement of trades executed on the Exchange as stated in the contract note. Every trade
executed by a stock broker on behalf of his client should be supported by a contract note.

Contract note should be issued within 24 hours of execution of contract and in the format prescribed by
Exchanges/SEBI. These should be issued in physical form or electronic form depending on the mode
chosen by client.

The contract notes should be acknowledged by the clients along with date in case of personal delivery.
Stock-brokers are required to maintain proof of dispatch of contract notes in the case of delivery of
physical contract notes through post/courier. The digitally signed Electronic Contract Notes (ECNs) may
be sent only to those clients who have opted to receive the contract notes in an electronic form, either in
the account opening kit or by a separate letter. The usual mode of delivery of ECNs to the clients shall be
through e-mail. For this purpose, the client shall provide an appropriate e-mail account to the member
which shall be made available at all times for such receipts of ECNs. The acknowledgement of the e-mail
shall be retained by the member in a soft and non-tamperable form. The proof of delivery i.e., log report
generated by the system at the time of sending the contract notes shall be maintained by the member
Stock-Broker should also maintain a bounce mail log showing details of the contract notes that were not
delivered to the clients/e mails rejected or bounced back. Whenever ECNs have not been delivered or has
bounced, Member should send the physical copy of the contract note to such clients within the stipulated
time under the extant regulations of SEBI/stock exchanges and maintain the proof of delivery. All ECNs
sent through the e-mail shall be digitally signed, encrypted, non-tamperable and shall comply with the
provisions of the IT Act, 2000. In case the ECN is sent through e-mail as an attachment, the attached file
shall also be secured with the digital signature, encrypted and non-tamperable. In addition to the e-mail
communication of the ECNs in the manner stated above, in order to further strengthen the electronic
communication channel, the member shall simultaneously publish the ECN on his designated web-site in
a secured way and enable relevant access to the clients. In addition, through e-mail ECN can be send
through SMS/electronic instant messaging services only on registered mobile number as uploaded by the
member on Exchange portal.

The contract notes should be unique running serially numbered starting from the beginning of the
financial year. They should be issued with the client’s name, PAN and client’s code written on them. It
should also contain the exact order number, order entry time, trade number, trade time, quantity of
securities transacted, rates/price, etc. Contract notes with weighted average price of trade should contain
an annexure with the details thereon.

Stock brokers are required to maintain duplicate copy or counter foil of the contract notes. The contract
notes should be signed by stock broker or by an authorized signatory of the stock broker as per the
guideline specified by SEBI/Exchanges from time to time. A contract note without consideration is null
and void under Indian Contracts Act and hence all contracts should mention the consideration separately.

Contract should also mention all statutory charges (like Securities Transaction Tax (STT), Goods and
Service Tax (GST), stamp duty etc.), Regulatory levies / charges (e.g., SEBI turnover fees, Exchange
transaction charges, etc.), Brokerage etc. Contract notes should be affixed with the brokers note stamps,
as a percentage of the total value of the contract, as per the government stamp acts / rules. Contracts
note also should clearly specify the complete address, phone number, e-mail IDs, fax numbers, the name
of the compliance officer, his telephone number and e-mail address etc. of the broker along with the PAN.

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3.1.5 Clearing and Settlement

Once the trade is executed on the Exchange, the details are passed on to the clearing
corporation, to initiate the clearing and settlement of those executed trades. Based on the
trade details from the Exchange, the Clearing Corporation determines the obligations of the
members. In case of cash segment, institutional trades are sent to custodian and in
derivatives custodian participant code trade send to clearing member for confirmation.
Based on the affirmation, the clearing corporation applies multilateral netting and
determines obligations. The settlement process begins as soon as member’s obligations are
determined through the clearing process.
The settlement process is carried out by the clearing corporation with the help of clearing
banks and the depositories. The clearing corporation provides a major link between the
clearing banks and the depositories. This link ensures actual movement of funds as well as
securities on the prescribed pay-in and pay-out day.
Instructions are given to the depositories and the clearing banks for pay-in of securities and
funds and pay-out of securities and funds. The clearing members have to ensure that they
make available the securities / funds to the clearing corporation before pay-in day and time.
Once the pay-in activities are carried out the clearing corporation carries out the pay-out of
funds and securities.
SEBI vide circular dated September 07, 2021, provided guideline for “Introduction of T+1
rolling settlement on an optional basis. T+1 rolling settlement was completely implemented
in the Indian securities market w.e.f. January 27, 2023. Currently for all securities traded in
equity segment Exchanges and clearing corporation follows the T+1 rolling settlement. In
case of T+1 rolling settlement, the trades executed on Wednesday, has to be settled on
Thursday (provided Thursday is working day) with pay-in and pay-out of funds and securities
being completed on that day. SEBI vide Circular No. SEBI/HO/MRD/MRD-PoD-
3/P/CIR/2024/20 dated March 21, 2024 introduced the beta version of T+0 rolling
settlement cycle on optional basis in addition to the existing T+1 settlement cycle in Equity
Cash Markets, for a limited set of 25 scrips and with a limited number of brokers. Further in
December 2024, SEBI increased the number of scrips under optional T+0 settlement and
also all stock brokers were allowed to participate in optional T+0 settlement.

3.2 Front Office Operations

The front office is responsible for order capture and execution. This is where the order/trade
originates, and the client relationship is maintained. The front office makes/takes orders
and executes them. Dealers and sales staff are considered front office staff.
To better understand the subsequent sections, we need to keep in mind the trade life cycle
(figure 3.1) discussed earlier. It can be clearly seen from the Figure 3.1 that the main task
of the front office staff is to generate orders and execute them. The dealers are the face of
the brokers, who communicate with the clients and accept orders. Discussed below are the
various front-office related activities.

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3.2.1 Client On-Boarding and Registration
An important part of a broker's job is finding clients and building a customer base. Thus,
securities sales agents spend time in networking and bringing on-board clients.
[Link] Sales

Traders buy and sell financial products with the goal of making an incremental amount of
money on each trade. The sales force, whose primary job is to call on clients to suggest
trading ideas and take orders and then communicate their clients' orders to the appropriate
trading desks and execute trades. The job of the sales team also includes getting new clients
to the brokerage firm.
[Link] Account opening

This refers only to the opening of accounts for new clients. There are certain procedures to
be followed before the account can be opened and the broker can execute the orders of the
client. With a view to simplify the account opening kit, SEBI has decided that stock
broker/depository participant shall make available standard documents to the clients either
in electronic or physical form, depending upon the preference of the client as a part of the
account opening kit. The preference of the client shall be sought as a part of the account
opening form. In case the documents are made available in electronic form, the logs of the
same shall be maintained by the broker/depository participant.29 Client account opening
form shall have two parts:
• Know Your Client (KYC) form capturing the basic information about the client
and instruction/check list to fill up the form: The KYC template finalised by Central
Registry of Securitization and Asset Reconstruction and Security interest of India
(CERSAI) and as specified by SEBI through various circulars issued from time to
time, shall be used by the registered intermediaries as Part I of Account Opening
Form (AOF) for individuals and legal entities.
• Document capturing additional information about the client related to trading
account such as bank details, demat details, trading preference30, past actions,
nomination details etc.

The standard documents which form a part of the account opening kit are:

1) Client Account Opening Form which is in two parts. a) Know Your Client (KYC) form
capturing the basic information about the client and instruction/check list to fill up the
form and b) Additional Document capturing additional information about the client
related to trading account.
2) Document stating the Rights & Obligations of stock broker and client for trading on
Exchanges (including additional rights & obligations in case of internet/wireless
technology based trading).

29 Vide SEBI Circular no. CIR/MIRSD/64/2016 dated July 12, 2016

30
SEBI circular: SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/95 dated June21, 2023

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3) Uniform Risk Disclosure Documents (RDD) for all segments/Exchanges detailing risk
associated with dealing in the securities market.
4) Guidance Note detailing Do’s and Don’ts for trading on Exchanges for the education of
the investor.
5) Document describing the Policies and Procedures of the stock broker
6) A tariff sheet specifying various charges, including brokerage, payable by the client to
avoid any disputes at a later date.
In addition to the above documents, the clients should also be provided with the contact
details of senior officials (compliance officer in particular) within the stock broking firm and
investor grievance cell in the stock Exchange, so that the client can approach them in case
of any grievance. Few Documents like Rights and Obligations, RDD and Guidance Note for
Do’s and Don’ts are provided by the Exchanges in Vernacular languages too.

It may be noted that any voluntary clause / document added by the stock brokers
shall form part of the non-mandatory documents. The stock broker shall ensure that any
voluntary clause/document shall neither dilute the responsibility of the stock broker nor
it shall be in conflict with any of the clauses in the mandatory documents, Rules, Bye-
laws, Regulations, Notices, Guidelines and Circulars issued by SEBI and the Stock Exchanges
from time to time. Any such clause introduced in the existing as well as new documents shall
stand null and void.

With a view to encourage participation of new individual investors in the securities market,
SEBI has prescribed a new simplified Account Opening Form ('AOF') termed as 'SARAL AOF'
for new individual investors participating in the cash segment of the Exchange but not
availing facilities such as internet trading, margin trading, derivative trading and use of
power of attorney. The investors who open account through SARAL AOF will also have the
option to obtain other facilities, whenever they require, on furnishing of additional
information as per prescribed regulations/circulars. The standard set of documents viz.
Rights and Obligations document, Uniform Risk Disclosure Document and Guidance Note
and documentary proof related to identity and address as specified by SEBI shall continue
to remain applicable. It is further clarified that the provisions laid down under the PML Act,
PML Rules, SEBI Master Circular on AML is applicable to these set of investors.

SEBI’s Master Circular for Foreign Portfolio Investors, Designated Depository Participants
and Eligible Foreign Investors dated May 30, 2024, inter-alia mandates every FPI applicant
to submit a duly filled and signed Common Application Form (CAF) and ‘Annexure to CAF’
supported by required documents for registration. Further, with an objective to facilitate
ease of onboarding for FPI applicants and reduce duplication of available information SEBI
vide circular dated November 12, 2024, simplified registration for Foreign Portfolio
Investors (FPIs).

Details of certain documents to be submitted by the client are enumerated in the following
section.

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KYC and Other Documents

KYC is an acronym for “Know your Client”, a term commonly used for Customer
Identification Process. SEBI has prescribed certain requirements relating to KYC norms for
Financial Institutions and Financial Intermediaries including Mutual Funds and Stock Brokers
to ‘know’ their clients. This entails verification of identity and address, financial status,
occupation and such other personal information as may be prescribed by guidelines, rules
and regulation. For account opening purpose, stock brokers shall use the KYC templates
provided by Central Registry of Securitisation Asset Reconstruction and Security Interest
of India (CERSAI) for individuals and for legal entities for capturing the KYC information.

Know Your Customer (KYC) and Customer Due Diligence (CDD) policies as part of KYC are
the foundation of an effective Anti-Money Laundering process. The KYC process requires
every SEBI registered intermediary to collect and verify the Proof of Identity (PoI) and Proof
of Address (PoA) from the investor. The provisions as laid down under the Prevention of
Money-Laundering Act, 2002, Prevention of Money-Laundering (Maintenance of Records)
Rules, 2005, as amended from time to time, SEBI Master Circular on Anti Money Laundering
(AML) dated June 06, 2024, and relevant KYC / AML circulars issued from time to time shall
continue to remain applicable.

Digital KYC

In order to enable the online KYC process for establishing account based relationship with
the registered intermediary, SEBI allowed client’s KYC through digital medium (viz.
online/Application (App)based) KYC, in-person verification through video, online submission
of officially valid document / other documents, using electronic/digital signature, including
Aadhaar e-Sign). SEBI registered intermediaries shall obtain the express consent of the client
before undertaking online KYC. The PAN, name, photograph, address, mobile number and
email ID of the client shall be captured digitally, and officially valid document shall be
provided as a photo / scan of the original under electronic/digital signature, including
Aadhaar e-Sign and the same shall be verified. Aadhaar shall be verified through UIDAI's
authentication/verification mechanism. e-KYC through Aadhaar Authentication service of
UIDAI (e-KYC) or offline verification through Aadhaar QR Code/XML file shall be undertaken.
SEBI registered intermediary can implement its own App for undertaking online KYC of
clients.

Stock Brokers for reasons such as online on-boarding of clients, client convenience,
increased efficiency and reduced time for client onboarding prefer to use Aadhaar based e-
KYC facility to complete KYC of the client. The e-KYC service launched by UIDAI shall be
accepted as a valid process for KYC verification. As per the process outlined by Department
of Revenue (DoR), Ministry of Finance(MoF) vide circular dated May 09, 2019 for use of
Aadhaar authentication services by entities other than the banking companies, entities
in the securities market as may be notified by the Central Government shall be allowed
to undertake Aadhaar Authentication under section 11A of the PMLA . These entities would
be registered with UIDAI as KYC user agency(KUA)/sub KYC user Agency(sub-KUA). The
KUAs shall allow the SEBI registered intermediaries as sub-KUA to undertake Aadhaar

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Authentication of their clients for the purpose of KYC. Stock Brokers who want to
undertake Aadhaar authentication services through KUAs, shall enter into an agreement
with any one KUA and get themselves registered with UIDAI as Sub-KUAs. The agreement in
this regard shall be as prescribed by UIDAI.

The Hon’ble Supreme Court in its judgement dated April 30, 2025, emphasized the need for
equal and accessible inclusion of persons with disabilities for availing financial services and
directed to ensure that the process of digital KYC is accessible to persons with disabilities. In
order to make the digital KYC process inclusive and accessible, FAQ on Account opening by
Persons with Disabilities has been revised and is available on ‘SEBI Website → FAQs → Know
Your Client Requirements, Demat / Trading Account Opening → FAQ on Account Opening by
Persons with Disabilities.31

Requirement of In-Person Verification (IPV)

It shall be mandatory for all the registered stock brokers to carry out IPV of their clients.
The brokers shall ensure that the details like name of the person doing IPV, his
designation, organization with his signatures and date are recorded on the KYC form at the
time of IPV. The IPV carried out by one SEBI registered intermediary can be relied
upon by another intermediary. In case of Stock brokers, their Authorised Persons
(appointed by the stock brokers after getting approval from the concerned Stock Exchanges)
shall also perform the IPV.

To enable ease of completing IPV of an investor, SEBI has allowed stock brokers Video
in Person Verification (VIPV) of an individual investor through their App. The following
process shall be adopted in this regard:
a) Intermediary through their authorised official, specifically trained for this purpose, may
undertake live VIPV of an individual client, after obtaining his/her informed consent. The
activity log along with the credentials of the person performing the VIPV shall be stored for
easy retrieval.
b) The VIPV shall be in a live environment.
c) The VIPV shall be clear and still, the client in the video shall be easily recognisable and
shall not be covering their face in any manner.
d) The VIPV process shall include random question and response from the investor including
displaying the officially valid document, KYC form and signature or could also be confirmed
by an OTP.
e) The intermediary shall ensure that photograph of the client downloaded through the
Aadhaar authentication / verification process matches with the investor in the VIPV.
f) The VIPV shall be digitally saved in a safe, secure and tamper-proof, easily retrievable
manner and shall bear date and time stamping.

IPV shall not be required in such cases where:

31
[Link]
SEBI Circular No.: SEBI/HO/MIRSD/SECFATF/P/CIR/2025/74 dated May 23,2025

71
a) The KYC of the client has been completed using the Aadhaar authentication/
verification of UIDAI.
b) The KYC form has been submitted online, documents have been provided through
Digilocker or any other source which could be verified online.

The broker must ensure that the clients fill-up the KYC form and submit it to them. There
are separate forms for individuals and non-individuals. Brokers must also ensure that the
following documents are submitted along with the KYC forms by the clients.

• PAN Card: The PAN card along with its photocopy is required for identity verification
of an individual. Self-attested copy of PAN card is mandatory for all clients, including
Promoters/Partners/Karta/Trustees and whole time directors and persons
authorized to deal in securities on behalf of company/firm/others. The original PAN
card is for verification only and will be returned to the client immediately. PAN is the
sole identification number for all participants transacting in securities market,
irrespective of the amount of transactions. The stock broker shall verify the PAN of
their clients online at the Income Tax website without insisting on the original or
copy of PAN card.
The following are exempted from mandatory requirement of PAN.
o In case of transactions undertaken on behalf of Central Government and / or
State Government and by Officials appointed by Courts e.g., Official
Liquidator, Court receiver etc. (under the category of Government) for
transacting in the securities market.
o Investors residing in the state of Sikkim.
o UN entities / multilateral agencies exempt from paying taxes / filing tax
returns in India.
o In case of institutional clients, namely, FPIs, MFs, VCFs, FVCIs, Scheduled
Commercial Banks, Multilateral and Bilateral Development Financial
Institutions, State Industrial Development Corporations, Insurance
Companies registered with IRDAI and Public Financial Institutions as defined
under the Companies Act, 2013, Custodians shall verify the PAN card details
with the original PAN card and provide duly certified copies of such verified
PAN details to the intermediary. It has further been specified by SEBI, that
the E-PAN issued by CBDT can also be produced by FPI for KYC compliance.
• Proof of Address Document: List of documents admissible for Proof of Address are
given below, however the documents having an expiry date should be valid on the
date of submission:
o Passport/Voters Identity Card issued by Election Commission/ Driving license
o Aadhaar letter issued by UIDAI.
o Job card issued by NREGA duly signed by an officer of the State Government;
o Letter issued by the National Population Register containing details of name,
address; or

72
 o Any other document as notified by the Central Government in
consultation with the Regulator.
In case the document furnished by the client does not contain updated address, the
following documents (or their equivalent e-documents thereof) are acceptable for the
limited purpose of proof of address, provided that the client submits updated officially valid
document (or their equivalent e-documents thereof) with current address within a period
of three months of submitting the following documents:

o Utility bills like Telephone bill (only landline), Electricity bill or Gas bill –Not
more than 2 months old.
o Property or municipal tax receipt not more than 3 months old.
o Pension or family pension payment orders (PPOs) issued to retired
employees by Government Departments or Public Sector
Undertakings, if they contain the address (not more than 3 months old)
o Letter of allotment of accommodation from employer issued by state or
central government departments, statutory or regulatory bodies, public
sector undertakings, scheduled commercial banks, financial institutions
and listed companies and leave and licence agreements with such employers
allotting official accommodation.
• Proof of Identity: Stock brokers at the time of commencement of an account-
based relationship shall identify their clients, verify their identity and obtain
information on the purpose and intended nature of the business
relationship. The name as mentioned in the KYC form shall match the name as
mentioned in the Proof of Identity (PoI) submitted. The following documents are
considered admissible as proof of Identity:
i. Unique Identification Number (UID) (Aadhaar)/Passport/Voter ID Card issued
by Election Commission/Driving License.
ii. Job card issued by NREGA duly signed by an officer of the State Government;
iii. The letter issued by the National Population Register containing details of
name address; or
iv. Any other document as notified by the Central Government in consultation
with the Regulator.
Further, in terms of proviso to the above Rule, where simplified measures
are applied for verifying the identity of the clients, the following
documents shall also be deemed to be officially valid document:
v. Identity card/ document with applicant’s photo, issued by the Central/State
Government Departments, Statutory/Regulatory Authorities, Public Sector
Undertakings, Scheduled Commercial Banks and Public Financial Institutions;
vi. Letter issued by a gazetted officer, with a duly attested photograph
of the person.

73
 As part of KYC SEBI has mandated non-individual FPIs to provide Legal Entity
Identifier (LEI) code. For non-residents and foreign nationals, (allowed to trade
subject to RBI and FEMA guidelines), copy of passport/Persons of Indian Origin
(PIO) Card/Overseas Citizenship of India (OCI) Card and overseas address proof
is mandatory. In case the officially valid document presented by a foreign national
does not contain the details of address, the documents issued by the
Government departments of foreign jurisdictions and letter issued by the Foreign
Embassy or Mission in India shall be accepted as proof of address. If the proof of
identity or address is in a foreign language, then translation into English is required.

Identification of Beneficial Ownership

SEBI Master Circular SEBI/HO/MIRSD/MIRSDSECFATF/P/CIR/2024/78 dated June 06,
2024 on “Guidelines on Anti-Money Laundering ….” has prescribed the approach to
be followed towards identification of beneficial ownership. Accordingly, the stock
brokers shall be guided by the provisions of the said Master Circular and
amendments thereto for the purpose of identification of beneficial ownership of the
client. Whenever it is apparent that the securities acquired or maintained through
an account are beneficially owned by a party other than the client, that party
shall be identified using client identification and verification procedures. The
stock broker shall periodically update all documents, data or information of all
clients and beneficial owners collected under the Client Due Diligence (CDD) process.
In case of non-individuals (such as corporates, Partnership firm, trust, HUF, Bank
etc.) additional documents (certified copies of equivalent e-documents) to be
obtained.
• Bank account details: The client must also have a valid bank account from which
transactions can be made for pay-in/pay-out of funds. The details are to be given
with the KYC. A cancelled cheque leaflet with a copy of the bank account statement/
pass book should also be submitted at the time of opening the trading account. This
bank account will be mapped to the client’s trading account and thereafter,
generally, payment will be accepted only from this account. A client can map more
than one bank account also but should provide the proof of the same.
The client must have also opened a demat account with a DP for pay-in or pay-out
of securities. A copy of the client master given by the respective DP to the client
should be submitted to broker at the time of opening the trading A/C.
Normally the client prefers to open both trading and demat account with the same
broker. In that case the client is willing to give Power of Attorney (POA) in favour of
broker for smooth functioning. SEBI has stipulated certain formats and stipulations
with respect to POA to be followed by the broker.
• Authority Letter to settle an account: The settlement of funds shall be done within
24 hours of the payout, unless specifically authorized by client to maintain running
account. However, the client can authorize the Broker to retain funds in his Trading
Account and maintain it as Running Account. This is called Running Account
Authorization. To facilitate this SEBI has approved brokers to collect running

74
 authority letter from the client. Authorization shall be signed by the client only &
not by any POA holder. In spite of this letter, actual settlement of funds shall be done
by the broker, at least once in a calendar quarter or month depending on preference
of the client.
• Rights and Obligations: The document provides the rights and obligations of the
stock broker, authorized persons and client for trading on exchanges. It provides
information about client, brokerage charges, margins, transaction & settlement,
liquidation/close out, dispute resolution and termination of relationship. It also
includes additional rights & obligations in case of internet / wireless technology
based trading by the client.
• Risk Disclosure Document: This document contains important information on risks
involved during trading in Equities/Derivatives Segments of the stock exchanges. All
clients are required to read this document and understand the nature of the
relationship into which they are entering and the extent of their exposure to risk
before trading in Equities/Derivatives Segments of the Exchanges. The documents
make the clients aware of various risks such as risk of higher volatility, risk of lower
liquidity, risk of rumors, risk of news announcements, system risks and risks involved
on holding or writing options. The documents also require members to inform the
client any additional provisions defining the features, risks, responsibilities,
obligations and liabilities associated with securities trading through wireless
technology/ smart order routing or any other technology.
• Nomination of Eligible Trading Accounts: Submission of “choice of nomination” for
trading accounts has been made voluntary by SEBI vide circular dated September 26,
2023. Investors opening new trading account(s) shall have the choice of providing
nomination or opting out nomination. Trading Members shall activate new trading
accounts only upon receipt of nomination in the formats specified by SEBI.
• The stock broker shall have documentary evidence of financial details provided by
the clients who opt to deal in the derivative segment. In respect of other clients, the
stock broker shall obtain the documents in accordance with its risk management
system.
List of Illustrative documents
• Copy of ITR Acknowledgement
• Copy of Annual Accounts
• In case of salary income - Salary Slip, Copy of Form 16
• Net-worth certificate
• Bank account statement for last 6 months
• Copy of Holding statement of de-mat account
• Any other relevant documents substantiating ownership of assets
• Self-declaration along with relevant supporting

Stock brokers shall keep confidentiality of every information maintained, furnished or

verified, save as otherwise provided under any law for the time being in force.

75
[Link] KRA Agency (Know Your Client Registration Agency)
SEBI has simplified the account opening process for investors and made it uniform across
intermediaries in the securities markets as already mentioned above. Further, to avoid
duplication of the KYC process with every intermediary, in the year 2011 SEBI has devised
the KRA system for centralization of the KYC records in the securities markets.
The brokers or trading members, after completing the client account opening procedures,
the intermediary shall perform the initial KYC/due diligence of the client, upload the KYC
information with proper authentication on the system of the KRA within 3 working days
from the date of completion of KYC process, furnish the scanned images of the KYC
documents to the KRA, and retain the physical KYC.
For ease of onboarding of clients for dealing in securities market, SEBI vide circular dated
August 11, 2023, has decided to simplify the KYC process and rationalise the risk
management framework at KRAs. 32 In the interest of investors and for ease of transacting
in securities market, the client shall be allowed to open an account with the intermediaries
and transact in securities market as soon as the KYC process is completed. Thereafter, as
a part of risk management framework, the KRAs shall verify the necessary attributes of
records of all clients within 2 days of receipt of KYC records. The records of those clients in
respect of which all attributes are verified by KRAs with official databases (such as Income
Tax Department database on PAN, Aadhaar XML/Digilocker/ M-Aadhaar) and PAN-Aadhaar
linkage as also been verified as referred to in Rule 114 AAA of the Income Tax Rules, 1962
shall be considered as Validated Records. The validated records shall be allowed portability
i.e. the client need not undergo the KYC process again when he approaches different
intermediary in securities market and the intermediary shall fetch the validated records
from the KRA database. The clients can open an account with intermediaries and transact
in securities market as soon as the KYC process is completed. However, clients whose KYC
attributes cannot be verified by KRAs will not be allowed to transact further in the securities
market until the attributes are verified. KRAs facilitate the clients to check their KYC status
on the KRA website. The different KYC status and implications thereto are also available on
the KRAs website.
[Link] Central Know Your Client (CKYC)
Government of India has authorized the Central Registry of Securitization and Asset
Reconstruction and Security interest of India (CERSAI), set up under sub-section (1) of
Section 20 of Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, to act as, and to perform the functions of, the Central KYC
Records Registry under the PML Rules 2005, including receiving, storing, safeguarding and
retrieving the KYC records in digital form of a “client”, as defined in clause (ha) sub-section
(1) of Section 2 of the Prevention of Money Laundering Act, 2002. As per the 2015
amendment to PML (Maintenance of Records) Rules, 2005 (the rules), every reporting entity
shall capture the KYC information for sharing with the Central KYC Records Registry in the
manner mentioned in the Rules, as per the KYC template for “individuals” finalised by
CERSAI. CKYC refers to Central KYC (Know Your Customer), an initiative of the Government
of India which aims to have a system which allows investors to complete their KYC only once

32
SEBI circular: SEBI/HO/MIRSD/FATF/P/CIR/2023/0144 dated August 11, 2023.

76
before interacting with various entities across the financial sector. CKYC is managed by
CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of
India), which is authorized by Government of India to function as the Central KYC Registry
(CKYCR). Thus, CKYCR will act as centralized repository of KYC records of investors in the
financial sector with uniform KYC norms and inter-usability of the KYC records across the
sector.
Stock brokers shall within 10 days after the commencement of an account-based
relationship with a client, file the electronic copy of the client’s KYC records with the
CKYCR. They ensure that all existing KYC records of legal entities and of individual clients
are uploaded on to CKYCR when the updated information is obtained/received from the
client. Once the KYC form is submitted, a unique KYC Identification Number (also known as
CKYC Number) is generated and communicated to the client by SMS / Email.

For additional information on KYC, participant can refer SEBI “Master Circular on Know Your
Client (KYC) norms for the securities market” dated October 12, 202333 and FAQ on “KYC
norms for Securities Market”34

[Link] Unique Client Code (UCC)

In 2001, SEBI made it mandatory for brokers to use unique client codes for all clients.35 Once
the formalities of KYC and other details thereon are complete, each client is assigned a
unique client code (UCC) by the broker. This acts as an identity for the client with respect to
the broker. SEBI has made it mandatory for all the brokers to use unique client codes for all
clients while entering orders on their behalf. It is also mandated by SEBI, that the unique
client code should be mapped with the PAN number of the client.
The broker has to provide the Stock Exchange(s) with the UCC and the PAN details of the
client(s) before entering into any trade for the client. The Stock Exchanges provide an upload
facility to the brokers through which the UCC and other client details are uploaded on the
stock exchange platform on a regular basis. Stock Exchanges validate UCC and PAN for all
orders in all markets (PRO and CLI) at the time of order entry with the details uploaded by
members on Exchange. UCC allotted by the trading member (TM) to the client shall be
mapped with the demat account of the client. For mapping Stock Exchanges shall share the
UCC data with the Depositories which shall include the PAN, segment, TM/CM code and
UCC allotted.
SEBI has advised Stock Exchanges to provide a platform to stock brokers to upload the
details of their clients, preferably, in sync with the UCC updation module. Stock Brokers
shall upload the details of clients, such as, name, mobile number, address for
correspondence and E-mail address. Stock Exchanges shall send details of the transactions
to the investors, by the end of trading day, through SMS and E-mail alerts uploaded by the
stock-brokers. Stock Brokers shall ensure that the mobile numbers/E-mail addresses of their
employees /remisiers/authorized persons are not uploaded on behalf of clients. Stock

33
[Link]
for-the-securities-market_77945.html
34
[Link]
35SEBI Circular no: SMDRP/Policy/CIR-39/2001 dated July 18, 2001 and Circular SEBI/MRD/SE/CIR-34/2003/29/09 dated
September 29, 2003

77
 Brokers shall ensure that separate mobile number/E-mail address is uploaded for each
client. However, under exceptional circumstances, the stock broker may, at the specific
written request of a client, upload the same mobile number/E-mail address for more than
one client provided such clients belong to one family (in case of individual clients) or such
client is the authorized person of an HUF, Corporate, Partnership or Trust (in case of non-
individual clients).

[Link] Execution of Power of Attorney (PoA) by the Client in favour of the Stock Broker /
Stock Broker and Depository Participant

SEBI vide circular no. CIR/MRD/DMS/13/2010 dated April 23, 2010, circular no.
CIR/MRD/DMS/28/2010 dated August 31, 2010 and the SEBI Circular
SEBI/HO/MIRSD/DOP/CIR/P/2020/158 dated August 27, 2020, has issued guidelines and
clarification for execution of Power of Attorney (PoA) by the client favouring Stock Broker /
Stock Broker and Depository Participant to standardize the norms to be followed by stock
brokers/ stock broker and depository participants while obtaining PoA from the clients.
Details of the same is give below:
I. A Power of Attorney (PoA) is executed by the client in favour of the stock broker /stock
broker and depository participant to authorize the broker to operate the client’s demat
account and bank account to facilitate the delivery of shares and pay –in/ pay –out of
funds.
II. PoA is optional and should not be insisted upon by the stock broker / stock broker
depository participant for opening of the client account. No stock broker or depository
participant shall deny services to the client if the client refuses to execute a PoA in
their favour. However, internet based trading is exempted from this clause.
III. PoA executed in favour of stock broker / stock broker depository participant by the client
shall be utilized
a. For transfer of securities held in the beneficial owner accounts of the client
towards Stock Exchange related deliveries / settlement obligations arising out of
trades executed by clients on the Stock Exchange through the same stock broker.
b. For pledging / re-pledging of securities in favour of trading member (TM) /
clearing member (CM) for the purpose of meeting margin requirements of the
clients in connection with the trades executed by the clients on the Stock
Exchange.
c. To apply for various products like Mutual Funds, Public Issues (shares as well as
debentures), rights, offer of shares, tendering shares in open offers,
redemptions etc. pursuant to the instructions of the Client(s). However, a
proper audit trail should be maintained by the stock broker to prove that the
necessary application/act was made/done pursuant to receipt of instruction
from Client. Further, redemptions are also included in PoA pursuant to client’s
instructions.
IV. For limited purpose to transfer of funds from the bank account(s) of the clients for the
following:
a. For meeting the settlement obligations of the client(s)/ margin requirements of
the client(s) in connection with the trades executed by the clients on the stock
exchange through the same Stock Broker.

78
 b. For recovering any outstanding amount due from the client(s) arising out of
clients trading activities on the stock exchanges through the same Stock Broker.
c. For meeting obligations arising out of the client subscribing to such other
products/facilities/services through the Stock Broker like Mutual Funds, Public
Issues (shares as well as debentures), rights, offer of shares etc.
d. Towards monies/fees/charges, etc. due to the Stock Broker/Depository
Participant/ Principal payable by virtue of the client using/subscribing to any of
the facilities/services availed by the client at his/her instance.
V. The PoA shall not facilitate the stock broker to do the various actions like Off-market
trades between parties other than the related parties, transfer of funds from the bank
account(s) of the Clients for trades executed by the clients through another stock broker,
Open a broking / trading facility with any stock broker or for opening a beneficial
owner account with any depository participant etc.
SEBI also provided guidelines about execution of PoA. For e.g. PoA should Identify/provide
the particulars of the beneficial owner account(s) and the bank account(s) of the
client(s) that the stock broker is entitled to operate, PoA should be executed in the
name of the concerned SEBI registered entity only and not in the name of any
employee or representative of the stock broker /depository participant.
All off-market transfer of securities shall be permitted by the Depositories only by
execution of Physical Delivery Instruction Slip (DIS) duly signed by the client himself or
by way of electronic DIS. The Depositories shall also put in place a system of obtaining
client’s consent through One Time Password (OTP) for such off market transfer of
securities from client’s demat account.

[Link] Execution of ‘Demat Debit and Pledge Instruction’ (DDPI) for transfer of securities
towards deliveries / settlement obligations and pledging / re-pledging of securities36

While executing a PoA, authorization is given by client to the stock broker / stock
broker and depository participant, to access the Beneficial Owner (BO) account of the client
to meet settlement obligations of the trade executed by the client. In order to make the
process more transparent and simpler, the following conditions shall be made part of a
separate document viz. ‘Demat Debit and Pledge Instruction’ (DDPI).

• Transfer of securities held in the beneficial owner accounts of the client towards
Stock Exchange related deliveries / settlement obligations arising out of trades
executed by clients on the Stock Exchange through the same stock broker.
• Pledging / re-pledging of securities in favour of TM/ CM for the purpose of meeting
margin requirements of the clients in connection with the trades executed by
the clients on the Stock Exchange.
• Mutual Fund transactions being executed on stock exchange order entry
platforms and which shall be in compliance with SEBI circulars
SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/634 dated October 04, 2021,
SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/635 dated October 04, 2021 and

36
[Link]
for-transfer-of-securities-towards-deliveries-settlement-obligations-and-pledging-re-pledging-of-
securities_57546.html

79
 SEBI/HO/IMD/IMD-I DOF5/P/CIR/2022/29 dated March 15, 2022 or any other
circular which may be issued in this regard; and
• Tendering shares in open offers which shall be in compliance with SEBI circular
SEBI/HO/CFD/DCR-III/CIR/P/2021/615 dated August 13, 2021 or any other circular
which may be issued in this regard.

The DDPI shall serve the same purpose of PoA and significantly mitigate the misuse of PoA.
The use of DDPI shall be limited only for the purposes as mentioned above.

The client may use the DDPI or opt to complete the settlement by issuing physical Delivery
Instruction Slip (DIS) or electronic Delivery Instruction Slip (eDIS) themselves. The existing
PoAs shall continue to remain valid till the time client revokes the same. Thus, the stock
broker/stock broker and depository participant shall not directly / indirectly compel the
clients to execute the DDPI or deny services to the client if the client refuses to execute the
DDPI. Hence, with the implementation of this circular, PoA shall no longer be executed for
the conditions specified above. For further information participants may refer SEBI circular.

[Link] Brokerage

Brokerage are charges that are mutually agreed between member and client subject to
maximum permissible by the Exchange and brokerage rate shall be mentioned in the tariff
sheet. Brokerage firms have elaborate commission module (brokerage) to attract and retain
clients. Given below are the rules for charging brokerage.
 Brokerage rule for Equity/Capital Market segment:
o Maximum brokerage that brokers can charge is 2.5% of the trade value
exclusive of statutory levies.
o If the value of share is Rs.10/- or less, a maximum brokerage of 25 paise per
share can be collected.
o There is no minimum brokerage requirement specified.
 Brokerage rule for Derivatives segment:
o Brokerage rule for future is similar to the equity segment
o In the case of options contracts, maximum brokerage can be 2.5% of the
option premium or Rs.100/- per lot whichever is higher.
Trading member can be a full service broker, discount broker or an online broker.
Commission charged can be different for different types of brokers.
 Full service broker charges higher commission
 Discount brokers charge a much lower commission
 Online brokers cater to niche segment of retail clients.
o Commission charged is lesser than what would be charged for a client
placing orders through a broker.
 Brokers also use multiple commission schemes such as
o Volume based commission
o Slab wise commission or
o Scrip wise commission.

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Commission charges may differ for day trades versus delivery transactions.
In order to bring more transparency SEBI advised members to display details of brokerage
to the investor on the “order placement window” on their IBT/WT application prior to
placement of order.
3.2.2 Order Management

Order management consists of entering orders, order modification, order cancellation and
order matching. The main components of an order are:
• Price
• Time
• Quantity / No. of Contract
• Security/Contract (What to buy and what to sell))
• Action (Buy / Sell)
• Client identity (UCC)
A trading member can enter various types of orders depending upon his/her requirements.
The order conditions are broadly classified into three categories: price related conditions,
time-related conditions, and quantity related conditions. We will see about the order
condition in following section. Trading members are allowed to enter order during market
hours only. Following are some examples of order entry:

Security Details Buy / Quantity Price Time Pro / UCC & PAN CP
Symbol/Code/Name Sell Condition Cli Code

ABCDE 12345 B 5 76.50 Day Cli A001 -

XXXXXXXXXX

[Link] Types of order

Price, time and quantity are three major components of an order. A stock broker can enter
various types of orders depending upon his/her requirements. These conditions are broadly
classified into three categories: price related conditions, time-related conditions, and
quantity related conditions.

A. Price Condition:

Market Order - Basic Trade

A market order is where a trader purchases or sells their security at the best market price
available across the market depth to complete the order quantity. In the market order there
is no need to specify the price at which a trader wants to purchase or sell. There are two
variations on the market order—market order without protection and Market with
protection order. The market order without protection means that the trades are executed
at the best available price/s in the market at that point in time. The second type of market
order i.e. market with protection order is a combination of market and limit order. It allows

81
the market order to be executed till a specified level mentioned by trader. The risk of an
order getting executed at any price is protected by using such order.

Example 3.1: Illustration of a typical market order

Order is placed to buy 100 shares of ABC Industries Ltd. “at Market”. The order book
snapshot looks like as below:

Buy Qty. Buy Price Sell Price Sell Qty.

1,606 807.55 807.60 100
13 807.50 807.65 119
383 807.45 807.70 184
78 807.40 807.75 42
1 807.35 807.85 86

In this current scenario, the incoming market order will get matched with the best sell order
in the book which is 100 shares @ Rs.807.60 and a trade will take place for 100 shares at
Rs.807.60.

Limit Order -

Limit orders involve setting the entry or exit price and then aiming to buy at or below the
market price or sell at or above it. Unlike market order, the trader here needs to specify
price. They of course can be changed any time before execution. Reaching these
limits/targets is not always possible and sometimes the orders do not go through. Limit
orders are very common for online traders.

Example 3.2: Illustration of a typical limit order

Order is placed to buy 200 shares of ABC Industries Ltd at Rs.807.60. The order book
snapshot looks like as below:

Buy Qty. Buy Price Sell Price Sell Qty.

1,606 807.55 807.60 100
13 807.50 807.75 119
383 807.45 807.80 184
78 807.40 807.85 42
1 807.35 807.90 86

In this current scenario, the incoming limit order will get matched with the best sell order in
the book which is 100 shares @ Rs.807.60 and a trade will take place for 100 shares at
Rs.807.60. Orders lying unmatched in the system are 'passive' orders and orders that come
in to match the existing orders are called 'active' orders. It should be noted that the order
is always matched with the passive order price. The balance buy order for 100 shares @

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Rs.807.60 will sit in the order book on the buy side as the best buy order. The revised order
book snapshot after the trade match will look as follows:

Buy Qty. Buy Price Sell Price Sell Qty.

100 807.60 807.75 119

1,606 807.55 807.80 184
13 807.50 807.85 42
383 807.45 807.90 86
78 807.40 807.95 12

Stop Orders (orders with stop loss triggers)

The one that allows the Trading Member to place an order which gets activated only when
the market price of the relevant security reaches or crosses a threshold price. Until then the
order does not enter the market.
In stop order, the client enters two prices: one is trigger price and the other is limit/market
price. A stop order can best be explained with an example. Suppose a trader has a short
term (say, for a day), bullish view on a stock, he may buy the stock at say Rs.100 per share
in the early hours of trading session. If the stock price moves upwards as per his expectation,
he may sell the stock, say at Rs.110 and close his position. The stock price can also move
downwards much against expectations of the trader. It may so happen that the trader may
have limited risk appetite and does not want to incur loss of more than Rs.5 per share. In
such a scenario, trader can give stop loss sell order with trigger price of Rs.96 and limit price
of Rs.95. When the stock price starts moving downwards, as soon as it hits price of Rs.96,
the sell order of Rs.95 will automatically get triggered. Any further downward movement in
price will not affect the trader as he has already limited his loss on the position.

A buy order in the Stop Loss book gets triggered when the last traded price in the normal
market reaches or exceeds the trigger price of the order.

A typical sell stop loss order example:

 Original transaction-Bought 400 shares of ABC Industries Ltd. (ABC) at Rs.830.
 If the price falls below the purchase price, the investor will start clocking a loss.
 Investor may place a sell stop loss order at a trigger price of Rs.800. When the price
of ABC drops to Rs.800 or below, sell stop loss order will get triggered.
 Order is then placed in the market to sell 400 shares of ABC.
 It can be triggered as a market order, or as a limit order
 If the investor had specified a limit price (which can be equal to or less than trigger
price), for example in this case, Rs.790
 In the case of stop loss limit order, once triggered, the order will be placed in the
market for sell ABC 400 shares at Rs.790.
 It will match only if a corresponding buy order exists for Rs.790/- or better.

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  If it is stop loss market order, once triggered it will match with the best counter order
available.

A typical buy stop loss order example:

 Original transaction – Sell 400 shares of ABC Industries Ltd (ABC) at Rs.830.
 If the price goes above the selling price, the investor will start clocking a loss.
 Buy stop loss order is used to anticipate potential loss. Investor may place a buy stop
loss order at a trigger price of say Rs.880.
 When ABC price reaches Rs.880 or above, the buy stop loss order will get triggered.
 An order will be placed in the market to buy 400 shares of ABC.
 It can be triggered as a market order, or as a limit order.
 If the investor had specified a limit price (which can be equal to or more than trigger
price), for example in this case, the limit price could be Rs.890.
 In the case of stop loss limit order, when the stop loss order is triggered, the order
will be placed in the market for buying 400 ABC shares at Rs.890/-. It will match only
if a corresponding sell order exists for Rs.890/- or better.
 If it is stop loss market order, once triggered it will match with the best counter order
available.

The variations in the three orders require traders to be well aware of the options when
trading. Studying the stock and predicting the trend accurately is very important.

B. Time Condition:

DAY - A Day order, as the name suggests, is an order which is valid for the day on which it is
entered. If the order is not matched during the day, the order gets cancelled automatically
at the end of the trading day.

IOC - An Immediate or Cancel (IOC) order allows a Trading Member to buy or sell a security
as soon as the order is released into the market, failing which the order will be removed
from the market. Partial match is possible for the order, and the unmatched portion of the
order is cancelled immediately.

Example 3.3: Illustration of a typical IOC order

Order is placed to buy 200 shares of ABC Industries Ltd. at Rs.807.60 immediate or cancel.
The order book snapshot looks like as below:

Buy Qty. Buy Price Sell Price Sell Qty.

1,606 807.55 807.60 100
13 807.50 807.75 119
383 807.45 807.80 184
78 807.40 807.85 42
1 807.35 807.90 86

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In this current scenario, the incoming limit order will get matched with the best sell order in
the book which is 100 shares @ Rs.807.60 and a trade will take place for 100 shares at
Rs.807.60. It should be noted that the order is always matched with the passive order price,
in this case as the sell order is the passive order, matching takes place at Rs.807.60. The
balance buy order for 100 shares @ Rs.807.60 will be cancelled as it is an IOC order and
there is no match for the remaining 100 shares.

GTC - A Good Till Cancelled (GTC) order is an order that remains in the system until it is
cancelled by the Trading Member. It will therefore be able to span trading days if it does not
get matched. The maximum number of days a GTC order can remain in the system is notified
by the Exchange from time to time.

GTD - A Good Till Days/Date (GTD) order allows the Trading Member to specify the
days/date up to which the order should stay in the system. At the end of this period the
order will get flushed from the system. Each day/date counted is a calendar day and
inclusive of holidays. The days/date counted are inclusive of the day/date on which the
order is placed. The maximum number of days a GTD order can remain in the system is
notified by the Exchange from time to time.

Cancel on Logout (COL): If member / user entered order with COL, all outstanding order of
the user will get cancelled once user logs out from the TWS.

Note: Currently, GTC and GTD orders are not available on the system as per SEBI directives.

C. Quantity Condition:

Disclosed Quantity (DQ)- An order with a DQ condition allows the Trading Member to
disclose only a part of the order quantity to the market. For example, an order of 1000 with
a disclosed quantity condition of 200 will mean that 200 is displayed to the market at a time.
After this is traded, another 200 is automatically released and so on till the full order is
executed. The Exchange may set a minimum disclosed quantity criteria from time to time.

MF - Minimum Fill (MF) orders allow the Trading Member to specify the minimum quantity
by which an order should be filled. For example, an order of 1000 units with minimum fill
200 will require that each trade be for at least 200 units. In other words, there will be a
maximum of 5 trades of 200 each or a single trade of 1000. The Exchange may lay down
norms of MF from time to time.

AON - All or None orders allow a Trading Member to impose the condition that only the full
order should be matched against. This may be by way of multiple trades. If the full order is
not matched it will stay in the books till matched or cancelled.

Note: Currently, AON and MF orders are not available on the system as per SEBI directives.

Other conditions
• Pro: ‘Pro’ means that the orders are entered on the trading member's own account.

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• Cli: ‘Cli’ means that the trading member enters the orders on behalf of a client.

Proprietary Trading

Trading members are also allowed to trade on own behalf. To facilitate the same Stock
Exchanges provide facility of placing order on proprietary (pro) account. Facility of placing
orders on proprietary account through trading terminals shall be extended only at one
location of the members as specified / required by the members. Trading terminals located
at places other than the above location shall have a facility to place orders only for and on
behalf of a client by entering client code details as required / specified by the Exchange /
SEBI. Proprietary trading allowed from more than one location is subject to certain
conditions. In case any member requires the facility of using “pro-account” through trading
terminals from more than one location, such member shall be required to submit an
undertaking to the Stock Exchange stating the reason for using the “pro-account” at
multiple locations and the Stock Exchange may, on case to case basis after due diligence,
consider extending the facility of allowing use of “pro-account” from more than one
location.

With a view to increase the transparency in the dealings between the broker and the client,
every broker shall disclose to his client whether he does client based business or proprietary
trading as well. The broker shall disclose this information upfront to his new clients at the
time of entering into the Know Your Client agreement.

A stock broker of an exchange cannot deal with the brokers of the same exchange either for
proprietary trading or for trading on behalf of clients, except with the prior permission of
the exchange. The Stock Exchanges while giving such permission, shall consider the reasons
stated by the brokers for dealing with brokers of the same exchange and after carrying
out due diligence allow such brokers to deal with only one stock broker of the same
exchange. A stock broker of an exchange can deal with only one broker of another exchange
for proprietary trading after intimating the names of such stock broker to his parent
Stock Exchange.

[Link] Process of order routing through the Exchanges

Once the order is entered and confirmed by the client/dealer at his trading terminal and
verified by the broker software, the order is routed to the Exchange for its execution. The
Exchange system allots a unique order number for all orders received in the system. This is
given as order confirmation along with the time stamp to the broker.
The order gets executed at the Exchange depending upon the type of order. If the order is
a market order it gets executed immediately subject to availability of counter order. If it is
a limit order it is matched against appropriate counter orders. Once the order is matched, a
trade is said to be executed. As soon as a trade is executed the trade confirmation message
will be automatically available on the trading terminal of broker.

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All orders can be modified or cancelled during the trading hours and pre-open market stage
provided they are not fully executed. For the orders, which are partially executed, only the
open or unexecuted part of the order can be cancelled/modified.
The order matching in an Exchange is done based on price-time priority. The best price
orders are matched first. If more than one order arrives at the same price they are arranged
in ascending time order. Best buy price is the highest buy price amongst all orders and
similarly best sell price is the lowest price of all sell orders. Let us take an example here to
better understand this. A sample of the order book is given below for understanding.

Buy Quantity Buy Price Sell quantity Sell Price

50 121.20 50 121.50
100 121.10 200 121.80
25 120.90 3000 122.10
500 120.80 1000 122.20
5000 120.00 200 122.60

These quotes given in the table above are visible to clients. Now if a buy market order comes
with an order quantity of 50 it gets executed for a price of Rs. 121.50 and the order book
entries on the sell side moves up by one notch i.e. the Rs. 121.80 order comes to top. On
the other hand if a limit order with a sell price of Rs. 121.20 for a quantity of 500, only 50
shares get executed and the order for remaining 450 stays at the top on the sell side at Rs.
121.20.
All orders come as active orders into the order book. If they get a match they will be
executed immediately, else they will be entered into the order book according to price and
time as passive orders.
Let us take another example:

Buy Qty./Lot Buy Price Sell Price Sell Qty./Lot

1,606 807.55 807.60 100
13 807.50 807.75 119
383 807.45 807.80 184
78 807.40 807.85 42
1 807.35 807.90 86

Order is placed to buy 200 shares at Rs.807.65. In this current scenario, the incoming limit
order will get matched with the best sell order in the book which is 100 shares @ Rs.807.60
and a trade will take place for 100 shares at Rs.807.60 and not at Rs. 807.65. It should be
noted that the order is always matched with the passive order price, in this case as the sell
order is the passive order, matching takes place at Rs.807.60. The balance buy order for 100
shares @ Rs.807.65 will sit in the order book on the buy side as the best buy order.

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3.2.3 Order Modification/ Cancellation

Sometimes in a moving market, orders need to be changed in terms of the price and
quantity as per the client’s requirement. All the orders can be modified till the time they are
not fully executed.
Due to some problems in the moving market or when one does not want to buy or sell
shares, then orders need to be cancelled. In this case only those orders can be cancelled
during market hours which have not been fully or partially executed.

3.2.4 Trade execution

Execution of trade occurs when a buyer and seller reach an agreement pertaining to the
terms and price of a trade, and the order to buy or sell a security is completed after the
same is matched on the Exchange platform. Once the order is executed it turns into trade
and exchange sends notification of the trade to the broker. The broker in turn
communicates these trades to the client either immediately or end of day. Official
communication from broker is done to the client through contract note.
Trade modification is allowed for parameters like client code and custodian participant
code. However, there are certain conditions and timings for such modifications as given
below:

• Stock Exchanges may allow modifications of client codes of non-institutional trades only
to rectify a genuine error in entry of client code at the time of placing/modifying the
related order. The Stock Exchange shall conduct a special inspection of the trading
member to ascertain whether the modifications of client codes are being carried on as
per the strict objective criteria set by the Stock Exchange. Shifting of trades to the error
account of broker would not be treated as modification of client code, provided the
trades in error account are subsequently liquidated in the market and not shifted to
some other code.
• Further, brokers shall disclose the codes of accounts which are classified as ‘error
accounts’ to the Stock Exchanges. Each broker should have a well-documented error
policy approved by the management of the broker. Stock Exchanges shall periodically
review the trades flowing to the error accounts of the brokers.
• The Stock Exchanges shall levy a penalty on trading members wherever applicable and
credit the same to its Investor Protection Fund. Stock Exchanges may waive penalty
for a client code modification where stock broker is able to produce evidence to the
satisfaction of the stock exchange to establish that the modification was on account of
a genuine error.
• Proprietary trades shall not be allowed to be modified as client trade and vice
versa.
Modification between client codes of two entities which are of the institutional category
will be allowed only if the modification from both client codes is from different schemes /
sub-accounts of / managed by the same Institution. Such modifications shall not be subject
to penalty.

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Any modification between two client codes which are of institutional category and do not
satisfy the above criteria, i.e., modification between two unrelated institutional clients will
be subject to penalty.

Members can modify the Custodial Participant Code (CP Code) on the trade day during
trading hours as per the time stipulated by Stock Exchanges and Clearing Corporation.
Trade annulment37: Trading members are allowed to provide trade annulment request on
trading system. The request should be submitted within 30 minutes from trade execution.
However, stock exchange may consider requests received after 30 minutes, but no longer
than 60 minutes, only in exceptional cases and after examining and recording reasons for
such consideration. Trade annulment request should satisfy certain condition for further
processing. A fee based on value of trade(s) for which annulment is requested, subject to
minimum and maximum fee shall be charged as annulment application fee for accepting the
request. Examination of trade(s) for annulment can also be taken suo moto by stock
exchange.
As per SEBI guideline on Trade Annulment, Stock exchanges shall charge an application fee
equal to 5% of the value of trade(s) for accepting an annulment request from a stock broker,
subject to minimum fee of ₹ 1 lakh and maximum fee of ₹10 lakhs. Stock exchanges may
suitably increase the upper limit of the application fee as deemed necessary to discourage
frequent or frivolous requests for annulment. The amount realised as application fee shall
be credited to the "Investor Protection Fund" of the concerned stock exchange.

3.3 Middle Office Operations

The middle office, as the name implies, is a hybrid function between the front and back
office. The middle office handles validations, bookings and confirmations. Risk Management
and Surveillance typically forms the main function of the middle office.
3.3.1 Risk Management & Surveillance

Any transaction or behaviour, whether it is buying, selling or instigating to wilfully produce

an abnormal effect on prices and/or volumes, goes against the fundamental objective of
protecting the interest of the investors of the securities markets. Here the risk management
system plays a crucial role. An efficient risk management system is integral to an efficient
settlement system. As we know that obligation to settle the trades lies with the broker, if
any client makes any trade default, then the same has to be made good by the broker to
the clearing corporation. When orders are accepted and sent to exchange these orders go
through various risk management checks for clients. The broker system should have an on-
line risk management capability for all orders placed on the Exchange platform. Further,
brokers should have various trading limits (like Order Quantity and Value Limits, User /
Branch Order Limit, Order Price limit, etc.) on the system and only such orders which are
within the parameters specified by the risk management system be allowed to be pushed
into exchange trading platform. Margin is an amount that clearing corporations levy on the
brokers for maintaining positions on the exchange. The amount of margin levied is

37
Circular No. CIR/MRD/DP/15/2015 dated July 16, 2015

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proportional to the exposure and risk the broker is carrying. Since positions may belong to
a broker’s clients, it is the broker’s responsibility to collect the margin upfront from clients
and allow trading to client based on the collateral provided by the client. The broker system
should have capability to generate reports relating to margin requirements, payments, and
delivery obligations. The goal of a broking firm’s risk management system is to measure and
manage its own and its client’s exposure to various risks identified as central to its
operations. Broker system should assess the risk of the client as soon as the order comes in,
further broker can have system-based control on the trading limits of clients, and exposures
taken by clients. Brokers are required to set pre-defined limits on the exposure and turnover
of each client. SEBI/Stock Exchanges have specified various system/risk management
requirement based on the type of broker. For example Brokers who trade through exchange
provided terminals, brokers trade through CTCL, IBT, STWT, SOR and brokers who use
Algorithmic Trading facility. For each risk category, the broking firm must employ
procedures to measure and manage firm-level exposure. These are:
a) Establishing Standards and Reports
Every broking firm is mandated to define a set of risk management standards. They
themselves adhere to these standards and also measure the risk appetite of their clients
(individuals and companies). Policies of the broking firm clearly mention the details of risk
management, authorised person who will be responsible for risk management, internal
control process, internal and external audit. Firms should have in place a risk management
and control reporting and review process. Assessment of the effectiveness of established
strategies, policies and procedures should be performed regularly.
b) Imposing Position Limits
A key element in financial risk management is identifying the type of risk(s) and the extent
to which those risk(s) can be borne. A broking firm imposes limits to cover exposures, and
overall position concentrations relative to the potential systematic risks.
c) Set Investment Guidelines and Strategies
The broking firm should outline investment guidelines and strategies for risk taking in the
immediate future in terms of commitments to a particular market area, extent of asset-
liability mismatching, or the need to hedge against systematic risk at a particular time. Risk
management involves determining what risks the firm’s financial activities generate and
avoiding unprofitable risk positions.
d) Systems for Reporting Compliance with Established Policies and Procedures
The Broking Firms should have in place a risk management and control reporting and review
process. This process should include a review mechanism for reporting compliance with
established policies and procedures and addressing exceptions
e) Assessment of the Effectiveness of the Strategies, Policies and Procedures
Assessment of the effectiveness of established strategies, policies and procedures should
be performed regularly. The evaluation should consider the results of established policies,
changes in business activities and changes in markets. Material changes to methodologies,
models, and assumptions of risk management and control policies should be reviewed by

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the governing body. Policies and procedures should require that the risk management and
control functions be involved in the review of new business products and activities.
[Link] Types of Risk for Members

Operational risk is the risk of monetary loss resulting from inadequate or failed internal
processes, manual and systems error or external events. For the stock broker, operations
risks are essentially risk arising on account of handling of client assets, regulatory non-
compliance, trading error, non-payment for buying or selling a scrip, non-delivery of scrip(s),
denial of matched order by clients, sudden closure of banks where funds are deposited etc.
Operational risk encompasses the risk of loss due to the breakdown in controls within the
firm including, but not limited to, unidentified limit excesses, unauthorized trading, fraud in
trading or in back office functions including inadequate books and records and a lack of basic
internal accounting controls, inexperienced personnel, and unstable and easily accessed
computer systems.

Market risk refers to the possibility of incurring large losses from adverse changes in
financial asset prices such as stock prices. For the stock broker, market risks are essentially
risk arising on account of concentration of client collateral in stocks/sectors, brokers own
investment in stocks/sectors etc. This risk entails the erosion of value of marketable
securities and assets, due to factors beyond an enterprise’s control. Market risk is usually
affected by economic developments and political destabilization such as a rising fiscal gap,
national debt, terrorism, energy price shocks, increase in interest rates, all resulting in a
drop in equity prices. Market risk can also include the risks associated with the cost of
borrowing securities, dividend risk, and correlation risk.

Credit risk is the risk of default on a debt that may arise from a borrower failing to make
required payments. The credit risk for broker can arise on account of Loans to Group
Companies/ Related Parties, debit balance of clients, funding of clients, short collection of
margins, Non-confirmation of DVP trade by custodian etc. Credit risk can be minimized by
risk management and controls and procedures that require counterparties to maintain
adequate collateral, make margin payments, and have contractual provisions for netting.

Legal risk arises from the possibility that an entity may not be able to enforce a contract
against another party. Legal risk involves the potential illegality of the contract, as well as
the possibility that the other party entered into the contract without proper authority.

Systemic Risk refers to (1) the scenario that a disruption at a firm, in a market segment, or
to a settlement system could cause a “domino effect” throughout the financial markets
toppling one financial institution after another or (2) a “crisis of confidence” among
investors, creating illiquid conditions in the marketplace. Systemic risk encompasses the risk
that failure in one firm or one segment of the market would trigger failure in segments of
or throughout the entire financial markets.

Technology risk which includes technical glitches and cyber-attacks.

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A stock broking firm must identify factors that can trigger operational, market, legal,
systemic and credit risk. It needs to establish procedures so that risk management begins at
the point nearest to the assumption of risks. This means adapting trade-entry procedures,
customer documentation, client engagement methods, trading limits, and other normal
activities to maintain management control, generate consistent data, and eliminate
needless exposure to risk.

With regards to “Monitoring of unauthenticated news circulated by SEBI Registered

Market Intermediaries through various modes of communication” SEBI is directed following
to SEBI Registered Market Intermediaries.

• Proper internal code of conduct and controls should be put in place.

• Employees/temporary staff/voluntary workers etc. employed/working in the offices
of market intermediaries do not encourage or circulate rumours or unverified
information obtained from client, industry, any trade or any other sources without
verification.
• Access to social media platforms/ instant messaging services/ VoIP /Blogs/Chat
forums/websites/e-mail or any such medium should either be subject to controlled
supervision or access should not be allowed.
• Logs for any usage of such social media platforms/ instant messaging services/ VoIP
/Blogs/Chat forums/websites/e-mail or any such medium shall be treated as records
and the same should be maintained as specified by the respective regulations which
govern the concerned intermediary.
• Employees should be directed that any market related news received by them
either in their official mail/personal mail/blog or in any other manner, should be
forwarded only after the same has been seen and approved by the Compliance Officer
of the concerned Intermediaries. If an employee fails to do so, he/she shall be
deemed to have violated the various provisions contained in SEBI Act and the
Rules/Regulations framed thereunder, and shall be liable for action. The Compliance
Officer shall also be held liable for breach of duty in this regard.

SEBI regulated market intermediaries also required to report to Stock Exchanges regarding
violations under SEBI (Prohibition of Insider Trading) Regulations, 2015 relating to the Code
of Conduct (CoC) .

SEBI has introduced Chapter IVA in SEBI (Stock Brokers) Regulations, 1992 Institutional
Mechanism for Prevention and Detection of Fraud or Market Abuse 38. Accordingly, it
has been decided that stock brokers shall comply with the following obligations /
mechanisms as laid down in Chapter IVA of the Broker Regulations:
• Systems for surveillance of trading activities and internal controls
• Obligations of the stock-broker and its employees
• Escalation and reporting mechanisms
• Whistle Blower Policy

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[Link]
institutional-mechanism-for-prevention-and-detection-of-fraud-or-market-abuse_84588.html

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3.4 Back Office Operations
The back office exists for three reasons: confirmation, payments, settlements and
accounting. In other words, the back office monitors the post-market processing of
transactions. The back office is where the trade ends.

3.4.1 Trade Enrichment

Trade enrichment is defined as process of including additional information in one instruction

in a trade which is already being executed.

Trade Enrichment is performed automatically after each trade execution. In this step, all
necessary details for the clearing of futures and option contracts, or the settlement of cash
securities are added.

For the purpose of back office operations, the back-office systems maintain masters relating
to brokerage rate client wise, Goods and services tax (GST), stamp duty and Securities
Transaction Tax charge tables.

When the trade data is uploaded into the back office, the above information is appended to
every trade. Post upload of data with all the relevant information, the back-office process is
carried out to arrive at:

• Client wise brokerage

• Client wise obligation for securities and funds
• All the relevant tax amounts to be collected and paid

Back office systems generate obligations towards exchange settlements as well as client
wise contract notes, settlements and tax obligations.

3.4.2 Trade Allocation

In the case of institutional trades, the front office may enter a single order for a particular
client with CP code “INST” and subsequently distribute it across various sub schemes of the
client at the back office end.

For example, hedge fund makes a trade, and manages several portfolios. Often, they will
choose to allocate their trade to various portfolios for a number of reasons. Trade allocation
specifically refers to this process, or more specifically, how the trade is allocated (pro rata,
all or nothing, etc).

Once the trade data is received at the back office, the user will also receive deal sheets from
the front office team in terms of details of allocation to individual schemes. Based on these
instructions, the back office user will then allocate the trade to individual schemes within
the parent fund and generate appropriate contract note. Brokers also need to upload the
allocation details to clearing corporation.

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3.4.3 Clearing and Settlement Process

Clearing and Settlement is a post trading activity that constitutes the core part of equity
trade life cycles. After the trade is confirmed (when securities are obliged to change hands)
the broker who is involved in the transaction issues a contract note at the end of the trade
day. The contract note issued by broker, informs the client of his obligations.
Clearing house/corporation is an entity through which settlement of securities takes place.
The details of all transactions performed by the brokers are made available to the Clearing
House/Corporation by the Stock Exchanges. The Clearing House/Corporation gives an
obligation report to the brokers (clearing member) and custodians who are required to
settle their money/securities obligations within the stipulated time period, failing which
they are required to pay penalties. This obligation report serves as statement of mutual
contentment.

T+1 rolling settlement was completely implemented in the Indian securities market w.e.f.
January 27, 2023. Currently for all securities traded in equity segment Exchanges and
clearing corporation follows the T+1 rolling settlement. In India, the pay-in of securities and
funds for equities (cash segment) for T+1 rolling settlement happen on T+1 day by 11.00
a.m., and pay-out of securities and funds happen on T+1 day by 1.30 p.m. SEBI has advised
Clearing corporation to facilitate the securities for pay-out shall be credited directly to the
respective client’s demat account. As a consequence of the above, the timing of the payout
of securities shall be revised from 1:30 PM to 3:30 PM.

As already stated above, SEBI vide Circular No. SEBI/HO/MRD/MRD-PoD-

3/P/CIR/2024/20dated March 21, 2024 introduced the beta version of T+0 rolling
settlement cycle on optional basis in addition to the existing T+1 settlement cycle in Equity
Cash Markets, for a limited number of scrips.

Typical normal market settlement cycle (T+1 rolling settlement) for cash market is given in
Table 3.1.

Table 3.1

Activity Day (For T+1 Rolling

Settlement)
Trading Rolling Settlement Trading T
Download provisional obligation T
Clearing Custodial Confirmation on or by T +1 working day
Download of final obligation to T +1 working day
Member and Custodian
Settlement Securities and Funds pay in T+1 working day
Securities and Funds pay out T+1 working day
Valuation Debit T+1 working day
Post Settlement Auction on or by T+1 working day
Auction settlement on or by T+2 working day

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In a T+1 rolling settlement, for all trades executed on trading day i.e., T day the obligations
are determined on the T+1 day and settlement on T+1 basis i.e., on the next working day.
For arriving at the settlement day all intervening holidays, which include bank holidays,
Exchange holidays, Saturdays and Sundays are excluded.

3.4.4 Accounting

The stock brokers are required to maintain books of account as prescribed by the Securities
Contracts (Regulation) Rules 1957, SEBI (Stock brokers) Regulations 1992, and requirements
of Stock Exchanges. These are to be maintained for a minimum period of 5 years. In case
such documents are maintained in electronic form, provisions of Information Technology
Act, 2000 in this regard shall be complied with.

[Link] Different types of accounts, records, etc.

The broker has to keep and maintain the required books of accounts, records, documents
as per Rule 15 of the Securities Contracts (Regulation) Rules 1957 and Regulation 17 of SEBI
(Stock Broker) Regulations, 1992. Stock brokers are required to maintain separate books
for each Stock Exchange in which they operate. Further, for any Stock Exchange, a separate
set of ledger accounts of clients has to be maintained for each particular segment of the
Exchange in which the stock broker operates. The stock brokers are also required to
maintain client-wise separate books of accounts. With respect to segments forming part of
clearing corporation interoperability, client financial ledgers can be prepared Segment wise
and consolidated across Exchanges. However, during inspections, Stock Brokers should be
able to demonstrate the break-up of trades (Segment-wise & Exchange-wise) for the bills so
posted.
The books that shall be maintained by a broker include, register of transactions (sauda
book), clients ledger, general ledger, journals, cash book, bank pass book, securities register,
counterfoils or duplicates of contract notes, margin deposit book, KYC, client account
opening form etc. Some of these books/transaction records are briefly discussed below.

• The register of transactions (sauda book) is to include each transaction effected.

This would show the name of the security, its value, rates gross and net of brokerage
and names of the clients etc.

• The client’s ledger, as the name suggests, has the details of all clients, and their
transactions through the broker.

• The general ledger accounts for all general transactions including expenses,
overheads salaries, petty cash, etc.

• The journal is the accounting book of the general ledger. Any adjustment entries for
e.g., interest receivable, etc., are accounted here.

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 • The cash book and bank pass book contain records of all cash and cheque
transactions and are normally balanced daily.

• Documents register containing, inter alia, particulars of securities received and

delivered in physical form and the statement of account and other records relating
to receipt and delivery of securities provided by the depository participants in
respect of dematerialized securities.

• A contract note is a confirmation of trade done on a particular day for and on behalf
of a client. A contract note issued in the format and manner prescribed by the
Exchanges establishes a legally enforceable relationship between the stock broker
and the client in respect of settlement of trades executed on the Exchange as stated
in the contract note. Stock brokers are required to maintain duplicate copy or
counter foil of the contract notes.
• Written consent of clients in respect of contracts entered into as principals.
• The margin deposit book contains details of margins paid and collected and payable
and collectable.
• Member’s contract books showing details of all contracts entered into by him with
other members of the same exchange or counterfoils or duplicates of memos of
confirmation issued to such other members.
• Client account opening form in the format as may be specified by the Board.

As per regulation 18 of the SEBI (Stock Broker) Regulations, 1992, every stock broker shall
preserve the books of account and other records maintained under regulation 17 for a
minimum period of five years.
The broker also has to keep copies of KYC forms, agreement with clients, as part of his
records. Stock brokers shall also maintain separate ledgers reflecting the customers'
transactions which shall include, chronological and customer-wise record of money received
and paid, chronological and customer-wise record of securities received and delivered
specifically, chronological record of transactions made in a consolidated customers' account
and record of the customer account information.

Every member broker shall keep such books of accounts, as will be necessary, to
show and distinguish in connection with his business as a member:
a. Moneys received from or on account of each of his clients and
b. The moneys received and the moneys paid on Member’s own account

Brokers need to maintain proper records of client collateral and to prevent misuse of client
collateral. Brokers should have adequate systems and procedures in place to ensure that
client collateral is not used for any purposes other than meeting the respective client’s
margin requirements / pay-ins. Brokers should also maintain records to ensure proper audit
trail of use of client collateral.

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3.4.5 Information Technology (IT)

Any stock broking office needs to have a complete integrated system that optimizes current
business processes and provides a single integrated solution that covers all the aspects of
the stock brokering industry. The system should cover all areas of brokerage operations and
management, including, but not limited to, back office management, order management,
customer accounting, general accounting, branches management and control, accounts
managers, on line trading system, commissions builder, archiving system, auditing system,
invoicing, risk management and control. A summary of the operations is given below:
• Business Functions include customer database and document archiving including
customer signature, customer accounting, portfolio management, risk
management, auditing system, on-line trading system, general accounting system,
etc.
• Technical Functions include, support and standby database function, disaster
recovery, customer database, customer data, etc.
• Trades functions include, automatic entry of daily executions, automatic
identification of new customers, automatic link of executions to orders, etc.
• The IT will also include an order management system with features of sell orders,
buy orders, order execution, log of orders, orders confirmation, etc.
SEBI has mandated that there should be comprehensive testing of software deployed by the
brokers before release to market. These tests will include user acceptance testing on the
test environment of the exchange and mock testing. Mock testing and UAT test reports are
required to be verified and certified by system auditors appointed by the brokers.
SEBI has also advised the stock brokers to implement the following measures to protect
against trading disruption due to any kind of failure on part of the software vendor:39
(a) explore the possibility of establishing a 'software escrow arrangement' with their
existing software vendors. This arrangement would enable the brokers to transit to
another software vendor in those circumstances when the existing vendor is unable
to provide software and other services in a timely manner.
(b) In case of large stock brokers, consider engaging more than one vendor to reduce
dependency.
(c) Certain conditions should be included in the agreement with the software vendor.
These conditions relate to access to design documents; training of its staff with
regard to software usage and maintenance; appropriate penalty clauses for cases of
disruptions to the trading system of the broker and co-operation in case of software
audit including forensic audit (when required).

SEBI has mandated periodic system audit to members based on the category of stock
brokers (broker using Exchange system, Broker using CTCL/DMA, Broker using Algorithmic
trading etc.). The system audit mainly covers system controls and capabilities, risk
management system, password security, network integrity, access control, back-up
recovery, database security, software change management etc. SEBI vide circular dated

39 Vide SEBI circular no: CIR/MRD/DP/07/2014 dated February 11, 2014.

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January 31, 2025, introduced technology based mechanism to monitor and supervise the
way in which the system audits are conducted. 40

Since stock brokers and depository participants perform significant functions in providing
services to holders of securities, it is desirable that these entities have robust cyber
security and cyber resilience framework in order to provide essential facilities and perform
systemically critical functions relating to securities market. In view of the above, SEBI,
prescribed the framework for Cyber Security &Cyber Resilience for Stock Brokers /
Depository Participants.41 Further, the Stock Brokers / Depository Participants are
mandated to conduct comprehensive cyber audit at least once in a financial year. All
Stock Brokers / Depository Participants is required to submit with Stock
Exchange/Depository a declaration from the MD/ CEO/ Partners/ Proprietors certifying
compliance by the Stock Brokers / Depository Participants with all SEBI Circulars and
advisories related to Cyber security from time to time, along with the Cyber audit report.42

The stock brokers desirous of outsourcing their activities shall not, however, outsource
their core business activities and compliance functions. An example of core business
activity may be –execution of orders and monitoring of trading activities of clients in
case of stock brokers. Regarding Know Your Client (KYC) requirements, the stock brokers
shall comply with the provisions of Securities and Exchange Board of India {KYC (Know
Your Client) Registration Agency} Regulations, 2011 and Guidelines issued thereunder
from time to time. In order to address the concerns arising from the outsourcing of activities
by intermediaries the principal of outsourcing has been provided by the regulators which
shall be followed by the stock brokers who wants to outsource their activities to third
parties. SEBI has also provided framework for adoption of cloud services by SEBI regulated
entities 43.

[Link] Business Continuity Plan / Disaster Recovery Management

It is desirable that all stock brokers have business continuity plans. Ideally, the broker must
create and maintain a written business continuity plan (BCP) identifying procedures relating
to an emergency or significant business disruption. Such procedures must be reasonably
designed to enable the broker to meet its existing obligations to customers. In addition, such
procedures must address the member’s existing relationships with other broker-dealers and
counter-parties. Stock brokers with a minimum client base across the exchanges, as may
be specified by stock exchanges from time to time, shall mandatorily establish
business continuity/DR set up.

40
Vide SEBI Circular no.: SEBI/HO/MIRSD/TPD/CIR/2025/10 dated January 31, 2025 on Framework for Monitoring and
Supervision of System Audit of Stock Brokers (SBs) through Technology based Measures.
41
Vide SEBI circular SEBI/HO/MIRSD/CIR/PB/2018/147 dated December 03, 2018
42
Vide SEBI circular SEBI/HO/MIRSD/TPD/P/CIR/2022/80 dated June 07, 2022
43
SEBI circular Ref. No. SEBI/HO/ITD/ITD_VAPT/P/CIR/2023/033 dated March 06, 2023.

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[Link] Handling of Technical Glitches

With increasing dependence on technology in securities market, there is a rise in instances

of glitches in trading members’ systems, some of which lead to disruption of trading services
and investor complaints. To address this issue, SEBI has taken various measures which are
given below:

Investor Risk Reduction Access (IRRA) platform in case of disruption of trading services
provided by the Trading Member44:

• A joint platform to provide Investor Risk Reduction Access (IRRA) service shall be
developed by the exchanges to provide investors an opportunity to square off/close the
open positions and /or cancel pending orders in case of disruption of trading services
provided by the Trading Member.
• The IRRA service shall support multiple segments across multiple exchanges.
• Trading Members, upon facing technical glitches which lead to disruption of trading
services, can request for enablement of the IRRA service as per the procedures specified
by the stock exchanges from time to time.
• Once the service is enabled, all the investors of the TM shall be informed by the
exchange of the availability of the service through email/SMS and a public notice on
exchanges’ website. TMs shall also communicate the same by displaying on their
website.
• Investor can use IRRA service to square off/close the open position and/or cancel the
pending order. The IRRA service shall not permit any action that increases the risk
of the investor.
• Further, IRRA service shall also provide the TM with access to an Admin Terminal,
through which the TM can monitor the actions of investors and also carry out the
actions as mentioned above, on instructions of investors.

Stock Exchanges have introduced the IRRA platform for their trading members.

Business Continuity for Interoperable Segments of Stock Exchanges45

The following has been decided by SEBI for the interoperable segments of stock exchanges
(i.e. Cash Market/ Equity Derivatives/ Currency Derivatives/ Interest Rate Derivatives etc.):
• Common scrips, derivatives on single stocks or correlated indices, currency derivatives
segment and interest rate derivatives: If identical or correlated trading products are
available on another trading venue, then participants can hedge their open positions by
taking offsetting positions in identical or correlated indices on other exchange. Further,
as these segments are interoperable, taking offsetting positions in other trading venue

44
[Link]
platform-in-case-of-disruption-of-trading-services-provided-by-the-trading-member-tm-_66785.html
45
[Link]
stock-exchanges_89032.html

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 would net off such open positions for end clients and release the margin. Hence, no
separate treatment is required for such category of products.
• Scrips exclusively listed on an exchange: To ensure continuity, exchanges may create
reserve contracts for scrips (i.e. exclusively listed scrips on other exchange) and single
stock derivatives not traded on their exchange (and available on other exchange), to be
invoked at the time of outage on the other exchange.
• Index derivatives products not having correlated index derivatives products on another
exchange: Exchange which does not have a highly correlated index derivatives product
with one available on other exchange may consider creating such an index and
introducing derivatives contracts on it, in line with extant Regulatory provisions. The
aforesaid would provide an avenue to hedge positions in index derivatives products of
an exchange that suffered an outage.
• Intimation to SEBI and Alternative Trading Venue: The affected exchange should comply
with extant Regulatory requirements with regard to handling of technical glitch/
outage and intimate about the invocation of the instant business continuity
mechanism to the alternative trading venue and SEBI within 75 minutes of
occurrence of impact. The alternative trading venue would invoke the business
continuity plan as per the Standard Operating Procedure (SOP) within 15 minutes from
such intimation.
• NSE would act as an alternative trading venue for BSE and vice-a-versa. Both
exchanges would prepare a joint SOP that would include plan to be invoked at the time
of outage on one exchange along with flow of activity involving the affected exchange
and its alternative trading venue and roles/responsibility of each of them. Further, the
SOP shall also cover changes, if any, in the systems of stock brokers / CCs to implement
the measures mentioned at para 3 of the circular for end investors. The aforesaid SOP
should be submitted to SEBI within 60 days from the date of the Circular.

Framework to address the ‘technical glitches’ in Stock Brokers’ Electronic Trading

Systems46. Salient features of the SEBI circular are given below.

• Stock brokers shall inform about the technical glitch to the stock exchanges immediately
but not later than 1 hour from the time of occurrence of the glitch.
• Stock brokers shall submit a Preliminary Incident Report to the Exchange within T+1 day
of the incident (T being the date of the incident). The report shall include the date and
time of the incident, the details of the incident, effect of the incident and the
immediate action taken to rectify the problem.
• Stock brokers shall submit a Root Cause Analysis (RCA) Report (as per format specified
by SEBI) of the technical glitch to stock exchange, within 14 days from the date of the
incident.
• RCA report submitted by the stock brokers shall, inter-alia, include time of incident,
cause of the technical glitch (including root cause from vendor(s), if applicable),
duration, chronology of events, impact analysis and details of corrective/preventive
measures taken (or to be taken), restoration of operations etc.

46
[Link]
brokers-electronic-trading-systems_65466.html

100
• Increasing number of investors may create additional burden on the trading system of
the stock broker and hence, adequate capacity planning is prerequisite for stock
brokers to provide continuity of services to their clients.
• In order to streamline the reporting process of technical glitches across MIIs and
creation of centralized repository of technical glitches, SEBI has developed a web-based
portal, i.e. Integrated SEBI Portal for Technical Glitches (iSPOT), for submission of
preliminary and final RCA reports of technical glitches by the MIIs.
Proactively and independently monitoring technical glitches shall be one of the approaches
in mitigating the impact of such glitches. In this context, the stock exchange has advised to
build API based Logging and Monitoring Mechanism (LAMA) to be operated between
stock exchanges and specified stock brokers’ trading systems. Under this mechanism,
specified stock brokers shall monitor key systems & functional parameters to ensure
that their trading systems function in a smooth manner.
Candidates can refer SEBI circular dated January 09, 2023, regarding Standard Operating
Procedure for handling of Stock Exchange Outage and extension of trading hours thereof.

[Link] Cyber Security & Cyber Resilience Framework (CSCRF) for Stock Brokers /
Depository Participants47

Rapid technological developments in securities market highlighted the need for

maintaining a robust cyber security and cyber resilience framework to protect the integrity
of data and guard against breaches of privacy. Since stock brokers and depository
participants perform significant functions in providing services to holders of securities, these
entities should have robust cyber security and cyber resilience framework. This shall provide
for essential facilities and perform systemically critical functions relating to securities
market. Cyber security framework includes measures, tools and processes that are intended
to prevent cyber‐attacks and improve cyber resilience.
In order to strengthen the cybersecurity measures in Indian securities market, and
to ensure adequate cyber resiliency against cybersecurity incidents/ attacks,
Cybersecurity and Cyber Resilience Framework (CSCRF) for SEBI Regulated Entities has
been formulated recently by SEBI (SEBI circular dated August 20, 2024) in consultation
with the stakeholders. The CSCRF aims to provide standards and guidelines for
strengthening cyber resilience and maintaining robust cybersecurity of SEBI REs.
This framework shall supersede existing SEBI cybersecurity circulars/ guidelines/
advisories/ letters (list of such superseded circulars/ guidelines/ advisories/ letters are
given as part of the framework. CSCRF shall come into effect, in phased manner, starting
from January 1, 2025 onwards in phase manner.. The key objective of CSCRF is to address
evolving cyber threats, to align with the industry standards, to encourage efficient audits,
and to ensure compliance by SEBI Res. As per the CSCRF, the following REs are constituted
as the Market Infrastructure Institutions (MIIs):
a. Stock Exchanges
b. Depositories
c. Clearing Corporations

47
SEBI Circular No.: SEBI/HO/ITD-1/ITD_CSC_EXT/P/CIR/2024/113 dated August 20, 2024 on Cybersecurity and Cyber
Resilience Framework (CSCRF) for SEBI Regulated Entities (REs).

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d. KYC Registration Agencies (KRAs)
e. Qualified Registrars and Transfer Agents (QRTAs)
Cyber Resilience is an organization’s ability to prepare and respond to a cyber‐attack and to
continue operation during, and recover from, a cyber‐attack. The Cyber Security and Cyber
Resilience Framework is based on 5 cyber resiliency goals:
i. Anticipate: Maintain a state of informed preparedness from adversary attacks.
ii. Withstand: Continue essential business functions at times of adversary attacks.
iii. Contain: In the event of cyber-attacks, localise containment of crisis and isolate
trusted functions from untrusted ones to continue business operations.
iv. Recover: Restore business functions to the maximum extent, subsequent to
adversary attacks.
v. Evolve: To change business functions and its supporting cyber capabilities to
minimize adverse impacts of adversary attacks (actual or predicted).
These cyber resiliency goals have been linked with the following cybersecurity functions -
Governance, Identify, Protect, Detect, Respond, Recover.
CSCRF mandates that all REs are required to establish appropriate security monitoring
mechanisms through Security Operation Centre (SOC). The onboarding of SOC can be
done through RE’s own/group SOC or Market SOC or any other third-party managed SOC
for continuous monitoring of security events and timely detection of anomalous activities.
As compliance with the cybersecurity guidelines may be onerous for smaller REs due to the
lack of knowledge and expertise in cybersecurity and the cost factor involved in setting up
own SOC. Therefore, CSCRF mandates NSE and BSE to set up Market SOC(M-SOC) with the
objective of providing cybersecurity solutions to such categories of Regulated Entities.

[Link] Safeguards to avoid trading disruption in case of failure of software vendor

Software vendors who provide software to market participants and market infrastructure
institutions for the purpose of trading, risk management, clearing and settlement play
a crucial role in the securities market. Any inability on the part of such software vendors
to provide software or related services in timely and continuous manner may create a
situation of stress in the securities market.

It was recommended that adequate mechanism/ procedure should be in place to ensure

smooth transition by stock broker(s) to another software vendor in case of inability of the
existing software vendor to provide software and related services in timely and continuous
manner. Stock brokers have advised to take the following measures:
a) Explore the possibility of establishing a 'software escrow arrangement' with
existing software vendors. In case of large stock brokers, reducing dependence on a
single software vendor for trading and risk management systems, by engaging more
than one software vendor may be considered.

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[Link] Framework for Adoption of Cloud Services by SEBI Regulated Entities (REs)

SEBI vide its circular SEBI/HO/ITD/ITD_VAPT/P/CIR/2023/033 dated March 06, 2023,

provided “Framework for Adoption of Cloud Services by SEBI Regulated Entities (REs)”. The
major purpose of this framework is to highlight the key risks, and mandatory control
measures which REs need to put in place before adopting cloud computing. The
document also sets out the regulatory and legal compliances by REs if they adopt
such solutions. This cloud framework is applicable for adoption of public cloud and
community cloud. Consequently, REs are permitted to deploy public cloud and community
cloud models, subject to the conditions specified in above circular. A private cloud
shall be considered as an on-premise deployment model and consequently, private
cloud deployments shall be governed by SEBI circulars (for example cyber security circular,
outsourcing circular, BCP-DR, etc.), guidelines, advisories, etc. issued from time to time.
Therefore, private cloud deployments (by REs) are permitted, however, such
deployments may not be governed by this cloud framework. A hybrid cloud is a
combination of two or more out of public cloud, community cloud and private cloud.
Therefore, this cloud framework as well as the relevant SEBI circulars/ guidelines/
advisories shall be applicable for hybrid cloud deployments. In view of the above,
hybrid cloud deployment is permitted, subject to the conditions specified in the above
SEBI circular Deployment of any other cloud model is prohibited unless explicitly
permitted under this framework. SEBI may allow deployment of other models after
due consultations. The same may be specified by SEBI from time to time.
The cloud framework is a principle-based framework which covers Governance, Risk and
Compliance (GRC), selection of Cloud Service Providers (CSPs), data ownership and data
localization, due-diligence by REs, security controls, legal and regulatory obligations, DR &
BCP, and vendor lock-in risk. The principles are broadly stated guidelines to set
the standards by which RE must comply with while adopting cloud services.

3.4.6 Securities Transaction Tax48

Securities Transaction Tax (STT) is levied on every purchase or sale of securities that are
listed on the Indian Stock Exchanges. This includes shares, derivatives or equity-oriented
mutual funds units. STT is collected by the broker from their client and remitted to the Stock
Exchanges /Clearing Corporations.

The following STT rates are applicable for trades executed in the Equity segment of the Stock
Exchange:

Current
Sr. Effective
No. Taxable securities transaction Rates Payable by
Purchase of an equity share in a company or a
1. unit of a business trust, where- 0.100 per cent Purchaser-

48
[Link]

103
 (a) the transaction of such purchase is entered
into in a recognized stock exchange and
(b) the contract for the purchase of such share or
unit is settled by the actual delivery or transfer of
such share or unit.
Sale of an equity share in a company or a unit of
a business trust, where-
(a) the transaction of such sale is entered into in
recognized stock exchange and
(b) the contract for the sale of such share or unit
is settled by the actual delivery or transfer of such
2. share or unit. 0.100 per cent Seller
Sale of a unit of an equity-oriented fund, where-
(a) the transaction of such sale is entered into in
recognized stock exchange and
(b) the contract for such unit is settled by the
2A actual delivery or transfer of such share or unit 0.001 per cent Seller
Sale of an equity share in a company or a unit of
an equity oriented fund or a unit of a business
trust, where-
(a) the transaction of such sale is entered into in
a recognized stock exchange and such
(b) the contract for the sale of such share or unit
is settled otherwise than by the actual delivery or
3 transfer of such share or unit . 0.025 per cent Seller
The following rates are applicable for transactions executed in the Equity Derivatives
Segment:

Sr. Current Effective

No. Taxable securities transaction Rates Payable by
0.100 per cent on Seller of an
1 Option in equity securities & equity Indices premium option
Option in equity securities & equity indices, 0.125 per cent on Buyer of an
2 where option is exercised intrinsic value option
Sale of a futures in equity securities & equity
3 indices 0.020 per cent Seller
STT rate applicable to the delivery-based transaction (@0.1% by both receiver as well as
giver of securities) shall also be applicable on the physical settled stock derivatives (both
futures and options). STT is not applicable on Currency Derivatives, Interest Rate Derivatives
and Debt Securities transactions.

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 Stock Exchanges/Clearing Corporation provide a report to the brokers/members at the end
of each trading day. The report contains information on the total STT liability, trading
member wise STT liability, client wise STT liability and also the detailed computations for
determining the client wise STT liability.

3.4.7 Stamp Duty with respect to securities market instrument49

In order to facilitate ease of doing business and to bring in uniformity of the stamp duty on
securities across States and thereby build a pan-India securities market, the Central
Government, through requisite amendments in the Indian Stamp Act, 1899 and Rules made
thereunder, has created the legal and institutional mechanism to enable states to collect
stamp duty on securities market instruments at one place by one agency (through Stock
Exchange or Clearing Corporation authorized by it or by the Depository) on one Instrument.
A mechanism for appropriately sharing the stamp duty with relevant State Governments
has also been developed which is based on the state of domicile of the buyer.

The relevant provisions of the Finance Act, 2019 amending the Indian Stamp Act, 1899 and
the Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations
and Depositories) Rules, 2019 were notified simultaneously. The Amendments in the Indian
Stamp Act, 1899 brought through Finance Act 2019 and Rules made thereunder came into
effect from July 01, 2020.

Following are some of the salient features:

i. The stamp-duty on sale, transfer and issue of securities shall be collected on behalf of
the State Government by the collecting agents who then shall transfer the collected
stamp-duty in the account of the concerned State Government.
ii. In order to prevent multiple incidences of taxation, no stamp duty shall be collected by
the States on any secondary record of transaction associated with a transaction on
which the depository / stock exchange has been authorised to collect the stamp duty.
iii. The collecting agents shall be the Stock Exchanges or authorized Clearing Corporations
and the Depositories.
iv. For all exchange based secondary market transactions in securities, Stock Exchanges
shall collect the stamp duty;
v. The collecting agent shall transfer the collected stamp-duty in the account of concerned
State Government with the Reserve Bank of India or any scheduled commercial bank, as
informed to the collecting agent by the Reserve Bank of India or the concerned State
Government.

Mechanism similar to STT has been implemented by Exchange/Clearing Corporation for

determination and collection of stamp duty from brokers. Brokers have to collect the stamp
duty from their clients and remit to Exchange/Clearing Corporation.

49
[Link]
amp_act,_2019.pdf and [Link]

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3.4.8 Bulk Deals & Block Deals

Bulk Deals
With a view to imparting transparency in bulk deals and to prevent rumors/speculation
about such deals causing volatility in the scrip price, it was decided by SEBI to bring about
greater disclosure of such bulk deals as mentioned below: 50
• The disclosure shall be made with respect to all transactions in a scrip where total
quantity of shares bought/sold is more than 0.5% of the number of equity shares of
the company listed on the stock exchange. The quantitative limit of 0.5% can be
reached through one or more transaction executed during the day in the normal
market segment.
• The brokers shall disclose to the Stock Exchange the name of the scrip, name of the
client, quantity of shares bought/sold and the traded price.
• The disclosure shall be made by the brokers immediately upon execution of the
trade. In case of Bulk Deals:
o Single Trade: Immediately upon the execution of the order where the traded
quantity either buy or sell on account of any trade (client / proprietor) is
more than 0.5% of the number of equity shares of the company listed on the
stock exchange.
o Cumulative Trades for the Day: Within one hour from the closure of the
trading hours, the quantity traded on that day either purchases or sale under
proprietary or any single client code is more than 0.5% of the number of
equity shares of the company listed on the stock exchange
The Stock Exchanges shall disseminate the aforesaid information on the same day after
market hours to the general public.

Block Deals (Block Trading Session)

In September 2005, SEBI permitted the Stock Exchanges to set up a separate trading window
called block window.51 The Exchange has introduced revised Block deal window mechanism
from January 01, 2018.52 This window allows large size trades to be executed as a single
transaction without putting the buyer or seller at a disadvantageous position. A trade, with a
minimum value of Rs.10 crore executed through a single transaction on this separate
window of the stock Exchange constitutes a “block deal” as distinguished from “bulk” deal.

“Block Deals” are subject to the following conditions:

• ‘Block Deal’ windows is available twice a day under the names “Morning Block Deal
Window” and “Afternoon Block Deal Window”. The morning block deal window

50 Vide SEBI Circular SEBI/MRD/SE/Cir-7/2004) dated January 14, 2004

51Vide SEBI circular number: MRD/DoP/SE/Cir- 19 /05 dated September 2, 2005
52
Vide SEBI Circular number: Cir/MRD/DP/118/2017 dated October 26, 2017

106
 operates between 8.45 a.m. to 9.00 a.m. and the afternoon window operates
between 2.05 p.m. to 2.20 p.m.
• The reference price for execution of block deals in the Morning Window shall be the
previous day closing price or adjusted close price/base price of the stock. The stock
exchanges shall set their trading hours between 8.45 a.m. to 9.00 a.m. with a
stipulation that between this time, the stock exchanges shall operate only for
executing trades in the block deal window.
• The reference price for execution of block deals in the afternoon window shall be
the volume weighted average market price (VWAP) of the trades executed in the
stock in the cash segment between 01.45 p.m. to 02.00 p.m. Between the period
02.00 p.m. to 02.05 p.m., the stock exchanges shall calculate and disseminate
necessary information regarding the VWAP applicable for the execution of block
deals in this window. In case no trades are executed in the security in the cash
segment between 01:45 PM to 02:00 PM, the reference price shall be considered as
follows:
o VWAP based on trades executed in the security between 9:00 am to 1:45 pm
shall be taken as reference price. For the computation of VWAP, the trades
of pre-open / special pre-open session, shall also be considered.
o In case VWAP not available as per above, then previous day close price or
adjusted close price / base price of stock
• The orders may be placed in this window at a price not exceeding +1% of the
applicable reference price in the respective block deal window.
• An order may be placed for a minimum value of Rs.10 crore.
• Every trade executed in this window must result in delivery and shall not be squared
off or reversed.
• The broker shall make disclosure of the block deal to the Exchanges with client
information. The stock Exchanges shall disseminate the information on block deals
such as the name of the scrip, name of the client, quantity of shares bought/sold,
traded price, etc. to the general public on the same day, after the market hours.
• The applicability of all other trading and settlement related practices as well as
surveillance and risk containment measures shall be ensured by the stock
exchanges.

3.4.9 Regulatory Compliances

The stock broker has to follow certain regulatory compliances under the law, rules,
regulations and bye laws of SEBI and the Exchanges. These are mandatory and non-
compliance to these rules, regulations, circulars, laws attracts penal action. However, the
main compliances include:
• Maintain or furnish documents as prescribed under the various sub-sections of
section 15 of SEBI Act;

107
 • Maintenance of different types of Books as prescribed under SC(R)R 1957, SEBI Stock
Broker regulation, 1992 (e.g. Sauda book etc.);
• Compliance related to use of terminal, office management etc.;
• Compliance related to dealing with other intermediaries including Authorized
Person;
• Compliance related to dealing with clients;
• Sending account statements to clients;
• Submission of various periodic reports to the stock Exchanges etc.

These are covered in detail in section 4.2 under Regulatory Compliances and Reporting.

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Chapter 3: Sample Questions

Questions to assess your learning:

1. Direct Market Access facility is mainly introduced for __________________.

a. Retail Investors.
b. Institutional Clients.
c. Specific International Broking Firms.

2. Which of the statement is false?

a. On receipt of the order at the Exchange system, an order confirmation is sent to
the broker.
b. Depending upon the order terms and conditions and the actual prevailing market
prices, the order may get executed immediately, partially or fully.
c. The order can be entered for buy or sell irrespective of whether the client has
sufficient balance of funds or securities in his account.

3. A contract note is __________________________.

a. A legal document which is entered upon by the client with his broker before
entering into any transaction.
b. Confirmation of trade done during the particular day with all details of which
securities have been bought or sold, at price etc.
c. A note which holds margin details.

4. Maintenance of different types of Books by stock brokers is prescribed under

_______.
a. SC(R)R 1957
b. SCRA 1956
c. SEBI Intermediaries Regulations
d. Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations)
Regulations, 2018

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