Guidelines Issued by Reserve Bank of India for the Regulation of Financial Markets
1) Management oversight, policy/operational guidelines – The management of a Primary Dealer should bear primary responsibility for ensuring maintenance of appropriate standards of conduct and adherence to proper procedures by the entity. Primary Dealers (PD) should frame and implement suitable policy guidelines on securities transactions. Operational procedures and controls in relation to the day-to-day business operations should also be worked out and put in place to ensure that operations in securities are conducted in accordance with sound and acceptable business practices. With the approval of respective Boards, the PDs should clearly lay down the broad objectives to be followed while undertaking transactions in securities on their own account and on behalf of clients, clearly define the authority to put through deals, procedure to be followed while putting through deals, and adhere to prudential exposure limits, policy regarding dealings with brokers, systems for management of various risks, guidelines for valuation of the portfolio and the reporting systems etc. While laying down such policy guidelines, the Primary Dealers should strictly observe Reserve Bank’s instructions on the following:
1) Ready Forward deals
2) Transactions through SGL Account
3) Internal Controls/Risk Management System
4) Dealings through Brokers
5) Accounting Standards
6) Audit, Review and Reporting
Any other instructions issued from time to time The internal policy guidelines on securities transactions framed by the PD, duly certified by its management to the effect that they are in accordance with the RBI guidelines and that they have been put in place, may be perused by the Statutory Auditors and commented upon as to the conformity of the guidelines with the instructions/guidelines issued by RBI. The effectiveness of the policy and operational guidelines should be periodically evaluated.
2) Prohibition of short selling of securities – The Primary Dealers should not put through any sale transaction without actually holding the security in its portfolio i.e. under no circumstances, a PD should hold a oversold position in any security.
3) Concurrent audit of securities transactions – Securities transactions should be separately subjected to a concurrent audit by internal/external auditors to the extent of 100% and the results of the audit should be placed before the CEO(Chief Operating Officer)/ CMD(Chief Managing Director) of the PD once every month. The compliance wing should monitor the compliance on ongoing basis, with the laid down policies and prescribed procedures, the applicable legal and regulatory requirements, the deficiencies pointed out in the audits and report directly to the management.
4) All problem exposures where security of doubtful value, diminution of value to be provided for – All problem exposures, if any, which are not backed by any security or backed by security of doubtful value should be fully provided for.
5) Provision also for suits under litigation – Even in cases where a PD has filed suit against another party for recovery, such exposures should be evaluated and provisions should be made to the satisfaction of auditors.
6) Claims against the PD to be taken note of and provisions made – Any claim against the PD should also be taken note of and provisions made to the satisfaction of auditors.
7) Problem exposures to be reflected clearly in Profit and Loss Account – The profit and loss account should, reflect the problem exposures, if any, as also the effect of valuation of portfolio, as per the instructions issued by the Reserve Bank, if any, from time to time. The report of the statutory auditors should contain a certification to this effect.
8) Business through brokers and contract limits for approved brokers – A disproportionate part of the business should not be transacted through only one or a few brokers. PDs should fix aggregate contract limits for each of the approved brokers. A limit of 5%, of total transactions (both purchase and sales) entered into by a PD during a year should be treated as the aggregate upper contract limit for each of the approved brokers. This limit should cover both the business initiated by a PD and the business offered/brought to the PD by a broker. PDs should ensure that the transactions entered into through individual brokers during a year normally does not exceed this limit. However, the norm would not be applicable to PD’s dealings through other Primary Dealers.
9) Investments in and Underwriting of Shares, Debentures and PSU Bonds and Investments in Units of Mutual Funds-Guidelines. PDs should formulate, within the above parameters, their own internal guidelines, as approved by their Board of Directors, on securities transactions either by directly subscribing or through secondary market with counter-party or counter-party group, including norms to ensure that excessive exposure against any single counter-party or group or product is avoided and that due attention is given to the maturity structure and the quality of such transactions. The PDs will also need to take into account the fact that such securities are subject to risk weight and necessary depreciation has to be fully provided for.
10) Material changes in circumstances – The PDs should report any material changes in circumstances such as change in the ownership structure, business profile, organization etc. affecting the conditions of licensing as PD to RBI immediately.
Guidelines Issued by Securities and Exchange Board of India for the Regulation of Securities Markets
1)Prohibition of certain dealings in securities
a) No person shall buy, sell or otherwise deal in securities in a fraudulent manner.
2)Prohibition against Market Manipulation
No person shall –
(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;
(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;
(c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions;
(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities;
(e) pay, offer or agree to pay or offer, directly or indirectly, to any person any money or money’s worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing, or causing fluctuations in the market price of securities19.
3) Prohibition of misleading statements to induce sale or purchase of securities
No person shall make any statement, or disseminate any information which –
(a) is misleading in a material particular; and
(b) is likely to induce the sale or purchase of securities by any other person or is likely to have the effect of increasing or depressing the market price of securities, if when he makes the statement or disseminates the information-
(i) he does not care whether the statement or information is true or false; or
(ii) he knows, or ought reasonably to have known that the statement or information is misleading in any material particular.
Nothing in this sub-regulation shall apply to any general comments made in good faith in regard to –
(a) the economic policy of the Government,
(b) the economic situation in the country,
(c) trends in the securities markets, or
(d)any other matter of a similar nature, whether such comments be made in public or in private.
4) Prohibition on unfair trade practice relating to securities
No person shall –
(a) in the course of his business, knowingly engage in any act, or practice which would operate as a fraud upon any person in connection with the purchase or sale of, or any other dealing in, any securities;
(b) on his own behalf or on behalf of any person, knowingly buy, sell or otherwise deal in securities, pending the execution of any order of his client relating to the same security for purchase, sale or other dealings in respect of securities. Nothing contained in this clause shall apply where according to the clients instruction, the transaction for the client is to be effected only under specified conditions or in specified circumstances;
(c) intentionally and in contravention of any law for the time being in force delays the transfer of securities in the name of the transferee or the dispatch of securities or connected documents to any transferee;
(d) Indulge in falsification of the books, accounts and records (whether maintained manually or in computer or in any other form);
(e) When acting as an agent, execute a transaction with a client at a price other than the price at which the transaction was executed by him, whether on a stock exchange or otherwise, or at a price other than the price at which it was offset against the transaction of another client