Stock Exchange's Inspection, Internal Audit by CS/CA/CWA in practice, Default & Implementation - SEBI Master Circular

SEBI/MIRSD/Master Cir-04/2010 dated 17th March 2010

Master Circular on Oversight of Members (Stock Brokers/Trading Members/Clearing Members of any Segment of Stock Exchanges and Clearing Corporations).  This master circular consolidates and updates the requirements/obligations with regard to oversight of members (Inspection by Stock Exchanges/Clearing Corporations, Internal Audit and Default)

 

I. Inspection of Members by Stock Exchanges / Clearing Corporations
The Stock Exchange or the Clearing Corporation shall

1. formulate a policy for inspection of members and follow up action thereon.
2. shall inspect all active members in various segments every year covering,

a. Compliance with the relevant provisions of the Act, Rules and Regulations made there under, Rules and Regulation of the Stock Exchange / Clearing Corporation and the circulars issued by SEBI and Stock Exchanges / Clearing Corporations from time to time, and
b. Efficacy of the investor grievance redressal mechanism and discharge of various obligations towards clients, for the preceding one year unless a longer period is warranted in the circumstances.

An illustrative list of common violations/deficiencies observed by SEBI in its inspections of members are,

• Relating to KYC
• Relating to Contract notes
• Relating to Investor services
• Relating to funds and securities
• Relating to terminals
• OTHERS

The Stock Exchanges and Clearing Corporations are advised to bring this list to the notice of members with an advice to them to avoid these violations/deficiencies.

The Stock Exchange or the Clearing Corporation, as the case may be, shall initiate all the follow up action – remedial, penal and disciplinary - required on inspection findings, within 6 months from the conclusion of the inspection.

II. Internal Audit
The member shall carry out complete internal audit on a half yearly basis by an independent qualified Chartered Accountant, Company Secretary or Cost and Management Accountant who is in practice and does not have any conflict of interest.

The audit shall cover, inter alia,
a. the existence, scope and efficiency of the internal control system,
b. compliance with the provisions of the SEBI Act, 1992, Securities Contracts
(Regulation) Act 1956, SEBI (Intermediaries) Regulations, 2008, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, circulars issued by SEBI from time to time, Bye Laws and Regulations and circulars issued by the Stock Exchange / Clearing Corporation,
c. data security and insurance in respect of operations, and
d. efficacy of the investor grievance redressal mechanism and discharge of various obligations towards clients.

The internal auditor shall submit the audit report to the member, who shall place it before its Board of Directors/Proprietor/Partners and shall forward the same along with para-wise comments to the respective stock exchange/clearing corporation within 3 months from the end of the half year period.

The Stock Exchange/Clearing Corporation shall initiate appropriate actions – remedial, penal or disciplinary - against the members where deficiencies are noticed in audit reports or where audit report has not been received, and inform the details of action taken to SEBI, within 6 months from the end of the half year period.

III. Default in case of Multiple Membership
Whenever a member of any segment is declared defaulter, the concerned Stock Exchange/Clearing Corporation shall immediately declare it a defaulter in all its segments. It shall also immediately inform all other Stock Exchanges/Clearing Corporations the details of the defaulter member such as name of the member, the names of the proprietors/partners/promoters/dominant shareholders, as applicable.  Immediately on receipt of the information about default of a member, the Stock Exchange / Clearing Corporation shall declare the said member defaulter on all its segments.

The Stock Exchanges / Clearing Corporations shall take appropriate action against the associates of defaulter member. For this purpose, the term ‘associate’ shall include a person:
a. who, directly or indirectly, by itself, or in combination with other persons,
exercises control over the member, whether individual, body corporate or firm or holds substantial share of not less than 15% in the capital of such entities; or
b. in respect of whom the member, individual or body corporate or firm, directly or indirectly, by itself or in combination with other persons, exercises control; or
c. whose director or partner is also a director or partner of the member, body
corporate or the firm, as the case may be.
Explanation: The expression “control" shall have the same meaning as defined under clause (c) of Regulation 2 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

IV. Implementation
For the above purpose, the Stock Exchanges / Clearing Corporations shall take all necessary action, including the following:
a. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision immediately, if the same has not been already made.
b. bring the provisions of this circular to the notice of the members and also to disseminate the same on the website, and
c. communicate to SEBI, the status of the implementation of the provisions of
this circular in the Monthly Development Report (MDR).

The circulars mentioned hereunder stand rescinded:

A. Circular no. SMD(B)/104/22775/93 dated October 29, 1993
B. Circular no. SMD/MDP/CIR/043/96 dated August 5, 1996
C. Circular no. SMD/Policy/Cir-24/97 dated September 26, 1997
D. Circular no. SMDRP/POLICY/Cir-45/2001 dated September 17, 2001
E. Circular no. SEBI/SMD/DBA-1/CIR-27/2003 dated June 25, 2003
F. Circular no. MIRSD/DPSIII/Cir-26/08 dated August 22, 2008, and
G. Circular no. MRD/DMS/Cir-29/2008 dated October 21, 2008

Notwithstanding such rescission, anything done or any action taken under those circulars before the date of this Master circular, shall be deemed to have been done or taken or commenced under the corresponding provisions of this circular. After the rescission of the earlier circulars, any reference thereto in any regulation, guidelines and circulars shall be deemed to be a reference to this Master Circular.