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Securities and Exchange Board of India

MASTER CIRCULAR
CIR/MRD/DSA/SE/43/2010 December 31, 2010

The Managing Director/Executive Director,
of all Stock Exchanges.

Dear Sir / Madam,

Sub: Master Circular on Administration of Stock Exchanges, Arbitration
in recognised Stock Exchanges and Stock Exchanges / trading
platform for Small & Medium Enterprises including guidelines for
Market Makers.

The Securities and Exchange Board of India has, from time to time, issued
various circulars/directions on the captioned subject. In order to enable the
users to have an access to all the applicable circulars at one place, this Master
Circular has been prepared.

2. This Master Circular consolidates the circulars/directions issued by SEBI in this
regard up to December 31, 2010 as listed in the Schedule and shall come into
force from the date of its issue.

Yours faithfully,

D. Rajesh Kumar
Deputy General Manager
022-26449242

rajeshkd@sebi.gov.in

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Securities and Exchange Board of India

TABLE OF CONTENTS

Page No.
Allotment of Codes to Stock Exchanges 4
Subsidiary Management by Stock Exchange 6

2.1 Conditions for floating/promoting a subsidiary company by small
stock exchanges

2.2 Eligibility criteria to become trading member and /or clearing
member of the derivatives segment of BSE and NSE

2.3. Subsidiary Management
2.3.1. Governing Board
2.3.2 Chief Executive Officer
2.3.3 Staff of the Subsidiary

2.4 Responsibilities of Parent Exchange towards Subsidiary

2.5 Access to unauthorized persons by the members of subsidiaries
Governance of recognised Stock Exchanges 11
3.1. Composition of the Governing Board

3.2 General Requirements

3.3 Eligibility for election of trading members on the Governing Board
3.4 Chief Executive

3.5 Statutory Committees

3.6 | Code of Conduct for the Directors of Governing Board
3.6.1 Meetings & minutes
3.6.2 Strategic Planning
3.6.3 Regulatory Compliances
3.6.4 General Responsibility

3.7 Regulatory Orders, Arbitration Awards, details of complaints
lodged by clients / investors on Stock Exchange website

3.8 | Code of Ethics for Directors and Functionaries of Exchanges
Arbitration in recognised Stock Exchanges 23

4.1. Conformity of the Exchange Bye-Laws with the Arbitration and
Conciliation Act, 1996

4.2 Arbitration Mechanism in Stock Exchanges

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Securities and Exchange Board of India

4.3. Maintenance of Panel of Arbitrators

4.4 Code of conduct for Arbitrators

4.5 Arbitration

4.6 Appellate Arbitration

4.7 Arbitration Fees

4.8 Place of Arbitration

4.9 Implementation of Arbitral Award in favour of Clients

4.10 Record and Disclosures

V. Small and Medium Enterprise : ..............:ccceeseeeeeeeeeeeeeeeeeeeeeeneees 29
5.1 Setting up of Stock Exchange / a trading platform by a
recognized stock exchange having nationwide trading terminals

for SME
Vi. Small and Medium Enterprise : ................ccccceeeeeeeeeeeeeeeeeeeeaneeeees 33

6.1 Guidelines for Market Makers on SME

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1.

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Securities and Exchange Board of India

ALLOTMENT OF CODES TO STOCK EXCHANGES

Each of the stock exchanges in the country has been given a two-digit code
which is incorporated in the twelve digit registration number given to the trading
members. The code number for the exchange is the first two digits after the

letters "INB" in the registration number.

In this regard, the codes allotted to the recognised Stock Exchanges are as
under —

CODE EXCHANGE NAME
01 Bombay Stock Exchange Limited
02 AAhmedabad Stock Exchange Limited
03 The Calcutta Stock Exchange Limited
04 Madras Stock Exchange Limited
05 Delhi Stock Exchange Limited
06 Hyderabad Stock Exchange Limited*
07 Madhya Pradesh Stock Exchange Limited
08 Bangalore Stock Exchange Limited
09 Cochin Stock Exchange Limited
410 The Uttar Pradesh Stock Exchange Association

Limited

11 Pune Stock Exchange Limited
12 Ludhiana Stock Exchange Limited
13 The Gauhati Stock Exchange Limited
14 Mangalore Stock Exchange*
15 Magadh Stock Exchange Limited*
16 Jaipur Stock Exchange Limited
17 Bhubaneswar Stock Exchange Limited
18 Saurashtra Kutch Stock Exchange Limited*
19 Madodara Stock Exchange Limited
20 OTC Exchange of India
21 Coimbatore Stock Exchange Limited
23 National Stock Exchange of India Limited
24 Inter-connected Stock Exchange of India Limited
26 MCX Stock Exchange Limited
27 United Stock Exchange of India Limited

* derecognized Stock Exchanges

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Securities and Exchange Board of India

Circulars : Allotment of Codes to Stock Exchanges

The earlier circulars / directions issued by SEBI relating to allotment of codes to
Stock Exchanges, which are compiled in this master circular, are as under -

Circular No. Ref.SMD-I/22532 dated October 19, 1993.

Circular No. SMD/POLICY/CIR (DBA-II)-37/98 dated December 04, 1998.
Circular No. MRD/DSA/SE/CIR- 28 /2008 dated October 17, 2008.
Circular No. MRD/DSA/SE/Cir-8/2010 dated April 1, 2010.

PONS

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2.1

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Securities and Exchange Board of India

SUBSIDIARY MANAGEMENT BY STOCK EXCHANGE

Small stock exchanges may promote / float a subsidiary company to acquire

trading membership rights of other stock exchanges subject to the following
conditions :

a)

f)

The stock exchange and its trading members shall together hold 100% in
nominal value of the equity share capital of the subsidiary company, with
the exchange holding not less than 51% in nominal value of the equity
share capital of the subsidiary company.

The name of the subsidiary company shall not contain the words "Stock
Exchange".

The trading members of the stock exchange shall register themselves as
sub-brokers of the subsidiary company to enable them to trade through the
subsidiary company.

The subsidiary company shall not undertake any dealing in securities on its
own account.

The subsidiary company shall register only the trading members of the
stock exchange, which is promoting the subsidiary company as its sub-
broker and no other client / sub-broker shall be entertained by the
subsidiary company. All the stock exchanges which have set up
subsidiaries have to make the necessary provisions in their rules,
regulations and the byelaws to provide for the above requirement.

The sub-brokers of the subsidiary company shall maintain separate deposit
with the subsidiary company. The Base Minimum Capital deposited by the
sub-broker with the promoting stock exchange shall not be transferred to
the subsidiary company. This deposit to be maintained with the subsidiary
company could be 25% in the form of cash and the balance 75% in
irrevocable bank guarantees or Fixed Deposit Receipts (FDRs). The FDRs
would be discharged in favour of the subsidiary/company and the
subsidiary/company would be given a complete unencumbered and
unconditional lien on the FDRs.

The trading/exposure limit of the sub-brokers shall be based on the deposit
received by the subsidiary company from the sub-brokers and these limits
shall not exceed the limits as prescribed by the stock exchange of which the
subsidiary company is a trading member.

The subsidiary company shall collect margins from the sub-brokers for the
payment of margins to the respective stock exchanges of which the
subsidiary company is a trading member. The margin imposed by the
subsidiary company on its sub-brokers shall not be less than the margin

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Securities and Exchange Board of India

payable to the stock exchanges of which the subsidiary company is the
trading member.

i) The stock exchange shall incorporate the above mentioned conditions in
the Memorandum of Association / Articles of Association of the subsidiary
company.

Eligibility criteria to become trading member and / or clearing member of
the derivatives segment of BSE and NSE:

2.2 For becoming a trading and or clearing members of the derivatives segment,
the eligibility criteria laid down by the stock exchanges and prescribed under
the SEBI (Stock Broker and Sub-Broker) Regulations, 1992 have to be fulfilled
including the conditions as follows:

a) All the risk containment measures laid down by SEBI shall be followed by
these subsidiary companies and
b) These subsidiaries shall not undertake proprietary trade.

Subsidiary Management

2.3. The subsidiary company shall be required to comply with minimum
requirements in order to ensure that the transactions therein are conducted in a
manner which is not detrimental to the interest of the investors and also to
enable the subsidiaries to provide a safe and transparent mechanism for
transactions in securities. The stock exchanges shall, therefore, ensure the
following —

2.3.1 Governing Board

a) The Governing Board of the subsidiary company shall have the following
composition:

i. The Chief Executive Officer (CEO) of the subsidiary company shall be a
director on the Board of Subsidiary. The CEO shall not be a sub-broker
of the subsidiary company or a trading member of the parent exchange.

ii. At least 50% of Directors representing on the Governing Board of
subsidiary company shall not be sub-brokers of the subsidiary company
or trading members of the promoter / holding exchange (parent
exchange). These directors (excluding CEO) shall be called the Public
Representatives.

iii. | The Public Representatives shall be nominated by the parent exchange
(subject to prior approval of SEBI).

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vi.

vii.

viii.

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Securities and Exchange Board of India

Public Representatives to be nominated as directors of subsidiary
company shall be from amongst the persons of integrity having
necessary professional competence and experience in the areas related
to securities market.

For the purpose of nomination as Public Representatives, Governing
Board of the parent exchange may forward names of persons to SEBI
for its approval. SEBI shall, however have right to nominate persons,
whose names have not been forwarded by the Governing Board of the
stock exchange.

The Public Representatives to be appointed as directors shall hold the
office for a period of one year from the date of assumption of the office or
till the Annual General Meeting of the subsidiary company whichever is
earlier. However the Public Representative on the Boards of Subsidiary
Companies will continue till the time new Public Representatives are
appointed in their place.

The trading member directors on the Governing Board of the subsidiary
company shall have a gap of at least one year after a consecutive
period of two years before re-nomination on the Governing Board. As
regards the other directors, there should be a gap of at least one year
after a consecutive period of three years before re-nomination.

A person, who has completed two consecutive terms as a director of the
parent exchange, shall not be eligible for election as a director of the
subsidiary company, or for nomination as a member of any Committee
of such subsidiary.

The parent exchange may appoint a maximum of two directors who are
officers of the parent exchange. Such directors shall be in addition to
50% non-trading member directors (public representatives) mentioned
above.

2.3.2 Chief Executive Officer

b) The subsidiary company shall appoint a Chief Executive Officer (CEO) who

shall not hold any position concurrently in the stock exchange (parent
exchange). The CEO of the subsidiary company shall be appointed by the
Board of the subsidiary company through open advertisement. The
educational qualification and experience shall be similar to that of the Chief
Executive of the stock exchange and the stock exchange or subsidiary shall
fix the remuneration of the CEO. The appointment, renewal of appointment
and the termination of service of the CEO shall be subject to prior approval
of SEBI.

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Securities and Exchange Board of India

2.3.3 Staff of the Subsidiary

2.4

c) The subsidiary company shall have its own staff none of whom shall be

concurrently working for or holding any position of office in the parent
exchange. The staff of the stock exchange may serve on deputation or loan
basis etc. in the subsidiary company. However, such staff shall not be
concurrently working for or holding any position of office in the stock
exchange and the subsidiary company simultaneously. The stock exchange
shall maintain necessary records to ensure that the staff is not working
concurrently.

Responsibilities of Parent Exchange towards Subsidiary

The parent exchange shall be responsible for all risk management of the
subsidiary company and shall set up appropriate mechanism for the
supervision of the trading activity of subsidiary company. Such mechanism
shall include:

i. Verification of compliance of margin payments and other risk
management measures applicable to the subsidiary company as a
trading member of another stock exchange.

ii. Reporting requirements between the subsidiary and the parent
exchange, such as placing quarterly reports on the financials and
accounts of the subsidiary and on review of operations of the subsidiary
before the Governing Board of the stock exchange at its meetings.

iii. | Conducting half-yearly inspections of the subsidiary and 20% of its sub-
brokers and placing such reports before the Governing Board of the
stock exchange.

iv. Handling of investor complaints of sub-brokers of the subsidiary
company.

v. | Submission of a half-yearly certificate on risk management system being
followed by their subsidiary. This certificate should be furnished to SEBI
on a half yearly basis by July 15 of each year for certificate as on June
30 and by January 15 for certificate as on December 31.

Access to unauthorized persons by the members of subsidiaries

2.5 Appropriate penal action including fine, suspension of trading rights of the

subsidiaries/sub-brokers, etc., shall be initiated, in case, any of the members of
the exchange who are sub-brokers of the subsidiary is found to be indulging in
activities viz. providing unauthorized access to persons for illegal trading
and/or providing their own terminal for illegal trading. The exchanges shall

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Securities and Exchange Board of India

exercise vigilance and surveillance on their subsidiaries/its members to ensure
that the members do not indulge in these types of activities.

Circulars : Subsidiary Management by Stock Exchanges

The earlier circulars / directions issued by SEBI relating to Subsidiary
management by Stock Exchanges, which are compiled in this master circular, are

as under:

Circular No

CONDUWPRWON>

Circular No.
Circular No.
. SMD-II/ALLSE/CIR-02/2000 dated January 10, 2000
Circular No.
Circular No.
Circular No.
Letter No. SMD/SEAD/997 1/03 dated May 21, 2003.
Circular No.
Circular No.

SMD-II/POLICY/CIR-37/99 dated November 26, 1999.
SMD-I/POLICY/CIR-40/99 dated December 16, 1999.

SMDRPD/Policy/Cir-8/2001dated February 07, 2001
SMDRP/Policy/Cir-41/2001 dated August 09, 2001
SMD/POLICY/CIR-4/2003 dated February 11, 2003.

SEBI/SMD/SE/Cir-20/2003/02/06 dated June 02, 2003
SEBI/MRD/SE/15958/2003 dated August 22, 2003

10. Letter No. MRD/DSA/6899/2004 dated April 07, 2004

11. Circular No.

MRD/POLICY/CIR-33/2004 dated September 30, 2004.

12. Letter no. MRD/DSA/C&D/72675/06 dated July 27, 2006.

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Securities and Exchange Board of India
I. GOVERNANCE OF RECOGNIZED STOCK EXCHANGES

Composition of the Governing Board

3.1. The composition of the Governing Board of all recognized stock exchanges
shall be as under -

a) Trading Member Directors shall constitute a maximum of one-fourth of the
total strength of the Governing Board.

b) Public Interest Directors shall constitute one-fourth of the total strength of
the Governing Board.

c) Shareholder Directors shall constitute the balance of the Governing Board.

General Requirements

3.2 The other incidental and consequential matters relating to governance of stock
exchanges shall be as under -

a) The Directors, except the Public Interest Directors and the Chief Executive
such as CEO, ED, MD etc. shall be elected by the Shareholders.

b) No Director shall hold office for more than two consecutive terms.

c) ‘Trading Member Directors’ shall be elected from amongst the Trading
Members of the concerned stock exchange.

d) ‘Shareholder Directors’ shall be elected from amongst the persons, who are
not Trading Members or Associates of Trading Members.

‘Associate’ in relation to a Trading Member, individual, body corporate
or firm, shall include a person:

(i) | who, directly or indirectly, by himself, or in combination with other
persons, exercises control over the Trading Member, whether
individual, body corporate or firm or holds substantial share of not
less than 15% in the capital of such entities, or

(ii) in respect of whom the Trading Member, individual or body
corporate or firm, directly or indirectly, by itself or in combination
with other persons, exercises control, or

(iii) whose director or partner is also a director or partner of the
Trading Member, body corporate or the firm, as the case may be.

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3.3

e)

f)

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Securities and Exchange Board of India

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.

‘Public Interest Directors’ shall be selected by the Governing Board from
amongst the persons in the SEBI constituted panel.

A person shall not act as ‘Public Interest Director’ on more than one Stock
Exchange simultaneously.

The Chairman shall be elected by the Governing Board from amongst the
non-executive non-trading member directors. If, for some reason, it is not
possible for the Governing Board to elect the Chairman, the Governing
Board may elect a Chairman for every meeting of the Board from amongst
the non-executive non-trading member directors of the Governing Board.

The manner of election, appointment, tenure, resignation, vacation, etc. of
Directors (except the Chief Executive) shall be governed by the Companies
Act, 1956 save as otherwise specifically provided under or in accordance
with the Securities Contracts (Regulation) Act, 1956.

The Chief Executive shall be an ex-officio Director on the Governing Board.

No approval of SEBI shall be required for appointment of any Director,
except for the Chief Executive.

SEBI may nominate Directors on the Governing Board as and when
deemed fit.

Eligibility For Election of Trading Members on the Governing Board

For the Trading Members to be elected to the Governing Board of a stock
exchange, the following eligibility criteria shall be incorporated in the Rules of the
Exchange —

a)

In case of INDIVIDUAL trading members:

No trading member shall be eligible to be elected as member of the
Governing Board if -

i) he is not a citizen of India;

ii) he has been a trading member for less than three years standing
on the last day for submission of proposals by candidates for
election.

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b)

c)

qd)

f)

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Securities and Exchange Board of India

iii) he has at any time been declared a defaulter or failed to meet his
liabilities in ordinary course or compounded with his creditors.

In case of a CORPORATE trading member, one of its whole-time directors
subject to the fulfillment of the following conditions in addition to the above
mentioned conditions for individual trading members would be eligible to be
elected as a trading member of the Governing Board:

i) In case the director resign/retires from the board of the company, or
is removed from the board of the company and one post on the
Governing Board falls vacant, the vacancy will be filled as per the
Rules of the exchanges and corporate trading members will not
have right to replace the trading member.

ii) In case of conversion of individual trading member/partnership firm
into a corporate trading member, and the individual/partner(s) are
whole time director(s) of the corporate then the previous
experience of such trading member(s) would be considered for
meeting eligibility norms to become member of the Governing
Board.

Further, in the event of suspension of trading, suspension of the registration
as trading member because of any disciplinary action taken against it by the
stock exchange / SEBI, the trading member shall not be eligible to continue
on the Governing Board and shall also not be eligible to be elected to the
Governing Board for two years from the date of expiry of such suspension
of trading or suspension of registration.

A trading member whose registration has been cancelled shall not be
allowed to continue on the Governing Board or be eligible to be elected to
the Governing Board.

The persons falling in the category of Notified Persons as per the Special
Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992,
would not continue on the Governing Board and would not be eligible to be
elected to the Governing Board for two years from the date such person is
notified under the said Act.

A trading member of the stock exchange who was on the Governing Board
of the stock exchange at the time of its supersession would not be eligible
for re-election to the Governing Board of the stock exchange for a period of
2 years from the date of expiry of the order of supersession passed by
SEBI.

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3.4

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Chief Executive

The provisions regarding the Chief Executive of the stock exchange, by
whatever name called, shall be as under -

a)

f)

The appointment, renewal of appointment and the termination of service of
the Chief Executive shall be subject to prior approval of SEBI. The
Exchange shall, however, determine the manner of selection, terms and
conditions of appointment and other procedural formalities associated with
the selection / appointment of the Chief Executive.

Further, to bring about uniformity and professionalism in the recruitment
process of the Chief Executives, the stock exchanges shall constitute a
Committee for the selection of Chief Executives. The Committee shall
generally consist of four persons, one representative from the exchange,
two outside experts and one Public Interest Director. However, constitution
of the said Committee shall not require SEBI approval.

While recommending the names to SEBI, the exchange shall submit an
undertaking that the necessary due diligence has been carried out by them
with respect to the verification of antecedents, credentials and experience
of the proposed persons.

The exchanges should ensure that adequate financial powers like
sanctioning the normal revenue expenditure and issue of cheques are given
to the Chief Executive for smooth functioning of the exchange. Further, one
more officer shall be the co-signatory on the cheques to ensure that at least
two persons sign the cheque. However no broker member of the stock
exchanges shall be an office bearer of an exchange i.e. holds the position
of President, Vice President, Treasurer etc. and shall not be authorized to
sign any cheques or operate any bank accounts on behalf of the stock
exchange

In order to ensure smooth functioning of the stock exchanges and to give
administrative freedom to the Chief Executive, the elected directors shall
not interfere in the day to day management of the exchange, particularly
relating to the surveillance and risk management functions.

The Rules or Articles shall provide that besides the Governing Board, it
shall be the duty of the Chief Executive to give effect to the directives,
guidelines and other orders issued by SEBI in order to implement the
applicable provisions of law, rules, regulations as also the Rules or the
Articles of Association, Regulations and Bye-laws of the stock exchange.
Any failure in this regard will make him liable for removal or termination of

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3.5

3.6

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services by the exchange with the prior approval of SEBI, subject to the
concerned Chief Executive being given an opportunity of being heard
against such termination.

Statutory Committees

The provisions regarding statutory committees of stock exchanges shall be as
under —

a) The Rules or byelaws, as the case may be, of the exchange shall provide
that not more than twenty percent of the members of the Arbitration
Committee, Disciplinary Committee, Defaults Committee and Investor
Services Committee shall be trading members.

b) However, the Arbitration Committee in case of disputes between a trading
member and a non-trading member shall not have representation of the
trading members.

c) The appointment of trading members on these committees shall not require
SEBI approval.

Code of Conduct _for the Directors on the Governing Board

The exchange shall frame and apply a set of criteria as near thereto the SEBI
(Intermediaries) Regulations, 2008 to the Directors on the Governing Board of
the Exchange. All the Directors of the stock exchange shall:

3.6.1 Meetings & minutes

a. not participate in the discussion on any subject matter in which any
conflict of interest exists or arises, whether pecuniary or otherwise, and
in such cases the same shall be disclosed and recorded in the minutes
of the meeting.

b. not encourage the circulation of agenda papers during the meeting,
unless circumstances so require.

c. offer their comments on the draft minutes and ensure that the same are
incorporated in the final minutes.

d. insist on the minutes of the previous meeting being placed for approval
in subsequent meeting.

e. endeavour to have the date of next meeting fixed at each Board Meeting
in consultation with other members of the Governing Board.

f. endeavour that in case all the items of the agenda of a meeting were not
covered for want of time, the next meeting is held within 15 days for
considering the remaining items.

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3.6.2

3.6.3

3.6.4

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Strategic Planning

participate in the formulation and execution of strategies in the best
interest of the exchange and contribute towards pro-active decision
making at the Board level.

give benefit of their experience and expertise to the exchange and
provide assistance in strategic planning and execution of decisions.

Regulatory Compliances

endeavour to ensure that the Exchange abides by all the provisions of
the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, Rules
Regulations framed thereunder and the circulars, directions issued by
the Government/SEBI from time to time.

endeavour compliance at all levels so that the regulatory system does
not suffer any breaches.

endeavour to ensure that the exchange takes commensurate steps to
honour the time limit prescribed by SEBI for corrective action.

not support any decision in the meeting of the Governing Board which
may adversely affect the interest of investors and shall report forthwith
any such decision to SEBI.

General Responsibility

place priority for redressing Investor Grievances and encourage fair
trade practice so that the exchange becomes an engine for the growth
of the securities market.

endeavour to analyse and administer the exchange issues with
professional competence, fairness, impartiality, efficiency and
effectiveness.

submit the necessary disclosures/statement of holdings/dealings in
securities as required by the exchange from time to time as per their
Rules or Articles of Association.

unless otherwise required by law, maintain confidentiality and shall not
divulge/disclose any information obtained in the discharge of their duty.
Further, no such information shall be used for personal gains.

maintain the highest standards of personal integrity, truthfulness,
honesty and fortitude in discharge of their duties in order to inspire
public confidence and shall not engage in acts discreditable to their
responsibilities.

perform their duties in an independent and objective manner and avoid
activities that may impair, or may appear to impair, their independence
or objectivity or official duties.

perform their duties with a positive attitude and constructively support
open communication, creativity, dedication, and compassion.

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3.7

3.8

ay Securities and Exchange Board of India

h. not engage in any act involving moral turpitude, dishonesty, fraud,
deceit, or misrepresentation or any other act prejudicial to the
administration of the exchange.

Regulatory Orders & Arbitration Awards on Stock Exchange website

The Stock Exchanges shall post all their regulatory orders and arbitration
awards issued since April 1, 2007, on their websites within 30 days. Further,
all regulatory orders and arbitration awards as and when issued by
Exchanges from the date of this circular shall be posted on their website
immediately.

Stock Exchanges shall disclose the details of complaints lodged by clients /
investors against trading members and companies listed in the exchange, in
their website. The aforesaid disclosure shall also include details pertaining to
arbitration and penal action against the trading members.

The format for the report for the aforesaid disclosure is given as nnexurelto
the circular, consisting of the following reports (Click the hyperlink for the
Reports):

a. Report 1A — Complaints received from clients against trading members
during the current financial year.

b. Report 1B — Redressal of complaints lodged by clients against trading
members during the previous financial year.

c. Report 1C — Redressal of complaints lodged by clients against trading
members during the current financial year.

d. Report 2A — Complaints received from investors against listed companies
during the current financial year.

e. Report 2B — Redressal of complaints lodged by investors against listed
companies during the previous financial year.

f. Report 2C — Redressal of complaints lodged by investors against listed
companies during the current financial year.

g. Report 3A — Disposal of arbitration proceedings (where client is a party)
during the previous financial year.

h. Report 3B — Disposal of arbitration proceedings (where client is a party)
during the current financial year.

i. Report 4A — Penal actions against trading members during the previous
financial year.

j. Report 4B — Penal actions against trading members during the current

financial year

Code of Ethics for Directors and Functionaries of Exchanges

The ‘Code of Ethics’ for Directors and Functionaries of the Stock
Exchanges, is aimed at improving the professional and ethical standards in

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the functioning of exchanges thereby creating better investor confidence in
the integrity of the market.

3.8.1 Objectives and Underlying Principles

The code of ethics for directors and functionaries of the exchange seeks to
establish a minimum level of business/ professional ethics to be followed by these
functionaries, towards establishing a fair and transparent marketplace. The code
of ethics is based on the following fundamental principles:

e Fairness and transparency in dealing with matters relating to the exchange
and the investors

e Compliance with all laws/ rules/ regulations laid down by regulatory
agencies/ exchange

e Exercising due diligence in the performance of duties
e Avoidance of conflict of interest between self interests of directors/
functionaries and interests of exchange and investors

3.8.2 Definitions

i. Functionaries: Functionaries of the exchange to whom this code shall be
applicable shall be decided by the exchange but shall include all officials of
the rank of General Manager and above.

ii. Family: Family members will include dependent spouse, dependent
children, dependent parents.

Securities: Securities for the purpose of this code shall not include mutual
fund units and govt. securities.

3.8.3 Ethics Committee

For overseeing implementation of this code, an Ethics Committee shall be
constituted by every exchange under the respective Governing Board. Not
more than 40% of the members of this committee shall be elected directors/
exchange members.

3.8.4 General Standards

i. Directors and functionaries shall endeavour to promote greater awareness
and understanding of ethical responsibilities.

ii. Directors and functionaries, in the conduct of their business shall observe
high standards of commercial honour and just and equitable principles of
trade.

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vi.

3.8.5

3.8.6

3.8.7

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Securities and Exchange Board of India

. The conduct of Directors and functionaries in business life should be
exemplary which will set a standard for other members of the exchange to
follow.

. Directors and functionaries shall not use their position to do or get favours
from the executive or administrative staff of the exchange, suppliers of the
Exchange or any listed company at the Exchange.

Directors and functionaries shall not commit any act which will put the
reputation of the Exchange in jeopardy.

Directors, Committee Members and functionaries of the Exchange should
comply with all rules and regulations applicable to the securities market.

Prohibition on dealings in securities in proprietary account by elected
office bearers of the exchange (Chairman):

Elected office bearers (Chairman) of the exchange shall refrain from
proprietary trades in securities, directly or indirectly, during the period of
holding office.

Disclosure of dealings in securities by functionaries of the exchange:

Functionaries of the exchange shall disclose on a periodic basis as
determined by the exchange (which could be monthly), all their dealings in
securities, directly or indirectly, to the Governing Board/ Ethics Committee/
designated compliance officer.

The dealings in securities shall also be subject to trading restrictions for
securities about which functionaries in the exchange may have non-public
price sensitive information. Requirement laid down under SEBI Insider
Trading Regulations may be referred in this regard.

All transactions must be of an investment nature and not speculative in
nature. Towards this end, all securities purchased must be held for a
minimum period of 60 days before they are sold. However, in
specific/exceptional circumstances, sale can be effected anytime by
obtaining pre-clearance from the compliance officer or any other designated
authority who will be empowered to waive this condition after recording in
writing his satisfaction in this regard.

Disclosure of dealings in securities by directors of the exchange:

Directors (other then elected office bearers as per clause 2) of the
exchange shall disclose on a periodic basis, as determined by the
exchange (which could be monthly), their proprietary trading, directly or
indirectly, to the Ethics Committee.

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3.8.8

3.8.9

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Securities and Exchange Board of India

All Directors shall also disclose on a periodic basis as above, the trading
conducted by firms/corporate entities in which they hold 20% or more
beneficial interest or hold a controlling interest, to the Ethics Committee.

Directors who are Govt. of India nominees or nominees of Govt. of India
statutory bodies or Financial Institutions and are governed by their own
codes shall be exempt from this requirement.

Avoidance of Conflict of Interest

No director of the governing board or member of any committee of the
exchange shall participate in any decision making/adjudication in respect of
any person /matter in which he is in any way, directly or indirectly,
concerned or interested.

. Whether there is any conflict of interest or not in a matter, should be

decided by the governing board.

Disclosures of beneficial interest

All Directors and functionaries shall disclose to the Governing Board, upon
assuming office and during their tenure in office, whenever the following
arises,

any fiduciary relationship of self and family members and
directorship/partnership of self and family members in any broking outfit,

. Shareholding, in cases where the shareholding of the director, directly or

through his family exceeds 5% in any listed company on the Exchange or in
other entities related to the capital markets,

any other business interests.

3.8.10 Role of the Chairman and directors in the day to day functioning of

the Exchange

The Chairman and directors shall not interfere in the day to day functioning
of the exchange and shall limit their role to decision making on policy issues
and to issues as the Governing Board may decide.

i. The Chairman and directors shall abstain from influencing the employees of

the Exchange in conducting their day to day activities.

The Chairman and directors shall not be directly involved in the function of
appointment and promotion of employees unless specifically so decided by
the Governing Board.

3.8.11 Access to Information

Directors shall call for information only as part of specific committees or as
may be authorised by the Governing Board.

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Securities and Exchange Board of India

There shall be prescribed channels through which information shall move
and further there shall be audit trail of the same. Any retrieval of confidential
documents/ information shall be properly recorded.

All such information, especially which is non-public and price sensitive, shall
be kept confidential and not be used for any personal consideration/ gain.

. Any information relating to the business/operations of the exchange, which

may come to the knowledge of directors/ functionaries during performance
of their duties shall be held in strict confidence, shall not be divulged to any
third party and shall not be used in any manner except for the performance
of their duties.

3.8.12 Misuse of Position

Directors/ committee members shall not use their position to obtain
business or any pecuniary benefit (as intermediaries like brokers or in any
other capacity like professional or consultancies) in the organization for
themselves or family members.

3.8.13 Ethics Committee to lay down procedures and designate compliance

officer

The ethics committee shall lay down procedures for the implementation of
the code and prescribe reporting formats for the disclosures required under
the code.

i. The ethics committee may designate a senior officer of the exchange as

compliance officer for executing the requirements laid down by it.

3.8.14 While the objective of this code is to enhance the level of market integrity

and investor confidence, it is emphasized that a written code of ethics may
not completely guarantee adherence to high ethical standards. This can be
accomplished only if directors and functionaries of the exchange commit
themselves to the task of enhancing the fairness and integrity of the system
in letter and spirit.

Circulars : Governance of recognised Stock Exchanges

The earlier circulars / directions issued by SEBI relating to Governance of
recognised Stock Exchanges, which are compiled in this master circular, are as
under -

1.
2.
3.

Circular No. SMD-II/11615/92 dated November 20, 1992.
Circular No. SMD/SED/6919/93 dated April 20, 1993.
Circular No. SMD-II(N)/24456/93 dated December 7, 1993

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Circular No. SMD/536/95 dated March 28, 1995

Circular No. Ref. SMD-II/52 dated January 10, 1996

Letter No. SMD/RCG/3737/96 dated August 13, 1996.

Circular No. SMD/POLICY/IECG/5694/96 dated December 20, 1996.
Circular No. SMD/POLICY/IECG/2-97 dated February 25, 1997.
Circular No. SMD/POLICY/CIRCULAR-27/97 dated November 05, 1997.
Circular No. SMD/POLICY/CIRCULAR-09/98 dated February 24, 1998.
Circular No. SMDRP/Policy/Cir-33/98 dated November 12, 1998.
Circular No. SMDRP/Policy/Cir - 25 /99 dated August 12, 1999

Letter No.LKS/229/2001 dated May 18, 2001

Circular No. SMD/POLICY/CIR-2/2002 dated January 10, 2002.

Letter dated September 02, 2002.

Circular No. SMD/Policy/Cir-8/2003 dated March 4, 2003

Circular No. SEBI/SMD/SE/Cir- 19/2003/02/06 dated June 02, 2003
Circular No. MRD/DOP/SE/Cir-5/2005 dated February 9, 2005

Letters dated August 31, 2005 / September 21, 2005.

Letter dated November 6, 2008.

Letters dated February 20, 2009

Circular No. MRD/DoP/SE/Cir-10/2009 dated September 03, 2009
Circular No. SEBI/MRD/DSA-OIAE/Cir.09/2010 dated April 1, 2010

Page 22 of 35

IV.

41

4.2

i)

4.3
i)

ii)

ii)

iv)

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Securities and Exchange Board of India

ARBITRATION IN RECOGNISED STOCK EXCHANGES

Conformity of the Exchange Bye-Laws with the Arbitration and
Conciliation Act, 1996

The Bye-laws of the stock exchanges relating to arbitration proceedings shall
be in accordance with the Arbitration and Conciliation Act, 1996.

Arbitration Mechanism in Stock Exchanges

In consultation with the stock exchanges, it has been decided to streamline
the arbitration mechanism available at stock exchanges for arbitration of
disputes (claims, complaints, differences, etc.) arising between a client and a
member (Stock Broker, Trading Member and Clearing Member) across
various market segments.

A stock exchange shall provide an arbitration mechanism for settlement of
disputes between a client and a member through arbitration proceedings in
accordance with the provisions of this Circular read with Section 2(4) of the
Arbitration and Conciliation, Act, 1996.

Maintenance of a Panel of Arbitrators
A stock exchange shall maintain a panel of arbitrators. The number of
arbitrators in the panel shall be commensurate to the number of disputes so
that an arbitrator handles a reasonable number of references simultaneously
and all arbitration references are disposed of within the prescribed time.

The stock exchange shall have a set of fair and transparent criteria for
inclusion of names in the panel of arbitrators.

While deciding to include a particular person in the panel of arbitrators, the
stock exchange shall take into account the following factors:

a. age,

b. qualification in the area of law, finance, accounts, economics,
management, or administration, and

c. experience in financial services, including securities market.
The name of a person shall be included in the panel after obtaining:

a. a declaration that he has not been involved in any act of fraud,
dishonesty or moral turpitude, or found guilty of any economic offence,

b. disclosure of the nature of his association with securities market,

c. disclosure of the names of his dependents associated with the securities
market as member, sub-broker or authorized person, and

Page 23 of 35

v)

vi)

44

ay Securities and Exchange Board of India
d. an undertaking that he shall abide by the code of conduct prescribed in

this circular.

The stock exchange shall provide at least seven days of continuing
education to every arbitrator each year.

The stock exchange shall have a mechanism to appraise the performance of
arbitrators and reconstitute the panel based on such appraisal atleast once a
year.

Code of Conduct for Arbitrators

An arbitrator shall —

4.5

i. actin a fair, unbiased, independent and objective manner;

ii. maintain the highest standards of personal integrity, truthfulness, honesty
and fortitude in discharge of his duties;

iii. disclose his interest or conflict in a particular case, i.e., whether any party
to the proceeding had any dealings with or is related to the arbitrator;

iv. not engage in acts discreditable to his responsibilities;

v. avoid any interest or activity which is in conflict with the conduct of his
duties as an arbitrator;

vi. avoid any activity that may impair, or may appear to impair, his
independence or objectivity;

vii. conduct arbitration proceedings in compliance with the principles of
natural justice and the relevant provisions of the Arbitration and
Conciliation Act, 1996, the SEBI Act, 1992, the Securities Contracts
(Regulation) Act, 1956 and the Rules, Regulations and Bye-laws framed
thereunder and the circulars, directions issued by the Government / SEBI;

viii. endeavour to pass arbitral award expeditiously and in any case not later

than the time prescribed in this circular; and
ix. pass reasoned and speaking arbitral awards.

Arbitration

The limitation period for filing an arbitration reference shall be governed by
the law of limitation, i.e., The Limitation Act, 1963.

An arbitration reference for a claim / counter claim up to Rs.25 lakh shall be
dealt with by a sole arbitrator while that above Rs.25 lakh shall be dealt with
by a panel of three arbitrators.

The stock exchange shall ensure that the process of appointment of
arbitrator(s) is completed within 30 days from the date of receipt of
application from the applicant.

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vi.

vii.

4.7

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Securities and Exchange Board of India

The arbitration reference shall be concluded by way of issue of an arbitral
award within four months from the date of appointment of arbitrator(s).

The Managing Director/ Executive Director of the stock exchange may for
sufficient cause extend the time for issue of arbitral award by not more than
two months on a case to case basis after recording the reasons for the same.

Appellate Arbitration

A party aggrieved by an arbitral award may appeal to the appellate panel of
arbitrators of the stock exchange against such award.

An appeal before the appellate panel of arbitrators may be filed within one
month from the date of receipt of arbitral award.

The appellate panel shall consist of three arbitrators who shall be different
from the ones who passed the arbitral award appealed against.

The stock exchange shall ensure that the process of appointment of
appellate panel of arbitrators is completed within 30 days from the date of
receipt of application for appellate arbitration.

The appeal shall be disposed of within three months from the date of
appointment of appellate panel of such appeal by way of issue of an
appellate arbitral award.

The Managing Director/ Executive Director of the stock exchange may for
sufficient cause extend the time for issue of appellate arbitral award by not
more than two months on a case to case basis after recording the reasons for
the same.

A party aggrieved by the appellate arbitral award may file an application to
the Court of competent jurisdiction in accordance with Section 34 of the
Arbitration and Conciliation Act, 1996.

Arbitration Fees

Each of the parties to arbitration (other than a client with a claim / counter
claim upto Rs. 10 lakh and filing the arbitration reference for the same within
six months) shall deposit an amount, as may be prescribed by the stock
exchange, at the time of making arbitration reference. The deposits
(exclusive of statutory dues - stamp duty, service tax, etc.) shall not exceed
the amount as indicated under:

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Amount of Claim / If claim is filed If claim is filed after
Counter Claim, within six months six months
whichever is
higher
(Rs.)
< 10,00,000 1.3% subject to a/3.9% subject to a
minimum of | minimum of Rs.30,000
Rs.10,000
> 10,00,000 - <|Rs. 13,000 plus 0.3% | Rs. 39,000 plus 0.9%
25,00,000 amount above Rs. 10 | amount above Rs. 10
lakh lakh
> 25,00,000 Rs. 17,500 plus 0.2 % | Rs. 52,500 plus 0.6 %
amount above Rs. 25 | amount above Rs. 25
lakh subject to | lakh subject to
maximum of _ Rs. | maximum of Rs. 90,000
30,000

A client, who has a claim / counter claim upto Rs. 10 lakh and files arbitration
reference for the same within six months, shall be exempt from the deposit.

In all cases, on issue of the arbitral award the stock exchange shall refund
the deposit to the party in whose favour the award has been passed. In cases
where claim was filed within six months period, the full deposit made by the
party against whom the award has been passed, shall be appropriated
towards arbitration fees. In cases where claim was filed after six months, one-
third of the deposit collected from the party against whom the award has
been passed, shall be appropriated towards arbitration fees and balance two-
third amount shall be credited to the Investor Protection Fund of the
respective stock exchange.

Note: Six months (as referred to in paras i, ii and iii above) shall be
computed from the end of the quarter during which the disputed
transaction(s) were executed/ settled, whichever is relevant for the dispute,
and after excluding:-

a. the time taken by the Investors Grievances Redressal Committee of
the Stock Exchange (the time taken from the date of receipt of dispute till
the decision by the committee) to resolve the dispute under its Rules, Bye-
laws & Regulations, and

b. the time taken by the member to attempt the resolution of the dispute
(the time from the date of receipt of dispute by the member to the date of
receipt of the member’s last communication by the client) or one month
from the date of receipt of the dispute by the member, whichever is earlier.

Page 26 of 35

4.8

4.9

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Securities and Exchange Board of India

A party filing an appeal before the appellate panel [as mentioned under item
6 above] shall pay a fee not exceeding Rs. 30,000,as may be prescribed by
the stock exchange, in addition to statutory dues (stamp duty, service tax,
etc) along with the appeal.”

Place of Arbitration

The Stock Exchanges having nationwide terminals, such as National Stock
Exchange of India Ltd., Bombay Stock Exchange Ltd., MCX Stock Exchange
Ltd., and United Stock Exchange of India Ltd., shall provide arbitration facility
(arbitration as well as appellate arbitration) at all four regional centres (Delhi,
Mumbai, Kolkata and Chennai). The arbitration and appellate arbitration shall
be conducted at the regional centre nearest to the client. The application
under Section 34 of the Arbitration and Conciliation Act, 1996, if any, against
the decision of the appellate panel shall be filed in the competent Court
nearest to such regional centre.

Other stock exchanges shall provide the arbitration facility, including
appellate arbitration, at the place where it is located.

Implementation of Arbitral Award in favour of Clients

In case the arbitral / appellate arbitral award is in favour of the client, the
stock exchange shall, on receipt of the same, debit the amount of the award
from the security deposit or any other monies of the member (against whom
an award has been passed) and keep it in a separate escrow account.

The stock exchange shall implement the arbitral award, by making payment
to the client, along with interest earned on the amount that has been set
aside, as soon as the time for preferring an appeal before the appellate panel
of arbitrators has expired and no appeal has been preferred.

The stock exchange shall implement the appellate arbitral award, by making
payment to the client, along with interest earned on the amount that has been
set aside, as soon as

a. the time for making an application to a Court to set aside such appellate
arbitral award under Section 34 of the Arbitration and Conciliation Act,
1996 has expired, and no application has been made, or

b. when an application to a Court to set aside such appellate arbitral award
under Section 34 of the Arbitration and Conciliation Act, 1996, having
been made, it has been refused by such Court, or

c. an application to a Court to set aside such appellate arbitral award
under Section 34 of the Arbitration and Conciliation Act, 1996, having
been made, but where no stay has been granted by such Court within a

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period of three months from the date on which the party making that
application had received the appellate arbitral award.

4.10 Record and Disclosures

i. | The stock exchange shall preserve the following documents related to
arbitration:

a. the arbitral and appellate arbitral award with acknowledgements,
confirming receipt of award by the disputing parties, permanently;

b. other records pertaining to arbitration for five years from the date of
arbitral award, appellate arbitral award or Order of the Court, as the case
may be; and

c. register of destruction of records relating to (ii) above, permanently.

ii. |The stock exchange shall disclose on its website, details of disposal of

arbitration proceedings as per format Aland details of arbitrator-wise disposal
of arbitration proceedings as pe (Click the hyperlink for the format)

Circulars : Arbitration in recognised Stock Exchanges

The earlier circulars / directions issued by SEBI relating to Arbitration in
recognised Stock Exchanges, which are compiled in this master circular, are as
under:

1. Circular No. SMD/POLICY/CIRCULAR/3-97, dated March 31, 1997

2. Circular No. SMD/MRD/DSA/24/2010 dated August 11, 2010
3. Circular No. CIR/MRD/DSA/29/2010 dated August 31, 2010

Page 28 of 35

V.

5.1

5.2

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Securities and Exchange Board of India

SMALL AND MEDIUM ENTERPRISES (SME) : SETTING UP OF STOCK
EXCHANGE / A TRADING PLATFORM BY A RECOGNIZED STOCK
EXCHANGE HAVING NATIONWIDE TRADING TERMINALS FOR SME

SEBI had laid down the framework (on November 05, 2008) for recognition
and supervision of stock exchanges/platforms of stock exchanges for small
and medium enterprises (SMEs).

In order to lay down the policy for issue, listing and trading of the securities
issued by the SMEs, necessary amendments have been made in the SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2009, SEBI
(Merchant Bankers) Regulations, 1992, SEBI (Foreign Institutional Investors)
Regulations, 1995, SEBI (Venture Capital Funds) Regulations, 1996, SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and
SEBI (Stock Brokers and Sub-brokers) Regulations, 1992. Complete text of
the said amendments is available on the SEBI website, www.sebi.gov.in.
Salient features of those amendments are as under:

(a) An issuer whose post -issue face value capital does not exceed ten
crore rupees shall make Initial Public Offer of specified securities in
terms of Chapter XA of the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2009
(ICDR Regulations).

(b) An issuer listed on a SME exchange and whose post- issue face value
capital pursuant to further issue of capital does not exceed ten crore
rupees shall make further issue of specified securities in terms of
Chapter XA of the ICDR Regulations.

(c) An issuer having post -issue face value capital between ten crore
rupees and twenty five crore rupees may make Initial Public Offer and
further issue of specified securities in terms of Chapter XA of the
ICDR Regulations.

(d) An issuer making issue of specified securities in terms of Chapter XA
of the ICDR Regulations shall be required to list its entire specified
securities on the SME exchange.

(e) An issuer making issue of specified securities in terms of Chapter XA
of the ICDR Regulations shall be exempted from the eligibility
requirements as laid down under regulations 25, 26 and 27 of the
ICDR Regulations.

(f) | An issuer with post issue face value capital between Rs 10 crore and
Rs 25 crore listed on SME exchange can migrate to Main Board, as
specified in the ICDR Regulations and vice-versa, provided they meet
the listing requirements of the stock exchange where they propose to
list the specified securities and have obtained the shareholders
approval in the manner specified in the ICDR Regulations.

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(g)

(h)

(i)

A)

(k)

(I)

(m)

Securities and Exchange Board of India

An issuer listed on SME exchange proposing to issue further capital
pursuant to which their post -issue face value capital may increase
beyond Rs. 25 crore shall migrate to the main board, subject to
obtaining in-principle approval of the main board before issue of such
securities.

An issuer making issue of specified securities in terms of Chapter XA
of the ICDR Regulations shall file the offer document with SEBI and
SME exchange, in respect of proposed issue, through the merchant
banker. No observations would be issued by SEBI on the offer
documents filed by the Merchant Banker/s. The offer document shall
be made available on the websites of SEBI, the issuer, the merchant
banker/s and the SME exchange.

The issue made in terms of Chapter XA of the ICDR Regulations shall
be 100% underwritten and the merchant banker/s shall underwrite
15% in their own account. Merchant Banker/s can also enter into
agreement with nominated investors to subscribe to the unsubscribed
portion of the issue. Such arrangements shall be disclosed in the offer
document.

The merchant banker to the issue will undertake market making
through a stock broker who is registered as market maker with the
SME exchange. The merchant banker shall be responsible for market
making for a minimum period of three years from the date of listing of
the specified securities. Further, the merchant bankers can also enter
into agreement with nominated investors, as defined under ICDR
Regulations, to whom the shares bought or sold during the market
making process can be transferred. Such arrangements shall be with
the prior approval of the SME exchange and disclosed in the offer
document.

During the compulsory market making period, the promoters holding
shall not be eligible for offering to market makers. However, the
promoters holding which are not locked-in in terms of the ICDR can be
traded on the SME exchange with the prior approval of the SME
exchange, in the manner specified by the SEBI. During the
compulsory market making period the buyer of shares from the
promoters or persons belonging to promoter group of the issuer shall
not be eligible to offer such shares to market makers.

Merchant Banker/s who have the responsibility of market making may,
at their option, be represented on the board of the issuer subject to
agreement with the issuer in this regard.

The issuer shall stipulate in the offer document, the minimum
application size in terms of number of specified securities which shall
not be less than one lakh rupees per application.

Page 30 of 35

5.3

5.4

5.5

5.6

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Securities and Exchange Board of India

(n) A minimum number of 50 (fifty) investors is required at the IPO stage
only. There shall be no continuous requirement of minimum number of
shareholders.

(0) A stock broker of the Main Board need not obtain fresh registration for
trading on SME platform of such Main Board. Further, no fresh
registration needs to be obtained by a sub-broker, where such
registered sub-broker is affiliated to stock broker who is eligible to
trade on SME platform.

It is hereby further clarified that —

(a) an issuer listed on a recognized stock exchange other than a SME
exchange and whose post -issue face value capital pursuant to further
issue of securities of the same class does not exceed ten crore rupees
will have option to make further issue of specified securities of same
class in accordance with Chapter XA of the ICDR Regulations
provided that its entire specified securities of the same class shall be
listed on the SME exchange.

(b) In case of migration from SME exchange to main board or vice-versa,
in terms of the ICDR Regulations the issuer shall submit an
information memorandum to the Stock Exchange where it is migrating
to in the format specified by the SME exchange or the Main Board, as
the case may be.

However, if migration is on account of further issue of capital through an
offer document or placement document in terms of ICDR Regulations
the issuer shall not file the information memorandum.

Further, the Guidelines for market making for the specified securities listed
on the SME exchange have also been issued separately through circular no.
CIR/MRD/DP?/ 14 /2010 dated April 26, 2010. Complete text of the guidelines
is available on the SEBI website, www.sebi.gov.in.

The model listing agreement for listing of specified securities issued or
migrated on SME exchange, in terms of Chapter XA of the Securities and
Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009 have also been issued through separate circular no.
CIR/CFD/DIL/6/2010 dated May 17, 2010. Complete text of the model listing
agreement is available on the SEBI website, www.sebi.gov.in.

In view of the above policy decisions, it has been decided to make certain
changes in the framework for recognition and supervision of SME
exchanges/platforms prescribed on November 05, 2008. Accordingly, in
supercession to earlier framework of November 05, 2008, the following
framework in hereby specified.

A. A company desirous of being recognized as a SME exchange may
apply to Market Regulation Department, SEBI, in accordance with the

Page 31 of 35

Bi

oda sfaytr sik fata ad

Securities and Exchange Board of India

provisions of the Securities Contracts (Regulation) Act,1956 ( SCRA)
read with the provisions of the Securities Contracts (Regulation) Rules,
1957 (the SCRR), subject to the applicant fulfilling the following
conditions:

(i)

(ii)

(iii)

(iv)

(vi)

(vii)

(viii)

(ix)

(x)

(xi)

It is a corporatised and demutualised entity and is compliant
with requirements of maintaining public shareholding and
shareholding restrictions in accordance with Chapters II and Ill
of the Securities Contracts (Regulation) (Manner of Increasing
and Maintaining Public Shareholding in Recognised Stock
Exchanges) Regulations, 2006;

It has a balance sheet networth of atleast Rs. 100 crores;

It shall have nation wide trading terminals and an online screen-
based trading system, a suitable Business Continuity Plan
including a disaster recovery site;

It shall have an online surveillance capability which monitors
positions, prices and volumes in real time so as to check market
manipulation;

It shall have adequate arbitration and investor grievances
redressal mechanism operative from all the four regions of the
country.

It shall have adequate inspection capability;

It shall have the same risk management system and
surveillance system as are required for cash market segment of
a recognised stock exchange;

Information about trades, quantities, and quotes shall be
disseminated by the recognized stock exchange in real time to
at least two information vending networks which are accessible
to investors in the country;

The trading system of the stock exchange may be quote driven
or a hybrid of quote driven and order driven. The settlement
system in the stock exchange shall be the same as that of the
cash market of a recognised stock exchange;

The clearing function of the stock exchange shall be performed
by a clearing corporation/ clearing house;

The minimum lot size for trading on the stock exchange shall be
one lakh rupees.

B. The above eligibility criteria shall mutatis mutandis apply to recognised
stock exchanges having nation wide trading terminals and which desires
to set up a trading platform for listing of the specified securities issued in
terms of Chapter XA of the Securities and Exchange Board of India

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Vi.

6.1

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(Issue of Capital and Disclosure Requirements) Regulations, 2009.
Such recognised stock exchange shall file an application demonstrating
its compliance with the conditions mentioned in sub-para (i) to (xi) of
para 6 above alongwith the proposed Rules, Regulations and Byelaws
for the SME platform. Such a platform can be operationalised by the
recognised stock exchange only after obtaining prior approval of SEBI.

SMALL AND MEDIUM ENTERPRISE (SME) : GUIDELINES FOR MARKET
MAKERS ON SME EXCHANGE / SEPARATE PLATFORM OF EXISTING
EXCHANGE HAVING NATION WIDE TERMINAL

SEBI has put in a framework for setting up of new exchange or separate
platform of existing stock exchange having nationwide terminals for SME
(hereinafter referred to as the ‘Exchange/ SME Exchange’). As per the
framework, market making has been made mandatory in respect of all
scrips listed and traded on SME exchange. The following guidelines shall
be applicable to the Market Makers on this exchange.

Applicability

These guidelines are applicable to all the registered Market makers for
making market in all scrips listed and traded on SME exchange.

i. Registration of the Market Maker

Any member of the Exchange would be eligible to act as Market Maker
provided the criteria laid down by the exchange are met. The member
brokers desirous of acting as Market Maker in this exchange shall apply to
the concerned stock exchange for registration as Market Makers unless
already registered as a Market Maker.

i. The obligations and responsibilities of Market Makers

The Market Maker shall fulfil the following conditions to provide depth and
continuity on this exchange:

(a) The Market Maker shall be required to provide a 2-way quote for 75%
of the time in a day. The same shall be monitored by the stock
exchange. Further, the Market Maker shall inform the exchange in
advance for each and every black out period when the quotes are not
being offered by the Market Maker.

(b) The minimum depth of the quote shall be Rs.1,00,000/- . However, the
investors with holdings of value less than Rs 1,00,000 shall be allowed
to offer their holding to the Market Maker in that scrip provided that he

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vi.

Capt acta aera site fatima ate

Securities and Exchange Board of India

sells his entire holding in that scrip in one lot along with a declaration to
the effect to the selling broker.

(c) Execution of the order at the quoted price and quantity must be
guaranteed by the Market Maker, for the quotes given by him.

(d) There would not be more than five Market Makers for a scrip. These
would be selected on the basis of objective criteria to be evolved by the
Exchange which would include capital adequacy, networth,
infrastructure, minimum volume of business etc.

(e

YS

The Market Maker may compete with other Market Makers for better
quotes to the investors;

(f) Once registered as a Market Maker, he has to start providing quotes
from the day of the listing / the day when designated as the Market
Maker for the respective scrip and shall be subject to the guidelines laid
down for market making by the exchange

(g) Once registered as a Market Maker, he has to act in that capacity for a
period as mutually decided between the Merchant Banker and the
market maker.

(h) Further, the Market Maker shall be allowed to deregister by giving one
month notice to the exchange, subject to (g) above.

. Dissemination of Information

The exchange should disseminate the list of Market Makers for the
respective scrip to the public.

Number of Shares per Market Maker

The number of companies in whose shares a Market Maker would make
market should be linked to his capital adequacy as decided by the
exchange.

Risk Containment Measures and monitoring for Market Makers

All applicable margins should be levied and collected without any
waiver/exemption.

Capital Adequacy

The exchanges would prescribe the capital adequacy requirement for its
members to commensurate with the number of companies which Market
Maker proposes to make market. Further, the stock exchange may lay
down additional criteria also for Market Makers as risk containment
measures. The same shall be monitored by the stock exchange.

Monitoring

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Capt acta aera site fatima ate

Securities and Exchange Board of India

All the requirements with regard to market making shall be monitored by the
stock exchange and any violation of these requirements would be liable for
punitive action to be taken by the Disciplinary Action Committee (DAC) of
the Exchange, which may also include monitory penalty apart from the
trade restriction as decided by the DAC under intimation to the Merchant
Banker.

ii.Price Band and Spreads

The exchanges shall prescribe the maximum spread between bid and ask
price. The exchange, may at its discretion also prescribe the price bands for
the same. Further, in case of new issue the spread shall also be specified in
the offer document with the prior approval of the exchange

Circulars : Small and Medium Enterprises : Setting up of Stock Exchange /
a trading platform by a recognized stock exchange having nationwide trading
terminals for SME

1. Circular No.MRD/DP/14/2010 dated April 26, 2010
2. Circular No. CIR/MRD/DSA/17/2010 dated May 18, 2010

REE

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