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Securities and Exchange Board of India
MASTER CIRCULAR
CIR/MRD/DMS/40/2010 December 31, 2010
To,
All Stock Exchanges and Depositories
Dear Sir / Madam,
Sub: Master Circular for Stock Exchanges and Depositories
Securities and Exchange Board of India (SEBI) has been issuing various circulars
from time to time. In order to enable the users to have an access to all the
applicable circulars at one place, Master Circular for Stock Exchanges and
Depositories has been prepared.
This Master Circular is a compilation of the circulars issued by Market
Regulation Department –Division of Market Supervision of SEBI up to December
31, 2010 and shall come into force from the issuance date.
Yours faithfully,
MANOJ KUMAR
General Manager
+91-22-26449260
manojk@sebi.gov.in
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Securities and Exchange Board of India
Table of Contents
SECTION -I: ANNUAL SYSTEMS AUDIT
1.1 Annual System Audit for Stock Exchanges
1.2 Annual System Audit for Depositories
SECTION -II: POWER OF ATTORNEY
2.1 Execution of Power of Attorney (PoA) by the Client in favour of the
Stock Broker/ Stock Broker and Depository Participant.
2.2 Execution of Power of Attorney (PoA) by the Client in favour of the
Stock Broker/ Stock Broker and Depository Participant
Clarifications.
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Securities and Exchange Board of India
SECTION – 1: ANNUAL SYSTEMS AUDIT
1.1 Annual System Audit for Stock Exchanges1
1. Considering the importance of systems audit in a highly technology
driven securities market, it has been decided that exchanges shall conduct
audit of their systems by a reputed independent auditor on an annual
basis. The systems audit should be comprehensive encompassing audit of
systems and processes related to examination of Trading Systems,
Clearing and Settlement Systems (Clearing Corporation/Clearing House),
Risk Management, Databases, Disaster Recovery Sites, Business
Continuity Planning, Security, Capacity Management and Information
Security Audit.
2. Accordingly, Stock Exchanges are advised to get the above systems audit
conducted on an annual basis and such Systems Audit Report and
Compliance Status be placed before the Governing Board of the exchange.
The systems audit report / findings along with comments of Stock
Exchanges should be communicated to SEBI.
1.2 Annual System Audit for Depositories2
1. Regulation 35 of the SEBI (Depositories and Participant) Regulations, 1996
requires that “Every depository shall cause an inspection of its controls,
systems, procedures and safeguards to be carried out annually and
forward a copy of the report to the Board”.
2. In this context, it is advised that the Systems Audit of the depository
should be carried out once every year and such Systems Audit Report
along with the compliance status should be placed before the Governing
Board of the depository. Such report should include security audit as well.
The systems audit report / findings along with comments of Depositories
should be communicated to SEBI.
SECTION -II: POWER OF ATTORNEY
1
Circular No. MIRSD/DPS-III/Cir-22/2008, Dated: July 23, 2008
2
Letter No. MIRSD/DPS-III/ 132833/ 2008, Dated: July 23, 2008
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Securities and Exchange Board of India
2.1 Execution of Power of Attorney (PoA) by the Client in favour of the
Stock Broker/ Stock Broker and Depository Participant3
1. A Power of Attorney 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.
2. Generally, the PoA is taken from the clients who want to avail internet
based trading services. For offering internet based trading services, a stock
broker requires necessary authorizations for seamless trading, collection
of margins as well as settlement of funds and securities. Further, some of
the stock brokers also obtain authorizations from their clients to offer non-
internet based services.
3. It has come to SEBI’s notice that the clients are compelled to give
irrevocable power of attorney to manage clients’ demat account(s) and
bank account(s) so that the clients are able to pay funds or deliver shares
to their brokers on time. In some cases, the PoA even allows a broker to
open and close accounts on behalf of the client and to trade on client’s
account without the consent of the client.
4. In order to standardize the norms to be followed by stock brokers / stock
broker and depository participants while obtaining PoA from the clients,
guidelines have been finalized based on discussions in Secondary Market
Advisory Committee of SEBI (SMAC) and feedback from market
participants, investor associations, major stock exchanges and depositories
on discussion paper on the captioned subject put on SEBI website. It has
been decided that the guidelines as set out in para 7, 8 and 9 shall be made
applicable to stock brokers / stock broker and depository participants.
5. Standardizing the norms for PoA must not be construed as making the
PoA a condition precedent or mandatory for availing broking or
depository participant services. PoA is merely an option available to the
client for instructing his broker or depository participant to facilitate the
delivery of shares and pay-in/pay-out of funds, etc. No stock broker or
depository participant shall deny services to the client if the client refuses
to execute a PoA in their favour.
3
Circular No. CIR/MRD/DMS/13/2010 Dated April 23, 2010
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Securities and Exchange Board of India
6. The stock brokers were required to take necessary steps to implement this
circular latest by May 31, 2010 for the new clients and ensure to take
necessary steps latest by September 01, 2010 to revoke those
authorizations given by the existing clients to the stock brokers / stock
broker and depository participants through PoA that are inconsistent with
the present guidelines.
7. Guidelines for execution of Power of Attorney by clients favouring stock
brokers / stock broker and depository participants:-
7.1 PoA favouring Stock Brokers
PoA executed in favour of a stock broker by the client should be limited to
the following:
A. Securities
(i) Transfer of securities held in the beneficial owner account(s) of the
client(s) towards stock exchange related margin / delivery
obligations arising out of trades executed by the client(s) on the stock
exchange through the same stock broker.
(ii) Pledge the securities in favour of Stock Broker for the limited
purpose of meeting the margin requirements of the client(s) in
connection with the trades executed by the client(s) on the stock
exchange through the same stock broker. Necessary audit trail
should be available with the stock broker for such transactions.
(iii) To apply for various products like Mutual Funds, Public Issues
(shares as well as debentures), rights, offer of shares, tendering
shares in open offers 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 instructions from client(s).
B. Funds
Transfer of funds from the bank account(s) of the client(s) for the
following:
a) For meeting the settlement obligations of the client(s) / margin
requirements of the client(s) in connection with the trades
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Securities and Exchange Board of India
executed by the clients on the stock exchange through the same
stock broker.
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, tendering of shares in open offers, 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.
e) Necessary audit trail should be available with the stock broker
for such transactions.
7.2 POA favouring Stock Brokers and Depository Participants
PoA executed in favour of a stock broker and depository participant by
the client should:
(i) 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.
(ii) provide the list of clients’ & brokers’ bank accounts & demat
accounts where funds and securities can be moved. Such bank
& demat accounts should be accounts of related party only.
(iii) 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.
(iv) not provide the authority to transfer the rights in favour of any
assignees of the stock broker /depository participant.
(v) be executed and stamped as per the rules / law prevailing in
the place where the PoA is executed or the place where the PoA
is kept as a record, as applicable.
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Securities and Exchange Board of India
(vi) contain a clause by which the stock broker would return to the
client(s), the securities or funds that may have been received by
it erroneously or those securities or funds that it was not
entitled to receive from the client(s).
(vii) be revocable at any time, without notice.
(viii) be executed by all the joint holders (in case of a demat account
held jointly). If the constitution of the account is changed for
whatever reason, a new PoA should be executed.
(ix) authorize the stock broker/depository participant to send
consolidated summary of client's scrip-wise buy and sell
positions taken with average rates to the client by way of SMS /
email on a daily basis, notwithstanding any other document to
be disseminated as specified by SEBI from time to time.
8. General Guidelines
The POA shall not facilitate the stock broker to do the following:
(i) Transfer of securities for off market trades.
(ii) Transfer of funds from the bank account(s) of the clients for
trades executed by the clients through another stock broker.
(iii) Open a broking / trading facility with any stock broker or for
opening a beneficial owner account with any depository
participant.
(iv) Execute trades in the name of the client(s) without the client(s)
consent.
(v) Prohibit issue of Delivery Instruction Slips (DIS) to beneficial
owner (client).
(vi) Prohibit client(s) from operating the account.
(vii) Merging of balances (dues) under various accounts to nullify
debit in any other account.
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Securities and Exchange Board of India
(viii) Open an email ID/ email account on behalf of the client(s) for
receiving statement of transactions, bills, contract notes etc.
from stock broker / depository participant.
(ix) Renounce liability for any loss or claim that may arise due to
any blocking of funds that may be erroneously instructed by the
stock broker to the designated bank.
9. Stock Broker / Depository Participant should ensure that:
(i) A duplicate/ certified true copy of the PoA is provided to the
client(s) after execution.
(ii) In case of merger/ demerger of the stock broker/depository
participant with another entity/ into another entity, the scheme
of merger/ demerger should be approved by High Court and
one month prior intimation given to the client about the
corporate restructuring to facilitate investor / client to continue
or discontinue with the broker / depository participant.
2.2 Execution of Power of Attorney (PoA) by the Client in favour of the
Stock Broker/ Stock Broker and Depository Participant – Clarifications4
1. SEBI received representation from Market Participants seeking guidance
and clarifications on process to be followed for implementation of the
provisions of the circular no. CIR/MRD/DMS/13/2010 dated April 23,
2010.
2. Based on the examination of the issues highlighted in the representations
and so as to facilitate the implementation of the provisions of the aforesaid
circular, clarifications were issued for immediate implementation as
follows :
S. Clauses / Provisions of the PoA Clarifications
No. Circular
1 Standardizing the norms for PoA Only internet based trading
must not be construed as making exempted.
the PoA a condition precedent or
4 Circular No. CIR/MRD/DMS/28/2010 Dated August 31, 2010.
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Securities and Exchange Board of India
S. Clauses / Provisions of the PoA Clarifications
No. Circular
mandatory for availing broking or
depository participant services.
PoA is merely an option available
to the client for instructing his
broker or depository participant to
facilitate the delivery of shares and
pay-in /pay-out of funds, etc. No
stock broker or depository
participant shall deny services to
the client if the client refuses to
execute a PoA in their favour.
2 The Stock Brokers shall take Stock Broker/ DP may revoke
necessary steps to implement this those authorizations that are
circular latest by May 31, 2010 for inconsistent with the present
the new clients and ensure to take guidelines by communicating
necessary steps latest by the inconsistent clauses to the
September 01, 2010 to revoke those existing clients. In the event,
authorizations given by the the deleted / modified clauses
existing clients to the stock are not accepted by the client,
brokers/ stock broker and Stock Broker / DP may be
depository participants through required to either obtain fresh
PoA that are inconsistent with the PoA or close the account. In
present guidelines. case of any addition to the
existing PoA, Stock Broker /
DP shall be required to obtain a
new PoA from clients.
3 PoA executed in favour of a stock Margin / Delivery obligations
broker by the client should be shall also include settlement
limited to the following: obligations, if any.
“(i) Transfer of securities held in
the beneficial owner account(s)
of the client(s) towards stock
exchange related margin /
delivery obligations arising out
of trades executed by the
client(s) on the stock exchange
through the same stock broker.”
4 PoA executed in favour of a stock Redemptions are also included
broker by the client should be in PoA pursuant to client’s
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Securities and Exchange Board of India
S. Clauses / Provisions of the PoA Clarifications
No. Circular
limited to the following: instructions.
“(iii) To apply for various
products like Mutual Funds,
Public Issues (shares as well as
debentures), rights, offer of
shares, tendering shares in open
offers 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.”
5 PoA executed in favour of a stock The list of clients’ & brokers’
broker and depository participant bank accounts & demat
by the client should provide the accounts may be updated /
list of clients’ & brokers’ bank amended by proper
accounts & demat accounts where communication without
funds and securities can be moved. executing a new PoA every
Such bank & demat accounts time. Copies of such
should be accounts of related party communications may be
only. preserved as annexure to the
PoA.
6 PoA executed in favour of a stock PoA executed in favour of a
broker and depository participant stock broker / stock broker and
by the client should be revocable at depository participant by the
any time, without notice. client should be revocable at
any time. However, such
revocation shall not be
applicable for any outstanding
settlement obligation arising
out of the trades carried out
prior to receiving request for
revocation of PoA. Further,
the PoA revocation requests
should be dated and time
stamped by the brokers for
ensuring proper audit trail.
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Securities and Exchange Board of India
S. Clauses / Provisions of the PoA Clarifications
No. Circular
7 The POA shall not facilitate the The PoA shall not facilitate
stock broker to do the following: off-market trades between
parties other than the related
parties as mentioned in the
“12. Transfer of securities for off
PoA.
market trades”
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