Roles of market surveillance to a stock exchange

Market Surveillance plays a key role in ensuring safety and integrity of the markets. Market Surveillance Division was set up in SEBI in July , with a view to keep a proactive oversight on the surveillance activities of the stock exchanges.

The primary responsibility of market surveillance has been entrusted to the stock exchanges.

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However, SEBI keeps a proactive oversight on market movements and trends and in exceptional circumstances it analyses the same. In case an analysis of the trading information for the stock exchanges leads to a suspicion of market abuse, then, client details and records are obtained from the stock brokers.

If further analysis of these records suggests the possibility of occurrence of market manipulation or insider dealing or other misconduct, investigations are initiated. The Market Surveillance systems are developed and consolidated on a continuous basis. Some of the surveillance systems and risk containment measures that have been put in place are briefly given below:. An essential tool for ensuring the safety of market is the risk containment system. To ensure safety of the market, all the stock exchanges have an elaborate margining system including mark to market margins and daily margins and exposure and intra-day trading limits.

Different margins were prescribed by the SEBI in consultation with the stock exchanges at different points of time keeping in view the requirements and exigencies of the prevailing situations.

Though, largely the existing margining system had worked well. However, it was felt that there was lack of uniformity in the implementation of various margins by the exchanges. The SEBI has constituted a group to review, rationalize and streamline the margining system. As per the recommendations of the group the following changes were made in the margining system during the year to bring uniformity in implementation of mark to market margin across stock exchanges and remove undue burden on investors who sell for delivery.

The mark to market margin is calculated by marking each transaction in a scrip to the closing price of the scrip at the end of trading. These provisions would bring uniformity in implementation of mark to market margin across stock exchanges and remove undue burden on investors who sell for delivery.

Concentration margin, margin on net exposure and 90 day special margin. Based on the overall assessment of risk it was decided to do away with these three types of margins. Further, the scrips which are in compulsory dematerialised trading for all investors are to be accepted in dematerialised form only. This would improve the quality of the securities component held by the stock exchanges as capital and also guarantee the requisite level of liquidity for these deposits.

It was also decided to increase the frequency of valuation of securities deposited as capital. The valuation would be done at haircut of 15 per cent when it is done more frequently i.

It was also decided to allow the excess additional capital, i. The system of incremental carry forward margin was implemented in to control excessive built up of carry forward positions. The system was modified and it was provided that instead of a flat rate of 10 per cent for every additional 1 per cent increase in carry forward positions the incidence of this margin would be low at low levels of carry forward position in a scrip and high at higher levels.

For carry forward positions exceeding 3 per cent a graded structure of rate of margin varying from 5 per cent to 30 per cent was prescribed. Collection of margins by brokers from their clients was made mandatory.

However, exemption from this has been granted when the margin liability on the client is less than Rs. The system of volatility margin was introduced in June, to curb excessive volatility in the markets. However, it was felt that this margin addressed volatility over a short period of one week only.

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Therefore, with a view to address volatility over short term as well as longer period of six weeks, it was decided that the margin would be levied on the basis of volatility computed on a rolling basis over a period of preceding six weeks. This system was further modified and the threshold volatility was increased from 40 per cent to 60 per cent and the margin rates were increased to 5 per cent to 30 per cent.

To contain abnormal price variations, the SEBI had introduced the system of scrip specific daily price bands. In January, it was decided in principle to allow a further variation of 4 per cent in the scrip prices beyond the existing limit of 8 per cent after a cooling off period of 30 minutes.

This is expected to provide additional exit route to investors. This modified system would be implemented shortly after necessary software changes are carried out by the exchanges.

To start with, this modification will be applicable in the case of top scrips.

Increase in cash component of total cover available with exchanges to 30 per cent. In order to enhance the safety of the markets, it was decided to increase the cash component of additional capital and margins deposited by brokers with exchanges to 30 per cent of the total deposits. Institutional trades form a large part of the trading volumes on major exchanges.

These trades are at present not subjected to margin; it has bee decided to examine the issue of margining these trades. Though the minimum measures for risk containment have been specified by the SEBI, the overall responsibility for risk containment lies with the exchanges. Exchanges have been directed to take further measures as required. Some additional measures taken by the exchanges for risk containment, are intra-settlement and inter-settlement scrip-wise limits on broker positions in addition to the overall limits specified by the SEBI, enforcement of early pay-ins by members with large positions and member-wise adhoc margins.

In order to make the securities markets fair and transparent and for enhanced investor protection, SEBI had taken initiatives, which are given below:. It is necessary to have a proper method for dissemination of price sensitive and other important information relating to companies and market to the public so that they can make informed investment decisions.

The stock exchanges have been advised to display such information on their terminals in the quickest possible manner. Market rumours can do considerable damage to the normal functioning and behaviour of the securities market. It is therefore essential to have quick verification of such rumours from the corporates as well as from other entities whenever necessary. On being asked by the SEBI, companies have designated compliance officers who would be contacted by the stock exchanges whenever such verification is needed.

Exchanges have been asked to take up quick verification of rumours and proper dissemination of the same. Public disclosure of information relating to actions taken against stockbrokers. The stock exchanges are required to make public the actions taken by the Disciplinary Action Committee of the stock exchanges against their member brokers. The stock exchanges have also been asked to issue press releases when such actions are of serious nature. While insider-trading regulations were framed in , it was felt that there was no framework for prevention of insider trading.

A group was set up under the Chairmanship of Shri Kumar Mangalam Birla, member, SEBI, to suggest measures to be taken for strengthening the regulations as well as requirements of procedures, code of conduct and reporting about the entities in the capital market which may have access to non-public information.

The group is in the process of coming up with suitable recommendations in this regard. Internet based securities trading was permitted in Indian capital markets in Jan Internet is a versatile medium and apart from proliferating genuine applications, it has also provided new avenues for market manipulators and fraudsters. The SEBI Committee on Internet based trading and services has set up a working group to look into surveillance and monitoring related issues arising due to Internet based securities trading.

The surveillance cells of the stock exchanges have been advised to devise an internal system of documentation of their surveillance activities and follow-up actions, in order to bring about greater responsibility and accountability in discharging the surveillance functions. The surveillance cells of stock exchanges have been strengthened in terms of manpower and systems as directed by the SEBI.

During , the SEBI inspected surveillance cells of 7 stock exchanges and shortcomings and suggestions have been communicated to them for improvement of the functioning of surveillance cells. The SEBI had put in place a system of reporting by the stock exchanges on surveillance related matters. With a view to bring emphasis on oversight and exception reporting, it was decided to modify the reporting requirements on the lines as below:. Earlier, the exchanges had to seek prior approval from SEBI for suspending scrips for more than three days.

As all the information required for taking such decisions is available with the exchanges, it was decided that the decision for suspension of trading of scrips including for more than 3 days should be taken at the exchange level itself. To improve the functioning of the surveillance cells of stock exchanges, it has been decided that exchanges will take steps to assess manpower requirements and deploy adequate staff for surveillance and monitoring.

Exchanges are also required to provide appropriate training and certification to surveillance staff and facilitate process of certification. SEBI has been trying to strengthen the role of exchanges as effective self-regulatory organisations. Setting up of independent surveillance cells directly reporting to the exchange executive directors was a step in this direction.

Market Surveillance

Development of exchange level surveillance capabilities like stock watch system, directing exchanges to augment their surveillance staff strength and devising a training and certification module for the exchange surveillance staff are further initiatives taken by SEBI in this direction.

Self-regulatory steps taken by exchanges under the oversight of SEBI have improved market safety and integrity. In line with their self-regulatory role, the primary responsibility of market surveillance and monitoring, detection of abnormal trading patterns, analysis and initiation of investigations has been entrusted to exchanges.

Exchanges are required to make reference to SEBI, in appropriate cases, for further investigations by the SEBI. In the year , in 12 cases, further investigations were taken up by the SEBI on reference from exchanges. Major exchanges conducted suo-moto investigations in more than other cases.

As part of its oversight of surveillance activity, SEBI also takes up cases for investigations, but this is done on exceptional basis only. In some of these cases, exchanges had already initiated investigations on their own. There are 23 stock exchanges having different trading and settlement cycles and at the same time scrips have multiple listing on these stock exchanges.

For effective and meaningful co-ordination between these stock exchanges for healthy functioning of the market, an Inter Exchange Market Surveillance Group was set up by the SEBI. The group meets at regular intervals. Six meetings of the Group were convened by the SEBI during Development and implementation of stock watch system — an on-line automated surveillance system.

As trading in the Indian securities markets has become on-line, a sophisticated on-line surveillance system was called for to have effective market surveillance in line with international standards. Development of the Stock Watch System at the exchange level was initiated by the SEBI with this objective. All major exchanges have put in place the basic structure of the stock watch system.

The system is fully functional in NSE. In BSE, the system was formally inaugurated in July , and is operational. However, BSE and some other exchanges are now in the process of prioritisation and benchmarking of the alerts generated by the system. Further refinements of the stock watch system will be taken up after the basic system becomes fully functional in all major stock exchanges. Excessive volatility in the securities markets is a cause of concern for regulators, corporates and investors.

When prices swing at extreme levels, they can have a number of adverse consequences:. As a result of these effects, increased price volatility could in the long run, impact the securities markets adversely. The regulators across the world remain concerned about excessive price volatility. The movement of the BSE Sensex and the Index Volatility are shown in Graph 2. The intra-day and inter-day price fluctuations of the BSE Sensex are shown in Graph 2.

The BSE Sensex had bottomed out in April and closed at Thereafter the index has shown steady rise till October From October 27, , the Sensex witnessed a correction and fell continuously from a level of The fall in the index was attributed to FII sales due to the redemption pressure at the year end. The Sensex rose substantially from then to reach a level of During this period, sensex crossed level on February 11, at This rally could not be sustained and Sensex closed at The fall was attributed to the profit taking in the software scrips after a meteoric rise.

Excessive volatility has been observed in world markets as well, mainly on account of the popularity of telecom, media and technology stocks.

These stocks are inherently volatile because of "uncertainty element" associated with them, absence of any clear cut method of valuation and fast pace of change in technology. These stocks have also been favourites in the Indian markets, and contributed a major portion of trading volumes in this period.

With a view to protect the interest of investors, SEBI has also taken the following steps: It was also observed that the activity in the area of restructuring of companies including mergers, acquisitions, strategic stakes and brand acquisitions had increased in The exchanges were advised to ensure that news and information with respect to such corporate developments is properly disseminated in a timely and effective manner.

Exchanges were also asked to be watchful and alert and verify rumours to ensure fairness in the securities market. In the wake of such events, reported or rumoured, exchanges were also advised to analyse trading patterns quickly. In view of sharp and sudden variations in scrip prices of certain sectors, it was suggested to exchanges in December to take possible proactive actions such as. Some of the measures taken to enhance market safety and described earlier also, are as follows:.

In addition to these measures, press releases were issued on two occasions for the benefit of small investors, cautioning investors to exercise due diligence while transacting in securities.

Implementation of the measures described above have resulted into margin cover to the tune of around 45 per cent in the Indian capital markets. This is borne out by the fact that despite sharp fluctuation in market prices and several instances of high market volatility, the Indian markets have remained safe and stable. SEBI has been strengthening its investigation activities over the years and these activities were further strengthened during Investigations carried out by SEBI during the last few years have produced salutary impact the capital market.

The investigations coupled with proactive surveillance measures have resulted in reduction in number of instances of alleged market manipulations and price rigging. Pursuant to completion of investigation, a number of actions like administrative directions and penal actions under the SEBI Act and the various SEBI Rules and Regulations were effected. These actions include monetary penalties, warning, suspension of activities and cancellation of registration, refund of issue proceeds, prohibiting dealing in securities and access to the capital market, asking trustees and key persons of mutual fund to step down for their failure to protect the interest of the investors, etc.

During , investigations were taken up in several cases alleging market manipulations and price rigging, issues related to manipulations, insider trading and non-compliance of regulations of mutual funds and take-over of companies. The details of these are given in Table 2. As can be seen from table, SEBI took up investigations in 56 cases in bringing the total cases taking up the cumulative total to cases.

The break up of 56 cases in respect to nature of violations alleged, taken up during is given in table 2. Likewise, the break up of 57 cases in respect to nature of violations completed during is given in Table 2. Nature of Investigations Taken up by the SEBI in Nature of Investigations taken up by SEBI in Nature of Investigations Completed by SEBI in On completion of investigations, SEBI Regulations provide procedure of enquiry proceedings in respect of intermediaries for their prima facie violations of SEBI Act and its Regulations.

Show cause notices have been issued during this year to 52 intermediaries by the Enquiry Officer pursuant to enquiry proceedings. Likewise, show cause notices have also been issued in this year to 98 non-intermediaries, pursuant to the completion of the investigation, asking them to show-cause as to why suitable directions including directions prohibiting them from dealing in securities and accessing the capital market, for an appropriate period, should not be issued, for creation of artificial market, price manipulations, insider trading, non-compliance of takeover codes etc.

These non-intermediaries include individuals, firms as well as corporates. In addition to the above, show cause notices have also been issued for initiating prosecution proceedings against the intermediaries and the non-intermediaries for mis-statement in prospectus, market manipulations, delay in transfer of shares, substantial acquisition without following procedure of open offer in violation of takeover code, etc.

During , on completion of investigations, enquiry proceedings were initiated in respect of 52 intermediaries i. The break up of these 52 intermediaries is given in Table 2. In enquiry proceedings have been completed against 81 intermediaries, the details of which is given in Table 2.

During , adjudication proceedings have been initiated in 16 cases and out of these, adjudication proceedings were completed in one case.

Details of Cases Where Enquiry Officer has been Appointed in On completion of investigations and after following the procedure of enquiry proceedings in respect of intermediaries, i. Apart from action against the intermediaries, prohibitive directions were issued under section 11B of the SEBI Act against 58 non-intermediaries, i.

Action taken during is given in Table 2. During the year , 56 cases were taken up for investigation. These cases pertained to allegations of market manipulations and price rigging, issue related manipulations, insider trading, non-compliance with Takeover Regulations, mis-statement in the prospectus, etc. Out of these 56 cases, investigations were taken up in 47 cases of alleged market manipulation and price rigging, 2 cases of issue related manipulations, 3 fresh cases of alleged insider trading, etc.

Such investigations coupled with effective market surveillance under the oversight of SEBI have resulted in significant reduction in cases of market manipulation and price rigging. During , investigations in 37 cases of market manipulation and price rigging, 8 cases of issue related manipulations, 5 cases of insider trading, 3 cases of takeover code violations were completed. Likewise, investigations into issue related manipulations showed that there was mis-use of stock invests, arrangement of subscription to circumvent requirement of minimum subscription, buy-back of shares by the company in contravention of provisions of the Companies Act, acceptance of applications after the closure of the issue, grey market operations, mis-statement in prospectus etc.

After completion of investigations, SEBI has ordered refund of the issue proceeds in one case. Investigations into alleged insider trading cases revealed that in one instance insider trading had taken place.

Apart from price manipulations, issues related to irregularities, takeover code violations and insider trading.

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During this year investigations into irregularities by Mutual Fund were also conducted for the first time. Further, investigations were also made into attempt of certain entities to trigger fall in the market and defraud the settlement guarantee scheme of NSE. In the wake of sudden payment crisis in the month of June , on The Stock Exchange, Mumbai BSE and National Stock Exchange NSE and allegations of manipulation in the scrips of BPL Ltd.

Videocon Sterlite Industries Ltd. It was also alleged that Shriram Mutual Fund SRMF had helped certain brokers of BSE who were having payment problems and purchased shares of Videocon in pursuance to buy-back arrangement. Investigations by SEBI revealed that a company belonging to Shriram group, purchased large quantities of shares of Videocon to help out brokers of BSE who were having payment problems.

Out of these purchases, part of the shares were sold to SRMF as cross deal at a price which was much higher than the market price prevailing on the date of purchase. Investigations also revealed that the purchase of these shares by SRMF, in a falling market, was for extraneous considerations rather than a normal investment decision and pursuant to buy-back arrangement. It was also seen that Shriram Group who is the promoter of Shriram Mutual Fund and Videocon Group of Companies were close associates of each other.

An attempt was made to create record to show that purchase price was not higher than the market price by ante-dating the purchase i.

As a result of investigations, enquiry proceedings were initiated against the brokers involved for falsifying the records. Adjudication proceedings were initiated against Shriram Asset Management Co. SAMC and on completion of the proceedings a fine of Rs. Further, directions were given under Section 11B of the SEBI Act, to the Sponsors of SRMF to pay with interest towards the loss caused to the unit-holders for making purchases at a price higher than the market price. Consequent to initiation of proceedings, the Managing Director of SAMC, resigned from the office.

Directions have been issued making him ineligible to hold any public position in any capital related public institution for a period of three years. It was also directed that 2 other key persons who assisted the Managing Director in these operations and were still with SAMC should resign with immediate effect. The trustees were also asked to step down and Board of Trustees be reconstituted. Investigations were conducted by SEBI into the alleged creation of a false market and price rigging in the scrip of Kamal Overseas Limited.

The allotment money was shown as brought in by means of fictitious book entries without infusion of genuine funds and the shares were issued without receipt of consideration. Investigations further revealed that certain entities tried to create a false market for the shares through circular trading i. Investigations brought out that there was an attempt to defraud the Clearing Corporation of National Stock Exchange settlement guarantee scheme , as sellers connived with the buyers and created large buy positions, when purchasers had no intention to honour the purchase obligation.

Pursuant to the findings of the investigations, enquiry proceedings were initiated against the brokers and sub-brokers and actions are being undertaken against the promoters and their abettors.

Trades were annulled by the stock exchange. SEBI initiated investigation on the receipt of a reference from NSE alleging that there was an attempt to defraud the clearing corporation of NSE by certain clients who built up large purchase positions and then vanished without paying to the brokers for the purchases made by them.

It was also alleged that sellers and buyers connived in this operation. The buying position was built up across the country i. Investigations revealed that brokers at whose terminal buying positions were built up, were not acting diligently and failed to obtain basic details such as address, reference, bank account of the client, etc. It was also seen that clients were allowed to trade without obtaining margins as prescribed by the SEBI and the NSE.

Enquiry proceedings have been initiated against these brokers. Police authorities are looking for absconding clients and proceedings would be initiated on tracing them. Investigations were conducted by the SEBI into the alleged insider trading in the scrip of ABS Industries Ltd.

It was seen that ABS Industries was taken over by the Bayer Industries Ltd. BIL with 51 per cent holding. In order to achieve this objective, preferential allotment was made to BIL and in addition, an open offer was given by BIL to the shareholders of ABS Industries for acquiring 20 per cent holding.

Investigations revealed that there were large purchases by a close relative of the Managing Director of the company, prior to this public offer.

Investigations revealed that these purchases were financed by the Managing Director. The shares acquired from the open market were also offered in the public offer by this relative alongwith companies of the Managing Director.

Show-cause notice was issued for violation of the Insider Trading Regulations and proceedings are in progress. Investigations revealed that company purchased large quantities of shares through its front entities prior to coming out with the right issue at premium.

Investigations brought out that these purchases were made with a view to create artificial market in the scrip of the company and to increase the price of its shares. This was done so that public is induced to invest in the rights issue, which was being brought out at premium. Pursuant to investigations, show cause notices were issued to the promoters and their front entities asking them to show cause why suitable directions including prohibiting them from accessing the capital market, should not be issued.

Enquiry proceedings have been initiated against the concerned brokers, merchant bankers, etc. Investigations were undertaken by the SEBI on the basis of complaints alleging that shares allotted during the public issue on being sold, were declared by exchanges as bad deliveries. These shares on being sold by the allottees, were declared as bad deliveries. Further, investigations revealed that the issue was not fully subscribed and the prices of this scrip were manipulated by some stock brokers.

Pursuant to investigations, enquiry proceedings initiated against the brokers and merchant bankers to the issue involved in the price rigging. Investigations revealed that company had made false claims of dividend payment for previous years in the prospectus to meet the requirement of dividend paying track record for companies coming out with the public issue.

Further, there were other material of misstatements in the prospectus such as pledge of large quantity of shares of the promoters to the bank. Action was initiated against merchant banker for not acting diligently.

Investigations were undertaken by SEBI into the alleged irregularities in the public issue and price manipulations in the scrip of Karwa Salt Refinery and Industries Ltd, Hyderabad. Investigations prima facie revealed that the issue did not receive the required minimum subscription and promoters entered into a financing arrangement for circumventing this requirement.

The subscription was arranged with the understanding that shares would be purchased back by the company from the allottees immediately after completion of allotment process. This also led to cornering of large quantity of shares in the hand of promoters, which facilitated price rigging. Investigations also brought out that the promoters did not bring the contribution as required under the SEBI guidelines. Later, on listing of the scrip on the exchanges, promoters manipulated the prices of the scrip by continuous buying on the exchange.

Pursuant to investigations, enquiry proceedings have been initiated against the registrars to the issue and also the stock brokers etc.

Show cause notices have also been issued to the promoters and also other related entities. Investigations brought out that promoters of Rajesh Exports, Elvis India Ltd. The SEBI initiated prosecution proceedings in 19 cases in bringing the total prosecution proceedings initiated so far to 63 in the last six years. Out of these, 42 prosecution proceedings were initiated under the powers delegated to SEBI under the Companies Act.

Likewise, 8 prosecution proceedings were initiated for violations of the SEBI Substantial Acquisitions of Shares and Take-overs Regulations, Similarly, seven prosecution proceedings were initiated for violations of the SEBI Prohibition of Fraudulent and Unfair Trade Practices relating to the securities market Regulations, , one for violations of the SEBI Insider Trading Regulations, and other one was initiated for non-cooperation during the investigation proceedings.

Further during the year , SEBI for the first time also initiated two prosecution proceedings each against Portfolio Managers and unregistered entities. The details of the above prosecution cases filed in the Court of Law till the end of are given in Table 2. Prosecution proceedings were initiated in nineteen cases in the financial year , which involved persons. The persons against whom prosecution proceedings have been initiated by SEBI till the end of numbered The breakup of the cases and the number of persons involved which is given in Table 2.

The prosecution proceedings initiated in 9 cases during the year as was shown in the last years annual report was cumulative figure till March 31, A total of 13 Registrars to an Issue and Share Transfer Agents were suspended for non-payment of fees. One Registrar has been referred to adjudication as it had not entered into valid agreement with their clients. During the year 5 Banks were Show-Caused and 2 Warning Letters were issued to them for non compliance with SEBI directives and various rules and regulations.

In view of this, as a remedial measure, the Chairman issued direction under section 11 B of the SEBI Act, directing the banks to refund a sum of Rs Facts on record indicate that Shri Rajesh Gupta apparently colluded with Shri Traun Goyal and made Elite Computer Technics Pvt.

Ltd a party to the aforesaid public issues.. No due diligence was exercised by Shri Rajesh Gupta while accepting the assignments and he had acted recklessly in collusion with Shri Tarun Goyal in becoming a party in committing the above said irregularities. Number of Cases Taken up for Investigation. Number of Cases Completed. Registrars to an issue and share transfer agents. Prohibitive directions issued under section 11B of SEBI Act.

Under powers delegated under the Companies Act. Delay in refund of excess application money, delay transfer of shares and non-payment of dividend. Mis-statement in offer document and fraudulent inducement. Under powers given by the SEBI Act.

Violation of SEBI Substantial Acquisition of Shares and Take-overs Regulations, Violation of SEBI Prohibition of Fraudulent and Unfair Trade Practices relating to the securities market Regulations, Violation of SEBI Insider Trading Regulations, Persons prosecuted for violation of the provisions of SEBI Act and Rules and Regulations made thereunder.

Persons prosecuted for violation of the provisions of Companies Act,