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S E C U R I T I E SAND EXCHANGEBOARD OF INDIA

ANNUAL REPORT 2002 - 2003 111111111111111

Part Three of this Annual Report discussesand analyzes regulation and functioning ofstock exchanges, subsidiaries of stockexchanges, regulatory action against stockexchanges, status of capital market,intermediaries registered with SEBI andmatters pertaining to, Mutual Funds,Collective Investment Schemes andregulatory developments.

1. REGULATION OF STOCKEXCHANGES AND SUBSIDIARIES

One of the key functions of the Board is tosupervise and monitor the activities of theexchanges, clearing houses and thesettlement system, strengthen marketinfrastructure and ensure that appropriate riskmanagement systems are in place.

I. Inspection of Stock Exchanges:

On-site supervision through inspection ofstock exchanges is considered an effectiveregulatory tool. Under the policy of risk-basedsupervision which has been adopted from theyear under review, stock exchanges havinga significant turnover were taken up for on-site inspection. These were The BombayStock Exchange (BSE), Calcutta StockExchange (CSE), National Stock Exchange(NSE), Inter Connected Stock Exchange(ISE), Ludhiana Stock Exchange (LSE),Hyderabad Stock Exchange (HSE) andAhmedabad Stock Exchange (ASE).

The objectives of the inspection were toensure that -

A. The exchange provides a fair, equitableand growing market to investors,

PART THREE: FUNCTIONS OF SEBI IN RESPECT OFMATTERS SPECIFIED IN SECTION 11 OF THE SECURITIES

AND EXCHANGE BOARD OF INDIA ACT, 1992

B. the exchange has complied with theconditions, if any, imposed on it at thetime of renewal/ grant of its recognitionunder section 4 of the SC(R) Act, 1956.

C. The exchange’s organization, systemsand practices are in accordance with theSecurities Contracts (Regulation) Act(SC(R) Act), 1956 and rules framedthereunder,

D. The exchange has implemented thedirections, guidelines and instructionsissued by the SEBI from time to time,

E. There are adequate internal controlmechanisms and risk managementsystems.

A Special inspection of Calcutta StockExchange (CSE), Uttar Pradesh StockExchange (UPSE), Ludhiana Stock Exchange(LSE) and Jaipur Stock Exchange (JSE) wasalso carried out during the year.

The post inspection follow up was alsostrengthened through -

A. Increase in periodicity of review ofcompliance reports.

B. Mandating review of action taken on thereport by a sub-committee of theGoverning Board of the stock exchangesatleast twice each quarter andsubmission of the review to theGoverning Board of the exchange.

C. Issue of letters of displeasure for failureto comply with the previous inspectionreports and unsatisfactory compliance.

D. Personal meetings to discuss the statusof implementation of findings ofinspection reports.

Part-III Functions of SEBI in Respect of Matters specified in Section 11 of the SEBI Act, 1992

112112112112112 ANNUAL REPORT 2002 - 2003

II. Inspection of Subsidiaries of StockExchanges

A. Six subsidiaries of stock exchanges wereinspected during the financial year 2002-03viz ASE Capital Markets Ltd (ACML –Subsidiary of ASE), ISE Securities & ServicesLtd (ISS - Subsidiary of ISE), LSE SecuritiesLtd (LSESL - Subsidiary of LSE), HSESecurities Ltd (HSESL - Subsidiary of HSE),SKSE Securities Ltd (SKSESL - Subsidiary ofSaurashtra Kutch Stock Exchange) and VSESecurities Ltd (VSL- Subsidiary of VadodaraStock Exchange). A special inspection ofMPSE Securities Ltd (MPSESL - Subsidiaryof MPSE) was carried out. Follow up actionincluded discussion with the parent exchangesof the subsidiaries. Letters of displeasure wereissued to the parent stock exchanges of thosesubsidiaries for which findings were seriousas well as those which failed to comply withsuggestions/observations of inspection reports.

III. Restructuring of Management ofSubsidiaries:

The inspection of the subsidiaries of stockexchanges revealed deficiencies in theirfunctioning and risk management systems Themanagement structure of the subsidiariesneeded to undergo change in order to enablethem to be able to provide a safe andtransparent market and effectively dischargetheir responsibilit ies towards investorprotection. A Circular dated February 11, 2003has, therefore, been issued to stockexchanges directing them to carry out thechanges in management structure of theirsubsidiaries.

IV. Illegal Trading in Securities

It had come to the notice of the SEBI thatcertain persons were engaging in trading insecurities outside the purview of the stockexchanges (‘illegal trading in securities’). Suchtrading particularly in Gujarat has come to be

known as ‘DABBA’ trading. There were alsoreports in the media regarding illegal use ofterminals provided to the brokers by theNational Stock Exchange in Kolkata and otherplaces. Media had also reported Kerb tradingin the cities of Kanpur, Kolkata, Mathura,Ahmedabad, Rajkot and Mumbai. Since theseactivities are illegal and pose a systemic riskbesides luring common investors into the netthe Board tool immediate action by sendingteams to some cities of Gujarat viz.Ahmedabad, Vadodara and Rajkot to conductsurprise inspections. Since it is not possibleto identify the persons who carry on theseactivities the Chief Ministers of all the Stateswere requested through letters and remindersto use the local police force to check theseillegal activities. NSE, BSE and other StockExchanges were altered to verify involvementof their members and take coercive action.The public were also cautioned through anotice issued in the newspapers in English,Hindi and major regional languages about theillegal activities and educating them about theperils of such illegal trades.

2. REGISTRATION AND REGULATIONOF THE WORKING OFINTERMEDIARIES

In order to interpose between issuers andinvestors, regulators recognize various classesof intermediaries in the capital market.Regulation through intermediaries has beenfound, perhaps more effective in certainspheres of activity. SEBI, over the period,recognized many types of capital marketintermediaries in India and operations duringthe year is reviewed in the following sections.

I. Primary Market

Intermediaries such as merchant bankers,underwriters, debenture trustees, bankers toan issue, registrars to an issue and sharetransfer agents and portfolio manager are the


ANNUAL REPORT 2002 - 2003 113113113113113

intermediaries that function in the inter aliain the primary markets. From Table 3.1 it maybe seen that number of registeredintermediaries declined (except for portfoliomanagers) as a result of, consolidation ofintermediary activities, enhanced complianceand disclosure systems and the general downtrend in the primary markets.

A. Broker Registration

Table 3.2: Details of Registered Brokers

Total No. of Registered Addition during the Reconciliation - Total No. of RegisteredBrokers as on 31-3-2002 year 2002-2003 Cancellation/ Surrender Brokers as on

of Memberships 31-3-2003

9687 135 303 9519

Source: SEBI

details of registered brokers – exchange wise,and their composition, and ownership pattern.There are 3835 corporate brokers in India ason March 31, 2003 and they constituted about40 per cent of total brokers. Percentage ofcorporate brokers is found to be at the highestat NSE, OTCEI and BSE at 89 per cent, 76and 67 per cent respectively and togetherconstitute over fifty percent of the corporatebrokers in all exchanges. NSE and BSEtogether have over one-third of corporatebrokers between them. On the smallerexchanges such as Gauhati and Jaipurpercentage of corporate brokers is negligible.The composition of membership has beenshifting to the corporate entities over theyears.

MULTIPLE MEMBERSHIP :

Entities are allowed to obtain membership atmore than one stock exchange. Table 3.5gives details of such Multiple membership.

The multiple membership ranges between twoto six. It may be seen that 854 entities.

have membership at two exchanges while 3entities have membership at 6 exchanges.About ten per cent of the total brokers havemultiple memberships.

B. Sub-Broker RegistrationSub-brokers are intermediaries between thebroker and the investor. SEBI Requirementsinclude registration of sub-brokers through thestock exchanges at which the broker is a

Table 3.1: Details of IntermediariesRegistered as at end March 2003

Type of intermediary No. Varia-

2001-02 2002-03 tionin Nos.

Registrarto an Issue Category I 98 90 -8and Share Category II 63 53 -10TransferAgent Total 161 143 -18

Banker to an Issue 68 67 -1

Debenture Trustee 40 35 -5

Merchant Banker 145 124 -21

Portfolio Manager 47 54 +7

Underwriter 54 43 -11

Source: SEBI

II. Secondary Market

Brokers are one of the most important linksbetween the investors and the market. Theirassociation with the stock exchanges andinvestors dates back to as early as nineteenthcentury. The number of registered brokersdeclined by168 during 2002-03. Jaipur, NSE,Gauhati and OTCEI stock exchanges mainlycontributed to this fall. However, on certainexchanges, for example, BSE, Delhi etc. therewere new registrations. Tables 3.2 to 3.4 give


114114114114114 ANNUAL REPORT 2002 - 2003

Table 3.3: Exchange-wise Brokers registered with SEBI

Sr. Stock Exchange Total Regd Corporate Corporate Total Regd Corporate Corporate AbsoluteNo. Brokers Regd. Broker Brokers Regd. Broker Variation –

(31.3.02) Brokers as a (31.3.03) Brokers as a Total regdPercentage Percentage Brokers

of total of totalbrokers broker

1. Ahmedabad 325 151 46.46 323 152 47.06 -2

2. Bangalore 249 112 44.98 245 114 46.53 -4

3. Bhubaneshwar 232 17 7.33 233 18 7.73 1

4. Calcutta 992 205 20.67 987 201 20.36 -5

5. Cochin 470 74 15.74 464 75 16.16 -6

6. Coimbatore 193 63 32.64 182 62 34.07 -11

7. Delhi 379 214 56.46 374 213 56.95 -5

8. Gauhati 194 5 2.58 175 5 2.86 -19

9. Hyderabad 303 117 38.61 306 120 39.22 3

10. ICSE 630 245 38.89 630 247 39.21 0

11. Jaipur 592 21 3.55 555 19 3.42 -37

12. Ludhiana 300 83 27.67 302 85 28.15 2

13. Madhya Pradesh 187 34 18.18 188 34 18.09 1

14. Madras 192 71 36.98 186 71 38.17 -6

15. Magadh 200 19 9.5 199 20 10.05 -1

16. Mangalore 138 15 10.87 116 11 9.48 -22

17. Mumbai 660 463 70.15 665 468 70.38 5

18. NSE 1065 940 88.26 1036 918 88.61 -29

19. OTCEI 902 705 78.16 883 690 78.14 -19

20. Pune 196 60 30.61 197 59 29.95 1

21. Saurashtra Kutch 446 82 18.39 436 85 19.5 -10

22. UPSE 520 101 19.42 518 103 19.88 -2

23. Vadodara 322 65 20.19 319 65 20.38 -3

Total 9687 3862 39.87 9519 3835 40.29 -168

Source: SEBI


ANNUAL REPORT 2002 - 2003 115115115115115


116116116116116 ANNUAL REPORT 2002 - 2003

Table 3.4: Classification of Brokers as per Nature of Ownership (March 31, 2003)

Sr. Stock Exchange Proprietor Partnership Corporate Financial Composite TotalNo. Institution Corporate

1. Ahmedabad 147 24 151 0 1 323

2. BSE 158 39 446 0 22 665

3. Bangalore 128 3 114 0 0 245

4. Bhubaneshwar 215 0 18 0 0 233

5. Calcutta 735 51 200 1 0 987

6. Cochin 379 10 75 0 0 464

7. Coimbatore 120 0 62 0 0 182

8. Delhi 127 34 212 1 0 374

9. Gauhati 169 1 5 0 0 175

10. Hyderabad 180 6 120 0 0 306

11. ICSE 382 1 246 1 0 630

12. Jaipur 529 7 19 0 0 555

13. Ludhiana 215 2 85 0 0 302

14. Madhya Pradesh 151 3 34 0 0 188

15. Madras 97 18 71 0 0 186

16. Magadh 178 1 20 0 0 199

17. Mangalore 101 4 11 0 0 116

18. NSE 58 60 918 0 0 1036

19. OTCEI 173 20 675 15 0 883

20. Pune 130 8 59 0 0 197

21. Saurashtra Kutch 349 2 85 0 0 436

22. UPSE 409 6 103 0 0 518

23. Vadodara 251 3 65 0 0 319

Total 5381 303 3794 18 23 9519

Source: SEBI


ANNUAL REPORT 2002 - 2003 117117117117117

During the year 49 FIIs were granted freshregistration whereas 34 FIIs were grantedrenewal of registration. 163 sub-accounts gotregistered and the registration of 71 sub-accounts were renewed.

IV. Registration of Custodian ofSecurities

Eleven entities stood registered as custodianof securities as of March 31, 2003 comparedto 12 entities as of March 31, 2002.

member. Details of registered sub-brokers –exchange wise, is given in Table 3.6. About99% of the sub-brokers are registered throughmembers of NSE and BSE. During the year54% of the registrants were through NSEmembers compared to 45 percent throughBSE members. Six exchanges do not haveany sub-brokers.

III. Registration of FIIs

As at March 31, 2003 there were 502 FIIsand 1361 sub-accounts registered with SEBI.

Table 3.5: Multiple Membership Details :

2001-02 2002-03

No. of Memberships No. of members Total Mutliple No. of members Total Multiple Members Members

2 627 1254 854 1708

3 90 270 82 246

4 9 36 10 40

5 4 20 3 15

6 1 6 3 18

Source: SEBI


118118118118118 ANNUAL REPORT 2002 - 2003

Table 3.6: Stock Exchange- wise Registered Sub-Brokers : Percentage Share in Total

Sr. Name of Stock Exchange During 2002-03 As on March 31, 03No.

1. Ahmedabad 0.3 1.1

2. Bangalore 0.0 1.2

3. Bhubaneshwar 0.0 0.1

4. Calcutta 0.1 1.1

5. Cochin 0.0 0.3

6. Coimbatore 0.0 0.2

7. Delhi 0.0 3.5

8. Gauhati 0.0 0.0

9. Hyderabad 0.0 1.5

10. ICSE 0.1 0.0

11. Jaipur 0.0 0.3

12. Ludhiana 0.0 0.3

13. Madhya Pradesh 0.0 0.9

14. Madras 0.0 0.0

15. Magadh 0.0 0.0

16. Mangalore 0.0 0.0

17. Mumbai 45.3 51.8

18. NSE 54.1 35.4

19. OTCEI 0.0 0.2

20. Pune 0.0 1.2

21. Saurashtra Kutch 0.0 0.0

22. UPSE 0.0 0.2

23 Vadodara 0.0 0.6

Total 100.0 100.0

Source: SEBI

3. REGISTRATION AND REGULATIONOF COLLECTIVE INVESTMENTSCHEMES INCLUDING MUTUALFUNDS

I. Registration of Collective InvestmentSchemes (CIS)

Subsequent to the notification of Regulations,SEBI had received applications for grant of

registration from 50 CIS entities. Out of these50 CIS entities, SEBI had granted provisionalregistration to six CIS entities, whileapplications of 44 CIS entities were rejectedand they were ordered to wind up theirschemes and make repayment to theirinvestors. During the year 2002-2003, theprovisional registration granted to one CIS


ANNUAL REPORT 2002 - 2003 119119119119119

entity expired. Thus, the total number ofprovisionally registered CIS entities is five.

In terms of Regulations, an existing collectiveinvestment scheme which has (i) failed tomake an application for registration to theBoard; or (ii) not been granted provisionalregistration by the Board; or (iii) havingobtained provisional registration fails tocomply with the provisions of Regulation 71;or (iv) is not desirous of obtaining provisionalregistration; is required to wind up its existingschemes, make repayment to the investorsand thereafter submit “Winding up andRepayment Report” to SEBI. SEBI hasreceived “Winding up and Repayment Report”from 57 CIS entities.

Prosecution under Section 24 of SEBI Act,1992 has been filed by SEBI against 139erring CIS entities. Other actions such asdebarring the promoters/ directors/ managers/persons in charge of the business of thescheme from operating in the capital market;writing to the State Governments to registercivil/ criminal cases against the erring entitiesfor apparent offences of fraud, cheatingcriminal breach of trust and misappropriationof public funds; writing to the Department ofCompany Affairs to initiate the process ofwinding up of the erring 555 CIS entities hasalso been taken up.

Requests have been made to policeauthorities to file the First Information Reportsagainst 49 CIS entities for offences such ascriminal breach of trust, cheating, etc.

In CWP No. 3352/98 in the matter of Shri. S.D Bhattacharya and others vs SEBI, theHon’ble High Court, Delhi impleaded all theCIS entities. Earlier, the court had, inter-alia,restrained them from selling, disposing of and/or alienating their immovable properties orparting with the possession of the same. Their

directors had also been interdicted fromtransferring their immovable property in anymanner whatsoever. The Hon’ble High Courtalso made it clear that its order will not comein the way of companies intending to refundthe money to their investors. In an orderdated January 22, 2002, the Hon’ble HighCourt has ordered to freeze the bankaccounts of 513 erring CIS entities and theirdirectors/promoters till they comply with theregulations/SEBI Directions regardingrepayment to their investors.

II. Mutual Funds Registered with SEBI

During the year, registration was granted totwo new mutual funds in the private sectorviz HSBC Mutual Fund and Deutsche MutualFund. With the enactment of the UTI(Repealment Ordinance), the UTI was dividedinto the UTI-I and UTI-II. UTI-II known as UTIMutual Fund was registered with SEBI onJanuary 14, 2003.

During the year 2002-03, the certificate ofregistration granted to two mutual funds werecancelled viz JF Mutual Fund (formerly knownas Jardine Fleming Mutual Fund) and PioneerITI Mutual Fund (formerly known as KothariPioneer Mutual Fund). In case of JF MutualFund, the schemes were taken over by SunF&C Mutual Fund whereas the schemes ofPioneer ITI Mutual Fund were merged withTempleton Mutual Fund.

Table 3.7: Mutual Funds Registered withSEBI

Sector As on As on31-03-2002 31-03-2003

Public Sector 8 9*

Private Sector 29 29

Total 37 38

* Public sector mutual funds include UTI Mutual Fund.

Source: SEBI


120120120120120 ANNUAL REPORT 2002 - 2003

III. Venture Capital Funds

A. Domestic and Foreign VentureCapital Funds

During the year, registration was granted tonine new domestic venture capital funds(DCVFs). Registration was also granted tofour foreign Venture Capital Investors (FVCIs).

Table 3.8: Number of Venture capital Funds

31-03-2002 31-03-2003

DVCF 34 43

FVCI 2 6

Source: SEBI

4. PROMOTION AND REGULATION OFSELF REGULATORYORGANISATIONS

I. Development of Stock Exchanges asSelf Regulatory Organisations

There are 23 stock exchanges recognizedunder Section 4 of the Securities Contracts(Regulation) Act, 1956.These exchanges wererecognized /set up over a period of time tostimulate growth of capital market throughchannelising the savings of individuals andsmall investors. These exchanges are suitablyempowered by the section 9 of SC(R)A, 1956to make bye laws for the conduct of business,regulation and control of contracts.

SEBI is contemplating development of SelfRegulatory Organizations(SROs) for marketintermediaries. Stock exchanges are alreadyacting as SROs and the SRO structure needsto be strengthened further. The objective forpromoting intermediaries like Stock Exchangesas Self Regulatory Organizations (SROs) isthat since they have a better feel on theground reality, they should take care of themicro aspects of regulation. The other inherentadvantages of self regulation are:

a. Self regulation becomes the responsibilityof market professionals and may resultin greater acceptance of rules by themembers of SRO.

b. It also provides market players with greaterflexibility to respond to securities market.

c. It avoids duplication of responsibilities:it is observed over years of experiencethat if the regulatory body gets into microregulation, it loses the sight offundamentals and lands up in duplicationof responsibilities, besides

d. SROs are expected to have a betterunderstanding of ground realities.

However, for any organization /body like StockExchange to effectively function as an SRO,it is necessary that it has the capacity toenforce compliance to byelaws, rules andregulations laid down by itself. Further, theseSROs should be able to enforce and establishrules which prevent fraudulent andmanipulative trade practices and promote justand equitable principles of trade. Presentlysuch powers are conferred to the exchangesby the section 9 of SC(R)A, 1956 wherebythey can make bye laws for the conduct ofbusiness, regulation and control of contracts.

However, developing Stock Exchanges asSelf Regulatory Organizations and enhancingtheir effective regulatory role puts additionalresponsibility on SEBI to ensure that SROsare efficiently carrying out/conducting theirmonitoring responsibilities.

5. FRAUDULENT AND UNFAIR TRADEPRACTICES

SEBI took up investigations in 122 cases in2002-03 bringing the total cases taken up forinvestigation till end of this financial year to654 cases. Of these 122 cases, investigationinto 102 cases have been completed during2002-2003.

6. INVESTOR EDUCATION AND THETRAINING OF INTERMEDIARIES

I. Securities Market AwarenessCampaign:

SEBI, launched the nation-wide SecuritiesMarket Awareness Campaign to empower


ANNUAL REPORT 2002 - 2003 121121121121121

investors with education in the securitiesmarket in a ceremony held at Vigyan Bhawan,New Delhi on January 17, 2003. Thecampaign was inaugurated by Shri A.B.Vajpayee, Hon’ble Prime Minister, Republic ofIndia. Shri Jaswant Singh, Hon’ble UnionMinister for Finance and Company Affairsdelivered the keynote address. Severalprominent personalities contributing to thegrowth of the Indian Securities Market andother eminent personalities were also present.

The inaugural session of the programmefeatured a curtain raiser audio-visualencompassing the theme of the campaign “

Empowering Investors – A SEBI Initiative”. Itshowed that people in India have respect formoney but treat it with a little knowledge. Amnemonic especially created by Shri R.K.Laxman, for the SEBI campaign was alsounveiled by Hon’ble Prime Minister. Theinaugural session was followed by threetechnical sessions wherein discussionsemphasising empowerment of investorsthrough education and the roles played byintermediaries, issuers and professionals ininvestor education were held by eminentpersonalities. This campaign is expected tosustain the felt need for investor educationand awareness across the country.

Inauguration of Securities Market Awareness Campaign at New Delhi.Standing Left to Right: Shri Vinod Dhall, Secretary, Department of Company Affairs, Shri G.N. Bajpai, Chairman,

SEBI, Shri A.B. Vajpayee, Hon’ble Prime Minister, Shri Jaswant Singh, Hon’ble Union Finance Minister,Shri Bimal Jalan, Governor, RBI, and Dr. S. Narayan, Finance Secretary.


122122122122122 ANNUAL REPORT 2002 - 2003

An educative website (http://investor.sebi.gov.in) was also dedicated toinvestors.

7. PROHIBITION OF INSIDER TRADING

During the year 2002-03, 13 cases of allegedinsider trading were taken up for investigation.A total of 14 cases of insider trading werecompleted during the financial year.

8. SUBSTANTIAL ACQUISITION OFSHARES AND TAKE-OVERS

During the 2002-03, 83 cases were referredfor adjudication under section 15 of SEBI Act,1992 for alleged violation of the provisions ofSEBI (Substantial Acquisition of Shares andTakeovers) Regulations, 1997 and a total ofRs. 73,95,000/- was received towardsmonetary penalties.

9. INSPECTION AND INQUIRIES

I. Stock Brokers and Sub Brokers :

of inspections and mutual funds were advisedto take corrective action, wherever necessary.

A. Adjudication Ordered and MonetaryPenalties Imposed

Monitoring of mutual funds was furtherstrengthened through their periodical reportssubmitted to SEBI and inspection reports toensure that interests of investors areprotected. Clarifications were sought from themutual funds from time to time on complianceof regulations and guidelines. SEBI tookdisciplinary action against a number of mutualfunds in the year 2002-03, the details of whichare given in the following table:

II. Monitoring and Inspections of MutualFunds

Inspections of 32 active mutual funds,covering the period October-March 2002,were ordered and were carried out byindependent chartered accountancy firms. Allthe inspection reports were processed andnecessary action was taken on the findings

Adjudication Ordered and MonetaryPenalties Imposed

During the year, adjudication proceedingswere ordered against four mutual funds –Reliance Mutual Fund, Kotak MahindraMutual Fund, First India Mutual Fund andDundee Mutual Fund.

On the basis of adjudication ordered in thecurrent year as well as those ordered in theprevious year but decided in the current year,financial penalties were imposed on thefollowing mutual funds for violation of SEBIRegulations :

1. Kotak Mahindra Mutual Fund : Apenalty of Rs. 50,000 each was imposedon Kotak Mahindra AMC Pvt. Ltd. and

Table 3.10: Adjudication/PenaltyImposition – Mutual Funds

Sr. Description No. ofNo. Mutual Funds

1. Adjudication Ordered 4

2. Financial Penalty Imposed 6

3. Warning / DeficiencyLetters issued 35

4. Compensation to Schemes 2

5. Other issue 1

5. Payment of Interest 19

Source: SEBI

Table 3.9: Inspection/ Enquiry- StockBrokers and Sub- Brokers

Particulars 2001-2002 2002-2003

Inspections – Brokers 10 135Inspections – Sub Brokers Nil 58

Enquiries ordered – Brokers 24 62

Enquiries ordered – Sub Brokers Nil 3Warned 39 38

Suspended 15 24Registration cancelled 18 122

Adjudication Nil 1

No Action 2 337Source: SEBI


ANNUAL REPORT 2002 - 2003 123123123123123

Kotak Mahindra Mutual Fundrespectively for lack of due diligence ontheir part for violation of guidelines onadditional plans.

2. LIC Mutual Fund : The investment limitas prescribed in clause 10 of theSeventh Schedule to SEBI (MutualFunds) Regulations, 1996 was exceededin case of 3 schemes viz., Dhan 88(1),Dhan Tax Saver 96 and Dhan Tax Saver97. These investments were made in the1st quarter of the year 2000. A penaltyof Rs. 1 lakh each was imposed on LICMutual Fund and Jeevan BhimaSahayog Asset Management Co. Ltd. forthe violation of the Regulations, whichhas since been paid.

3. First India Mutual Fund - The AMCviolated Clause 1 of the SeventhSchedule of the SEBI (MF) Regulations,1996 when it invested more than 15%of its NAV in the debt instruments of asingle issuer in case of the ‘First IndiaIncome Fund’ scheme. A penalty of Rs.3lakhs was imposed on First India AMCPvt.Ltd. and an amount of Rs.1 lakh isimposed on First India Mutual Fund forlack of due diligence on their parts.Mutual Fund has paid the penalty.

4. Dundee Mutual Fund : The AMCreported violation of Clause 1 of SeventhSchedule (Regulation 44(1)) as it hadinvested more than 15% of its NAV inunrated debt instruments issued by asingle issuer. A penalty of Rs. 5 lakhswas imposed on Dundee InvestmentManagement Research Pvt. Ltd. and anamount of Rs. 2 lakhs was imposed onDundee Mutual Fund for lack of duediligence on their parts, which has sincebeen paid.

5. Shriram Mutual Fund : In the quartersended June 98, September 98,

December 98, March 99, September 99and December 99, the business throughassociated brokers exceeded the limit of5% of the aggregate purchases andsales of securities made by the MutualFund in all its schemes, in violation ofRegulation 25(7a) of SEBI (MFs)Regulations, 1996. Mutual Fund did notreport this violation earlier. The matterwas referred for adjudication and as perthe Adjudication order, Shriram AssetManagement Co. Ltd., has beenimposed penalty of Rs. 5 lakhs underSection 15E of SEBI Act, 1992 andShriram Mutual Fund has been imposedpenalty of Rs. 2 lakhs under Section15D(b) of SEBI Act, 1992. The mutualfund preferred an appeal before theSecurities Appellate Tribunal against thepenalty imposed which is still pending.

6. Reliance Mutual Fund : (24/3/03) TheReliance Monthly Income Plan hadexceeded investment restriction byinvesting in unrated instruments of asingle issuer in violation of Clause 1ASeventh Schedule and Regulation 44(1)to the SEBI (MFs) Regulations 1996.After examining the issue the matter wasreferred to adjudication. A penalty of Rs.4 lacs is imposed on Reliance CapitalAsset Management Ltd. and an amountof Rs. 2 lacs is imposed on RelianceMutual Fund.

Warning / Deficiency Letters

Considering the magnitude and seriousness,35 warning/deficiency letters were issued to21 mutual funds on the basis of monitoringthrough various periodical reports anddeficiencies pointed out in the inspectionreports.

Some of the main reasons for which warningand deficiency letters were issued to mutualfunds were:


124124124124124 ANNUAL REPORT 2002 - 2003

1. Violation of advertisement code/guidelines

2. Delay in submission of periodical reports

3. Inadvertent short-selling

4. Failure to install systems and compliancemechanism in place

5. Systemic deficiencies for delays inremitting the repurchase/redemptionproceeds (apart from their paying interestto unit holders)

6. Marginally exceeding the investmentlimits.

7. Non-compliance regarding uploadingNAVs on AMFI website

8. Delay in updating offer document andfiling within the mandatory 2 years periodand delay not reported to SEBI

9. Delay in publication of half yearlyfinancial results in 2 newspapers andposting it on AMFI website as per ourcircular

10. Non-compliance of standardobservations in offer documents

11. Discrepancies in calculation ofannualized returns in draft offerdocument

12. Submission of securities holdingstatement later than the time stipulatedby SEBI in the guidelines

13. Discrepancy in case of inter-schemetransfers

14. Delay in giving information to SEBIauditors on timely basis.

Compensation to Scheme:

1. IL&FS Mutual Fund – For the purposeof meeting immediate cash requirementthe AMC shifted the sell position fromone exchange to another. In this process

the scheme incurred a notional loss ofRs.1.05 lac. The matter was reported inthe inspection report of 1999-2001 andon discussing this issue with the AMC,they reimbursed the notional loss ofRs.1.05 lacs to the scheme.

2. Birla Sun Life Mutual Fund – Themutual fund reported that variousbalances and accounts of their schemeshad deficits of around Rs.10.82 crores.The reasons attributed for the variationsincluded errors, non-reporting/ inaccuratereporting of subscription, redemption andexchange transactions, factoring ofapplicable loads, computation of dividendliability. The differences were made goodby the AMC alongwith interest. Theboards of the AMC and trustee companyconfirmed that no investor was adverselyaffected and they were satisfied with theentire adjustment process including thecontrol systems put in place to preventrecurrence of such events.

Other Actions :

Escorts Mutual Fund – Two offer documentsfiled by the mutual fund have been kept inabeyance, pending compliance of certaindirections issued to them on the basis of thefindings of the inspection report.

Payment of Interest

SEBI has made it mandatory that the mutualfunds must pay interest @ 15% for the delaysin despatch of repurchase/redemptionproceeds to the unitholders. The mutual fundsare required to report these cases of delaysto SEBI on quarterly basis.

During the year 2002-2003, 19 mutual fundspaid Rs. 5.56 lacs as interest to 9805investors for the delay in despatch ofredemption / repurchase proceeds.

During the year 2001-2002, 14 mutual fundspaid Rs. 2.57 lacs as interest to 399 investors


ANNUAL REPORT 2002 - 2003 125125125125125

for the delay in despatch of redemption /repurchase proceeds.

During the year 2000-2001, 22 mutual funds,paid interest of Rs. 8.37 lacs to 6,722unitholders as against a total amount of Rs17.24 lacs paid to 14,686 investors during1999-2000.

Due to strict action by SEBI and making itmandatory to pay interest for the delays indespatch of redemption/repurchase proceeds,the number of such cases of delays havedeclined considerably.

10. DELEGATED POWERS ANDFUNCTIONS

SEBI under sub-sec (2) of Sec 8 of SC(R)A,1956 notified the amendments to the Article/Rules of 12 exchanges who failed toimplement the Chairman’s order datedJanuary 10, 2003 issued under section 8 ofthe Act specifying that no broker member willhold post of any office bearer to give effectto. The exchanges in question were UttarPradesh Stock Exchange, Kanpur,Ahmedabad Stock Exchange, BangaloreStock Exchange, Coimbatore StockExchange, Pune Stock Exchange, VadodaraStock Exchange, Guwahati Stock Exchange,Bhubaneswar Stock Exchange, MangaloreStock Exchange, Hyderabad Stock Exchange,Jaipur Stock Exchange and Madhya PradeshStock Exchange.

II. Other Actions Initiated underDelegated Powers andFunctions :

A. A warning letter was issued toAhmedabad Stock Exchange pursuant tothe show cause notice issued under Sec12 of SC(R) A, 1956 for delayedimplementation of SEBI Circular oncalculation of margins on gross basisacross clients.

B. The Uttar Pradesh Stock Exchange wasadvised to direct the ED to immediatelyrelinquish office of the Executive Directoras no prior approval of SEBI was soughtfor appointment violating the SEBIcircular dated April 20, 1993 and alsothe Article of Association of theExchange.

I. Superscession of the Boards ofStock Exchanges :

Table 3.11: Superscession

Name of the Stock Notification PeriodExchange Dated

Uttar Pradesh Stock July 12, 03 One YearExchange

Bhubaneswar Stock January 3, 03 One YearExchange

Ahmedabad Stock March 25, 03 One YearExchange

Source: SEBI

Table 3.12: Renewal of Stock ExchangeRegistration

Name of the Notification PeriodStock DatedExchange

Bhubaneswar June 5, 02 One Year

Cochin November 8, 02 One Year

Coimbatore September 18, 02 One Year

Gauhati May 1, 02 One Year

Jaipur January 9, 03 One Year

Ludhiana April 28, 02 One Year

Mangalore September 9, 02 One Year

OTCEI August 23, 02 One Year

Pune September 9, 02 One Year

SKSE, Rajkot July 10, 02 One Year

Uttar Pradesh June 3, 02 One Year

Source: SEBI


126126126126126 ANNUAL REPORT 2002 - 2003

C. A warning letter issued to AhmedabadStock Exchange for non inclusion of allthe clauses of Code of Ethics anddelayed compliance of the said circular.

D. The Mangalore Stock Exchange wasadvised to direct the Executive Directorto immediately relinquish office of theExecutive Director as no prior approvalof SEBI was sought for appointment

violating the SEBI circular dated April 20,1993 and also the Article of Associationof the Exchange.

E. A warning letter issued to Madras StockExchange pursuant to show cause noticeissued under Sec. 12 of SC(R) A, 1956for delayed implementation of SEBICircular pertaining to calculation ofmargin on gross basis across clients.

11. FEES AND OTHER CHARGES

Table 3.13: Fees and Other Charges Received

(Rs. in lakh)

Item Fees Received Fees Received2001-02 2002-03

(Unaudited)

Offer Documents and Prospectuses filed 126.40 105.6

Merchant Bankers 64.23 212.70

Underwriters 25.000 54.00

Portfolio Managers 62.25 115.00

Registrars to an Issue and Share Transfer Agents 19.40 5.95

Bankers to an Issue 13.70 12.50

Debenture Trustees 30.90 10.00

Takeover Offer Documents filed 76.25 252.85

Mutual Funds 145.75 143.25

Stock Brokers and Sub-Brokers 8,079.44 10,003.56

Foreign Institutional Investors 408.32 338.79

Sub Account - Foreign Institutional Investors 174.01 113.13

Depositories 20.00 20.00

Depository Participants 77.70 69.14

Venture Capital Funds 6.25 46.50

Custodian of Securities 65.00 50.00

Approved Intermediaries under Securities Lending Scheme 44.79 29.21

Penalties 97.14 101.45

Collective Investment Schemes 5.00 0.25

Credit Rating Agencies — 12.00

Listing Fees-Contribution from Stock Exchanges 186.50 194.02

Foreign Venture Capital Funds 5.67 21.85

Derivatives 104.73 144.59

Total 9,838.43 12,056.34

Source: SEBI


ANNUAL REPORT 2002 - 2003 127127127127127

12. RESEARCH AND INTERNATIONALRELATIONS

During the year, SEBI brought out severalresearch papers on various aspects of thesecondary market. One of the papers wason price discovery and volatility on NSEfutures market.

I. Price Discovery and Volatility on NSEFutures Market

This paper studied price discovery andvolatility in the context of introduction of Niftyfutures at the National Stock Exchange (NSE)in June 2000. Cointegration and GeneralisedAutoRegressive ConditionalHeteroscedasticity (GARCH) techniques areused to study price discovery and volatilityrespectively. The major findings are that thefutures market (and not the spot market)respond to deviations from equilibrium; pricediscovery occurs in both the futures or spotmarket, especially in the latter half of thestudy period. The results also show thatvolatility in the spot market has come downafter the introduction of stock index futures.

A. Price discovery

Results indicate that the null hypothesis isrejected at one per cent level, showing thatboth the markets are integrated. Informationflows from one market to another market. Theresults are very useful to regulators as wellas to market participants. Any regulatoryinitiative on futures market will have itsdesired impact on cash market. Therefore,regulators can take actions in the futuresmarket such as reduction in contract size,changes to margins and others which willhave their desired impact on the cash market.Market participants, such as investors, canuse these results to predict impact of shocksof the futures market on cash market.

Price discovery results indicate that theinformation gets reflected first in the futures

market and the dissemination time to the cashmarket is unascertainable from the results.One of the constraints of the data is that dailyclose values are used whereas theinformation might get transmitted much faster.This particular aspect can be stated moreauthoritatively only if high frequency data isused for this purpose. High frequency datais currently not available for spot market Indexin India, therefore they could not be employedin the equation.

B. Volatility

Results of the study indicate that volatility hasreduced after introduction of Index futures.The study suggested the following to furtherimprove efficiency, liquidity and reducevolatility : a) introduction of futures contractson more number of indices b) permission tointroduce smaller value contracts c) Effortsmay be made to look at margin impositionsystem and reduce margins withoutcompromising on the integrity of the marketand d) enhance institutional participation.

II. Survey of Indian Investors, 2000-01

The first Survey of Indian Investors wasconducted during1998-99 SEBI and NCAERconducted another survey of Indian investorsduring April-December, 2000 based on asample of 2,88,081 households located ingeographically dispersed rural and urbanareas. The findings of the Survey werepublished in March, 2003. The importantfindings are:

� An estimated 13.1 million or 7.4 percentof all India households totaling 21 millionindividuals directly invested in equityshares or debentures or both during2001-02.

� An estimated 11.8 million householdstotaling 19 million individuals invested inunits of mutual funds during 2001-02.

� The number of debenture owing


128128128128128 ANNUAL REPORT 2002 - 2003

households at 9.6 million far exceededthe number of equity owing householdsat 6.5 million.

� Altogether, there is a projected total of13.1 million investor households as per2000-01 Survey as against 12.8 millioninvestor households as per 1998-99Survey, thereby indicating an increase of3 lakh investor households.

� While the number of investor householdsin the urban sector declined by 1 millionbetween both the Surveys, the numberof investor households in the rural sectorincreased by 1.3 million.

� The number of investor householdsowing equity shares declined to 6.6million in 2000-01 (12.1 million in 1998-99) while the number of investorhouseholds owning debentures shot upto 9.6 million in 2000-01 (3.7 million in1998-99).

� The growth of investor households hasdecelerated to 2.3 percent.

� The percentage of households investingin equity or debentures is more in urbanareas (15.29 percent) than in rural areas(4.24 percent).

� The number of non-investor householdsincreased from about 156 million in1998-99 to nearly 164 million in 2000-01.

� The Southern Region (46 percent),Western Region (33 percent), NorthernRegion (11 percent) and Eastern Region(11 percent) figure in the same order inthe share of investor households.

III. International Affairs

The Board continued to play an important roleat the international fora by extending co-operation to international regulatory bodiesand other international organisations.

During the year 2002-03, SEBI was electedas a member of the IOSCO EmergingMarkets Advisory Board in Kuala Lumpur,Malaysia. SEBI also became a member ofthe Screening Group and the VerificationTeam for the IOSCO Multi Lateral MoUproject. SEBI was also a part of the IOSCOImplementation Committee Meeting onIOSCO Objectives and Principles of SecuritiesRegulations.

In December 2002, SEBI signed aMemorandum of Understanding with theFinancial Services Commission, Mauritius tostrengthen communication channels andestablish a framework for assistance andmutual cooperation between the two parties.The MoU marked the beginning of greatercollaboration between India and Mauritius toeffectively regulate and develop securitiesand futures markets, in view of greater cross-border trade and cross-market linkagesbrought about by the globalisation of financialmarkets. In January 2003, SEBI signed aMemorandum of Understanding withSecurities and Exchange Commission, SriLanka. Under the MoU, both regulatorsrecognised the desirability for providingassistance and exchange of information toaid each other in ensuring compliance withlaws and regulations in their respectivecountries. The scope of the Memorandumincludes providing assistance and takingaction against insider dealing, marketmanipulation and other fraudulent practicesin securities dealings.

SEBI’s application for becoming signatory tothe IOSCO Multilateral MoU concerningConsultation and Cooperation and theExchange of Information was approved by theScreening Group of IOSCO and the MoUwould be signed in the near future. Currently,only nine IOSCO members have becomesignatory to the MoU. SEBI is amongst thefew Regulators from the emerging marketsto be admitted as a signatory.


ANNUAL REPORT 2002 - 2003 129129129129129

During the year the following internationalmeetings were attended by officials of theBoard.:

A. Fourth Round Table on CapitalMarket Reform in Asia in Tokyo,Japan

The theme of this year’s Round Table inTokyo was Medium Term Responses to theCrisis in Asian Financial Markets. Regulatorsfrom Asian jurisdictions deliberated upon thefollowing issues:

a. Progress in Capital Market Reform inAsia

b. Market Structure

� Demutualisation

� Cross border alliances

� Mergers of securities and derivativesmarkets

c. Regulatory Structures

� Integrated regulators

� Conglomerates

� Governance of the regulators

d. Corporate Governance

� OECD Principles

� Closely held companies listed onstock markets

� Financial institutions

e. Issuers

� Debt restructuring initiatives

� SMEs and venture capital

B. Annual Conference of theInternational Organization ofSecurities Commissions (IOSCO) inIstanbul, Turkey

The theme of this year’s conference was“Globalization: Opportunities and Challenges.”This theme was chosen in recognition thatthe process of globalization presents bothnew opportunities to investors and financialservices providers and new challenges tofinancial services regulators. The conferenceprovided a forum for securities regulators andindustry participants to consider fundamentalissues relating to the increasing provision offinancial services on a cross-border basis andthe associated international capital flows. Inaddition, the conference provided a forum forregulators and industry participants toconsider issues that are of paramountconcern subsequent to the events of 11September 2001 and recent corporate failuresof international significance.

C. International Organisation ofSecurities Commissions (IOSCO)Emerging Markets CommitteeMeeting in Kuala Lumpur, Malaysia.

The theme of this year’s EMC Meeting was“Strengthening Investor Confidence in

Memorandum of Understanding with FinancialServices Commission, Mauritius

Memorandum of Understanding with Securities andExchange Commission, Sri Lanka


130130130130130 ANNUAL REPORT 2002 - 2003

Emerging Markets”. Apart from the customarymeetings of the EMC working groups and theEMC Plenary Meeting, a special briefingsession for EMC members focusing onIOSCO’s newly endorsed MultilateralMemoranda of Understanding and the workof the Implementation Committee was alsoheld to inform the members of the currentdevelopment in this regard.

D. Intentional Organisation of SecuritiesCommissions (IOSCO) Asian PacificRegional Committee (APRC) meetingand APRC Enforcement Director’sConference in Colombo, Sri Lanka.

The IOSCO- APRC Meeting was held inJanuary 2003 in Colombo. The meetingfocused upon the issues of international co-operation and enforcement like

a. Regulation of Terminals Placed byOverseas Exchanges or TradingSystems

b. Investor Protection

c. IMF Financial Sector AssessmentProgramme

d. Corporate Governance

13. OTHER FUNCTIONS

I. Grievances Redressal

A. Mutual funds

The complaints received from investorsagainst the mutual funds are taken up directlyby the Board with the mutual funds forredressal. Out of a total of 41,695 complaints(cumulative) which have been received bySEBI against 36 mutual funds till March 31,2003, a total of 41,468 complaints standredressed.

B. Securities market

SEBI has a comprehensive investorgrievances processing mechanism. Astandardised complaint format is available atall SEBI offices and on the SEBI website forthe convenience of investors. Complaints

Table 3.14: Redressal of Grievances –

Financial Year Grievances Received Grievances Resolved Redressal Rate(End March) (Cumulative) (Cumulative) (Per Cent)

1991-92 18,794 4,061 21.61

1992-93 1,29,111 27,007 20.92

1993-94 7,13,773 3,66,524 51.35

1994-95 12,29,853 7,18,366 58.41

1995-96 16,06,331 10,34,018 64.37

1996-97 18,23,725 14,65,883 80.38

1997-98 23,35,232 21,42,438 91.74

1998-99 24,34,364 22,69,665 93.24

1999-00 25,32,969 24,16,218 95.39

2000-01 26,29,882 25,01,801 95.13

2001-02 27,11,482 25,72,129 94.86

2002-03 27,48,916 26,11,101 94.99

Source: SEBI


ANNUAL REPORT 2002 - 2003 131131131131131

received from investors are acknowledgedand a reference number is sent to thecomplainant. Complaints are taken up withthe concerned companies. SEBI officers alsohold meetings with the company officials toimpress upon them their obligation to redressthe grievances of investors. Recalcitrantcompanies are referred to EnforcementDivision for appropriate action. SEBI alsoissues fortnightly press release for publicinformation, on the status of redressal ofinvestor grievances. This report is also postedon SEBI web-site.

During the period 1991-92 to 2002-03, SEBIreceived 27,48,916 grievances from investors.Of this a total of 26,11,101 grievances wereredressed by companies, which indicates aredressal rate of 94.99 per cent. The cumulativestatus of investor grievances received by SEBI,resolved by companies and the redressal ratein this regard from the year 1991-92 to 2002-2003 is provided in Table 3.14.

C. Investors’ Associations

The Board has been granting registration toInvestor Association in order to bring about aorganised form of investor movement. Therole of investor associations are two fold -

one, to take up investor complaints and raiseissues which may affect interst of investorsand two, educating and creating awarenessabout the securities markets to investors SEBIThe investor associations are also nominatedin various Committees so that they have anopportunity to represent the ‘investor angle’in any proposed policy changes. As of theend of the year, the following investors’associations were registered :

1. Consumer Education and ResearchSociety, Ahmedabad.

2. Consumer Unity& Trust Society, Jaipur.

3. Ghatkopar Investors’ WelfareAssociation, Mumbai.

4. Investors’ Grievances Forum, Mumbai.

5. Jagrut Grahak Mandal, Patan (Gujarat)

6. Kolhapur Investors’ Association,Kolhapur

7. Midas Touch Investors’ Association,Kanpur

Some of the Investors’ Associations registeredwith SEBI have organised seminars foreducating investors on various topics ofcapital market with the financial supportextended by SEBI.

asd

Education

inspection of stock

vadodara stock exchange

regulation of stock

functioning of stock

parent stock exchanges

stock exchangesa

ludhiana stock exchange

ahmedabad stock exchange