Question

Stock exchange and financial law -

This question will also ask for you to respond to a set of fictitious factors. It will test your knowledge of possible market misconduct and how to detect it, how to avoid it and what to do if you are faced with it.

Answer 1

The Securities Market, refers to the markets for those financial instruments/claims/obligations that are commonly and readily transferable by sale. The Securities Market has two inter-dependent and inseparable segments, the new issues (primary) market and the stock (secondary) market.

The secondary market enables those who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs. The price signals, which subsume all information about the issuer and his business including associated risk generated in the secondary market, help the primary market in allocation of funds.

Secondary market essentially comprises of stock exchanges which provide platform for purchase and sale of securities by investors. The trading platform of stock exchanges are accessible only through brokers and trading of securities is confined only to stock exchanges. The stock market or secondary market ensures free marketability, negotiability and price discharge. For these reasons the stock market is referred to as the nerve centre of the capital market, reflecting the economic trend as well as the hopes, aspirations and apprehensions of the investors.

Market abuse is a broad term which includes abnormal price/ volume movement, artificial transactions, false or misleading impressions, insider trading, etc. In order to detect aberrant behaviour/ movement, it is necessary to know the normal market behaviour. The department uses various tools to determine normal and abnormal market behaviour. The necessary actions are initiated like imposition of special margin, reduction of circuit filters, trade to trade settlement, suspensions, de-activation of terminals, etc. to control abnormal market behaviour. The department carries out investigation, if necessary, based on the preliminary examination/analysis and suitable actions are taken against members involved based on the investigation.

As per Indian Rules some of the steps that are viable for Shareholder , Different rules are avilable at different country one should follow accordingly:-

The various Surveillance activities that should me followed in stock market by Financial Law to avoid market abuse these are as follows :

(a) Price Monitoring The functioning of the Price Monitoring is broadly divided into following activities:

(i) On-Line Surveillance

(ii) Off-Line Surveillance

(iii) Derivative Market Surveillance

(iv) Investigations

(v) Surveillance Actions

(vi) Rumour Verification

(vii) Pro-active Measures

1. On line Surveillance

One of the most important tools of the Surveillance is the On-line Real Time Surveillance system to detect potential market abuses at a nascent stage to reduce the ability of the market participants to unduly influence the price and volumes of the scrips traded at the Exchange, improve the risk management system and strengthen the self regulatory mechanism at the Exchange. The system has a facility to generate the alerts on-line, in real time, based on certain preset parameters like price and volume variations in scrips, members taking unduly large positions not commensurate with their financial position or having large concentrated position(s) in one or few scrips, etc.

2. Off-Line Surveillance

The Off-Line Surveillance system comprises of the various reports based on different parameters and scrutiny thereof. – High/Low Difference in prices – % change in prices over a week/fortnight/month – Top N scrips by Turnover – Trading in infrequently traded scrips – Scrips hitting New High/Low The Surveillance actions or investigations are initiated in the scrips identified from the above-stated reports.

3. Derivative Market Surveillance

Areas of Focus – Abnormal fluctuation in the prices of a series – Market Movement (Cash vis-a-vis Derivative) – Member Concentration (Cash vis-a-vis Derivative) – Closing Price Manipulation (Cash & Derivative).

4. Investigations

The Exchange should conduct in-depth investigations based on preliminary enquiries/ analysis made into trading of the scrip as. In case irregularities observed, necessary actions are initiated and/or investigation case forwarded to Financial Law board of Stock Exchange,

5. Surveillance Actions

Special Margins Special margins are imposed on scrips which have witnessed abnormal price/ volume movements. Special margin is imposed @ 25 % or 50 % or 75 % as the case may be, on the client wise net outstanding purchase or sale position (or on both side) by the department. Reduction of Circuit Filters The circuit filters are reduced in case of illiquid scrips or as a price containment measure in low volume scrips. The circuit filters are reduced to 10 % or 5 % or 2 % as the case may be, based on the criteria decided by the Exchange. These circuit breakers will bring about a coordinated trading halt in both Equity and Derivative market. Trade to Trade If a scrip is shifted on a Trade-to trade settlement basis, selling/ buying of shares in that scrip would result into giving/ taking delivery of shares at the gross level and no intra day/ settlement netting off/ square off facility would be permitted. In addition to that Surveillance department transfers various scrips from time to time on a trade to trade settlement basis to contain the excessive volatility and/or abnormal volumes in the scrip. Suspension of a scrip The scrips are suspended by the Surveillance department in exceptional cases pending investigation or if the same scrip is suspended by any other Stock Exchange as a Surveillance action. Warning to Members The department may issue verbal/ written warning to member/s when market manipulation in the scrip is suspected. Imposition of penalty/suspension/de-activation of terminals The department imposes penalty or suspend the member/s who are involved in market manipulation, based on the input/ evidence available from investigation report or as and when directed by Financial Law Board of Stock Exchange.

6. Rumour Verification

The following steps are involved in Rumour verification process:-

– Surveillance Department liaises with Compliance Officers of companies to obtain comments of the company on various price sensitive corporate news items appearing in the selected News Papers.

– Comments received from the companies are disseminated to the Market by way of BOLT Ticker and/ or Notices in the Bulletin.

– Show cause notices are issued to companies which do not reply promptly to the Exchange.

– Investigations based on rumour verifications are carried out, if required, to detect cases of suspected insider trading

7. Pro-active Measures

The Department compiled and disseminated a list of companies who have changed their names to suggest that their business interest is in the software Industry.

(b) Position Monitoring

(i) Statement of Top 100 Purchasers/Sellers

(ii) Concentrated Purchases/Sales

(iii) Purchases/Sales of Scrips having Thin Trading

(iv) Trading in B1, B2 and Z group Scrips

(v) Pay-in liabilities above a Threshold Limit

(vi) Verification of Institutional Trades

(vii) Snap Investigation

(viii) Market Intelligence

Grievance redressal mechanism at stock exchange

1. Investor Services Cell (ISC) of Stock Exchanges (SE)/Depositories sent through SCORES or directly by the investors Stock exchanges have been advised to redress the complaint within 15 days.
2. Investor Grievance Redressal Committee (IGRC) If not satisfied, Approach Depository/Investor Grievance Redressal Committee (IGRC) of SEs. The complaints not redressed through ISCs also get referred to IGRCs. 15 days to amicably resolve the investor complaint if not, IGRC to ascertain the value of the claim admissible to the investor and the amount is blocked in IPF Member given 7 days from the date of IGRC to inform whether he would pursue arbitration if :-No Stock exchange releases the the amount to the investor, if yes then Stock exchange releases 50% of admissible value or 0.75 lac whichever is less is given to the investor from IPF
3. Arbitration It’s the quasi-judicial process of settlement of dispute, if one party feels that satisfactory redressal of grievance has not taken place at IGRCs If arbitration is in the favour of investor and the member decides to make application in appellate arbitrator panel, then the positive difference of the following is paid from IPF of the exchange (A) 50% of the amount mentioned in the arbitration award or 1.5 lacs which is less and (B) Amount already released to the investor earlier.
4. Appellate Arbitrator Panel If arbitration is in the favour of investor and the member decides to make application if next higher court, then the positive difference of the following is paid from IPF of the exchange (A) 75% of the amount mentioned in the appellate award or 2 lacs which is less and (B) Amount already released to the investor earlier
5. Court:-Undertaking given by the investor to stock exchange to return the amount released to him, in case the proceedings are decided against the investor or he decides not to persue further. • Total amount released to the investor through monetary relief shall no exceed Rs.5 lac in one financial year • In case of non-payment of the amount by the investor, trading not allowed on any stock exchange and demat account shall be frozen.