Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4

Recommendation 5 Recommendation 6 Recommendation 7 Recommendation 8

Market selection

Recommendation 4

Each market must have clear rules assuring investor protection by safeguarding participants from the financial risks of failed settlement and ensuring that listed companies are required to follow sound policies on corporate governance, transfer of economic benefits and shareholder rights.

1.	Does the depository or the market have securities lending and borrowing schemes in place, and are these open to all market participants and their settlement agents?	Yes. Securities lending for dematerialized securities held at the depositories is permitted; however, certain restrictions for foreign institutional investors (FIIs) apply. FIIs are currently permitted to lend, but not borrow, securities per the SEBI Securities Lending Scheme (1997).
2.	Does the settlement system mark fail trades to market and collect margin from the failing counterparty to protect the innocent counterpart's interest?	Yes. Buy-in procedures applied by the clearinghouses for failing transactions are described in detail below. In addition to buy-in procedures, the Securities and Exchange Board of India requires investors, including FIIs, to provide margin payments for pending sale transactions. Margin obligations are security-specific and may be calculated by a weekly fixed rate (Additional Volatility Margin) or may be marked-to-market daily using a Value at Risk (VAR) methodology. Stock Exchange Mumbai (BSE) Clearinghouse For settlement of Group A shares contracted to take place through the BSE Clearinghouse, the process is as follows: one day after the pay-out date, the clearinghouse prepares a list of defaulting parties and number of shares not received. This list is posted on the exchange's notice board along with a call for an auction. Brokers holding the shares may submit their application (including the price at which they are willing to sell) within 48 hours of the notice's posting. Any active members of the exchange can participate in the auction. There is no minimum number of quotes required and the contract is assigned to the best offer. If the complete trade is not filled at first, successive auctions are conducted until all shares are received. The buying broker benefits from a lower price resulting from the auction. The clearinghouse collects shares from the brokers with successful bids and delivers them to the receiving brokers. The clearinghouse debits the defaulting broker's account for the difference between the contract and the auction prices, in addition to a penalty of 2 percent of the total transaction value. The underlying trade is considered settled and the shares received by the purchasing broker will come from the auctioned trade. The entire process takes about six to seven days. For trades executed through the BSE Clearinghouse, shortages are auctioned on the following Monday. National Securities Clearing Corporation Limited (NSCCL) For settlement of Group A shares contracted to take place through the NSCCL (the NSE's Clearinghouse), each clearing member advises the clearinghouse on pay-in date of those securities it is delivering, and those it is unable to deliver. The clearinghouse identifies the short deliveries on Tuesday and the NSCCL conducts a buy-in auction on the payout date through the NSE trading system. In the NSE Clearinghouse, shortages are auctioned on Wednesdays. The clearing member is debited by an amount equivalent to the securities not delivered, and valued at a valuation price based on the closing price as announced by the NSE on the Friday prior to valuation. If the buy-in auction price is more than the valuation price, the clearing member is liable for the difference. All shortages not bought in are deemed closed out at the highest price between the first day of the trading period until the day of squaring off, or closing price on the auction day plus 20 percent, whichever is higher. This amount is credited to the receiving member's account on the auction payout day.
3.	Does the market operate a guarantee fund or have an equivalent procedure to protect against the cost of failed transactions; and which sectors of the market does it cover?	BSE In May 1997, the BSE established a Trade Guarantee Fund (TGF) approved by SEBI, which is currently valued at over INR 18.5 billion. This fund applies to trades settling through the BSE Clearinghouse. Funding for the TGF is provided by BSE members who are required to contribute INR 1.50 per INR 100,000 of gross weekly settlement turnover to the fund. Changes to the Trade Guarantee Fund must be authorized by SEBI. BSE members failing to meet obligations to the BSE Clearinghouse on pay-in day are reported to the Executive Director or the President of the BSE, who in turn, officially declares the member in question a 'defaulter.' The BSE's Defaulters' Committee is required to pay the failing member's obligations on pay-out date. This guarantee fund does not cover company share objections. In February 2001, the Stock Exchange, Mumbai (BSE) announced insurance coverage for its Trade Guarantee Fund (TGF). The policy will cover payouts of the TGF up to the maximum aggregate of Indian rupee (INR) 600 million per annum. In addition, the BSE maintains a Customers' Protection Fund (CPF) in case of BSE-member defaults, which protects investors for up to INR 300,000; and a Brokers' Contingency Fund, which became operational July 1997 with maximum pay-out of INR 5 million per incident. The exchange also maintains an integrated comprehensive insurance policy of INR 10 million per member (subject to an overall limit of INR 2 billion) covering incidents caused by the BSE, BSE members, or the BSE Clearinghouse. NSE The NSE maintains a Settlement Guarantee Fund, currently valued at INR 24 billion, which is managed by the NSCCL. The Settlement Guarantee Fund at the NSE applies to all trades settling through the NSCCL up to settlement (i.e. pay-out) date. After pay-out date, the investor is subject to the risk of the counterparty broker, not the NSCCL. The NSE Settlement Guarantee Fund does not have a formal approval from SEBI and the exchange maintains full discretionary powers over the Fund. The NSCCL has not declared a limit for the maximum pay-out per incident and to date has honored all legitimate claims in full. This guarantee fund does not cover company share objections. The NSE established an Investor Protection Fund to provide compensation to an investor in the event of member default. The protection fund limits pay-outs to INR 125,000 per member and is funded by member contributions of 0.001 percent of monthly member turnover (subject to a minimum of INR 5,000) per year. In February 2001, SEBI authorized the stock exchanges to use up to 25 percent of their guarantee funds to cover failures of payment during the allotment of initial public offerings (IPOs) for shares offered through their own exchange. This use of guarantee funds is permitted provided the aggregate exposure does not exceed 25 percent of the fund at any time.
4.	Are the stock transfer agents (share registrars) linked electronically to the depository?	Yes. Share registrars maintain electronic links with the depositories to notify either the CDSL or NSDL of securities converted to dematerialized form.
5.	Is there a legal maximum time period to complete ownership transfers in the books of the issuer? If so, does market practice adhere to the deadline?	Yes. For physical securities, the law requires companies to effect the transfer of ownership within 60 days of receiving the securities from the investor (or custodian). Transactions involving dematerialized securities automatically transfer ownership upon settlement. Approximately 99 percent of securities settlement currently takes place in dematerialized form. The legal time frames for transfers are enforced by SEBI.
6.	Are investors entitled to all benefits arising on a security from the point of purchase; and how are any rules enforced?	Yes. Investors are eligible for all corporate entitlements (dividend, bonus rights, etc) from the point of purchase. There is a cut-off date (called book closure or record date) after which the benefit does not accrue to the purchaser. The cut-off dates are informed by the stock exchanges. Before the cut-off date the securities are traded cum-benefit and after the cut-off date they are traded as ex-benefit. Physical securities require re-registration into the investor's name in order to receive entitlements directly from the company.
7.	Is proxy voting permissible in the market and can such proxies be lodged by post or other remote delivery method?	Yes. While holders of ordinary shares typically have equal voting rights, they or their proxies must attend the meeting in order to vote. Proxy cards are not typically used as most proxy votes are conducted by a show of hands. Registered shareholders are notified of the annual general meetings (AGMs) and extraordinary general meeting (EGMs) through the mail. Shares are not blocked from trading during the meeting period.
8.	Are there binding rules in the market stating the minimum and maximum lapsed time between the announcement and completion of key events, including registration, the calling of shareholder meetings, the payment of dividends or interest, rights issues, tender offers and other voluntary corporate actions?	Yes. The Companies Act of 1956 and listing agreements maintained between listed companies and stock exchanges serve as the legal framework for issuer obligations, including registration, shareholder meetings, the payment of dividends or interest, rights issues, tender offers and other voluntary corporate actions.
9.	Are all voluntary corporate actions advised through a central mechanism assuring consistent information to all investors?	No. Ex-dates for voluntary corporate actions are declared by the exchange and may differ between exchanges (NSE and BSE) to accommodate trading cycles (ex-dates are typically declared on the first day of trading cycle for the same company). Furthermore, ex-dates between physical and dematerialized shares of the same company may also differ.
10.	Is information on corporate actions available electronically, and is the minimum lapsed time for responding to such actions sufficient to enable all domestic and foreign investors to respond in a timely and considered fashion?	Yes. The BSE and NSE notify members of corporate actions information via their websites. In addition, similar information is available electronically through information vendors to subscribers. Generally, sufficient time is available to all investors to respond to corporate actions.