Archive for the ‘Guidelines’ Category


CIRCULAR- CIR/MRD/DMS/ 12 /2012- dated April 13, 2012

To,

All Stock Exchanges / All Depositories

1. In the event of disaster, the disruption in trading system of stock exchanges /depository system may not only affect the market integrity but also the confidence of investors. In order to address this issue, the current BCP – DR setups of some of the stock exchanges having nation-wide terminals and depositories were examined by the Technical Advisory Committee of SEBI (TAC). Based on the recommendations of TAC, the broad guidelines for BCP – DR are given below:

i. The stock exchanges and depositories should have in place Business Continuity Plan (BCP) and Disaster Recovery Site (DRS) so as to maintain data and transaction integrity.

ii. Apart from DRS, stock exchanges should also have a Near Site (NS) to ensure zero data loss.

iii. The DRS should be set up sufficiently away, i.e. in a different seismic zone, from Primary Data Centre (PDC) to ensure that both DRS and PDC are not affected by the same disasters.

iv. The manpower deployed at DRS / NS should have similar expertise as available at PDC in terms of knowledge / awareness of various technological and procedural systems and processes relating to all operations such that DRS / NS can function at short notice, independently.

v. Configuration of DRS / NS with PDC

a) Hardware, system software, application environment, network and security devices and associated application environments of DRS / NS and PDC should have one to one correspondence between them.

b) Exchanges / Depositories should have Recovery Time Objective (RTO) and Recovery Point Objective (RPO) not more than 30 minutes and 4 hours, respectively.

c) Solution architecture of PDC and DRS / NS should ensure high availability, fault tolerance, no single point of failure, zero data loss, and data and transaction integrity.

d) Any updates made at the PDC should be reflected at DRS / NS immediately (before end of day) with head room flexibility without compromising any of the performance metrics.

e) Replication architecture, bandwidth and load consideration between the DRS / NS and PDC should be within stipulated RTO and ensure high availability, right sizing, and no single point of failure.

f) Replication between PDC and NS should be synchronous to ensure zero data loss. Whereas the one between PDC and DR and between NS and DR may be asynchronous.

g) Adequate resources (with appropriate training and experience) should be available at all times to handle operations on a regular basis as well as during disasters.

 vi. DR Drills / Testing

a) DR drills should be conducted on quarterly basis. In case of exchanges, these drills should be closer to real life scenario (trading days) with minimal notice to DR staff involved.

b) During the drills, the staff based at PDC should not be involved in supporting operations in any manner. To begin with, initial three DR drills from the date of this circular may be conducted with the support of staff based at PDC.

c) The drill should include running all operations from DRS for at least 1 full trading day.

d) Before DR drills, the timing diagrams clearly identifying resources at both ends (DRS as well as PDC) should be in place.

e) The results and observations of these drills should be documented and placed before the Governing Board of Stock Exchange / Depositories. Subsequently, the same along with the comments of the Governing Board should be forwarded to SEBI within a month of the DR drill.

f) The system auditor while covering the BCP – DR as a part of mandated annual system audit should also comment on documented results and observations of DR drills.

vii. BCP – DR Policy Document

a) The BCP – DR policy of stock exchanges and depositories should be well documented covering all areas as mentioned above including disaster escalation hierarchy.

b) The stock exchanges should specifically address their preparedness in terms of proper system and infrastructure in case disaster strikes during business hours.

c) Depositories should also demonstrate their preparedness to handle any issue which may arise due to trading halts in stock exchanges.

d) The policy document and subsequent changes / additions / deletions should be approved by Governing Board of the Stock Exchange / Depositories and thereafter communicated to SEBI.

2. Considering the above, stock exchanges and depositories are advised to submit their BCP – DR policy to SEBI within 3 months from the date of this circular. Further, they should also ensure that point 1 (vi) (f) mentioned above is also included in scope of system audit as mentioned in the circular no. CIR/MRD/DMS/13/2011 dated November 29, 2011.

3. These guidelines will be applicable to depositories, stock exchanges having nationwide terminals and stock exchanges having trading on their own platforms. Further stock exchanges, currently having no trading on their own platforms, will be required to comply with these guidelines before recommencement of trading on their own platforms in terms of Circular No. MRD/DSA/SE/Cir-12/09 dated October 07, 2009.

4. This circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

5. This circular is available on SEBI website at www.sebi.gov.in under the categories “Legal Framework” and “Circulars”.

Click here to download the complete text of the above Circular in PDF Format- CIR/MRD/DMS/ 12 /2012- dated April 13, 2012.

Source: Securities and Exchange Board of India.


CIRCULAR- CIR/MRD/DP/ 09 /2012- Dated March 30, 2012

To

All Stock Exchanges

1. It has been observed that adoption of technology for the purpose of trading in financial instruments has been on a rise over the past few years. Stock brokers as well as their clients are now making increased usage of trading algorithm (hereinafter referred to as “algo”).

2. Based on recommendations of Technical Advisory Committee (TAC) and Secondary Market Advisory Committee (SMAC), it has been decided to put in place the following broad guidelines for algorithmic trading in the securities market.

Definition

3. Algorithmic Trading – Any order that is generated using automated execution logic shall be known as algorithmic trading.

Guidelines to the stock exchanges and the stock brokers

4. Stock exchanges shall ensure the following while permitting algorithmic trading:

(i)     The stock exchange shall have arrangements, procedures and system capability to manage the load on their systems in such a manner so as to achieve consistent response time to all stock brokers. The stock exchange shall continuously study the performance of its systems and, if necessary, undertake system upgradation, including periodic upgradation of its surveillance system, in order to keep pace with the speed of trade and volume of data that may arise through algorithmic trading.

(ii)   In order to ensure maintenance of orderly trading in the market, stock exchange shall put in place effective economic disincentives with regard to high daily order-to-trade ratio of algo orders of the stock broker. Further, the stock exchange shall put in place monitoring systems to identify and initiate measures to impede any possible instances of order flooding by algos.

(iii) The stock exchange shall ensure that all algorithmic orders are necessarily routed through broker servers located in India and the stock exchange has appropriate risk controls mechanism to address the risk emanating from algorithmic orders and trades. The minimum order-level risk controls shall include the following:

  1. Price check – The price quoted by the order shall not violate the price bands defined by the exchange for the security. For securities that do not have price bands, dummy filters shall be brought into effective use to serve as an early warning system to detect sudden surge in prices.
  2. Quantity Limit check – The quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.

(iv) In the interest of orderly trading and market integrity, the stock exchange shall put in place a system to identify dysfunctional algos (i.e. algos leading to loop or runaway situation) and take suitable measures, including advising the member, to shut down such algos and remove any outstanding orders in the system that have emanated from such dysfunctional algos. Further, in exigency, the stock exchange should be in a position to shut down the broker’s terminal.

(v)   Terminals of the stock broker that are disabled upon exhaustion of collaterals shall be enabled manually by the stock exchange in accordance with its risk management procedures.

(vi) The stock exchange may seek details of trading strategies used by the algo for such purposes viz. inquiry, surveillance, investigation, etc.

(vii)  The stock exchange shall include a report on algorithmic trading on the stock exchange in the Monthly Development Report (MDR) submitted to SEBI inter-alia incorporating turnover details of algorithmic trading, algorithmic trading as percentage of total trading, number of stock brokers / clients using algorithmic trading, action taken in respect of dysfunctional algos, status of grievances, if any, received and processed, etc.

(viii)   The stock exchange shall synchronize its system clock with the atomic clock before the start of market such that its clock has precision of atleast one microsecond and accuracy of atleast +/- one millisecond.

5. Stock exchange shall ensure that the stock broker shall provide the facility of algorithmic trading only upon the prior permission of the stock exchange. Stock exchange shall subject the systems of the stock broker to initial conformance tests to ensure that the checks mentioned below are in place and that the stock broker’s system facilitate orderly trading and integrity of the securities market. Further, the stock exchange shall suitably schedule such conformance tests and thereafter, convey the outcome of the test to the stock broker.

For stock brokers already providing algo trading, the stock exchange shall ensure that the risk controls specified in this circular are implemented by the stock broker.

Additionally, the annual system audit report for a stock broker, as submitted to the stock exchange, shall include a specific report ensuring that the checks are in place. Such system audit shall be conducted by Certified Information System Auditors (CISA) empanelled by stock exchanges. Further, the stock exchange shall subject the stock broker systems to more frequent system audits, if required.

6. The stock broker, desirous of placing orders generated using algos, shall satisfy the stock exchange with regard to the implementation of the following minimum levels of risk controls at its end –

(i)     Price check – Algo orders shall not be released in breach of the price bands defined by the exchange for the security.

(ii)   Quantity check – Algo orders shall not be released in breach of the quantity limit as defined by the exchange for the security.

(iii) Order Value check – Algo orders shall not be released in breach of the ‘value per order’ as defined by the stock exchanges.

(iv) Cumulative Open Order Value check – The individual client level cumulative open order value check, may be prescribed by the broker for the clients. Cumulative Open Order Value for a client is the total value of its unexecuted orders released from the stock broker system.

(v)   Automated Execution check – An algo shall account for all executed, unexecuted and unconfirmed orders, placed by it before releasing further order(s). Further, the algo system shall have pre-defined parameters for an automatic stoppage in the event of algo execution leading to a loop or a runaway situation.

(vi) All algorithmic orders are tagged with a unique identifier provided by the stock exchange in order to establish audit trail.

7. The other risk management checks already put in place by the exchange shall continue and the exchange may re-evaluate such checks if deemed necessary in view of algo trading.

8. The stock broker, desirous of placing orders generated using algos, shall submit to the respective stock exchange an undertaking that –

(i)     The stock broker has proper procedures, systems and technical capability to carry out trading through the use of algorithms.

(ii)   The stock broker has procedures and arrangements to safeguard algorithms from misuse or unauthorized access.

(iii) The stock broker has real-time monitoring systems to identify algorithms that may not behave as expected. Stock broker shall keep stock exchange informed of such incidents immediately.

(iv) The stock broker shall maintain logs of all trading activities to facilitate audit trail. The stock broker shall maintain record of control parameters, orders, trades and data points emanating from trades executed through algorithm trading.

(v)   The stock broker shall inform the stock exchange on any modification or change to the approved algos or systems used for algos.

9. The stock exchange, if required, shall seek conformance of such modified algo or systems to the requirements specified in the circular.

10. Stock exchanges are directed to:

(i)     take necessary steps and put in place necessary systems for implementation of the above within a period of one month from the date of this circular.

(ii)   make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

(iii) bring the provisions of this circular to the notice of the stock brokers of the stock exchange and also to disseminate the same on the website.

(iv) For stock brokers that are currently executing orders through algos, a period of three months is provided to the stock exchanges within which the approval process shall be completed and minimum risk controls shall be established, if not already done.

(v)   communicate to SEBI, the status of implementation of the provisions of this circular in the Monthly Development Report.

11. This circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Click here to download the complete text of the above Circular in PDF Format- CIR/MRD/DP/ 09 /2012 dated March 30, 2012.

Source: Securities and Exchange Board of India.


Guidelines for Credit Rating Agencies

CIRCULAR- CIR/MIRSD/3/2012 dated March 01, 2012

 To

 All Credit Rating Agencies Registered with SEBI

1. According to SEBI (Credit Rating Agencies) Regulations, 1999 (the Regulations), a credit rating agency (CRA) has been defined as a body corporate which is engaged in the business of rating of securities offered by way of public or rights issues. The term “securities” has been defined in Clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.

2. However it is observed that the CRAs registered with SEBI also carry out rating of other securities / instruments and loans / facilities provided by banks which are not regulated by SEBI. Such ratings are being used by the other regulators or their regulated entities for the specified purposes

3. Therefore, it is desirable that in addition to the review/accreditation process put in place by these regulators, if any, such ratings should also be governed by the same stringent norms as applicable for rating of securities issued by way of public and rights issues.

4. In view of the above, it has been decided in consultation with the CRAs and also with other regulators that for the above mentioned ratings, CRAs shall follow the applicable requirements pertaining to rating process and methodology and its records, transparency and disclosures, avoidance of conflict of interest, code of conduct, etc, as prescribed in the Regulations and circulars issued by SEBI from time to time.

5. The half-yearly internal audit for the CRAs as prescribed by SEBI shall also cover the above mentioned ratings.

6. This circular is issued in exercise of the powers conferred by Section 11(1) of Securities and Exchange Board of India Act, 1992 and Regulation 20 of the Regulations.

7. This circular is available on SEBI website at www.sebi.gov.in under the categories “Legal Framework” and “Circulars”.

Click here to download the complete text of the above Circular- Guidelines for Credit Rating Agencies.

Source: Securities and Exchange Board of India


Frequency Norms of Audit for Service Tax Assessees

Director General of Audit, New Delhi has prepared Service Tax Audit Manual, 2010.

As per the guidelines, tax payers whose annual service tax payment (including cash and CENVAT) was Rs.3 crore or more in the preceding financial year may be subjected to mandatory audit each year.

It is preferable that Audit of all such Units is done by using Computer Assisted Audit Program (CAAP) techniques.

The frequency of audit for other taxpayers would be as per following norms:-

i. Taxpayers with Service Tax payment above Rs.3 crores (Cash + CENVAT) (MANDATORY UNITS) – to be audited every year.

ii. Taxpayers with Service Tax payment between Rs.1 crore and Rs.3 crores (Cash + CENVAT) – to be audited once every two years.

iii. Taxpayers with Service Tax payment between Rs.25 lakhs and Rs.1 crore (Cash + CENVAT) – to be audited once every five years.

iv. Taxpayers with Service Tax payment upto Rs.25 lakhs (Cash + CENVAT) – 2% of taxpayers to be audited every year.

The Audit selection guidelines, therefore, would apply to the non-mandatory taxpayers, forming part of the discretionary workload.  These taxpayers should be selected on the basis of assessment of the risk potential to revenue.  This process, which is an essential feature of audit selection, is known as Risk Assessment.  It involves the ranking of taxpayers according to a quantitative indicator of risk known as a “risk parameter”.  It is also suggested that the taxpayers whose returns were selected for detailed scrutiny, may not be taken up for Audit that year, to avoid duplication of work.  Similarly, the taxpayers who have been selected for Audit, may not be taken up for detailed scrutiny of their ST-3 Returns during that year.

The Service Tax Audit Manual, 2010 is in the process of finalization and publication by D.G. Audit, New Delhi. In the circumstances, till the same is published, the existing instructions on audit shall continue.

Source: http://www.servicetax.gov.in


Guidelines in respect of the disclosures to be made in the Letter of offer in respect of Buy-back of securities in terms of SEBI (Buy-back of Securities) Regulations, 1998 and Format of Standard letter of offer.

CIRCULAR

CIR/CFD/DCR/ 2 /2012 dated February 9, 2012

To

All Merchant Bankers

1. SEBI (Buyback of Securities) Regulations, 1998 (“the Regulations”) were amended vide notification dated February 07, 2012 with an objective of aligning the regulatory provisions with the principle of equitable treatment to all shareholders and enhancing the efficiency in the Buyback process.

2. The amendments to the regulation necessitate certain changes in the format of standard letter of offer issued vide SEBI circular (MIRSD/DPS-2/MB/Cir-02/8859/04) dated May 07, 2004. The revised format of standard letter of offer is given at Annexure-A.

3. This circular shall come into force with immediate effect.

4. This circular is in supersession of the previous circular no. MIRSD/DPS-2/MB/Cir-02/8859/04 dated May 07, 2004 issued to Merchant Bankers registered with SEBI.

5. This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 read with regulation 26 of the SEBI (Buy-Back of Securities) Regulations, 1998 as amended.

6. All Merchant Bankers are advised to ensure compliance with this circular.

7. This circular is available on SEBI website at www.sebi.gov.in under the category “Legal Framework”.

Annexure-A

SECURITIES AND EXCHANGE BOARD OF INDIA

STANDARD LETTER OF OFFER FOR BUY BACK OF SECURITIES IN TERMS OF THE SEBI (BUY BACK OF SECURITIES) REGULATIONS, 1998

General Instructions / Guidelines:

1. The purpose of this standard letter of offer for Buy Back of equity in accordance with Chapter III of the SEBI (Buy Back of Securities) Regulations, 1998 (hereinafter referred to as “the Regulations”) is to provide the requisite information about the company so as to enable the shareholders to make an informed decision of either remaining the shareholders of the company or to exit from the company.

2. Care shall be taken by the Merchant Banker to ensure that the Letter of Offer may not be technical in legal or financial jargons and it shall be presented in simple, clear, concise and easily understandable language.

3. This standard Letter of Offer enumerates the minimum disclosure requirements to be contained in the Letter of Offer for the Buy Back of equity. The Merchant Banker/ the company is free to add any other disclosure(s) which in his / its opinion is material for the shareholders.

4. The merchant banker shall ensure that the disclosures made in the letter of offer are not presented in an incomplete, inaccurate or misleading manner and are made in accordance with the Regulations.

5. The standard Letter of Offer prescribes only the nature of the disclosures that should be contained under various heads in the Letter of Offer and is not intended to describe the language to be contained therein.

6. All the financial data shall be in terms of Rupees Lacs unless required otherwise (e.g. EPS). When financial data pertains to an overseas entity, the rupee equivalent shall be disclosed in terms of Rs. Lacs and the basis of conversion shall also be disclosed. (If so desired, such data may also be disclosed in terms of the monetary unit applicable for that overseas entity).

7. Unless otherwise specified

7.1. Information contained in Letter of Offer shall be as on the date of the Public Announcement (PA).

7.2. The “Regulations” shall mean SEBI (Buy Back of Securities) Regulations, 1998 and subsequent amendments thereof.

8. The source from which data / information is obtained should be mentioned in the relevant pages of Letter of Offer.

9. Merchant Banker shall ensure the following;

9.1 The letter of offer along with the tender form shall be dispatched to the security holders who are eligible to participate in the buyback offer, not later than five working days from the receipt of communication of comments from the Board.

9.2 The date of the opening of the offer shall be not later than five working days from the date of dispatch of letter of offer.

9.3 The offer for buy back shall remain open for a period of ten working days.

10. Merchant Banker shall submit the Due Diligence Certificate in terms of Regulation 20(f) of the Regulations to Board along with the draft Letter of Offer as per the standardized format.

11. The merchant banker to give registration number of the Chartered Accountant who has given the report in terms of clause (xi) of Schedule II, part A of the Regulations.

Click here to download- Format of Standard letter of offer (From Page 5 to Page 32).

Click here to download the Circular- Guidelines in respect of the disclosures to be made in the Letter of offer in respect of Buy-back of securities in terms of SEBI (Buy-back of Securities) Regulations, 1998 and Format of Standard letter of offer- Feb 09, 2012. [PDF Format], {No. of Pages- 32}, (Size- 219Kb).

Source: Securities and Exchange Board of India.