Unit 5
Security Brokerage
Q1) Explain brokerage.
A1)
A broker-dealer is a term used in financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers.
Although many broker-dealers are "independent" firms solely involved in broker-dealer services, many others are business units or subsidiaries of commercial banks, investment banks or investment companies.
When executing trade orders on behalf of a customer, the institution is said to be acting as a broker. When executing trades for its own account, the institution is said to be acting as a dealer. Securities bought from clients or other firms in the capacity of dealer may be sold to clients or other firms acting again in the capacity of dealer, or they may become a part of the firm's holdings.
Types
Brokerage firms may be classified into three basic types: full-service, discount and limited products. There is also another sub-class of brokers known as online brokers.
Full-Service brokerage firm:
A full service brokerage firm can provide you with a complete package of investment services, including recommending securities, researching a particular issue, or providing individualized service through a salesperson. The firm receives its payment in the form of a commission that is calculated according to the type of security and the amount you are investing. A full-service firm is generally best for those who are new to the market or who do not have the time or the desire to do their own investment research.
Full Service Stock Brokers
A full service stock broker is there to provide you with advice, updates and everything you need to manage your investment. In some cases, you can tell full service stock brokers your investment goals and appetite for risk, and allow them free reign to manage your money.Full service brokers and financial advisors come with associated price tags that are obviously more expensive than a no frills broker or online stock broker. However, the cost can be largely negligible of a full service broker makes you more money in the long run.If you have larger amounts of investment capital and you want to reduce risk as much as possible, it makes sense to use a full service broker. With larger amounts of capital, brokerage charges will often be miniscule compared to overall potential gains and risk management advantages.
Discount brokerage firm
While a discount brokerage also can provide you with a wide range of services, its salespersons are not allowed to give investment advice, to make recommendations or to provide research materials. For these reasons, a discount firm can offer substantially lower commissions than full-service brokers. Experienced investors capable of doing their own investment research typically use a discount firm. Discount stock brokers offer stock broking services for lower fees than full-service stock brokers. Discount brokers may also be called non-advisory brokers, no-frills brokers or low-fee stock brokers. Many online stock brokers would be considered discount brokers. The name is fairly self-explanatory, but don't misjudge discount brokers just because they are cheap. Many discount brokers will provide general advice, market reports and even stock tips.
Limited products firm:
These brokerage firms specialize in a limited number of securities products, such as mutual funds, limited partnerships or specific bonds.
Online Stock Brokers
Online stock brokers are an appealing choice for many investors. Using the power of the internet, online stock brokers provide cost effective brokerage services, up-to-date information and advanced stock trading platforms to suit a variety of investment strategies. Online stock brokers may also be called internet brokers, online brokers or online discount brokers.
Q2) Explain types of broker.
A2)
A broker-dealer is a term used in financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers.
Although many broker-dealers are "independent" firms solely involved in broker-dealer services, many others are business units or subsidiaries of commercial banks, investment banks or investment companies.
When executing trade orders on behalf of a customer, the institution is said to be acting as a broker. When executing trades for its own account, the institution is said to be acting as a dealer. Securities bought from clients or other firms in the capacity of dealer may be sold to clients or other firms acting again in the capacity of dealer, or they may become a part of the firm's holdings.
Types
Brokerage firms may be classified into three basic types: full-service, discount and limited products. There is also another sub-class of brokers known as online brokers.
Full-Service brokerage firm:
A full service brokerage firm can provide you with a complete package of investment services, including recommending securities, researching a particular issue, or providing individualized service through a salesperson. The firm receives its payment in the form of a commission that is calculated according to the type of security and the amount you are investing. A full-service firm is generally best for those who are new to the market or who do not have the time or the desire to do their own investment research.
Full Service Stock Brokers
A full service stock broker is there to provide you with advice, updates and everything you need to manage your investment. In some cases, you can tell full service stock brokers your investment goals and appetite for risk, and allow them free reign to manage your money.Full service brokers and financial advisors come with associated price tags that are obviously more expensive than a no frills broker or online stock broker. However, the cost can be largely negligible of a full service broker makes you more money in the long run.If you have larger amounts of investment capital and you want to reduce risk as much as possible, it makes sense to use a full service broker. With larger amounts of capital, brokerage charges will often be miniscule compared to overall potential gains and risk management advantages.
Discount brokerage firm
While a discount brokerage also can provide you with a wide range of services, its salespersons are not allowed to give investment advice, to make recommendations or to provide research materials. For these reasons, a discount firm can offer substantially lower commissions than full-service brokers. Experienced investors capable of doing their own investment research typically use a discount firm. Discount stock brokers offer stock broking services for lower fees than full-service stock brokers. Discount brokers may also be called non-advisory brokers, no-frills brokers or low-fee stock brokers. Many online stock brokers would be considered discount brokers. The name is fairly self-explanatory, but don't misjudge discount brokers just because they are cheap. Many discount brokers will provide general advice, market reports and even stock tips.
Limited products firm:
These brokerage firms specialize in a limited number of securities products, such as mutual funds, limited partnerships or specific bonds.
Online Stock Brokers
Online stock brokers are an appealing choice for many investors. Using the power of the internet, online stock brokers provide cost effective brokerage services, up-to-date information and advanced stock trading platforms to suit a variety of investment strategies. Online stock brokers may also be called internet brokers, online brokers or online discount brokers.
Q3) Explain broker.
A3)
Broker
A stock broker buys and sells shares on behalf of clients. Say you want 1,000 shares of stock in XYZ Corp. You place your order through a brokerage, which then acts as your agent in locating a seller and obtaining the shares. You then typically pay a commission for the broker's services. The commission may be a percentage of the price you paid for the stock, or, as is common with online and discount brokerages, it could be a flat fee per trade, regardless of the size of your order.
Broker is a bonafide member of the stock exchange who deals outside the house for the purpose of bringing together his clients who cannot deal directly on the stock exchange. Broker thus transacts business in securities on behalf of his clients. He generally deals in a large variety of securities. He receives commission from his clients in exchange for his services. He is an experienced agent of the public. He renders important functions in regard to deal with skilled jobbers directly. 3. Minimum subscription. It is the minimum amount of shares subscribed by public before the directors can proceed to allotment. The amount of minimum subscription fixed by the Memorandum the Articles and named in the prospectus under the heading i.e. Preliminary expenses, underwriting commission, working capital and repayment whole of the capital offered for subscription must be subscribed by the public. This is intended to ensure that the company will not commence the business without adequate capital. Broker is a retailer of stocks and shares. His customers are investors.
Q4) Explain jobber.
A4)
Jobber
"Jobber" is a British term for what in the United States is commonly called a "market maker." This is someone who maintains an inventory of shares in order to make trades possible. When you place your order for 1,000 shares of XYZ Corp., your broker doesn't have to call around trying to find someone with 1,000 shares to sell. Instead, he can simply go to a market maker, who keeps an inventory of XYZ stock, and buy the shares there. Likewise, if you decide you want to sell those 1,000 shares, your broker can sell them to the market maker. Jobbers typically post two prices for a stock: what they'll buy it for and what they'll sell it for. The sell price will be slightly higher, which is how jobbers make their money.
Jobber is the member of the stock exchange who performs important functions. He is an independent dealer in securities which are transacted in the market. He conducts the securities in his own name but they cannot deal directly with non members. In others words jobber has to deal with a broker or another jobber. He is a professional speculator who has complete information regarding the particular shares he deals in jobber does not transact for commission but transacts for profit which he gains from speculating activities. In brief he renders the valuable services by executing the public's orders that help to make the price fluctuations smooth. A jobber is a wholesaler of stocks and shares. His customers are brokers.
Q5) Explain difference between broker and jobber.
A5)
Broker
A stock broker buys and sells shares on behalf of clients. Say you want 1,000 shares of stock in XYZ Corp. You place your order through a brokerage, which then acts as your agent in locating a seller and obtaining the shares. You then typically pay a commission for the broker's services. The commission may be a percentage of the price you paid for the stock, or, as is common with online and discount brokerages, it could be a flat fee per trade, regardless of the size of your order.
Broker is a bonafide member of the stock exchange who deals outside the house for the purpose of bringing together his clients who cannot deal directly on the stock exchange. Broker thus transacts business in securities on behalf of his clients. He generally deals in a large variety of securities. He receives commission from his clients in exchange for his services. He is an experienced agent of the public. He renders important functions in regard to deal with skilled jobbers directly. 3. Minimum subscription. It is the minimum amount of shares subscribed by public before the directors can proceed to allotment. The amount of minimum subscription fixed by the Memorandum the Articles and named in the prospectus under the heading i.e. Preliminary expenses, underwriting commission, working capital and repayment whole of the capital offered for subscription must be subscribed by the public. This is intended to ensure that the company will not commence the business without adequate capital. Broker is a retailer of stocks and shares. His customers are investors.
Jobber
"Jobber" is a British term for what in the United States is commonly called a "market maker." This is someone who maintains an inventory of shares in order to make trades possible. When you place your order for 1,000 shares of XYZ Corp., your broker doesn't have to call around trying to find someone with 1,000 shares to sell. Instead, he can simply go to a market maker, who keeps an inventory of XYZ stock, and buy the shares there. Likewise, if you decide you want to sell those 1,000 shares, your broker can sell them to the market maker. Jobbers typically post two prices for a stock: what they'll buy it for and what they'll sell it for. The sell price will be slightly higher, which is how jobbers make their money.
Jobber is the member of the stock exchange who performs important functions. He is an independent dealer in securities which are transacted in the market. He conducts the securities in his own name but they cannot deal directly with non members. In others words jobber has to deal with a broker or another jobber. He is a professional speculator who has complete information regarding the particular shares he deals in jobber does not transact for commission but transacts for profit which he gains from speculating activities. In brief he renders the valuable services by executing the public's orders that help to make the price fluctuations smooth. A jobber is a wholesaler of stocks and shares. His customers are brokers.
Q6) Explain sebi regulation related to brokerage.
A6)
The stock markets in India are governed by the provisions of Securities and Exchange Board of India Act, 1992. The Securities Exchange Board of India constituted under SEBI Act, 1992 exercises overall superintendence over the stock exchanges under the Securities Contracts (Regulation) Act, 1956. SEBI was constituted on 21st February, 1992, with the twin objectives of regulation and development. The present broker regulations are by and large sufficient to protect the needs of the investors.
There are stock exchanges recognized under Securities Contract (Regulation) Act, 1956 which are the exclusive centres for trading of securities. Most of the stock exchanges in India are organized as mutuals which is considered beneficial in terms of tax benefits and matters of compliance. The trading members, who provide broking services also own, control and manage the exchanges. The trading platform of an exchange is accessible only to brokers. Demutualised exchange allows free entry and exit of brokers. The broker enters into trades in exchanges either on his own account or on behalf of his clients.
Brokers deal with secondary markets for the sale and purchase of securities such as stocks and bonds. Trading is done in various ways such as it may occur on a continuous auction basis; it may involve brokers buying from and selling to dealers in stock markets. The stock exchanges differ from country to country in eligibility requirements and in the degree to which the govt. Participates in their management.
‘Broker’ as defined in the Concise Law Dictionary means a middleman or agent who, for a commission on the value of the transmission, negotiates for others the purchase or sale of stocks, bonds, commodities or property of any kind, or who attends to the doing of something for another. Thus, brokers are the people who deal in shares and whose business includes the procuring of subscribers for shares. They are basically intermediaries in the secondary market and are middlemen between the investors and stock exchanges. They reflect the deal by transferring the stock and shares. They bring funds from investors to the stock exchanges. One category of intermediaries are stock brokers and sub brokers.
Securities Exchange Act, 1934 defines the term Broker as anyone, other than a bank, engaged in the business of effecting securities transactions for the account of others. In other words, brokers form a sub-class of dealers and include anyone who is in the business of effecting securities transactions as agents for others. Broker is an intermediary who is associated with securities market and is registered under Section 12 of the SEBI Act, 1992.
‘Brokerage’ is a commission paid to a bank, stock-broker, or other marketing intermediary for placing shares on a best effort basis or for inducing a broker’s clients or customers to subscribe for the company’s shares or other securities and is lawful if reasonable in amount. In other words, brokerage is a fee or commission given to or charged by a broker. When the owner of the property employs a broker to find a purchaser and he agrees to compensate him therefor, the consideration is known as Brokerage Commission. The listed companies can only pay brokerage of 5% on private placement of capital. However, the expenses incurred by the broker for getting hold of subscribers would be borne by the share broker himself. Brokerage can only be paid for the services rendered under a contract with the company
Stock Broker
Stock Broker is one who deals in stocks of monied corporations and other securities. He for a commission attends to the purchase and sale of stocks or shares, of the Government or other securities, on behalf of and for the accounts of their clients. He is a person who has either made an application for registration or is registered as a stock broker or sub broker, in accordance with the rules and regulations made under the SEBI Act, 1992. His functions are broader than the ordinary brokers, since he is entrusted with the possession of the property for which he acts and may even take and transfer it without the name of his principal appearing in the transactions. In India, there is no regulatory body for brokers.
In secondary market, brokers and sub brokers play a vital role. SEBI, as a regulator of the capital market has recognized their role and has thus permitted them to act as underwriters, without getting registered with SEBI pursuant to SEBI (Underwriters) Rules & Regulations, 1993. But this is subject to the condition that they hold a valid registration certificate from SEBI under SEBI (Stock Brokers and Sub Brokers) Rules & Regulations, 1992. However, he has to comply with all the obligations stipulated thereunder. He is also required to obtain the permission of the concerned Stock Exchange of which he is a member, so as to act as an underwriter for each and every issue
The Central Government in India has enacted the law relating to Stock brokers under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992 and the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. The SEBI Rules define ‘Stock Broker’ as a member of the stock exchange. A stock broker acts as an agent of his client and deals with securities on behalf of his client. Though strictly, a stock broker is an agent, yet for the performance of the contract on his part both in the market and with the client, he is deemed as a principal. He holds a peculiar position of dual responsibility. He can charge commission from his client. He not only executes transactions on behalf of investors but also offers value management or services such as initial public offerings on line, asset allocation, portfolio management, financial planning, tax planning, insurance services. In the case of Rajendra Prasad Bagaria v. Bhubaneshwar Stock Exchange Association Ltd. Orissa High Court held that stock broker is governed by SEBI in matters relating to their registration, functioning and have to abide by the SEBI Regulations as well as bye-laws of the respective stock exchanges.
A person who is willing to operate as a stock broker can make an application for it under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The stock broker has to get himself registered under the SEBI Act, 1992. He has to act as per the conditions of the certificate of registration obtained from the SEBI in accordance with regulations framed under the SEBI Act, 1992, otherwise he cannot deal with securities market and cannot even buy, sell or deal in securities. But he should be eligible as a member of the stock exchange, i.e., he should be a fit and proper person. This is based on an objective test, i.e., whether or not the person has been involved or has a pending enquiry against him for some malpractice in the stock exchange in any segment of the market. Persons who operate in the securities market are required to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings. People who indulge in manipulative, fraudulent and deceptive transactions or abet the carrying out of such transactions, which are fraudulent and unreliable, are not considered fit or proper persons to operate in the market.
There are certain conditions provided under Rule 4 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, which are to be fulfilled before the grant of a certificate to a stock broker. The SEBI Act, 1992 prohibits stock broker from buying, selling and dealing in securities unless he holds a certificate granted by the Board under the SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992. Existing brokers of the concerned stock exchanges were allowed to continue their business, if they made an application for such registration within a period of 3 months from the establishment of the Board, till the disposal of the application. An interesting aspect of the relationship between a brokers and stock exchange is that the stock brokers are required to pay registration fees for the grant of certificate as prescribed by Schedule III. But if they fail to pay, then the Board may suspend the registration certificate, which implies that the stock broker shall cease to buy, sell or deal in securities as a stock broker.
Sub-Broker
Sub Broker is any person, not being a member of a stock exchange. He acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock brokers. He is further an agent of the broker and carries out actual transactions for the broker. He is one who has either made an application for registration or is registered as a sub broker under SEBI Act, 1992.
The members of the stock exchange who execute transactions of their clients through the members of other stock exchanges are treated as Sub Brokers. Any person who not being a member of a stock exchange, acts on behalf of a stock broker as an agent for assisting the investors in buying, selling or dealing in securities through such stock brokers is called as a sub broker. He is associated with securities market and should not buy, sell or deal in securities unless he has complied with the conditions of the certificate of registration obtained from SEBI issued in accordance with Rules and Regulations.[36] If he is associated with securities market before the establishment of the SEBI, then he may continue to do business but upon an application made for registration within a period of 3 months from the establishment of SEBI, till the disposal of such application.
There are certain conditions provided in Rule 5 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, which are to be fulfilled before the grant of a certificate to a sub-broker. If the stock broker/sub broker fails to comply with the conditions subject to which he is been granted registration, then he would be penalized and his registration would be suspended or cancelled.
A sub broker should co-operate with his broker in the transactions. He should not knowingly and willfully deliver documents which constitute bad delivery. He should also co-operate with other contracting party for prompt replacement of the documents which are declared as bad delivery. Further, he should extend his full co-operation to his stock broker in protecting the interests of his clients regarding their rights to dividends, bonus rights, rights shares and any other right relatable to such securities.
Further, sub brokers, who act on behalf of their principal broker, are required to issue to their clients purchase or sale notes for all the transactions entered into by them on behalf of their clients. While performing this function, the sub brokers act as an agent of the principal broker.
He is also required to be registered with the concerned stock exchange. The business of the stock brokers and sub brokers is too much interlinked, so, for properly monitoring their activities separate registration procedure is provided. The sub broker owes obligations not only to the client but also to the stock broker. The sub broker enters into a tripartite agreement with the main broker and his client. He assists his clients in obtaining the contract note from the main broker. But he cannot issue the note or make payments through cheques directly, as that has to be done by the main broker.
Q7) Explain stock broker.
A7)
Stock Broker is one who deals in stocks of monied corporations and other securities. He for a commission attends to the purchase and sale of stocks or shares, of the Government or other securities, on behalf of and for the accounts of their clients. He is a person who has either made an application for registration or is registered as a stock broker or sub broker, in accordance with the rules and regulations made under the SEBI Act, 1992. His functions are broader than the ordinary brokers, since he is entrusted with the possession of the property for which he acts and may even take and transfer it without the name of his principal appearing in the transactions. In India, there is no regulatory body for brokers.
In secondary market, brokers and sub brokers play a vital role. SEBI, as a regulator of the capital market has recognized their role and has thus permitted them to act as underwriters, without getting registered with SEBI pursuant to SEBI (Underwriters) Rules & Regulations, 1993. But this is subject to the condition that they hold a valid registration certificate from SEBI under SEBI (Stock Brokers and Sub Brokers) Rules & Regulations, 1992. However, he has to comply with all the obligations stipulated thereunder. He is also required to obtain the permission of the concerned Stock Exchange of which he is a member, so as to act as an underwriter for each and every issue
The Central Government in India has enacted the law relating to Stock brokers under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992 and the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. The SEBI Rules define ‘Stock Broker’ as a member of the stock exchange. A stock broker acts as an agent of his client and deals with securities on behalf of his client. Though strictly, a stock broker is an agent, yet for the performance of the contract on his part both in the market and with the client, he is deemed as a principal. He holds a peculiar position of dual responsibility. He can charge commission from his client. He not only executes transactions on behalf of investors but also offers value management or services such as initial public offerings on line, asset allocation, portfolio management, financial planning, tax planning, insurance services. In the case of Rajendra Prasad Bagaria v. Bhubaneshwar Stock Exchange Association Ltd. Orissa High Court held that stock broker is governed by SEBI in matters relating to their registration, functioning and have to abide by the SEBI Regulations as well as bye-laws of the respective stock exchanges.
A person who is willing to operate as a stock broker can make an application for it under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The stock broker has to get himself registered under the SEBI Act, 1992. He has to act as per the conditions of the certificate of registration obtained from the SEBI in accordance with regulations framed under the SEBI Act, 1992, otherwise he cannot deal with securities market and cannot even buy, sell or deal in securities. But he should be eligible as a member of the stock exchange, i.e., he should be a fit and proper person. This is based on an objective test, i.e., whether or not the person has been involved or has a pending enquiry against him for some malpractice in the stock exchange in any segment of the market. Persons who operate in the securities market are required to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings. People who indulge in manipulative, fraudulent and deceptive transactions or abet the carrying out of such transactions, which are fraudulent and unreliable, are not considered fit or proper persons to operate in the market.
There are certain conditions provided under Rule 4 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, which are to be fulfilled before the grant of a certificate to a stock broker. The SEBI Act, 1992 prohibits stock broker from buying, selling and dealing in securities unless he holds a certificate granted by the Board under the SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992. Existing brokers of the concerned stock exchanges were allowed to continue their business, if they made an application for such registration within a period of 3 months from the establishment of the Board, till the disposal of the application. An interesting aspect of the relationship between a brokers and stock exchange is that the stock brokers are required to pay registration fees for the grant of certificate as prescribed by Schedule III. But if they fail to pay, then the Board may suspend the registration certificate, which implies that the stock broker shall cease to buy, sell or deal in securities as a stock broker.
Q8) Explain sub broker.
A8)
Sub Broker is any person, not being a member of a stock exchange. He acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock brokers. He is further an agent of the broker and carries out actual transactions for the broker. He is one who has either made an application for registration or is registered as a sub broker under SEBI Act, 1992.
The members of the stock exchange who execute transactions of their clients through the members of other stock exchanges are treated as Sub Brokers. Any person who not being a member of a stock exchange, acts on behalf of a stock broker as an agent for assisting the investors in buying, selling or dealing in securities through such stock brokers is called as a sub broker. He is associated with securities market and should not buy, sell or deal in securities unless he has complied with the conditions of the certificate of registration obtained from SEBI issued in accordance with Rules and Regulations.[36] If he is associated with securities market before the establishment of the SEBI, then he may continue to do business but upon an application made for registration within a period of 3 months from the establishment of SEBI, till the disposal of such application.
There are certain conditions provided in Rule 5 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, which are to be fulfilled before the grant of a certificate to a sub-broker. If the stock broker/sub broker fails to comply with the conditions subject to which he is been granted registration, then he would be penalized and his registration would be suspended or cancelled.
A sub broker should co-operate with his broker in the transactions. He should not knowingly and willfully deliver documents which constitute bad delivery. He should also co-operate with other contracting party for prompt replacement of the documents which are declared as bad delivery. Further, he should extend his full co-operation to his stock broker in protecting the interests of his clients regarding their rights to dividends, bonus rights, rights shares and any other right relatable to such securities.
Further, sub brokers, who act on behalf of their principal broker, are required to issue to their clients purchase or sale notes for all the transactions entered into by them on behalf of their clients. While performing this function, the sub brokers act as an agent of the principal broker.
He is also required to be registered with the concerned stock exchange. The business of the stock brokers and sub brokers is too much interlinked, so, for properly monitoring their activities separate registration procedure is provided. The sub broker owes obligations not only to the client but also to the stock broker. The sub broker enters into a tripartite agreement with the main broker and his client. He assists his clients in obtaining the contract note from the main broker. But he cannot issue the note or make payments through cheques directly, as that has to be done by the main broker.
Q9) Explain stock broker and sub broker.
A9)
Stock Broker
Stock Broker is one who deals in stocks of monied corporations and other securities. He for a commission attends to the purchase and sale of stocks or shares, of the Government or other securities, on behalf of and for the accounts of their clients. He is a person who has either made an application for registration or is registered as a stock broker or sub broker, in accordance with the rules and regulations made under the SEBI Act, 1992. His functions are broader than the ordinary brokers, since he is entrusted with the possession of the property for which he acts and may even take and transfer it without the name of his principal appearing in the transactions. In India, there is no regulatory body for brokers.
In secondary market, brokers and sub brokers play a vital role. SEBI, as a regulator of the capital market has recognized their role and has thus permitted them to act as underwriters, without getting registered with SEBI pursuant to SEBI (Underwriters) Rules & Regulations, 1993. But this is subject to the condition that they hold a valid registration certificate from SEBI under SEBI (Stock Brokers and Sub Brokers) Rules & Regulations, 1992. However, he has to comply with all the obligations stipulated thereunder. He is also required to obtain the permission of the concerned Stock Exchange of which he is a member, so as to act as an underwriter for each and every issue
The Central Government in India has enacted the law relating to Stock brokers under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992 and the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992. The SEBI Rules define ‘Stock Broker’ as a member of the stock exchange. A stock broker acts as an agent of his client and deals with securities on behalf of his client. Though strictly, a stock broker is an agent, yet for the performance of the contract on his part both in the market and with the client, he is deemed as a principal. He holds a peculiar position of dual responsibility. He can charge commission from his client. He not only executes transactions on behalf of investors but also offers value management or services such as initial public offerings on line, asset allocation, portfolio management, financial planning, tax planning, insurance services. In the case of Rajendra Prasad Bagaria v. Bhubaneshwar Stock Exchange Association Ltd. Orissa High Court held that stock broker is governed by SEBI in matters relating to their registration, functioning and have to abide by the SEBI Regulations as well as bye-laws of the respective stock exchanges.
A person who is willing to operate as a stock broker can make an application for it under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The stock broker has to get himself registered under the SEBI Act, 1992. He has to act as per the conditions of the certificate of registration obtained from the SEBI in accordance with regulations framed under the SEBI Act, 1992, otherwise he cannot deal with securities market and cannot even buy, sell or deal in securities. But he should be eligible as a member of the stock exchange, i.e., he should be a fit and proper person. This is based on an objective test, i.e., whether or not the person has been involved or has a pending enquiry against him for some malpractice in the stock exchange in any segment of the market. Persons who operate in the securities market are required to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings. People who indulge in manipulative, fraudulent and deceptive transactions or abet the carrying out of such transactions, which are fraudulent and unreliable, are not considered fit or proper persons to operate in the market.
There are certain conditions provided under Rule 4 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, which are to be fulfilled before the grant of a certificate to a stock broker. The SEBI Act, 1992 prohibits stock broker from buying, selling and dealing in securities unless he holds a certificate granted by the Board under the SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992. Existing brokers of the concerned stock exchanges were allowed to continue their business, if they made an application for such registration within a period of 3 months from the establishment of the Board, till the disposal of the application. An interesting aspect of the relationship between a brokers and stock exchange is that the stock brokers are required to pay registration fees for the grant of certificate as prescribed by Schedule III. But if they fail to pay, then the Board may suspend the registration certificate, which implies that the stock broker shall cease to buy, sell or deal in securities as a stock broker.
Sub-Broker
Sub Broker is any person, not being a member of a stock exchange. He acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock brokers. He is further an agent of the broker and carries out actual transactions for the broker. He is one who has either made an application for registration or is registered as a sub broker under SEBI Act, 1992.
The members of the stock exchange who execute transactions of their clients through the members of other stock exchanges are treated as Sub Brokers. Any person who not being a member of a stock exchange, acts on behalf of a stock broker as an agent for assisting the investors in buying, selling or dealing in securities through such stock brokers is called as a sub broker. He is associated with securities market and should not buy, sell or deal in securities unless he has complied with the conditions of the certificate of registration obtained from SEBI issued in accordance with Rules and Regulations.[36] If he is associated with securities market before the establishment of the SEBI, then he may continue to do business but upon an application made for registration within a period of 3 months from the establishment of SEBI, till the disposal of such application.
There are certain conditions provided in Rule 5 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, which are to be fulfilled before the grant of a certificate to a sub-broker. If the stock broker/sub broker fails to comply with the conditions subject to which he is been granted registration, then he would be penalized and his registration would be suspended or cancelled.
A sub broker should co-operate with his broker in the transactions. He should not knowingly and willfully deliver documents which constitute bad delivery. He should also co-operate with other contracting party for prompt replacement of the documents which are declared as bad delivery. Further, he should extend his full co-operation to his stock broker in protecting the interests of his clients regarding their rights to dividends, bonus rights, rights shares and any other right relatable to such securities.
Further, sub brokers, who act on behalf of their principal broker, are required to issue to their clients purchase or sale notes for all the transactions entered into by them on behalf of their clients. While performing this function, the sub brokers act as an agent of the principal broker.
He is also required to be registered with the concerned stock exchange. The business of the stock brokers and sub brokers is too much interlinked, so, for properly monitoring their activities separate registration procedure is provided. The sub broker owes obligations not only to the client but also to the stock broker. The sub broker enters into a tripartite agreement with the main broker and his client. He assists his clients in obtaining the contract note from the main broker. But he cannot issue the note or make payments through cheques directly, as that has to be done by the main broker.
Q10) Explain meaning and types broker.
A10)
A broker-dealer is a term used in financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers.
Although many broker-dealers are "independent" firms solely involved in broker-dealer services, many others are business units or subsidiaries of commercial banks, investment banks or investment companies.
When executing trade orders on behalf of a customer, the institution is said to be acting as a broker. When executing trades for its own account, the institution is said to be acting as a dealer. Securities bought from clients or other firms in the capacity of dealer may be sold to clients or other firms acting again in the capacity of dealer, or they may become a part of the firm's holdings.
Types
Brokerage firms may be classified into three basic types: full-service, discount and limited products. There is also another sub-class of brokers known as online brokers.
Full-Service brokerage firm:
A full service brokerage firm can provide you with a complete package of investment services, including recommending securities, researching a particular issue, or providing individualized service through a salesperson. The firm receives its payment in the form of a commission that is calculated according to the type of security and the amount you are investing. A full-service firm is generally best for those who are new to the market or who do not have the time or the desire to do their own investment research.
Full Service Stock Brokers
A full service stock broker is there to provide you with advice, updates and everything you need to manage your investment. In some cases, you can tell full service stock brokers your investment goals and appetite for risk, and allow them free reign to manage your money.Full service brokers and financial advisors come with associated price tags that are obviously more expensive than a no frills broker or online stock broker. However, the cost can be largely negligible of a full service broker makes you more money in the long run.If you have larger amounts of investment capital and you want to reduce risk as much as possible, it makes sense to use a full service broker. With larger amounts of capital, brokerage charges will often be miniscule compared to overall potential gains and risk management advantages.
Discount brokerage firm
While a discount brokerage also can provide you with a wide range of services, its salespersons are not allowed to give investment advice, to make recommendations or to provide research materials. For these reasons, a discount firm can offer substantially lower commissions than full-service brokers. Experienced investors capable of doing their own investment research typically use a discount firm. Discount stock brokers offer stock broking services for lower fees than full-service stock brokers. Discount brokers may also be called non-advisory brokers, no-frills brokers or low-fee stock brokers. Many online stock brokers would be considered discount brokers. The name is fairly self-explanatory, but don't misjudge discount brokers just because they are cheap. Many discount brokers will provide general advice, market reports and even stock tips.
Limited products firm:
These brokerage firms specialize in a limited number of securities products, such as mutual funds, limited partnerships or specific bonds.
Online Stock Brokers
Online stock brokers are an appealing choice for many investors. Using the power of the internet, online stock brokers provide cost effective brokerage services, up-to-date information and advanced stock trading platforms to suit a variety of investment strategies. Online stock brokers may also be called internet brokers, online brokers or online discount brokers.
