Protection of Indian Investors at Indian Bourses: A Critical Analysis of

Circuit Breakers

Dr. Vibha DuaLecturer, Delhi Institute of Advanced Studiesdua_vibha@rediffmail.com

Dr. Shilpa JainLecturer, University School of

Management Studies, GGSIP Universityshilpajain.usms@gmail.com

Abstract

With every advertisement of investment in the stock market there is a statutory warning to

be careful. Why; because it involves financial risk. In the modern world, stock markets

have evolved as important drivers of national economy. Transparent rules and

regulations are enforced by governing bodies to ensure safety of the participants playing

in the market. All stock exchanges across the world have their own rules and regulations.

Governing bodies take special care to protect interest of investors as this class is most

widely dispersed, and generally more vulnerable to being taken for a ride. Additionally it

is the investor class that infuses the capital into the market and hence bears higher risks

than other participants. But are the protection measures actually saving the investors to

the right limit or overprotecting them and thus making them loose the chance of good

business. This paper is an attempt to understand these protection measures at Indian

bourses with special reference to circuit breakers as a protection measure.

Introduction

Presently, financial markets across the world is going through a bearish phase which

could either be of short or long term, depending on global oil prices, US sub prime crisis,

failure of banks, high inflation rate, less job opportunities, and failure of corporate

governance practices like Satyam scam in the Indian economy. Since the year, there is a

reversionary trend in the Indian market. At that time of crisis, regulatory bodies played a

key role to control the worse situation. RBI has taken measures to control the increasing

inflation rate, government intervene to solve the Satyam scam. In this crisis, a ray of hope

has come by the victory of congress led UPA government. Recently on 18 th may, 2009

stock market jumped sharply rupture all previous records and reached at its highest level,

then SEBI played key role in controlling the situation and stock exchanges applied circuit

breakers in the market to save Indian investors from high market fluctuations. SEBI

keeps continuous watch on the stock market activities and timely review, the policies for

the safeguard of Indian investors. The basic objective of this paper is to investigate the

protection measures taken by the SEBI in India for investors and the effectiveness of

these measures.

Security Measure for Investors on NSE and BSE

In the modern world, stock markets have evolved as important drivers of national

economy. Transparent rules and regulations are enforced by governing bodies to ensure

safety of the participants playing in the market. All stock exchanges across the world

have their own rules and regulations. Governing bodies take special care to protect

interest of investors as this class is most widely dispersed, and generally more vulnerable

to being taken for a ride. Additionally it is the investor class that infuses the capital into

the market and hence bears higher risks than other participants. 

In India, SEBI is the principal regulatory authority for all secondary and primary market

related activity. Other regulatory bodies and laws governing secondary market

intermediaries are Securities and Contract Regulations Act 1956, Securities and Contracts

Regulations Rules 1957; the Indian Stamp Act 1961 and the Bombay Stamp Act; the

Central Excise Department; the Income tax; and the Reserve Bank of India. 

Initiatives Taken by the Stock Exchanges for Investor protection

PROTECTION MEASURES ON BSE

Trade Guarantee Fund

BSE has formulated a scheme to guarantee settlement of transactions of members, which

form part of the settlement system. For this, BSE has constituted a Trade Guarantee Fund

with the following objectives:

To guarantee settlement of transactions of members of the exchange inter-se which form

part of the stock exchange settlement system, so as to ensure timely completion of

settlements of contracts and thereby protect the interest of investors and members of the

exchange to inculcate confidence in the mind of secondary market participants.

Surveillance

BSE has set up a separate Surveillance Department to keep a close watch on price

movement of securities, detect market manipulations like price rigging, etc., monitor

abnormal prices and volumes which are not consistent with normal trading pattern and

monitor the member-brokers' position to ensure that defaults do not occur. It not only

monitors the exposure of the members on a daily basis but also scrutinizes the prices and

volumes of the securities on a daily basis. 

The large variation in the prices as well as the volumes of the securities is scrutinized and

appropriate actions are taken. The securities, which reach new high or new low and

companies, which have high turnover, are watched. Also the prices and volumes in the

newly listed securities are monitored. In case certain abnormalities are noticed, then

circuit filters are reduced to make it difficult for the price manipulators to increase or

push down the prices of security within a short period of time. The Exchange imposes

special margin in the securities where it is suspected that there is an attempt to ramp up

the prices by creating artificial volumes. In cases where the abnormal movements

continue despite the aforesaid measures, trading in the security is suspended. 

Detailed investigations are conducted in cases where price manipulation is suspected and

disciplinary action is taken against the members concerned, if warranted. Where any

security has been suspended for more than three days after obtaining necessary

permission from SEBI, a detailed investigation report is prepared and sent to SEBI for

further investigation/action, if any. 

Z Group

To protect investors from fraudulent companies listed on BSE has created a new group of

securities known as ‘Z’ group category. The 'Z' group was introduced in the month of

July 1999 and covers the list of companies, which fail to comply with listing

requirements and also fail to resolve investor complaints. 

Investors' or Customers Protection Fund (IPF) 

In accordance with the guidelines issued by the Ministry of Finance, Government of

India, BSE has set up an Investor Protection Fund (IPF) to meet the claims of investors

against defaulter members. Further, as per the recent SEBI decision, auction proceeds in

certain cases, where price manipulation / rigging was involved, have been impounded and

transferred to the Investor Protection Fund. 

Redressal of Investor Grievances

The grievances of investors against listed companies or members are redressed by the

Exchange. The Exchange also assists in arbitration process both between members &

investors and member’s inter-se. 

Investors’ Grievances against Companies

BSE forwards the investors’ complaints against the companies to the concerned

companies and a copy of the letter sent to the company is also forwarded to the

complainant. He is advised to intimate the Exchange if his complaint is not resolved

within 45 days. If a company fails to redress the complaint within 45 days, a reminder is

sent. If a company still fails to respond to a large number of complaints pending against

it, then a consolidated list of complaints is sent to it to resolve the same within 30 days.

Inspite of the above efforts, if the complaints are not resolved, the company officials are

asked to appear before the Investors’ Grievance Redressal Committee (IGRC) appointed

by the Governing Board of the Exchange to resolve all the investors grievances. This

Committee consists of five members including a retired judge of Mumbai High Court.

The company officials are impressed by the committee members to resolve all the

pending grievances immediately. 

Inspite of these efforts, if the complaints are not resolved then a show cause notice is

issued by the Exchange and then the matter is placed before the Governing Board of the

Exchange for necessary action against the company. 

Investors’ Grievances against Member-brokers of the Exchange

BSE handles complaints of investors against members and vice-versa. It forwards the

complaints of investors to the concerned members to settle within 7 days from the receipt

of the letter. In case no reply is received from a member, a reminder is sent and the

member is informed that if he does not reply/resolve the complaint immediately, a fine of

Rs.500/- is levied on him. He is also directed to settle the matter expeditiously. In order

to resolve the complaints expeditiously the matter is placed before the IGRC wherein

both the investors and members present their case. After hearing both the parties, the

Committee gives a decision, which is binding on both the parties. In case a member fails

to implement the decision of the IGRC, then the matter is referred to the Executive

Director for taking disciplinary action against the member which includes referring the

matter to the Disciplinary Action Committee.

PROTECTION MEASURES ON NSE

Settlement Guarantee Fund

In order to guarantee settlement, it has set up a Settlement Guarantee Fund contributed by

the clearing members of the Corporation. As counter-party to settlement obligations, NSE

guarantees financial settlement. As a result, though there have been a few defaults by

member firms, the Clearing Corporation has stepped in to complete settlement and

avoided market disruption. Short deliveries and un-rectified bad deliveries are

automatically auctioned by NSCCL so that settlement is completed within a well-defined

time frame. 

Investor Grievances Cell

The Investor Grievances Cell (IGC) attends to various problems faced by investors in

dealing with the two integral parts of the Capital Markets, Trading Members and

Companies whose securities are traded on the Exchange. The investors can report their

complaints/ grievances to the IGC through e-mails or through Complaint forms. All valid

complaints are assigned a unique complaint no. and are entered into a database for easy

follow up and necessary action. Most complaints are resolved within a period of 45 days.

On exhausting all means, if the matter remains unresolved, it is referred to Arbitration. 

Arbitration

Arbitration is an alternative dispute resolution mechanism provided by the NSE for

resolving disputes between the trading members and between trading members &

constituents (i.e. clients of trading members), in respect of trades done on the Exchange.

This process of resolving a dispute is comparatively faster than other means of redressal.  

The facility of arbitration on the Exchange can be availed by:

The comprehensive approach to risk management taken by BSE and NSE encompassing

the quality of clearing/trading members, tight monitoring mechanism, strict margining,

efficient settlement systems have made the Secondary market in India comparable to

world market across the globe.

Recently utility of these measures can be seen in the market when Indian stock market

celebrated the winning of Congress led UPA in the 2009 parliamentary election, by

breaking all past records and forcing the regulator to halt the trading for the day. It is

being considered that the main reason for such a bounce is the expectations of stable

economy after the UPA is coming in the center. The expectations were so high that it

created a world-wide record and made BSE SENSEX as the index with highest one-day

percentage gainer across the world. In this speculative market SEBI has taken step to

control speculation in the market and applied circuit breaker in the market

Circuit Breaker

The circuit breaker is an absolutely essential device in the modern world, and one of the

most important safety mechanism at your home. Whenever there is high voltage

fluctuation at home we either manually switch off sensitive electrical appliances or there

is an automatic circuit breaker in the appliances to save it from damage posed by high

voltage fluctuation. In the same way circuit breaker is also very important tool to reduce

the high volatility in the market. Circuit breakers were first introduced in 1987 in the US

in the wake of sharp decline in the share prices. In India, It was introduced for the first

time on Bombay Stock Exchange on Tuesday, 9 March 1993 when the SENSEX declined

by more than 5% from the opening level. Importance of circuit breaker comes into

existence once again on 18th may, 2009 after the victory of UPA government, when

market reacted sharply on the event. To control this severe condition regulatory authority

SEBI came into existence and applied circuit breakers on the Indian bourses. The

Exchange implements circuit a quarterly basis the index based market wide circuit

breaker system. The system is applicable at three stages of the index movement either

way at 10%, 15% and 20%. This circuit breaker brings about a coordinated trading halt in

all equity and equity derivative markets nationwide. The market wide circuit breakers

would be triggered by movement of either SENSEX or the NSE S&P CNX Nifty

whichever is breached earlier

Stages of Circuit Breaker

On March 31, 2009, the last trading day of the quarter, SENSEX closed at 9708.50

points. The absolute points of SENSEX variation (over the previous day's closing

SENSEX) which would trigger market wide circuit breaker for any day in the quarter

between 1st April 2009 and 30th June 2009 would be as under:

Movement Break in Trading

10%Before 1:00 PM 1 Hour

After 1:00 but before 2:30 PM ½

Hour

After 2:30 No trading halt

15%Before 1:00 PM 2 Hour

After 1:00 but before 2:00 PM 1

Hour

After 2:00 Trading will be halted

for the remainder of the day

20%Trading will be halted for the

remainder of the day

Percentage (+/-)Equivalent Points

(+/-)

10% 975

15% 1450

20% 1950

The percentages are calculated on the closing index value of the quarter. The above

mentioned percentages are translated into absolute points of index variations (rounded off

to the nearest 25 points in case of SENSEX). At the end of each quarter, these absolute

points of index variations are revised and made applicable for the next quarter.

The above basis points crossed by the SENSEX and NIFTY on 18th May, 2009. The

SENSEX at the opening bell, surged 1306 points to 13479 and NIFTY was 532 points up

at the 4203 and hit the first circuit at 9:55 AM for the day and also for the first time in the

history of Indian stock exchanges and the markets were closed for two hours. At 11:55

AM when the market opened again SENSEX gained another 700 points and NIFTY 150

points and hit the second circuit of the day and the market was closed for rest of the day.

Boons and Banes of Circuit Breakers

In the recent Asian crisis, there were many instances when price discovery process was

hampered in the cash markets, spilling over subsequently to the future markets as well.

However circuit filters are favored mainly on the ground that they are the best available

tool for containing volatility. This is based on the belief that containing of excess

volatility helps to maintain investor confidence in the market. Similarly, in some

countries, such as, Brazil, Taiwan and Thailand, showed that circuit filters were

successful in slowing down the market momentum, there has been some controversy over

effectiveness of circuit filters over the medium to long term. Because the opponents of

circuit filters also site their adverse effects on the process price formation.

The existing system of circuit breakers chokes the market as the entry/exit route is denied

to investors/traders for the rest of the day once the 10% limit is reached. This is because,

as the recent experience on the bourses shows, it is difficult to find buyers and sellers

when scrip hits the lower or upper price band respectively. Upper circuit benefits those

who have already invested in the particular stock or the market. While the lower circuit

being completely opposite, badly affects those have already invested in the market. This

is because after a stock enters a lower circuit, it becomes difficult for the investor to sell

the shares and recover the blocked money.

Critical Analysis

In the present world of recession, when people do not have job opportunities, good

packages, and liquidity, low interest rates etc. a ray of hope has come in the Indian stock

market by the victory of UPA alliance. Market has been seen in a positive mood and

jumped upto 20% level, there were more chances of recovery exist in the market but at

the same time circuit breakers have been applied to restrict the entry and exit of the

investors. Many investors and authorities have given their view and according to them it

is time to review the policy on circuit breakers. The policy on circuit breakers needs to be

reframed immediately. According to them, the markets should be halted for trading only

for one or two minutes when it moves up or down by 10 per cent, after which the trading

should commence with upfront higher margins for buyers in rising markets. Similarly,

higher upfront margins can be imposed on sellers, if it is a falling market, on resumption

of trade. The margins can be 50-60 per cent or even 100 per cent, depending on the

situation. If see other markets across the globe, When the Indian markets were halted for

trading due to the 20 per cent circuit limit, the SGX Nifty futures at the Singapore

Exchange continued to trade for the rest of the day without any problem.

So, what is the concern to SEBI’s top brass and market experts is the frequency at which

Indian markets is hitting the circuit breakers and that too on thin volumes. For instance,

on 18th May, 2009, the 20 per cent circuit was breached at a miniscule turnover of Rs 297

crore in the cash segment, compared with a daily average of about Rs 20,000 crore. There

is a feeling that markets can be manipulated easily on big days. Principaly, it is wrong to

deny entry and exit for investors in stock markets.

Conclusion

In this recessionary world, when people do not have job opportunities, good packages,

and liquidity crunch, low interest rates etc. a ray of hope has come in the Indian stock

market by the victory of UPA alliance. Stocks with an Indian flavor were as hot as a plate

of vindaloo following the congress led UPA alliances unexpected and indecisive victory

in the country’s election. Investors scrambled to buy stocks as if there was no tomorrow,

almost certain that the emergence of a stable government at center would solve all the ills

dogging the economy. In the mad rush, circuit breakers on the upside were triggered and

trading had to be halted from 12 noon onwards. And SENSEX moved up by nearly 2100

points and NIFTY by more than 650 points. These reflect a welcome change in business

sentiment that has turned positive after the election results. In Indian stock market people

are doing fundamental and technical analysis but all becomes failed at that movement

when market jumped at its highest level. It means market is not only influenced by the

fundamental and technical factors rather also influenced by the political factors. The

circuit breakers could be relaxed to, say, 40-50%, in a day, but this should be

accompanied by stiff margins and other risk-control measures after a cooling period after

which the initial level of the circuit breaker (which is currently 20%) is applied during the

day. The additional risk- control measures, besides higher margins, can allow only

delivery-based trading in the scrip after the cooling period.

Reference:

Websites

www.indianblogger.com

www.capitalmarket.com

www.reuters.com

www.newkerala.com

www.reapreturns.blogspot.com

www.news.oneindia.in

www.nowpublic.com

www.stockmarketindia.com

www.bseindia.com

www.nseindia.com

www.sebi.gov.in