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

Circuit Breakers

Dr. Vibha Dua Dr. Shilpa Jain

Lecturer, Delhi Institute of Advanced Lecturer, University School of
Studies Management Studies, GGSIP University
[email protected] [email protected]

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
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

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:
 Equivalent Points
Percentage (+/-)
(+/-)

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