MUMBAI, July 10: In an attempt to provide temporary accommodation to the members who might have financial mismatches for meeting their settlement liabilities the Bombay Stock Exchange has set up the `The Stock Exchange Brokers Contingency Fund'.

The exchange explains the move as a step towards safeguarding the interests of the investors in case of a broker member facing a payment crisis, the fund would serve the objective of ensuring timely completion of settlement.The fund with an initial corpus of Rs 9.51 crore and having a maximum advance limit of Rs 50 lakh is a step towards bridging the gap between stringent risk management system and trade guarantee fund.

"The main objective of the fund is to make temporary refundable advance to members for tiding over a temporary mismatch in his fund flow,'' said Bombay Stock Exchange (BSE) president MG Damani.

The idea was first mooted at the meeting held on November 25, 1991 where it was approved in-principle. In continuation to this, on June 8, 1992, the exchange decided to set aside 50 per cent of the interest earned on 1 per cent deposit amount placed with the exchange by the companies which are tapping capital market through their rights/public issues.

However, the Securities & Exchange Board of India (Sebi) in its inspection report dated October, 7-18, 1996 stated that "It was stipulated that 50 per cent of the interest earned on listing security deposit would be credited to the brokers' contingency fund which is not in order. ``This amounts to Exchange's income being diverted for brokers benefit. Exchange is advised to discontinue this practise immediately."

Hence, the governing board of Bombay Stock Exchange in its meeting held on March 31, 1997 resolved to discontinue this practise from April 1, 1997.Instead it was decided to collect 0.025 paise per hundred rupees of a members turnover as a continuous contribution towards brokers contingency fund which would be non-refundable. The fund is managed by a committee appointed by the governing board comprising the president, executive director, vice president, treasurer and three non-elected directors. A member in financial crisis would be required to immediately notify to the committee the details of his commitments and obligations.

A refundable contingency advance shall not be granted or disbursed to a member after he has been declared a defaulter unless the member has been re-admitted as the member of the exchange prior to the grant or disbursement of the refundable contingency advance.

As per the Bombay Stock Exchange byelaws, the member will also be liable to pay interest on the amount of refundable contingency advance disbursed to him at such rate as the governing board may from time to time specify for the period commencing on the date of disbursement and ending on the date of final repayment of the refundable contingency advance. However, the members of the governing board of the Bombay Stock Exchange and the trustees of the fund will not be entitled to claim any refundable contingency advances as long as they are members of the governing board or trustees of the fund.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.