Question

(a)Give the meaning of ‘Contract Note’ and ‘T+2’ system in the trading procedure in a stock exchange.
OR
(b)State any three regulatory functions of Securities and Exchange Board of India.

Hint:

T+2 is the standard settlement cycle in Indian stock exchanges ensuring timely trade execution.

Answer 1

In this response, we will explain the meaning of 'Contract Note' and 'T+2' system in the trading procedure in a stock exchange, along with the regulatory functions of the Securities and Exchange Board of India (SEBI).

Part (a): Contract Note and T+2 System

Contract Note:

Contract Note is a legal document issued by a stockbroker to a client confirming the details of a securities transaction. It serves as proof of the transaction between the buyer and the seller in the stock exchange. The contract note contains essential information such as:

• Details of the trade, including the name of the security, the number of shares, and the price at which the transaction was executed.
• The date and time of the transaction.
• Brokerage charges, taxes, and other fees applicable to the transaction.
• The unique identification number of the transaction for record-keeping and verification.

It is an important document for the investor, as it helps in verifying the accuracy of the trade and resolving any potential disputes regarding the transaction.

T+2 System:

T+2 refers to the settlement cycle for securities transactions in the stock exchange. The "T" stands for the transaction date, and the "+2" means that the settlement of the trade will occur two business days after the transaction date. This system allows the buyer and seller to complete the exchange of funds and securities within two days. In the T+2 system:

• On the trade date (T), the buyer and seller agree on the price and quantity of the security.
• On the second business day (T+2), the ownership of the securities is transferred, and the payment is made.

This system reduces the settlement period and ensures faster transfer of securities and payment, promoting efficiency in the stock market.

Part (b): Regulatory Functions of the Securities and Exchange Board of India (SEBI)

1. Regulation of Stock Exchanges:

SEBI regulates and supervises the functioning of stock exchanges to ensure that they operate in a fair, transparent, and efficient manner. SEBI monitors the trading activities and ensures that there are no manipulative or fraudulent activities occurring on the exchange. It ensures compliance with the rules and regulations to maintain market integrity and protect investors.

2. Protection of Investors' Interests:

SEBI is primarily focused on protecting the interests of investors in the securities market. It regulates the disclosure of accurate and timely information by companies, so that investors can make informed decisions. SEBI also takes actions against market manipulation, insider trading, and fraudulent activities that could harm investors. The aim is to create a safe and transparent environment for investors to trade.

3. Regulation of Market Intermediaries:

SEBI regulates market intermediaries such as brokers, merchant bankers, portfolio managers, and other entities that facilitate securities trading. It ensures that these intermediaries follow ethical practices, maintain proper licensing, and adhere to operational standards. SEBI sets rules for registration, monitoring, and conducting business to ensure that these intermediaries act in the best interest of investors and maintain market integrity.

Final Answer:

Part (a):
Contract Note is a document issued by a stockbroker confirming the details of a securities transaction, while the T+2 system refers to the settlement cycle, which occurs two business days after the trade date.

Part (b):
The three key regulatory functions of SEBI are:
1. Regulation of Stock Exchanges
2. Protection of Investors' Interests
3. Regulation of Market Intermediaries.