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RECTIFICATION OF BAD DELIVERY

The biggest problem facing the investors in the secondary market is that of bad delivery which arises out of rejection of shares sent in physical form to companies by the transferees (buyers) for registration in their names. In order to tackle this problem, the Exchange has set up a separate Bad Delivery Cell (BDC), as per the instructions from the Securities and Exchange Board of India, which has started functioning from December 10, 1996. The Cell handles bad delivery cases of Intra-Exchange as also Inter-Exchange. The processing of intra-exchange bad deliveries is fully computerised whereas processing of inter-exchange bad delivery is currently done manually and is expected to be computerised shortly. As per SEBI directives, even Custodians have been allowed to participate in the BDC of the Exchange with effect from April 1997. This is highly beneficial to the clients of custodians who get direct access to speedy and expeditious resolution of bad deliveries. The Cell follows a weekly cycle for acceptance of Objections and Rectifications. The Objections which have been forwarded to the Cell on the first day of the cycle are required to be rectified by the members and submitted to the Cell on the 21st day of the particular cycle. The cycle commences on every Tuesday, i.e., the day on which the Objections are accepted. The members/custodians have a facility of directly uploading the bad delivery claims to the BDC backend software and can download the various reports issued by the BDC, by using the BDC Upload Download software. The physical/objection documents are accepted only if the data has been successfully loaded in the BDC backend software. After receipt of Objections, the Seller Member can approach the verification officers of the BDC for obtaining the Award for Invalid Objections, if any. The BDC officers, on the basis of the guidelines issued by SEBI for Good and Bad Deliveries of Documents and on the basis of provisions of other relevant Acts, give an Award stating "Not in Order/In Order". If the Award is given as "In Order", the seller member is required to accept the objections and to rectify the same within 21 days. If the objections are not rectified within the prescribed period of 21 days, then the relevant transactions are auctioned or closed out as per the procedure laid down in this regard. If the Objection is "Not In Order", the Seller Members are required to return the shares to the buyer members. After the award session for invalid objections, the deletion/modification entries are made and a statement titled Permanent Claim Status is generated. The same is given to Seller Members and Buyer Members in order to enable the Seller Members to submit rectifications on a floppy. In order to minimise the interfaces the members/custodians can also upload rectification directly through BDC upload, download software and can downlod the error report w.e.f. 19/10/00 . The rectification will be accepted only if the data is properly uploaded. Along with the award for invalid objections, the award for the invalid rectifications is also given, if any. If the rectifications have not been properly submitted by Seller Member, then in such cases an award is given as "Not In Order". In that case the Buyer members are required to deliver back the shares to the BDC Clearing House who, in turn, returns the same to the Seller Member. Thus, all Invalid Rectifications go for auction/close-out along with all Unrectified Objections. The auction/close-out is conducted on 30th day and Buyer Member receives the shares in auction in case of unrectified objections after 30th day. The disputed matters are referred to arbitration. The BDC accepts the objections only if the Company Objection Memo is forwarded or the Patawat Objection Memo duly signed by the Arbitrator is forwarded in cases of Patawat Objections. The share documents which have been returned under objection by a company for the second time, can be reported in the BDC as Second Time Objection. The seller in this case is not given a chance to rectify the objections and the claim is closed out on the 10th day of reporting of the objection to the BDC. The BDC also settles the claims for Corporate Benefits through the Corporate Benefit (CB) Cycle which is a fortnightly cycle. In case of objection reported with the BDC as Fake/Forged and Missing/Lost/Stolen shares, the rectification is allowed only in Demat mode. After every BDC auction, a report is generated for bad deliveries submitted under the reason 'fake/forged shares'. Members are cautioned against introducing fake/forged shares. They have to follow the policy of 'Know your client', and be careful while choosing their clients. In case the amount of fake/forged shares introduced by a member exceeds Rs.10 lakhs in a year, then he has to submit an explanation for the same to the Exchange. In case where the value of fake/forged shares introduced by a member exceeds certain level, stringent action is taken against him. The list of members who have introduced fake/forged shares exceeding Rs. 5 lakhs in one quarter is also circulated to all the stock exchanges. The Cell also accepts Inter-Exchange Bad Deliveries from various Exchanges. The bad deliveries are forwarded to the members for rectifications and upon receiving the rectified/replaced shares, the same are forwarded to the respective stock exchanges. Similarly, bad deliveries are also forwarded to the other exchanges for rectification/replacement. 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