OTC EXCHANGE OF INDIA

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DEPUTY GENERAL MANAGER
Market Regulation Department
E-mail: sundaresanvs@sebi.gov.in
SEBI/MRD/SE/Cir- 37/2003
September 30, 2003

The Executive Directors / Managing Director/Administrators
Of All Stock Exchanges

Dear Sir / Madam,
Sub:- Risk Disclosure Document. 
1. A model format of the Risk Disclosure Document detailing the basic 
risks involved in trading on a stock exchange, the rights and obligations 
of the clients, etc., is enclosed. Based on these clauses the respective 
stock exchanges should prepare their own Risk Disclosure Document. The 
exchanges may, however, prescribe any additional clauses as may be 
considered necessary by them. 

2. The stock exchanges are advised to inform their member 
brokers/clearing members that they are required to bring the contents of 
the said document to the notice of their clients and make them aware of 
the significance of the document. The members would also be required to 
obtain a copy of the Risk Disclosure Document duly signed by their 
clients. 

3. The Stock Exchanges are directed to 

3.1. make necessary amendments to the relevant bye-laws, rules and 
regulations for the implementation of the above decision immediately.

3.2. bring the provisions of this circular to the notice of the member 
brokers/clearing members of the Exchange and also to disseminate the same 
on the website.

3.3. communicate to SEBI, the status of the implementation of the 
provisions of this circular in Section II, item no. 13 of the Monthly 
Development Report for the month of October 2003.

4. This circular is being issued in exercise of powers conferred 
under Section 11 (1) of the Securities and Exchange Board of India Act, 
1992, read with Section 10 of the Securities Contracts (Regulation) Act 
1956, to protect the interests of investors in securities and to promote 
the development of, and to regulate the securities market.

Yours faithfully,


V S SUNDARESAN

Encl:- a/a





RISK DISCLOSURE DOCUMENT

This document is issued by the National Stock Exchange of India 
(hereinafter referred to as “OTCEI”) in coordination with the Securities and 
Exchange Board of India (hereinafter referred to as “SEBI”) and contains 
important information on trading in the Equities Segment of OTCEI. All 
constituents are urged to read it before making a purchase or a sale in 
any security being traded on OTCEI.

OTCEI/SEBI does neither expressly nor impliedly guarantee nor make any 
representation concerning the completeness, the adequacy or accuracy of 
this disclosure document nor has OTCEI/SEBI endorsed or passed any merits of 
participating in this trading segment. This brief statement does not 
disclose all the risks and other significant aspects of trading. 

In the light of the risks involved, you should undertake transactions only 
if you understand the nature of the contractual relationship into which 
you are entering and the extent of your exposure to risk.

You must know and appreciate that investment in Equity shares or other 
instruments traded on the Stock Exchange, known as risk capital, is 
generally not an appropriate avenue for someone of limited 
resources/limited investment and/or trading experience and low risk 
tolerance. You should therefore carefully consider whether such trading 
is suitable for you in the light of your financial condition. In case you 
trade on OTCEI and suffer adverse consequences or loss, you shall be solely 
responsible for the same and OTCEI, its Clearing Corporation and/or SEBI 
shall not be responsible, in any manner whatsoever, for the same and it 
will not be open for you to take a plea that no adequate disclosure 
regarding the risks involved was made or that you were not explained the 
full risk involved by the concerned member. The constituent shall be 
solely responsible for the consequences and no contract can be rescinded 
on that account. You must acknowledge and accept that there can be no 
guarantee of profits or no exception from losses while executing orders 
for purchase and/or sale of a security being traded on OTCEI.

It must be clearly understood by you that your dealings on OTCEI through a 
trading member shall be subject to your fulfilling certain formalities set 
out by the trading member, which may interalia include your filling the 
know your client form, client registration form, execution of an 
agreement, etc., and are subject to the Rules, Byelaws and Regulations of 
OTCEI and its Clearing Corporation, guidelines prescribed by SEBI and in 
force from time to time and Circulars as may be issued by OTCEI or its 
Clearing Corporation and in force from time to time.

OTCEI does not provide or purport to provide any advice and shall not be 
liable to any person who enters into any business relationship with any 
trading member and/or sub-broker of OTCEI and/or any third party based on 
any information contained in this document. Any information contained in 
this document must not be construed as business advice/investment advice. 
No consideration to trade should be made without thoroughly understanding 
and reviewing the risks involved in such trading. If you are unsure, you 
must seek professional advice on the same.

In considering whether to trade or authorize someone to trade for you, you 
should be aware of the following:-

1. BASIC RISKS INVOVLED IN TRADING ON THE STOCK EXCHANGE 
(EQUITY AND OTHER INSTRUMENTS)

1.1 Risk of Higher Volatility:
Volatility refers to the dynamic changes in price that securities undergo 
when trading activity continues on the Stock Exchange. Generally, higher 
the volatility of a security, greater is its price swings. There may be 
normally greater volatility in thinly traded securities than in active 
securities. As a result of volatility, your order may only be partially 
executed or not executed at all, or the price at which your order got 
executed may be substantially different from the last traded price or 
change substantially thereafter, resulting in notional or real losses.

1.2 Risk of Lower Liquidity: 
Liquidity refers to the ability of market participants to buy and sell 
securities expeditiously at a competitive price and with minimal price 
difference. Generally, it is assumed that more the numbers of orders 
available in a market, greater is the liquidity. Liquidity is important 
because with greater liquidity, it is easier for investors to buy or sell 
securities swiftly and with minimal price difference, and as a result, 
investors are more likely to pay or receive a competitive price for 
securities purchased or sold. There may be a risk of lower liquidity in 
some securities as compared to active securities. As a result, your order 
may only be partially executed, or may be executed with relatively greater 
price difference or may not be executed at all.

1.2.1 Buying/selling without intention of giving and/or taking 
delivery of a security, as part of a day trading strategy, may also 
result into losses, because in such a situation, stocks may have to be 
sold/purchased at a low/high prices, compared to the expected price 
levels, so as not to have any obligation to deliver/receive a security.

1.3 Risk of Wider Spreads:
Spread refers to the difference in best buy price and best sell price. It 
represents the differential between the price of buying a security and 
immediately selling it or vice versa. Lower liquidity and higher 
volatility may result in wider than normal spreads for less liquid or 
illiquid securities. This in turn will hamper better price formation.

1.4 Risk-reducing orders: 
Most Exchanges have a facility for investors to place “limit orders, “stop 
loss orders” etc”. The placing of such orders (e.g., “stop loss orders, 
or “limit” orders) which are intended to limit losses to certain amounts 
may not be effective many a time because rapid movement in market 
conditions may make it impossible to execute such orders.

1.4.1 A “market” order will be executed fully and promptly without 
regard to price and that, while the customer may receive a prompt 
execution of a “market” order, the execution may be at available prices of 
outstanding orders, which satisfy the order quantity, on price time 
priority. It may be understood that these prices may be significantly 
different from the last traded price or the best price in that security.

1.4.2 A “limit” order will be executed only at the “limit” price 
specified for the order or a better price. However, while the customer 
receives price protection, there is a possibility that the order may not 
be executed at all. 

1.4.3 A stop loss order is generally placed “away” from the current 
price of a stock, and such order gets activated if and when the stock 
reaches, or trades through, the stop price. Sell stop orders are entered 
ordinarily below the current price, and buy stop orders are entered 
ordinarily above the current price. When the stock reaches the 
pre-determined price, or trades through such price, the stop loss order 
converts to a market/limit order and is executed at the limit or better. 
There is no assurance therefore that the limit order will be executable 
since a stock might penetrate the pre-determined price, in which case, the 
risk of such order not getting executed arises, just as with a regular 
limit order. 

1.5 Risk of News Announcements: 
Issuers make news announcements that may impact the price of their 
securities. These announcements may occur during trading, and when 
combined with lower liquidity and higher volatility, may suddenly cause an 
unexpected positive or negative movement in the price of the security.

1.6 Risk of Rumours: 
Rumours about companies at times float in the market through word of 
mouth, financial newspapers, websites or news agencies, etc. The investors 
should be wary of and should desist from acting on rumours. 




1.7 System Risk: 
High volume trading will frequently occur at the market opening and before 
market close. Such high volumes may also occur at any point in the day. 
These may cause delays in order execution or confirmation. 

1.7.1 During periods of volatility, on account of market 
participants continuously modifying their order quantity or prices or 
placing fresh orders, there may be delays in order execution and its 
confirmations.

1.7.2 Under certain market conditions, it may be difficult or 
impossible to liquidate a position in the market at a reasonable price or 
at all, when there are no outstanding orders either on the buy side or the 
sell side, or if trading is halted in a security due to any action on 
account of unusual trading activity or stock hitting circuit filters or 
for any other reason.

1.8 System/Network Congestion: 
Trading on OTCEI is in electronic mode, based on satellite/leased line based 
communications, combination of technologies and computer systems to place 
and route orders. Thus, there exists a possibility of communication 
failure or system problems or slow or delayed response from system or 
trading halt, or any such other problem/glitch whereby not being able to 
establish access to the trading system/network, which may be beyond the 
control of and may result in delay in processing or not processing buy or 
sell orders either in part or in full. You are cautioned to note that 
although these problems may be temporary in nature, but when you have 
outstanding open positions or unexecuted orders, these represent a risk 
because of your obligations to settle all executed transactions.





2. GENERAL 
2.1 For rights and obligations of the clients, please refer 
to Annexure-1 enclosed with this document. 
2.2 The term ‘constituent’ shall mean and include a client, a 
customer or an investor, who deals with a trading member for the purpose 
of acquiring and/or selling of securities through the mechanism provided 
by OTCEI.
2.3 The term ‘trading member’ shall mean and include a 
member, a broker or a stock broker, who has been admitted as such by OTCEI 
and who holds a registration certificate as a stock broker from SEBI.

NOTE:- The words “National Stock Exchange of India Ltd.”, “OTCEI” and other 
references, , such as, web-site, etc., need to be suitably replaced by the 
respective stock exchanges while preparing their own risk disclosure 
document.




ANNEXURE-1

INVESTORS’ RIGHTS AND OBLIGATIONS:

1.1 You should familiarise yourself with the protection 
accorded to the money or other property you may deposit with your trading 
member, particularly in the event of a default in the stock market or the 
broking firm’s insolvency or bankruptcy. 
1.1.1 Please ensure that you have a documentary proof of your 
having made deposit of such money or property with the trading member, 
stating towards which account such money or property deposited.
1.1.2 Further, it may be noted that the extent to which you may 
recover such money or property may be governed by the Bye-laws and 
Regulations of OTCEI and the scheme of the Investors’ Protection Fund in 
force from time to time. 
1.1.3 Any dispute with the trading member with respect to deposits, 
margin money, etc., and producing an appropriate proof thereof, shall be 
subject to arbitration as per the Rules, Byelaws/ Regulations of OTCEI or 
its Clearing Corporation. 

1.2 Before you begin to trade, you should obtain a clear idea 
from your trading member of all brokerage, commissions, fees and other 
charges which will be levied on you for trading. These charges will affect 
your net cash inflow or outflow. 

1.3 You should exercise due diligence and comply with the 
following requirements of the OTCEI and/or SEBI:
1.3.1 Please deal only with and through SEBI registered trading 
members who are members of the Stock Exchange and are enabled to trade on 
the Exchange. All SEBI registered trading members are given a registration 
no., which may be verified from SEBI. The details of all members of OTCEI 
and whether they are enabled to trade may be verified from OTCEI website 
(www.otcei.net> Home > Members > Member Directory). 
1.3.2 Demand any such information, details and documents from the 
trading member, for the purpose of verification, as you may find it 
necessary to satisfy yourself about his credentials. 
1.3.3 Furnish all such details in full as are required by the 
trading member as required in “Know your client” form, which may also 
include details of PAN or Passport or Driving Licence or Voters Id, or 
Ration Card, bank account and depository account, as is available with the 
investor. 
1.3.4 Execute a broker-client agreement in the form prescribed by 
SEBI and/or the Relevant Authority of OTCEI or its Clearing Corporation from 
time to time, because this may be useful as a proof of your dealing 
arrangements with the trading member.
1.3.5 Give any order for buy or sell of a security in writing or in 
such form or manner, as may be mutually agreed. Giving instructions in 
writing ensures that you have proof of your intent, in case of disputes 
with the trading member.
1.3.6 Ensure that a contract note is issued to you by the trading 
member which contains minute records of every transaction. Verify that the 
contract note contains details of order no., trade number, trade time, 
trade price, trade quantity, name of security, client code allotted to you 
and showing the brokerage separately. Contract notes are required to be 
given/sent by the trading member to the investors latest on the next 
working day of the trade. Contract note can be issued by the trading 
members either in electronic form using digital signature as required, or 
in hard copy. In case you do not receive a contract note on the next 
working day or at a mutually agreed time, please get in touch with the 
Investors Grievance Cell of OTCEI.
1.3.7 Facility of Trade Verification is available on OTCEI website 
(www.otcei.net), where details of trade as mentioned in the contract 
note may be verified from the trade date upto five trading days. Where 
trade details on the website, do not tally with the details mentioned in 
the contract note, immediately get in touch with the Investors Grievance 
Cell of OTCEI. 
1.3.8 Ensure that payment/delivery of securities against settlement 
is given to the concerned trading member within one working day prior to 
the date of pay-in announced by OTCEI or it’s Clearing Corporation. Payments 
should be made only by account payee cheque in favour of the firm/company 
of the trading member and a receipt or acknowledgement towards what such 
payment is made be obtained from the trading member. Delivery of 
securities is made to the pool account of the trading member rather than 
to the beneficiary account of the trading member. 
1.3.9 In case pay-out of money and/or securities is not received on 
the next working day after date of pay-out announced by OTCEI or its 
Clearing Corporation, please follow-up with the concerned trading member 
for its release. In case pay-out is not released as above from the 
trading member within five working days, ensure that you lodge a complaint 
with the Investors’ Grievance Cell of OTCEI. 
1.3.10 Every Trading Member is required to send a complete 'Statement 
of Accounts', for both funds and securities settlement to each of its 
constituents, at such periodicity as may be prescribed by the OTCEI from 
time to time. You should report errors, if any, in the Statement 
immediately, but not later than 30 calendar days of receipt thereof, to 
the Trading Member. In case the error is not rectified or there is a 
dispute, ensure that you refer such matter to the Investors Grievance Cell 
of OTCEI.
1.3.11 In case of a complaint against a trading member/registered 
sub-broker, you should address the complaint to the Office as may be 
specified by OTCEI from time to time.

1.4 In case where a trading member surrenders his trading 
membership, OTCEI gives a public notice inviting claims, if any, from 
investors. In case of a claim, relating to “transactions executed on the 
trading system” of OTCEI, ensure that you lodge a claim with OTCEI/NSCCL 
within the stipulated period and with the supporting documents.

1.5 In case where a trading member is expelled from trading 
membership or declared a defaulter, OTCEI gives a public notice inviting 
claims, if any, from investors. In case of a claim, relating to 
“transactions executed on the trading system” of OTCEI, ensure that you 
lodge a claim with OTCEI within the stipulated period and with the 
supporting documents.

1.6 Claims against a defaulter/expelled member found to be 
valid as prescribed in the relevant Rules/ Bye-laws and the scheme under 
the Investors’ Protection Fund (IPF) may be payable first out of the 
amount vested in the Committee for Settlement of Claims against 
Defaulters, on pro-rata basis if the amount is inadequate. The balance 
amount of claims, if any, to a maximum amount of Rs.10 lakhs per investor 
claim, per defaulter/expelled member may be payable subject to such claims 
being found payable under the scheme of the IPF.

Notes: 
1. The term ‘constituent’ shall mean and include a client, 
a customer or an investor, who deals with a trading member of OTCEI for the 
purpose of acquiring and / or selling of securities through the mechanism 
provided by OTCEI.
2. The term ‘trading member’ shall mean and include a 
member or a broker or a stock broker, who has been admitted as such by OTCEI 
and who holds a registration certificate as a stock broker from SEBI.


NOTE:- The words “National Stock Exchange of India Ltd.”, “OTCEI” and other 
references, such as, web-site, etc., need to be suitably replaced by the 
respective stock exchanges while preparing their own risk disclosure 
document.