This article is written by Pavan Kallem, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here he discusses “Straight Through Processing (STP)”.
At the beginning stage, it is crucial to define what Straight-Through Processing (“STP”) is, as under the SEBI guidelines. STP refers to and includes a mechanism that automates the end-to-end processing of transactions of financial instruments. It involves the use of a single system to process or control all elements of the work-flow of a financial transaction, including what is commonly known as the Front, Middle, and Back office, and General Ledger. It refers to electronically capturing and processing transactions in one pass, from the point of first ‘deal’ to final settlement.
In order to reduce the human intervention in writing and maintaining the documents relating to company transactions, SEBI has introduced this mechanism to prevent the costly multiple data re-entry from paper documents and other sources which are easily susceptible to errors, discrepancies, delays and possible fraud in the transactions of the company and also to ensure the accuracy of information.
This process was introduced in India when the global securities market drastically changed on account of high expectations from the customers. This dramatic change was brought about by the technological advancement in the world to prevent manual errors in the global securities industry and to provide effective solutions to several business-related problems.
STP usage in contemporary company practices ensures that orders are processed, confirmed, cleared and settled in a shorter time period, more cost-effectively, and with fewer errors. Apart from compressing the clearing and settlement time, STP also provides a flexible, cost-effective infrastructure, which enables e-business expansion through real-time processing and access to enterprise data.
Using STP in the international markets have given highly significant results in maintaining the accuracy of the flow of information regarding the transactions of the company. Therefore, SEBI mandated all the listed entities to follow STP in their regular transactions since 2004 and also prescribed several guidelines to be followed at the time of using messaging to communicate transaction details. This has also not imposed any standards on interoperability between the companies. Further, it is interesting that rarely have companies accepted STP at the broader level; most of them have adopted this at managerial levels and the organisational level. One reason for this is that there is a high probability of data leakage; rarely have attempts been made from the global securities markets to reduce this fear among companies.
Advantages of STP
- Provides proper and short time framework for settlement cycle.
- Strengthens transparency
- Prevents manual errors in the work and also avoids costly duplication of work
- Reduces errors and risks in the work related to transactions
- Facilitates effective data capturing mechanism and generates an accurate report
- Generates market cost-effective.
- Regulates effectively through systematic audit trial.
- And finally, effectively increases the overall efficiency of the company.
History of STP in India
On 19th February 2002, SEBI had constituted a committee to estimate the viability and suitability STP system in the Indian marketing field. The committee has undertaken a comparative study of the process which is an integral part of the trade cycle, both in India and at international level and recognised some of the areas which required to be automated on the priority basis.
In order to start STP in India, the committee has recommended some areas to be taken under STP to see the feasibility and viability of the Indian marketing and some of them will be as follow.
Firstly, it recommended facilitating On-line Connectivity between the depositories to permit easier settlement.
Secondly, it suggested for Recognition of electronic contract notes as a legal document as an alternative to paper-based contract notes.
Thirdly, it recommended for the paperless form of data and records in the company transactions and also suggested to change regulations, bylaws, and other statutory provisions for accommodating paperless mechanism in all spheres and transactions of the company.
And finally, it requested SEBI to adopt ISO 15022 standards for financial messaging with Digital Signature using PKI.
On account of the suggestions from the committee, SEBI on third of OCTOBER 2002 had introduced STP into the Indian markets on a voluntary basis. However, this system could not nourish in the initial stages on account of Lack of Inter-operability between all the STP Service Providers. To address the several problems along with the Lack of Inter-operability between all the STP Service Providers, SEBI had constituted a committee by all the existing STP providers headed by NSDL to rectify the problems and suggest the solutions for preventing them.
Constitution of this committee had identified several problems with the system and suggested some solutions to prevent them. SEBI latter had accepted most of them and gained experience in effective using of STP.
Mandatory STP Forms under Companies Act
Now let us discuss some E-forms which are needed to be processed under STP. This indicates that submitted forms cannot be processed by the RoC user for automatic approval of some forms again.
- forms 2 and 3 which deals with the return of allotment of shares
- forms such as 8 and 17, which mostly deals with the charges (other than condonation of delay cases)
- form number 18 regarding the change in registered office by an incorporated and existing company
- Form number 32 which deals with the change in directors and others by the presently functioning company
- Form number 1A for name availability by a new company this included simplification of the Name Availability Guidelines as well. This form will be taken without the intervention by the RoC to save time and also for the public inspection.
- Finally, forms such as Annual forms like 20B, 23AC & 23ACA
- Recently in order to simplify the process, with the view to dispose the E Forms in timely and to avoid the penal consequences for not complying under section 448 and 447, the MCA had clarified through the notification that even Form MGT-14 which deals All cases except for change of Name, change of object, resolution for further issue of capital and conversion of companies will be STP Mode.
- Above stated e-forms filed by companies with the Ministry of Corporate get direct approval once a practising professional (CA/CS/CWA) certifies the document.
Consequences, punishments and penalties for late submissions of Straight Through Processing E forms
- Failing to submit the form on Return of Allotment under section 39 (5) enables authorities to penalise company & officer in default: Rs. 1000/- per day or 1 lakh, whichever is less.
- If a company fails to Intimate alteration of Capital within the prescribed period, such company will be liable under section 64(2) according to which such company and every officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues, or five lakh rupees whichever is less.]]
- The company should file information regarding section 66 of the companies act which deals with Reduction of share capital and in case of non-compliance the company will be liable under clause 11 of the same section which says that If a company fails to comply with the provisions of sub-section (4), it shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and officer shall be liable under section 447.
- Late filing of documents relating to charges attracts section 86 of the companies act and according to which the rate of penalty and punishment, Company: Rs. 1 lakh to 10 lakh and Officer: Imprisonment up to 6 months and/or fine of Rs. 25000/- to 1 lakh
- Incorrect or late submission of forms related Annual Return will be penalised under clause 5 of section 92 and according to this Company has to pay Rs. 50,000/- to 5,00,000 and Officer either have to pay Rs. 50,000/- to 5,00,000/- or imprisonment of 6 months.
- Late Filing of resolutions has been dealt under Section 117 (2) where Company has to pay Rs. 5 Lakh to 25 Lakh and Officer have to pay Rs. 1 Lakh to 5 Lakh.
- Late submission of form relating to Intimation of DIN would be dealt under Section 157 (2) and according to this Company needs to pay Rs. 25,000/- to Rs. 1 lakh and Officer has to pay Rs. 25,000/- to Rs. 1 lakh.
Although this is not yet a complete list, this makes us aware of the stringent provisions of the Companies Act relating to forms which we need to submit under STP for the smooth functioning of the company.
- SEBI vide letter dated October 03, 2002 (Ref: FITTC/FII/19320/2002) mandated introduction of STP for electronic trade processing with a common messaging standard with effect from December 02, 2002
- General Circular 28-2014, File No.U9-2013- CL-VDSCN0214, Government of India, Ministry of Corporate Affairs
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