Securities and Exchange Board of India SEBI

SEBI reviewing rules for stock brokers; ‘code red’ to flag off misuse of client money

Stock brokers will have to brace for tighter rules while handling clients’ money and stocks. The Securities and Exchange Board of India (Sebi) is carrying out a comprehensive review of rules for stock brokers after it recently came across instances of siphoning of funds and securities from investors’ accounts.

The policy review — the first such exercise of this magnitude for brokers in the regulator’s history — comes in the wake of the regulator receiving hundreds of complaints from investors of Unicon Securities and Kassa Securities, where crores of rupees were siphoned off from clients’ accounts.

The new rules, which may be announced soon, will mandate a uniform nomenclature for the stock broking industry while handling their clients’ and own funds and securities.

Sebi will put in place “red flag indicators”, which will show whether brokers are misusing clients’ funds and securities. These indicators would include percentage change in net worth of the broker and his liability to clients among other things.

At present, brokers are required to maintain a certain net worth which varies from exchange to exchange.

“If the net worth falls below the threshold level, it could be a case of financial distress,” said a person familiar with the development.

The regulator will also mandate sharing of information among stock exchanges and depositories. Currently, information is shared only for inspection findings.

“Sebi wants to develop an alerting mechanism where quick action can be taken before things get worse. These reforms will have a significant impact on investors,” the person added.

After consulting with stock brokers, Sebi has devised a formula wherein, brokers would have to submit data on the credit balance in their ledger account to stock exchanges on a weekly basis.

The regulator will also mandate brokers to send client fund and securities balance on a monthly basis to stock exchanges, which will verify the trades and send them to investors.

“Sebi has noticed, at times brokers send false messages to clients. Once, they receive a SMS from stock exchange they would be able to verify the information correctly,” the person said.

CJ George, managing director, Geojit BNP Paribas, said: “Quasiregulators like exchanges taking up the role of sending SMS to investors. I’m not sure whether it’s feasible. It’s the same work that is being repeated.”


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