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Commentary

SEBI Tightens the Screws On Brokers

SEBI’s new proposed rules for brokerages include very strict guidelines on how they should work with their clients. Some salient points.

The Exposure/Turnover limit given by the trading members should be
commensurate with the financial details of the clients reported in the
KYC. The said limit to be specified in the KYC and strictly adhered to
or the details in KYC to be suitably modified.

Only person with financial standing at least comparable to that of the
client he is introducing should be accepted as introducer. The
documents such as PAN Card, Income Tax Return / Proof of residence
etc to be maintained alongwith the KYC of the client to whom he is
introducing.

This is weird. If I don’t know someone who is as rich as me, I can’t trade? (on a funny note, What does Mukesh Ambani do?)

The KYC point is well taken, that trading limits should be set on the basis of financial information provided by the client. But it is also stupid because: Client finances change EVERY SINGLE MONTH. There is no “credit rating” system for individuals in India, which can give anyone an idea of how creditworthy a person is. The broker may give a small limit based on today’s data, but the person may get a 50% increase in wealth or may inherit a fortune later, but he can’t use that fortune to trade! And if brokers are to do KYC every few months, people will get pissed off.

KYC makes sense only if there is a centralised system managing all people’s records, and all agencies (banks, credit cards etc.) reporting to that system. Otherwise it’s a waste of effort.

While recommending purchase or sale of any security / derivatives
contract to a client, trading member shall have reasonable grounds for
believing that the recommendation is suitable for such client on the
basis of the facts disclosed by such client as to his / her financial
position, other security holdings, past investment experience & pattern
and investment needs.

So brokers can’t recommend anything anymore. They are not going to get your holding information, your financial position etc. Let’s face it, no body gets this info. And reco’s are a good part of brokerage revenue.

Prior to the execution of transactions on behalf of a non-institutional
client, trading member shall make reasonable efforts to obtain the
following information regarding the client

  • Financial status
  • Investment objectives
  • Past investment experience & pattern
  • Risk appetite of the client.
  • Such other information considered to be reasonable by the
    trading member

I suppose we will all have to keep this handy, because we may not be allowed to make transactions without this info. I don’t even know if I want to part with this information.

The clients may be required to have certain minimum amount of networth
(e.g.5 lacs) for trading in Derivative Segment. A net-worth
certificate from a practicing Chartered Accountant or acknowledgement
for I.T. return filed should be accepted in this regard.

Fantastic. Now I must pay a CA to give me a net worth statement before I buy derivatives? Isn’t this a sure fire way to kill the market, which already sees little transactions? Why can’t this be done within the KYC norms?

People will defend this saying we should limit people’s losses. I say bull. People who want to do this will do it anyway, and give some random CA statement if required. It’s only going to trouble the majority, i.e. those that can really afford it.

Most of the remaining recommendations are good, like maintaining a Chinese wall between the trading and analyst operations, ensuring full and fair disclosure of holdings of every analyst, making brokers liable for fraud on their employees part etc.

What is missing is the extent of penalties. SEBI is a toothless tiger, or has been to date. They should present how they can fine misdemeanors heavily and have it stand, like the US SEC. Many of SEBI’s harsh verdicts get thrown out at the SAT level, and the rest at the court level – what use is this? No disgorgement, no system of real penalties – no wonder entities like Karvy still survive. Can we please show some real strength, SEBI?

Note: This is not yet a regulation. SEBI has requested for comments and we should mail them as given in the article (you and I can also mail) before April 15.

  • Shankar says:

    >Hi,

    An exposure or turnover limit is pretty similar to giving a loan. A loan requires KYC and a duly filled application form. In addition to this, he/she is required to furnish papers such as income proofs, bank statement etc. post which the financier conducts certain checks like site visit, tele-verification etc. before giving a line.

    With some of these things not possible in case of a brokerage, SEBI is trying to accomodate an introduction based verification.

    Warm Regards
    Shankar
    http://scrip-tures.blogspot.com

  • Deepak Shenoy says:

    >Shankar: From a brokerage perspective there is already a KYC requirement for opening an account, and that is the same norm as a loan. Margining on derivatives is NOT a loan, and does not behave like a loan – there is margin money placed without interest to cover the derivative and is subject to mark-to-market provisions. (The exchange does not “loan” margins to brokers on derivative contracts, so there is no loan onwards from the broker to the client)

    If there is a problem the client can be asked to pay a higher margin. This should be on a case-to-case basis, because more 90% of clients are fully compliant, and most brokers are aware of the remaining 10%! If anything, this method only protects and curtails brokerage profits!

    Introduction is a ridiculous way to do KYC. There is no plausible evidence that fraud reduces, it infact increases because of the shortage of serious players, who are put off by the introduction requirement. It’s like going back to the introducer funda of bank loans; we need to get to an india wide individual credit rating system, not this half baked stuff. And no, I don’t think this is a half way compromise (There are no half ways here)