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| Small brokers wary of Sebi grading |
| Palak Shah / Mumbai May 16, 2009, 00:10 IST |
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A tough task lies ahead for the Securities and Exchange Board of India (Sebi) before it makes grading mandatory for all stock brokers.
Market experts say the regulator will have to ensure fair assessment that prevents bigger brokers from establishing monopoly and allows even the smaller players to function.
Facing dearth of clients, a few big brokerages have requested Sebi to make grading mandatory. Big brokers will be able to lure more clients using grade as a benchmark and small brokers may lose out, fear industry experts.
What most small brokerages are worried about is the argument that net worth and financial strength should be the main criterion for grading. If Sebi is seriously considering making grading compulsory, there should be a clear rationale and policy, they say.
“There should be adequate norms and clear rationale and policy for grading. The assessment should not only include financial ability or top line of brokers but also service, governance practices, experience and ways of doing business at the grassroot level,” said Deven Choksey, managing director of KR Choksey Shares and Securities.
Choksey says efficient service and transparency is most important for clients. “It doesn’t matter if a broker is small and serving only a few clients. If he strictly adheres to legal procedures and has adequate risk management and due diligence systems as well as transparent and quality service, even he should be given the highest grade and not put below those with large client base and greater financial ability,” said Choksey.
Experts say brokers running non-banking financial companies (NBFCs) and depository services should be assessed strictly as the business involves high risk and Sebi receives maximum complaints against these entities.
A number of brokers with NBFCs and depositories have come under Sebi lens for misuse of client accounts. They were found to be not maintaining proper agreements or transaction records, which increased the chances of unaccounted money making way into the market.
A couple of years ago too, Sebi had put the demand for grading by top brokers on the back-burner. However, following this, Crisil developed a product for grading brokers. The product, however, did not receive the expected response.
Crisil had assigned BQ-2 grade to Mumbai-based Asit C Mehta Investment Intermediates Ltd in November 2006 on the scale of 1 to 5, followed by Indiabulls and Prabhudas Leeladhar.
The grading has be renewed every year and Asit C Mehta has not opted for a renewal, according to sources in Crisil. Joseph Messy, director, MCX Stock Exchange, said, “Grading could be a burden for small stock brokers in the current environment where there is no business. The recent meltdown has demonstrated that that even institutions with highest ratings can fail.”
“Those products that were assigned the highest ratings by the world’s top agencies became the cause of failure for biggest financial institutions like Bear Stearns, Merril Lynch and Lehman Brothers. So there is enough ground to say that rating agencies treat some clients more equally.”
Crisil analyst Tarun Bhatia, however, said, “Although financial ability and client base of a broker are given high weightage, at Crisil we also consider risk management, client servicing, and quality of operations and services.”
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