Brokers to raise concerns on compliance costs

Since 2011, the regulator has routinely levied a penalty of anywhere between Rs 10-30 lakh on brokers, with penalties of over Rs 1 crore in a few instances.

Brokers have raised concerns over the heavy penalty being levied by the Securities and Exchange Board of India (Sebi) in the past few years, and plan to approach the government on the matter as well as on the increased costs of compliance.

According to a study by a broker body, together with a national university, the penalties levied by Sebi are not fair when compared to penalties imposed by other Indian regulators such as Insurance Regulatory Authority of India and securities regulators in other countries such as the US, the UK, Japan, Singapore and Dubai.

Since 2011, the regulator has routinely levied a penalty of Rs 10-30 lakh on brokers, with penalties of over Rs 1 crore in a few instances.

Brokers are also worried about the increased cost of compliance, which has eaten into profits of several brokers, especially the smaller ones. In a survey conducted by the broker body, 744 out of a total 1,134 broker members said they could not earn enough as compliance and administrative expenses ate into their revenues. “The compliances and micro management of broking business should be substantially reduced,” it said.

The regulator has been tightening the screws on compliance requirements in the past few years. “There are regular audits being conducted and brokers have come under closer scrutiny,” said Prasanth Prabhakaran, head of retail broking at IIFL.

Last month, Sebi issued a circular on risk-based supervision by stock brokers. This includes monitoring of client funds lying with the stock broker by exchanges, uploading of information regarding client fund and securities balances with exchanges and rotation of internal auditors every five years, among other things.

The new guidelines are expected to increase the cost of compliance further.

The broker body noted that micro-managing the affairs of stock brokers would impact the ease of doing business and become a huge determent to the new players who want to join the stock broking business.

Since March last year, the broker count in the cash segment has halved from 6,147 to 3,186, Sebi data show. The sub-broker number has declined to 32,494 from 42,351 in the same period – a decline of 10,000 sub-brokers.

“Business is moving to larger brands, compliance costs have risen significantly in the past few years, and margins have declined. All this has forced many brokers to shut shop,” said Rahul Rege, business head (retail) at Emkay Global Financial Services.

With an eye on reducing costs, brokers want the government to halve securities transaction tax for cash and derivatives trades in the upcoming Budget. They also want uniformity for stamp duty across states, besides exemption on duty for currency derivatives.