Regulator mulls single licence for equity, commodity brokers

The new guidelines likely to be in place post September

The Securities and Exchange Board of India (Sebi) is working on a plan to allow a single licence for equity and commodity brokers, a move that will help the broking community reduce costs.

Though both security and commodity market intermediaries are now regulated by Sebi, following the absorption of Forward Markets Commission (FMC) into it, they still adhere to different guidelines and requirements. Sebi has initiated an exercise to have a common set of these.

“Once the commodity market stabilises, we will allow each lot of brokers to operate in the other segment. It will be done in a gradual and phased manner, so the market isn’t disrupted in any way,” a senior Sebi official told this newspsper.

The issue has been discussed in several meetings after the FMC merger in September. Experts say the move will bring down the cost of operations for brokers, under pressure due to shrinking margins. High costs and moderation in growth has led to nearly 3,000 shutting shop in the past eight months, according to Sebi data.

"The move will certainly be helpful for both investors and market participants. It will allow investors to utilise their funds in a more efficient manner, protect against downside risk and security in knowing that even if part of your portfolio is in decline, the other might still show profits,” said Kishore Narne, associate director and head of commodity and currency at Motilal Oswal.

Once it gets implemented, investors can get a common contract from the entities which include commodity business. Perhaps also a common registration number for all exchanges, unlike now. Sebi is keen on bringing more depth into the commodities trade.

“Undoubtedly an investor-friendly move,” said Alok Churiwala, vice-chairman, BSE Brokers Forum.

STREAMLINING

• Sebi plans to allow single licence for equity and commodity brokers
• New guidelines likely to be in place after September
• Securities brokers who have memberships of commodity futures will benefit
• The plan to create one market, one regulation for equity and commodity brokers
• Brokers may have common registration numbers for all exchanges
• Net worth criterion would be tweaked depending on the market size of the entity
• This will reduce duplication, cost of transaction and compliance
• The regulator is working on the plan since it got merged with FMC last year

However, certain irritants will have to be removed to make the proposal a reality, say experts. One would be the minimum net worth criterion for brokers, currently between Rs 25 lakh and Rs 3 crore, depending on the exchange. Net worth is the amount a broker keeps with an exchange, based on a formula prescribed by the J R Varma committee. It was set up by Sebi in 1998 to provide a method for fixing the initial margin on index futures contracts, and prescribes liquid net worth requirements for participants, from clearing members to trading members.

“To resolve the issue, the brokerage house can be asked to pay the net worth based on the market size of that particular entity, whichever is higher,” said a former Sebi official on the condition of anonymity.

Another issue could be shareholding at brokerages as a result of bringing commodity and securities businesses under one entity.