Sebi 'red card' for brokers with bad record

Regulator plans new system to rate stock brokers on operational parameters

The Securities and Exchange Board of India (Sebi) is planning to rate stock brokers on their track record in key operational parameters. The proposed ‘risk profiling’ system is aimed at increasing transparency and helping equity investors understand their investment advisors better.

A source said Sebi planned to tag brokers based on their performance on areas such as compliance, investor protection and arbitration. He added brokers with poor track records could be given red tags, while those who scored well would be given green ones.

“Sebi is working on a system of dynamic tagging of brokers. The idea is to provide investors a tool for differentiating brokers based on their performance,” said a person with direct knowledge of the development.

Brokers will have to make their ratings public.

RED ALERT FOR BROKERS

• Brokers to be tagged based on compliance, investor protection and arbitration
• Those with poor track record could be given red tag
• Green tag for those who score well
• Brokers will have to make the rating public
• New system to act as a tool for investors to select brokers

The move will be similar to the product-labelling system introduced for mutual fund products — schemes with low risks are colour-coded blue, while high-risk instruments are coded brown.

Pending investor complaints and arbitration cases could be the key parameters under the proposed ranking system. Factors to be considered might include instances of shortfalls in margin payment and poor regulatory track record such as adverse observations in Sebi’s internal audit report.

Sources said in spirit, the risk-profiling system was a good initiative. They, however, cited practical challenges. “The idea is novel, but implementation might be difficult, as there is no comprehensive tracking system. As far as arbitration and investor complaints are concerned, Sebi will have to establish whether the complaints are genuine,” said the head of a leading domestic brokerage.

On an average, Sebi examines about 300 cases against stock brokers a year. According to figures made public by Sebi, there are 17,400 registered stock brokers in the cash and derivatives segment. Experts said implementation of the proposed system would require Sebi’s data management system to be beefed up and effective and comprehensive management of the huge data flow at all intermediaries.

Last year, Sebi had mandated a centralised surveillance system across all major exchanges to oversee operations of market participants. The surveillance committees of bourses are required to submit market intermediary reports to Sebi every six months. Experts said investors could be willing to cough up higher fees for brokers with higher rating and better systems.

In 2011, Sebi had made it mandatory for bankers bringing initial public offerings (IPOs) to the market to disclose the performance of the past issues they had handled. This followed investors losing money in most IPOs.