Markets regulator Sebi tightens broker norms; customer caution is byword

Read online reviews before opening a brokerage account

Thirty-four brokers have defaulted since March 2018, including three year-to-date, according to the data available on the National Stock Exchange’s website.

Broking industry sources say these defaults are mostly the result of misuse of client securities and funds by brokers earlier. Once the Securities and Exchange Board of India (Sebi) ushered in more stringent norms to curb such practices, these brokers were unable to comply and hence defaulted.

Here is a look at some of the norms Sebi plans to introduce in the near future to safeguard customer interests, and checks that customers need to run while selecting a broker.

Trade on your own margin

One major step by the regulator that will take effect from May 2 pertains to the segregation and allocation of client margin.  

Suppose 10 clients transfer Rs 1 lakh each to their broker’s account. The broker gets Rs 10 lakh, with which he creates a fixed deposit. This is lien-marked to the Clearing Corporation of India (CCIL). The latter assigns the broker a margin limit of Rs 10 lakh.

Currently, how the broker assigns this overall limit to individual clients is in his hands. If he observes that three clients have not transacted during the past week, he could assign his Rs 10-lakh limit among seven clients. In other words, he could use the money belonging to one set of clients to fund the transactions of others.

Sebi’s new norms will take care of this issue. From May 2, brokers will have to upload a file to the CCIL, providing a break-up of the limit to be assigned to each client. Based on this information, the CCIL will ensure a client does not take positions in excess of his individual limit. “The introduction of these norms will mean it will not be possible for a customer to take positions in excess of the margin deposited by him, by using the limits of other customers,” says Venu Madhav, chief operating officer, Zerodha.

More skin in the game

The net worth requirements of brokers were set a long time ago (Rs 1 crore and Rs 5 crore for two categories of brokers). No link existed between a broker’s size and his net worth requirement.

Now the concept of floating net worth has been introduced. In addition to the minimum stipulated net worth, a broker will also be required to maintain a floating net worth equal to 10 per cent of the average daily cash balance his clients have maintained over the past six months. A broker whose average cash balance is, say, Rs 10,000 crore, he will have to maintain a net worth of Rs 1,000 crore. Brokers have to comply with this norm by February 2023.

“This norm will ensure that brokers have adequate skin in the game. If their actions cause losses, they will stand to lose more in the future,” says Shrey Jain, founder, SAS Online, a Delhi-based discount broking firm.

Watch out for delayed payouts

Before opening an account with a broker, read online reviews (on Google and on social media).

“The broker’s rating should be at least four-star and above and it should be based on a large number of reviews,” says Vikas Singhania, executive director, TradeSmart Online.

Check for complaints against the broker on the websites of exchanges. If you find complaints related to delayed payouts, mishandling of funds, or unauthorised trades, avoid that broker. Any broker trying to lure customers with the promise of higher leverage (than permitted by the regulator) should be avoided.

Once you have selected a broker, watch out for delays in payouts.

“If the broker takes more than two working days, that should raise a red flag,” says Singhania.

Also, keep an eye on email and text messages from your broker and depository. Complain if you find an unauthorised transaction.