Sebi to up vigil to check misuse of investor money by brokers

Stock exchanges to continuously monitor client assets lying with brokers and generate alerts about their potential misuse

To check any possible misuse of investors' money, markets regulator Sebi will soon put in place a mechanism for enhanced supervision of stock brokers and wants stock exchanges to evolve an automated alert-generation system for flagging suspicious activities.

Stock exchanges will be required to continuously monitor the client assets lying with the brokers and generate alerts to determine potential misuse of these assets by brokers.

Besides, the stock exchanges will monitor financial strength of stock brokers by continuously reviewing certain financial ratios and indicators of brokers.

The proposed measures, based on recommendations made by a high-level committee, will be soon implemented in consultation with the stock exchanges, a senior official said.

The Committee, consisting of Sebi (Securities and Exchange Board of India) officials and representatives of stock exchanges, depositories and stock brokers, was set up to suggest measures to further enhance the current regulatory and supervisory mechanisms for protection of clients' assets with stock brokers.

The Committee deliberated on various issues pertaining to enhanced supervision of stock broker's including augmented disclosures, periodic reconciliation, continuous information sharing, etc.

Among various recommendations, the Committee suggested there should be no netting between client and proprietary obligations -- meaning, client obligations and own obligations of the broker shall be settled separately.

This will ensure that brokers' obligation and payment thereof are separated from the clients' obligation and payment thereof.

Another proposed measure required prescription of uniform nomenclature for bank and demat accounts which are maintained by stock brokers in order to ensure maintenance of an audit trail.

Besides, disclosures would need to be made to the clients regarding pledging of their securities, funding provided by stock brokers, daily fund and securities balances. The disclosures would include number of securities pledged, funds raised through pledging, name of the pledge and amount of indebtedness of the client to the broker.

Sebi also wants strengthening of the existing internal audit system for stock brokers in line with the requirements for auditors as mentioned in the Companies Act, 2013.

Besides, it would develop a mechanism to share important information between stock exchanges and depositories. The information to be shared includes disciplinary actions along with major violations/lapses observed, reasons for terminal disablement and sudden rise in investor complaints.