Calling Sub-Brokers To Order

But the formula which Sebi has decided upon takes the issue nowhere beyond putting the contractual relationships between the broker and his sub-broker on record. As per the modalities worked out, while Sebi would still keep the records of sub-broker registration, the onus of watching the financial dealings of the sub-brokers would vest with the broker who sponsors the registration. Indeed, Sebi has complicated matters by introducing variants of the sponsorship concept. A sub-broker dealing with more than one primary (Sebi registered) broker will have to obtain separate registrations in each case. The crux of the regulatory model is that sub-brokers can do business only through the sponsoring broker. Sebis point is that if brokers have implicit trust in the sub-brokers, as evidenced by the amount of trade credit made, they should be held responsible for the latters financial dealings. But it does not work that way. Sub-brokers operate in a microcosm of their own: they net off purchases and sales at their end.

 

It is only for the net position (bought or sold) that they revert to the primary broker. But within the microcosm, if one of their clients defaults, the chain of payments is broken. Investors are hurt but it is not a matter over which the primary broker has any control. For good reasons, therefore, brokers have been suspicious of this model.

The via media model of remisier contracts, wherein the primary broker directly issues contract notes to the client and settles payments directly, is not a workable solution either. It places too much load on the back offices of the primary broker. It was specifically for this reason that most brokers on the BSE, for example, had stopped taking retail clients directly. Brokers argue, with reason, that since they do not know the clients directly there is no reason why they should undertake to vouch for their financial strength. Unresolved, the whole issue of sub-brokers is a potential time-bomb ticking away. Sebi will have to explore other ways in which sub-brokers can be called to order.