Hedge Fund For Investors Dealing With Sub-Brokers Mooted

At present, whenever the investor surrenders his shares to sub-brokers for selling in the market or whenever he pays up the amount for buying up shares in the market, he is exposed to 100 per cent risk. Our only concern is protecting this person who is at the tail-end in the entire interaction chain, O P Gahrotra, senior executive director, Sebi said.

Another suggestion which emerged during the meeting was the segregation of sub-brokers into two categories on the lines of the National Association of Securities' Dealers (NASD) in the US. The segregation has been proposed by Price Waterhouse and the Delhi Stock Exchange.

 

According to the suggestions made, sub-brokers who have a formal agreement with brokers would fall under the first category and sub-brokers falling outside the formal principal-agent relationship would come under the second category of sub-brokers. The DSE is learnt to have already taken the initiative and formed an association in consultation with Price Waterhouse, which will register the second category of sub-brokers as its members.

The association will work as a self-regulatory body, and sub-brokers registered with it would be answerable to it. The body will have power to cancel the membership of a sub-broker in case of non-compliance of norms. The norms suggested now are professional qualification, capital adequacy, accounting and reporting systems, inspection and arbitration.

Representatives of the Bombay Stock Exchange and the Delhi Stock Exchange have agreed to come out with a scheme on how the fund could be set up and what the contributions from brokers and sub-brokers to the fund would be by mid-next week.

The proposal to set up the fund has been suggested as a way out to break the deadlock between Sebi and brokers on the contentious issue of sub-brokers. While brokers were reluctant to take up the entire responsibility for their dealings with sub-brokers, Sebi was not willing to relent on its stand that brokers should take total responsibility for their deals with sub-brokers.

We understood the point of the brokers, and said that if individual brokers can't take up the responsibility of protecting investors from sub-brokers they are dealing with, all the brokers can collectively set up a fund to give full protection to investors, Gahrotra said.

The exchange representatives were willing to take up responsibility to the extent of Rs 1.5 lakh per client of the sub-broker, which was rejected by Sebi. This suggestion would have meant partial protection to investors, which was just not acceptable, Gahrotra said. Today, the broker, sub-broker and the exchanges are part of a system protected either through an insurance policy or some other form of protection. But the investor is totally outside this. This is an attempt to bring him under risk cover.