Multiple Membership Under Scrutiny

The recent directive issued by the National Stock Exchange (NSE) on personal liabilities of brokers and the subsequent Bombay Stock Exchange (BSE) decision on the same issue has sparked off a debate on whether brokers will be allowed to have multiple membership of exchanges.

According to the new NSE missive, members will have to furnish personal indemnity bonds which means that in case of a default, the dominant partner in the stockbroking outfit will have unlimited liability.

While this has sparked off wide-spread discontent among the broking community, the fact of the matter is that the directive would go a long way in improving the current bad delivery, fake/forged and stolen shares crisis in the capital market.

 

While the BSE has said that none of its members shall sign any such indemnity bond, even Delhi and Calcutta Stock Exchange brokers are expected to follow suit.

None of the exchanges (BSE, DSE or CSE) have expressly said that their brokers should not be allowed to have dual membership, the underlying feeling in stock market circles is that the BSE directive has been issued with the precise objective of disallowing dual membership.

An highly placed BSE official has meanwhile admitted (on conditions of anonymity) that the NSE directive is aimed at reducing the high incidence of bad deliveries in the market. He, however, added: Criminals will resort to crime in spite of checks and balances like these.

The official also admitted that a personal liability would also ensure that defaulters would not go scot-free. While only 70-100 brokers will be affected as a direct consequence of the recent NSE-BSE showdown, the issue may assume a serious proportion if other regional exchanges like CSE, DSE and others also decide to follow the BSE.

Market sources say that timely intervention by the Securities and Exchange Board of India (Sebi) could save the day for the stockbroking community. NSE has already asked the market regulator to intervene and this, say marketmen, should be done at the earliest.

BSE sources said that according to the BSE bye-laws, no BSE member can have an unlimited liability in any other exchange, which may affect the safety and integrity of BSE. They also added that under Rule 47 (a) (xi) of the BSE, members having personal financial liabilities in any other business will be disqualified.

However, in this context any other business obviously does not imply stockbroking in NSE or any other stock exchange. Also, there are many instances where BSE bye-laws have been changed by the governing board. A section of marketmen view the BSE directive as an arm-twisting measure and a measure to stop its own members from trading on the NSE. The BSEs theory that a personal liability will result into erosion of net worth of the broker has not been fully accepted.

This is because while the minimum net worth of a BSE broker is only Rs 10 lakh , the NSE members have to maintain a net worth of Rs 1 crore.

Assuming that a broker - having dual membership - defaults on the NSE, his position in the market will be known much ahead of his actually defaulting on the BSE. If BSE and NSE work together, then such incidents could be nipped in the bud, a marketman suggested.