Stock exchanges seek to raise entry bar for 'authorised persons'

To raise entry barriers with net-worth criteria, proposes stricter surveillance and greater accountability for brokers

Stock exchanges have proposed an overhaul of the regulatory framework governing authorised persons (APs), raising entry barriers through stricter eligibility criteria, mandatory certifications, net-worth requirements and tighter supervision by stock brokers — a move that industry executives said would increase compliance costs. APs are broker-appointed agents who acquire and service clients on behalf of stock brokers.   

In a consultation paper released late Thursday, the exchanges, along with the Securities and Exchange Board of India (Sebi), proposed introducing minimum net-worth criteria for APs. Individual APs would be required to maintain a minimum liquid net worth of ₹5 lakh, while companies would need a minimum net worth of ₹25 lakh. In addition, APs would have to maintain a minimum deposit of ₹1 lakh with the stock broker, although brokers may prescribe a higher deposit based on factors such as business volume and clientele. Currently, there is no such requirement. 

 

The proposal also seeks to raise the minimum age for individual AP registration to 21 years from 18 years. Applicants must have passed Class 12 or an equivalent examination, possess at least two years of work experience with a stock broker or in the securities market, and satisfy the fit-and-proper criteria under Sebi’s Intermediaries Regulations.  

The exchanges have also proposed mandatory National Institute of Securities Markets (NISM) certification for APs. 

For APs operating trading terminals, the consultation paper prescribes additional safeguards, including geo-tagging of terminals, CCTV surveillance, facial recognition or biometric authentication, centralised storage of pre-order placement evidence, and stringent data-security standards. Trading terminals located at AP premises would be treated as branch offices of the stock broker, making brokers responsible for liabilities arising from such locations, the paper said. 

The proposals also significantly expand the compliance responsibilities of stock brokers. Brokers would be required to conduct surprise and mystery audits, generate monthly off-site alerts, monitor APs’ social media activities, physically verify AP premises before onboarding, organise annual compliance training, make recorded welcome calls to AP-sourced clients warning them against promises of assured returns, and publish details of active and cancelled APs, along with complaint statistics, on their websites. 

According to broking industry officials, the changes are expected to increase compliance costs for both APs and brokers. 

“The proposed framework introduces a significant entry barrier for authorised persons by prescribing a minimum liquid net worth, deposits with brokers and enhanced infrastructure requirements. Unlike balance sheet-based net worth, the proposed liquid net worth excludes fixed assets and unlisted securities, making compliance more demanding. Along with geo-tagging, CCTV, facial recognition and tighter broker oversight, these measures will substantially raise compliance costs for both authorised persons and brokers, potentially forcing many small and mid-sized APs out of the business,” said D P Singh, head-compliance, Ventura Securities. 

According to a senior executive at a broking firm, the proposed framework is aimed at preventing the misuse of clients’ money by APs. “The proposal seeks to address the growing risks arising from the conduct of some APs, such as collecting money from clients or promising assured returns, both of which are prohibited under securities regulations. By prescribing minimum eligibility, infrastructure and oversight standards, the framework aims to strengthen accountability and investor protection. However, the tighter norms could also raise compliance costs significantly, making it difficult for many small and mid-sized authorised persons to continue operating,” the official said. 

The proposed framework seeks to replace the regulatory regime for Authorised Persons introduced in 2009, with the objective of strengthening supervision of APs and enhancing investor protection, the consultation paper said. The exchanges have invited public comments on the proposals until August 27.