Sebi keeps high net-worth in 16 parameters for qualified stock brokers
The Securities and Exchange Board of India (Sebi) may prescribe higher net-worth requirements, among other parameters, for qualified stock brokers (QSBs) who handle a substantial number of clients, funds, and trading volumes.
The markets watchdog is expected to implement additional guidelines for stockbroking companies to become qualified stockbrokers (QSBs) if they are handling a significant number of clients, funds, and trading volumes.
There will be an additional 16 parameters to be met by the QSBs, including, higher net-worth, and will be under increased scrutiny by the regulator and market infrastructure institutions, according to a report by Business Standard.
The Sebi board has decided that QSBs will need to comply with enhanced risk management requirements.
“If a broker is handling daily heavy volumes and a lot of client funds, he must also have capital in proportion to operate in it. A threshold net-worth requirement for QSB could help in mitigating risks,” said an official, as quoted by the daily.
According to the report, Sebi is following the footprints of Reserve Bank of India for the adoption of an enhanced regulatory framework by non-financial banking (NBFCs) companies.
“Certain stockbrokers in the market handle a large number of clients, large amounts of client funds, and large trading volumes. A possible failure by such brokers has the potential to cause a widespread impact on investors and reputational damage to the Indian securities market,” noted Sebi in its board decisions, Business Standard quoted in its report.
In the case of stockbrokers who conduct high volumes of business but maintain low net worth, a capital threshold requirement may help mitigate risk, according to the report. Sebi had increased the net-worth requirement for stockbrokers to Rs 5 crore earlier this year.
“Under the new framework, Sebi will be able to spend more time on larger brokers and reduce the systematic risk in the securities market. The turnover, number of clients, and client float can be included as parameters,” said Jimeet Modi, group chief executive officer of Samco, the report quoted.
This may lead to a class divide among emerging stockbrokers, with newer investors associating trust with qualified status, the report added.
“It will lead to a divide between brokers. It will create a different class of brokers with higher compliance to abide by, but it will create a surplus of trust in their favour in the years to come,” said Tejas Khoday, co-founder of FYERS, as quoted by the Business Standard.
“Traditional brokers catering to high net-worth individuals and institutions may not have an issue as they have an established trust, but for those expanding in the retail segment, there may be an impact on their ability to earn the trust that will have to be met in other ways,” he added.
However, the larger brokers have a different opinion, citing they will be under a constant regulatory lens.
“In my opinion, Sebi will not allow brokers to market themselves as QSB brokers. I don’t think the intention is to get that tag. This is one regulation which will ensure that cases like Karvy don’t happen again so that the general trust in the system goes up substantially,” said Modi.
Brokers believe that the compliance cost increase will only be marginal as they have already been following the regulations set by Sebi. Since they will be under enhanced monitoring, it may come with higher penalties for certain lapses.