Sebi to enhance supervision of brokers to check misuse of funds

Brokerages will be told to strengthen audit systems; bourses to get larger role in monitoring health of such firms

India’s capital market regulator is planning to step up supervision of stock brokers in a bid to check misuse or diversion of client funds and improve safety of the market.

The Securities and Exchange Board of India (Sebi) will ask brokerage firms to beef up their audit mechanism and also draw up a larger role for stock exchanges in monitoring the financial health of such firms.

These are a few of the suggestions that are part of a Sebi report titled Enhanced supervision of stock brokers. Feedback on it has been sought from the Bombay Stock Exchange Brokers Forum and Association of National Exchanges Members of India (Anmi), after which the proposals will be placed before the Sebi board. Mint has reviewed a copy of the report.

If approved, the recommendations will come into effect from April 2016. The report is part of Sebi’s effort to move towards a risk-based model of supervision of all stock brokers, said a person familiar with the regulator’s thinking.

One of the key recommendations of the report is on how brokerage firms manage their own accounts (proprietary accounts) and that of their clients. The market regulator wants a clear separation between the funds in these two accounts and has proposed that the bank and the demat accounts should be named accordingly. Brokers will get a year’s time to segregate the accounts once the norms come into effect. The transfer of funds and securities between the two accounts will also be allowed in rare circumstances, Sebi has proposed.

To strengthen internal auditing of brokerage firms, Sebi plans to make auditor rotation mandatory for stock brokers, a norm which is already in place for listed companies as per the Companies Act 2013. “No stock broker shall appoint or re-appoint: a) an individual internal auditor for more than one term of five consecutive years and, b) an audit firm as an internal auditor for more than two terms of five consecutive years,” says the report.

The block of five years will start from fiscal year ended 31 March 2012. An individual or an audit firm will not be eligible for re-appointment as an internal auditor with the same stock broker for five consecutive years, says the report.

Further, stock exchanges have been mandated to maintain a list of internal auditors of all stock brokers. Bourses, however, will have to do their own inspection of the brokers and if “serious deviations are observed between the findings of the internal audit report and the stock exchange inspection report”, then the broker can be asked to reconsider the appointment of the internal auditor.

“Some of the suggestions are practical, but one needs to remember that brokers are already reeling under a lot of regulations. Many people had to shut shop as the business has become unviable,” says Sudip Bandyopadhyay, managing director and chief executive at Destimoney Securities Pvt. Ltd, a brokerage firm.

Bandyopadhyay said the segregation of funds is important and some of the large firms already do it. “Auditor rotation is not a problem and can be done,” he added.

Sebi has also proposed that stock exchanges monitor the financial strength of brokers more keenly. “It should monitor the financial strength of brokers based on factors like change in net worth, collateral, liabilities and financial statements so that preventive action can be taken if a broker is facing default-related issues,” says the report.

Alok Churiwala, vice-chairman of Brokers Forum, says that the broker body has formed a committee of leading market firms to study the report and will give recommendations to Sebi.

“We are going through the recommendations and both the broker bodies (Brokers Forum and Anmi) will submit their suggestions,” said Churiwala.

“Ours is a responsible trade body and we will do everything to enhance market safety. But we will also be mindful of the fact that undue stress or compliance is not thrust upon the brokers who are already reeling under a lot of compliance requirements,” he added.

Sebi has suggested that brokers should submit half-yearly net worth certificates within 60 days of the end of half-year ended on 30 September and 31 March. Brokers will have to submit financial statements in the same format as prescribed in the Companies Act, 2013.

HT Mint, New Delhi, 9th Sept. 2015

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