Is Sebi tightening its stance on broking firms?

Not only has stockbroking become a difficult business, many in the industry also feel that it is no longer a lucrative one. The regulatory framework regarding the manner in which broking houses can use—or just keep—client funds has been tightened over the years and a recent consultation paper by the Securities and Exchange Board of India (Sebi) hints at an era wherein broking firms will have absolutely no access to client funds.

The capital markets regulator has proposed a mechanism where these funds will remain blocked in the bank account and will directly go to the clearing corporation as and when the trade is executed.

This represents a marked shift from the current system where the funds move from the client’s bank account to that of the broking firm and then ultimately to the clearing corporation.

The Sebi proposals stem from the concerns or fears that the regulator has in terms of the misuse of client funds by broking houses. Incidentally, the word misuse/misused has been used nine times in the 21-page consultation paper.

“There is a possibility that a client’s collateral retained with a stockbroker or CM (clearing member) can be misused... In order to retain investors’ confidence, it is imperative that the investors’ funds and securities should be adequately protected from the possibility of misuse/default by a stockbroker,” states the Sebi paper.

“The need for more innovative solutions to plug in any possible loopholes and minimise the risk of misuse of investors’ funds/securities by stockbrokers is ardently felt,” it adds.

It was just a matter of time before such a framework was announced for the secondary markets as a similar mechanism is already in place in the primary market. Called Application Supported by Blocked Amount (ASBA), it allows the client funds to remain blocked in the bank account at the time of applying for shares in an initial public offer (IPO) with the funds being released only when, and if, the shares are allotted.

Coming back to the latest set of Sebi proposals, it is certainly not going to go down well in the broking industry though the rules, whenever enacted, will only make the Indian capital markets more robust and enhance the overall safety from the perspective of an investor.

That’s the view heads of most broking firms have when they talk off the record. They say there is too much of a compliance requirement and the regulatory framework related to risk management and margins, in particular, keeps changing regularly thereby making the business less lucrative with each new rule that comes into play.

Interestingly, they feel that the capital markets regulator always looks at broking firms—the broking vertical to be more specific—with suspicion even as there are other categories of intermediaries as well that have their share of questionable actions.

That is also one reason why at a time when discount broking firms have become the go-to platforms for trade execution, most of the traditional brokerages have diversified into distribution and the advisory business to make money.

This assumes significance as brokerage rates are already at zero or near-zero levels and cannot really go further south. So, to keep the cash registers ringing, value-added services need to be offered—a fact not missed even by the discount broking firms that are cross-selling a lot of investment products to their broking clients.

It’s a fact that industries evolve and technology acts both as an enabler and a disruptor. Broking firms will have to be as agile as possible to keep themselves relevant in a fast-changing environment.

@ashishrukhaiyar