11 Sep 2017 15:53 IST

SEBI may block brokers from handling investor money

SMAC to discuss ways to facilitate direct payout of funds and securities to investors

In a move that will benefit thousands of retail investors, SEBI is looking to cut the role of stockbrokers in handling client money.

The Secondary Market Advisory Committee (SMAC), which meets on Monday, will discuss ways for a direct payout of funds and securities in a client account, which will limit the role of stockbrokers to just trade execution.

Currently, clients issue a cheque in the name of the broker via whom they place a buy order for shares. Similarly, it is the broker who does the payout to clients when shares are sold. This is set to change.

According to two sources close to the development, the SMAC may either suggest bringing in a custodian-like structure or ask stock exchanges and clearing houses to directly handle payout of funds and securities into a client account.

But the brokerage house may still remain the counter-party or guarantor for a client default as they will handle the Know Your Customer (KYC) exercise and even the buy-sell instructions of clients. In fact, client default will just become a paper term as securities will not be credited to the client account till money is paid.

Experts say the BSE and the NSE (National Stock Exchange) can adequately handle such a system. The stock exchanges already have direct reach to the clients of brokers and send SMSes and email alerts on trade execution.

These alerts also give details of the effective debit/credit of funds to the client. When such a system is available, it is only a matter of giving exchanges an authority to debit or credit money from the client account, the expert said.

“It will be the most effective step for retail investors if implemented properly,” said JN Gupta, former ED, SEBI. Going ahead, the move would limit the role of stockbrokers to giving financial advice, he added.

Brokers charge a fee for executing client trades but if the right technology is brought in, it would mean that no middle-man is required just for order matching, which anyway happens on an exchange’s automated trading screen, say experts. Transfer of the security is handled by depository participants such as NSDL and CDSL, they add.

The custodian structure is in use by large institutions, including foreign funds, wherein settlement is handled by a player like Stock Holding Corporation of India (SHCIL), which has client assets worth $530 billion (₹34 lakh crore) lying with it.

But SEBI, according to sources, is not too keen on the custodian structure if the work can be done directly, as SHCIL’s operations have been scam tainted in the past.

Brokers such as Kassa Finvest and Unicorn Securities in 2015, and Amrapali this year, are alleged to have been involved in diverting client funds. This has given the brokerage industry a bad name, leading SEBI to think of changing the system. Default claims worth several hundred crores are lying with stock exchanges, which will have to dip into an investor protection fund to settle them.

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