Sebi seeks to hike net worth requirement for brokers as defaults spike

The Securities and Exchange Board of India (Sebi) has proposed to enhance the net worth requirement for stock brokers manifold, amid a spate of defaults by brokers and several other cases of misuse of shopper securities.

Currently, the networth requirement for brokers differs for every phase and features they reform. For occasion, a so-called skilled clearing member (PCM) or a buying and selling and clearing member (TM & CM) is required to have networth of Rs 3 crore for the money phase and one other Rs 3 crore for the fairness derivatives phase.

Sebi has proposed that the bottom networth for PCM must be elevated to Rs 25 crore by October 2022 and additional to Rs 50 crore a year later. Some giant brokers might even have to present greater net worth if the ten per cent of the typical every day money steadiness of their purchasers they keep exceeds Rs 50 crore or different slabs prescribed by the regulator.

In a dialogue paper, Sebi has mentioned the present net worth thresholds had been set 20 years in the past and given the rise within the variety of new accounts, there’s a want to relook on the parameters.

“The failure of the capital market intermediaries to meet client obligations may arise out of the operational risk, using client money for other client or proprietary trading. The current minimum capital norms do not adequately address these risks,” the regulator has mentioned, inviting public suggestions till October 18.

The regulator has mentioned the steadiness sheet of brokers are be monitored and commensurate with the operational threat they take with respect to its purchasers.

Industry gamers mentioned the newest proposals will put additional strain on the brokers, who’ve been grappling with a number of regulatory adjustments.

Some gamers have questioned the timing of the transfer.

“After the introduction of pledge re-pledge norms and barring brokers from accessing client securities, the risks have gone down significantly. Most brokers act as pass-through intermediaries. Higher base capital norms will reduce the number of players in the segment, stifle competition and innovation,” mentioned a founding father of a small-sized brokerage.

Post the Covid-19 pandemic, the business has seen file variety of first-time buyers.

“The significant increase in the number of investors participating in the securities market, it seems appropriate that a review of net worth of the members… it was observed that existing base net worth requirements are very miniscule compared to the business that TMs are undertaking and the number of clients that they have,” Sebi has mentioned.

In latest years, Sebi has hiked networth of a number of different intermediaries. In 2014, it elevated the networth requirement for asset administration company from Rs. 10 crore to Rs. 50 crore. In 2019, networth of portfolio managers was revised from Rs 2 crore to Rs 5 crore and that of credit standing companies was additionally revised from Rs 5 crore to Rs 25 crore.

Sebi has mentioned greater net worth necessities for the broking business will guarantee shopper security.

“Handling of funds and securities results in their clients having a credit exposure against them. From the point of view of market safety, it is crucial that the risk of loss of clients’ assets in the event of default by the intermediary is mitigated, regardless of such default being on account of own trading or non-trading losses of the intermediary or due to default of another fellow customer,” the regulator has mentioned.

Sebi has additionally proposed to enhance the net worth requirement for stockbrokers who act as depository members, to Rs 5 crore by October 2023 onwards.

The regulator has mentioned the computation of net worth shall be primarily based on the suggestions made by the LC Gupta committee.

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