Sebi may prescribe higher net-worth needs for qualified stockbrokers

Regulator's approach being looked at as similar to one of different layers of NBFCs specified by RBI

The Securities and Exchange Board of India (Sebi) may prescribe higher net-worth requirements among other parameters for qualified stockbrokers (QSBs) who handle a substantial number of clients, funds, and trading volumes.

The Sebi board has decided that QSBs will need to comply with enhanced risk management requirements and will be under enhanced monitoring by the regulator and market infrastructure institutions.

According to Sebi, 16 brokers will fall under QSB parameters that will be issued separately.

 “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.

Sebi’s approach for QSBs is being looked at as similar to one of different layers of non-financial banking companies categorised by the Reserve Bank of India for the adoption of an enhanced regulatory framework. 

“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. 

A capital threshold requirement could help mitigate risk among stockbrokers who do high-volume business but maintain low net-worth. 

Earlier this year, Sebi had issued a notification specifying an increase in the net-worth requirement of stockbrokers to Rs 5 crore.

“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, Samco.

Many emerging stockbrokers have highlighted that this could lead to a class divide among them, with newer investors associating trust with a qualified tag. 

“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, CEO and co-founder, FYERS.

“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.

Control checks

• Qualified stockbrokers (QSBs) will be under enhanced regulatory monitoring; need to comply with higher risk management requirements
• Securities and Exchange Board of India’s decision will mitigate risk, contain the potential impact of failure of a stockbroker like Karvy
• Smaller brokers believe this may lead to a class divide, with qualified being associated with trust
• Brokers expect a marginal increase in the cost of compliance
• Detailed framework for QSBs to be issued separately