Sebi's unified broking license proposal faces integration roadblock

Key issue: unification of settlement and risk management mechanism of commodity and stock brokers

The Securities and Exchange Board of India (Sebi) proposal to have a unified licence for all commodity and equity market intermediaries is facing hurdles. Although the move has been approved by the Sebi board, the regulator is still facing issues on certain risk factors, which could delay implementation by up to six months.
 
Sources said Sebi needs to address some of the issues pertaining to the settlement and risk management mechanism of commodities and equities brokers and the regulator needs to find a workaround on the same.
 
“There is some apprehension as meeting operational and compliance obligations in both the segments needs effective oversight,” said a regulatory official in the know.

 

The Sebi board in April had approved the proposal of a unified licence for brokers as a first step towards complete integration of the two segments. That would have enable brokers and clearing members to deal in both securities and commodity derivatives segments without having to establish a separate entity. To enable the integration, Sebi had said it would amend the norms pertaining to stock broker and securities contract regulations.
 
“We have ironed out various regulations for the commodity market but considering the market penetration in the segment, we need to ensure there would not be any sort of risk which might affect the equity segment,” the official said.

 
Sources said the regulator wants to ensure there are no loopholes in the final guidelines. Some areas Sebi has to work on include having a common minimum net worth requirement, uniform margin requirement, contract sizes and shareholding rules.
 
Currently, most brokerages have separate arms for equities and commodity derivatives trading. Merging of these could entail capital gains tax and stamp duty, as the underlying assets, including securities and fixed assets, will undergo a change in ownership.
 
Fixed assets owned for more than two years will attract 20 per cent capital gains tax, adjusted for cost inflation. If fixed assets are owned for less than two years, the gains will be treated as income of the individual or company.

 
Brokerages will also be subject to stamp duty during new registration, the amount of which will be decided according to the state laws.
 
Some brokerages believe there could be a workaround in merging the entities. “The easiest way of adopting a unified licence is to buy out the entities. It is the simpler way of executing the concept, as once you acquire the commodity segment or vice versa, you can easily shift your client base without going through lengthy merger procedures,” said Kishore Narne, associate director, Motilal Oswal Commodity.
 
Legal experts say Sebi should allow the transfer of a licence to facilitate the need. The move would reduce the tax implications on brokers. “Sebi should permit transfer of licence from one broker entity to the other so the brokers may have the equity and commodity broking licences, currently housed in different entities, under the same roof. This will expedite the process and will be tax-neutral, unlike a merger process, which can be very time consuming and taxing,” said Tejesh Chitlangi, partner, IC Legal.

 
Following its adoption of the Forward Markets Commission in 2015, the commodity derivatives market had come under Sebi’s fold.
 

Challenges ahead

• Sebi allowed single licence for equity and commodity brokers
   
• Proposal may get delayed due to various “risk factors” involved
   
• Sebi could take 3-6 months to finalise the guidelines for single registration process
   
• Synergies between the two verticals need proper regulatory oversight
   
• Settlement, shareholding at brokerages and fixing margin are among issues the regulator is looking into
   
• Merging of entities will attract capital gains tax and stamp duty
   
• Tax will be charged on the basis of net worth after the merger