Sebi seeks clean-up of margin accounts

Brokers told to differentiate between proprietary and clients' accounts.

The Securities Exchange Board of India (Sebi) has expressed reservations over the transparency in transactions in the margin accounts of brokers.

In its investigation, the Sebi has observed that the securities maintained in these accounts are misused by brokers for leveraging and pushing up trading volumes in particular shares. The securities under the margin account are not earmarked client-wise and belong to brokers at any given point of time.

To curb market manipulation, the market regulator has directed the depositories to flag off such margin accounts by asking brokers to identify accounts as their own (proprietary) and that of the clients. Further, brokers will have to work out the volume of transactions and furnish the data to the Sebi periodically.

However, the details of such tradings nor their profits and loss are not reported to the Sebi and exchanges. Furthermore, there is no trail of income since the margin account is like a pool of securities with no legal owner of the shares.

Besides, the ownership of the securities in the margin accounts are not pledged in favour of brokers and there is no legal provision for the margin accounts and brokers are advised to maintain pool accounts under the Sebi Act.

In pool accounts, shares are bought and sold on behalf of client, monitored either by the Sebi or exchanges during the settlement of such trades. No securities are allowed to remain in the pool account for more than 48 hours and a violation attracts penalty.

However, to skirt such surveillance and remain leveraged, brokers prefer to maintain margin accounts where clients deposit their shares for availing of margin funding.

Even if such shares are transferred from the account of the clients to brokers, the pledge is not created in favour of the broker. Therefore, it is difficult to attribute the transactions to any single client.

Sources said a single broker has numerous margin accounts and each margin account funds numerous clients.

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TAKING STOCK

Margin account is like a pool of securities with no legal owner of the shares

There is no legal provision for the margin accounts and brokers are advised to maintain pool accounts under the Sebi Act

No securities are allowed to remain in the pool account for more than 48 hours and a violation attracts penalty

To skirt such surveillance and remain leveraged, brokers prefer to maintain margin accounts where clients deposit their shares for availing of margin funding