Sebi tightens stock brokers' annual audit norms

The annual audit statements of stock brokers also need to cover certain key regulatory aspects relating to financials and members dealing with clients and major deficiencies and non-conformance with regulatory requirements.

In a concept paper, the Securities and Exchange Board of India (Sebi) has said that the annual audit report should contain a certification as to whether the books of accounts have been maintained properly.

Auditors have to give a city-wise list of all trading terminals granted by the member. It may also be examined by the auditors whether such trading terminals have been given by the member only at its registered office, branch office and the registered sub-broker's office.

Grant of any unauthorised trading terminal by the broker to its clients has to be reported by auditors in their report.

The turnover of the member has to be given across different exchanges with segregation of the cash and derivatives segment.

Separate details on retail and institutional clients turnover has to be provided and distinct equity and debt turnovers.

A segment wise break-up of income earned by the broker has to be provided to throw light on various activities undertaken and their contribution to the overall revenue model of the broker, the paper said.

The statement should give shareholding pattern of the entity.

All those holding five per cent or above as on the close of year ending for which audit is conducted should be given in the audit report along with all the major changes in the shareholding pattern of the entity for the period under review.

A statement of net worth has to be furnished while the entity's financial position may be judged in terms of its net worth and overall exposure in the market and obligations due to various entities.

The auditors also have the mandate to examine the role of the compliance officer, whom all stock brokers are required to appoint.

With regard to margin collection and payment, the paper says that the system of collection of margins from clients may be examined by the auditors and any deviation from regulatory requirement has to be reported.

Auditors can also carry out a detailed analysis of various bank accounts being operated by the member. The analysis is expected to throw light on non-segregation of clients' funds and own funds, and misutilisation of clients' funds.

According to Sebi, "It is generally observed that the balances lying in clients' account also contain a portion representing the brokerage which members do not withdraw after every settlement. However, as and when need arises, payments or withdrawals are made from clients' account itself for different purposes and it is submitted that such withdrawal is always less than the amount of brokerage attributable to the broker."

In such a case, auditors have to make an analysis of total brokerage due to the broker and total withdrawals made to form a view about the misutilsation of clients' funds.

Auditors also have to verify whether appropriate stamp duty has been paid by brokers in line with provisions of the Stamp Act.

Auditors have to verify whether the borrowings and lending being done by the broker is in connection with or incidental to or consequent upon securities business.

In case the borrowings are excessive, which in the opinion of auditors are likely to impact the safety of operations of the member, auditors may comment on it.

Auditors can also analyse the total gross exposure of the broker based on its base minimum capital and additional base minimum capital deposited with the exchange.

In case of receivable and payment to clients and deliveries to clients, auditors have to examine the practices and procedures of the members in so far as they relate to payment of money and giving deliveries to clients within the prescribed time limit.

Auditors may also examine and verify the credit and debit balances lying in books for a considerable period and should form an opinion if adequate provisioning have been made in the books for those debit balances, which have remained unrecovered for a considerable period of time.