Brokerages could lose ease of doing business, make losses in some cases

MUMBAI: Stock brokers who provide a host of services including lending money to their clients to buy stocks in their fight to survive will have a tough time going forward with the market regulator barring them from pledging clients’ shares to raise funds.

The Securities and Exchanges Board of India (Sebi) has come out with a new set of regulations essentially to ensure brokers don’t misuse securities of one client to fund another client. However, these changes will have a major impact on brokers’ working capital and their business as these will restrict their access to funds, market participants said.

“The flexibility enjoyed by the clients where brokers could raise funds for them by using their securities for their positions has been withdrawn,” said Uttam Bagri, chairman at Bombay Stock Exchange Brokers Forum. “Now, either the broker will fund the client out of his own pocket, or where broker cannot extend credit facility, the client will have to directly raise funds from another entity like an NBFC or bank.”


As per the new guidelines, which would come into effect on September 1, shares lying with a trading or clearing member in client collateral account, client margin trading securities account and client unpaid securities account will not be permitted to be pledged or transferred to banks or non-banking financial companies (NBFCs) for raising funds by members.

Sebi had announced the new guidelines on Thursday.

“Client securities not being available for pledge will curtail liquidity in the share markets, for which alternative mechanisms like low-cost custodian will be necessary,” said Vijay Bhushan, president of Association of National Exchanges of Members of India (ANMI). Narinder Wadhwa, national president of Commodity Participants Association of India (CPAI), said brokerages will now require more working capital.

The market regulator has asked trading members to maintain a separate ‘client unpaid securities account’ for clients who have partly paid for the shares they bought. Shares kept in this account should be transferred to the client’s demat account only after full payment. If the client fails to make full payment, these shares should be disposed of in the market by the member within five days from the settlement date, it said.

“The requirement of compulsory disposing of unpaid client securities within T+5 days could cause heavy losses in periods of sudden fall in share markets,” said Bhushan of ANMI.

Sebi also said shares purchased under margin trading facility have to be kept in a separate ‘client margin trading securities account’. The regulator further said all the existing client securities accounts opened by the trading member (TM) or clearing member (CM), other than pool account, client margin trading securities account and client collateral account, shall be wound up on or before August 31.

Brokers In a Fix as Sebi Bars Pledging Of Clients’ Shares

The regulator has asked exchanges and clearing corporations and depositories to put in place a monitoring mechanism with respect to handling of clients’ securities.

Sebi has been working to devise a new mechanism, one which would ring-fence clients’ stocks from any utilisation by brokerage firms. Some cases had surfaced where brokers were found to have been engaged in manipulative activities involving misuse of clients’ money and stocks.

Although brokers feel these were one-off few cases that don’t pose systemic risk, the new circular from the regulator will require redefining of margins and management of clients’ funds or shares processes at stock brokers’ level.

“We foresee operational issues in implementation of this circular, like what happens for debit clients when their stock lying with brokers are at lower freeze for seven days, treatment of stocks of inoperative and untraceable clients,” said Wadhwa of CPAI. “For issues like this, our association will give our submissions to Sebi.”