Brokers bend KYC norms to welcome defaulting HNIs

MUMBAI: If you have defaulted on your credit card payment at one bank, there is a high probability that no other bank will be keen to have you as their credit card customer. This is because the Credit Information Bureau collects details of defaulting clients and shares that with member banks.

But if an equity investor were to default on payment to his broker, he can easily open an account with any other broking outfit. That is because stock broking firms have no way of finding out if their prospective client happens to be a wilful defaulter.

Many such clients, who had vanished from the market after defaulting on their obligations to broking houses during the market crash in January 2008, are slowly re-entering the market. But this time, they have signed up with a different broking house.

Many of these clients have opened accounts with multiple broking firms, so that they can continue trading, even if one of the firms decide to close their accounts.

���Technically, KYC (know-your-client) norms require that clients to disclose the names of all the broking houses in which they have trading accounts. But smarter players never give out details,��� said a BSE broker.

Some market observers say it is not these clients alone who are to blame. ���In many instances, broking houses may be aware that the client has defaulted at some other place. But they will still take him/her on, because the number of active clients among high net worth individuals in the market are limited,��� said another BSE broker.

While Sebi has prescribed stringent margin norms to be followed by broking firms, these are often relaxed by brokers, either to woo some new clients, or to retain an existing high volume client. Margin money is the deposit that clients have to keep with brokers before placing a trade.

While traded turnover rose dramatically between 2004 and 2008, brokers point out that the number of participants ��� especially high net worth individuals ��� has not grown in that proportion. This has led to many outfits bending a few rules to expand their customer base.