SEBI’s client-broker relationship guidelines throw up operational and cost challenges for brokers; they are seeking relaxation in the rules

Market watchdog Securities and Exchange Board of India (SEBI), in its circular dated 3 December 2009, had laid out rules pertaining to the broker-client relationship in a bid to increase transparency.

Among the various rules were authorising running an account once in a year, increase in font size of all documents and settlement of funds once in a calendar quarter or month. Following apprehensions from the broker community, the regulator extended the deadline to 30 June 2010 from its earlier deadline of 31 March 2010. However there were no amendments to this circular.

While brokerage houses are gearing up to ensure that they comply with the circular, they are still facing operational glitches. 

“The implementation faces practical and operational difficulties, for example, quarterly settlement of accounts for all clients on one single day is not possible as it may require a huge amount of working capital for rollover/margins/replenishment of exposures, etc. The broking industry is proposing its relaxation, to at least once a year instead of quarterly adherence. They are trying to impress upon the authorities to find a practical solution—implementing it in batches for a set of clients so that in a given period, all client accounts are settled as stipulated so as to remove the pressure of settling all accounts on a single day. The rotational settlement covering all clients will meet the desired objectives,” said a spokesperson from Anand Rathi.

“Most of the clients have given a mandate to square off the account in a quarter. We are planning to do it from 30th June. We have around one crore demat accounts in the country. If we are told to take new forms from them then there is a cost of Rs100 per form. It will be a very difficult task. There will be a burden of around Rs100 crore on the industry,” said a Mumbai-based broker.

“It is a yearly affair; hence a broker can send statements of balance of funds and securities to all his clients. Of course, it is a subjective matter in terms of cost escalation. Some brokers may charge a cost for the same under courier, despatch charges, etc,” said Chandrashekhar Layane, senior vice president, FairWealth Financial Services.

According to industry sources, some brokers are seeking a further extension and possible amendments to SEBI’s circular.

For renewing the accounts, the operational cost in terms of printing material, paper, and courier charges, etc, per account could go up to Rs25. Printing all documents in a font size of 11 is also likely to add to the costs. Besides, SEBI also has certain modifications to the ‘know your client’ (KYC) forms.

“A running account of a customer with a broking firm is similar in conformity with the established commercial practice for any financial relationship like a banking account, mutual fund account, a buyer and seller (trading) account and a supplier-customer account. An initial authority for setting up such an account with an authority to revoke with the customer should suffice. The new system of periodical squaring off and quarterly statements of accounts strengthens the system further. In view of this, yearly renewal is unwarranted,” adds the spokesperson from Anand Rathi.

The exchanges are trying to convince brokers to implement the circular by 30 June 2010.