Market regulator Securities and Exchange Board of India (SEBI) has issued a guideline for enhanced obligations and responsibilities on qualified stock brokers (QSB). Market infrastructure institutions (MIIs) will carry out the enhanced monitoring of QSBs from 1 July 2023. In December last year, the SEBI board had approved amendments to stock broker regulations for defining QSBs and making enhanced norms applicable to them.
In the circular issued on 6 February 2023, SEBI says “The stock broker designated as a QSB shall be required to meet enhanced obligations and discharge responsibilities to ensure appropriate governance structure, appropriate risk management policy and processes, scalable infrastructure and appropriate technical capacity, the framework for orderly winding down, robust cyber security framework, and investor services including online complaint redressal mechanism.”
According to the circular, the parameters for designating a stock broker as QSB includes the total number of active clients, the total assets of that clients, the trading volume of the broker, and the end-of-day margin obligations of all clients, excluding the proprietary responsibility of the broker in all segments.
The procedure for assigning the score, the number of active clients, will be divided by the aggregate count of active clients of all stock brokers and the total score shall be calculated by adding the individual score of all the parameters.
According to SEBI, stock brokers with a total score greater than or equal to five based on the number of active clients, assets, and other parameters will be identified as QSB. The scores will be calculated annually, and stock exchanges will publish the list of QSBs after consultation with SEBI. The brokers no longer on the revised list are still obliged to comply with responsibilities for an additional period of three years.
As per the guidelines, QSBs must have a board of directors or audit committee, risk management committee, information technology (IT) committee, cybersecurity committee, and any other committee mandated by the market regulator. These boards or committees should review and be cautious of incidents and activities that can affect the functioning of the QSB in the securities market and investor protection, including data security breaches that can affect investor data.
The chief financial officer (CFO) or an analogous person of the QSB will submit to the audit committee, details in respect of the financial status of the entity, disclosure of any related party transactions, inter-corporate loans and investments, internal financial controls and risk management systems, compliance with listing and other legal requirements relating to financial statements, adherence to regulatory provisions.
QSBs will submit an annual report to the stock exchanges regarding the committees' observations and corrective action taken by them.
Certain market stock brokers handle a large number of clients, a large amount of client funds and huge trading volumes. The possible failure of such brokers can potentially cause a widespread impact on investors and reputational damage to the Indian securities market.
To mitigate this risk, in December, the SEBI board approved amendments to the SEBI (Stock Brokers) Regulations to designate such stock brokers, based on identified parameters, as QSBs, who need to comply with enhanced risk management practices and requirements.
