SEBI gives a breather to brokers; leaves it to exchanges to handle sticky issues  

March 31, 2010

Market watchdog Securities and Exchange Board of India (SEBI) has given breathing space for brokers to comply with its earlier circular dated 3 December 2009 which laid down fresh rules on how to deal with clients but the pushed the sticky issues of implemenation to the stock exchanges. The deadline to implement the new rules was set at 31st March, but now brokers can complete the necessary process till 30 June 2010. Although there are no changes in the clarifications issued by SEBI, brokers are happy with the new timeline.

Yesterday, Moneylife had reported first on how brokers were not able to keep up with the 31 March 2010 deadline for complying with the changes brought about by SEBI (read here).

The broker community had sought an extension from SEBI to cope with the new rules. “The stock brokers are now directed to ensure the full compliance of the said circular dated 3 December 2009 in respect of all clients—existing and new—latest by 30 June 2010,” states the SEBI circular.

“If it has given an extension of three months then it’s enough time to get our act together. SEBI has acknowledged that some time needs to be given and I think it is in the right spirit. We would have liked to have certain changes to be made but I think it’s fair,” said Alok Churiwala, MD, Churiwala Securities Ltd.

However, what SEBI has done is a mere postponement of the issues that brokers would find hard to handle. Moneylife has learnt that SEBI has pushed the issue of implementation to the stock exchanges since it does not want to handle the problems thereof.

Among the various changes initiated by SEBI are related to the KYC (know your customer) compliance norms. Maintaining KYC documents of existing clients is proving difficult for brokers while those who have online accounts will have a smoother transition. “It is not feasible to take signatures of clients on the form every year,” said a source from the BSE Brokers Forum.
According to sources, most of the brokers will have a difficult time complying with the rule even if it is implemented. A client has to sign around 80 times on a KYC form.

Only brokers who are maintaining online transfer of funds will be able to deal with the new mandate smoothly. Brokers will have a tough time maintaining KYC forms for the older clients. Among the several changes made in the new KYC norms include having a font size of 11. According to sources, this would only make the form bulkier and the client may end up signing the form without reading the fine print.

“Clients sign where they are asked to sign. It was happening earlier and will continue to happen. It’s not desirable but that’s how it has been. Earlier everything was a part of the same booklet and the client did not know what was compulsory and what was not compulsory. Now clients have a choice,” said Alok Suriwala, MD, Suriwala Securities Ltd.

“People who are doing the transactions online will be able to make the transition smoother because they don’t have to change the system; others will have to get used to the new model. Whatever extension is given is welcome,” adds Mr Suriwala. 

One of the changes proposed by SEBI is that funds lying in clients’ accounts have to be squared off at least once in a quarter or month depending on the preference of the client.

But this is going to cause problems. This is because based on the initial deposit of funds and securities with the broker, clients are given an exposure for trading. “A compulsory settlement of funds and securities on a monthly/quarterly basis would result in the clients’ exposures being nullified. The exposure for trading would not be available to the client till such time that the client is able to replenish the funds and securities with the broker. The movement of funds and securities through paper instruments (cheques & Delivery Instruction Slips respectively) would imply that the client can be locked out from the market for two-three days. This would be the transit time required by the client to receive funds and securities from the broker and submitting it back to the broker for availing further exposure,” said the head of operations of a broking company.

According to SEBI sources, transferring of clients’ funds back to their accounts on a monthly or quarterly basis cannot be implemented so easily by the brokers and the watchdog is aware of that aspect. After receiving concerns from the brokers’ community, SEBI does not want to retreat from its earlier stand and has settled for an extension of the deadline for three months with exchanges being asked to handle the fallout. — Ravi Samalad