Exchanges, in consultation with market regulator Securities and Exchange Board of India (SEBI), are soon likely to finalise the new regulations for sub-brokers or so called authorised persons of brokers. As per the industry sources, a working group on the issue had submitted the report and exchanges are expected to issue consultation paper soon.
As per one source, “The revised norms will likely include net worth or deposit criteria, revised minimum education and NISM certification, stringent due diligence, and also liability on the broker in case loss is caused to investor due to acts of authorised person”.
As per the sources, in the consultation paper, exchanges are likely to come up with two separate categories of authorised persons, one who earn only referral fee from brokers and the others who provide full broking service to brokers as agents of brokers. Those with referral service only will require lower deposit or net worth criteria. The others with full service may be asked for higher deposit or net worth criteria. Even in this category, deposit or net worth may vary according to the number of clients they service. If higher number of customers are there then high deposit or net worth may be prescribed. A strict background check may also be prescribed.
On the educational, experience criteria it was suggested to that a minimum qualification of graduate with 3 years of experience or if 10th pass then minimum 10 years of experience may be should be there. But as regulator's focus is on Ease of Doing Business, then it may be diluted if market participants are against it. The existing authorised persons who may not be able to full the revised criteria may be asked to clear the NISM 7 series exam. A reasonable timeline to clear this exam will be suggested in consultation paper. In NISM 7 series exam understanding about basics of the market, risk management, broking operations, clearing and settlement process, investor grievance resolution etc. is tested.
Strict monitoring mechanism for authorised persons will be proposed in the consultation paper. Brokers will have to ensure that trading terminals are not misused and located at the address as informed to the exchanges. In the past, SEBI and exchanges have found misuse of trading terminals, in some cases terminals were found in other cities instead of the address shared to the exchanges. Alert system for brokers based on sudden increase or decrease in volume at the authorised persons terminal is also likely to be prescribed. Brokers will be advised to raise queries in case of unusual activities at the authorized persons terminals.
Exchanges will also retain in regulations that brokers will be held liable if loss is caused to investor due to acts of authorised persons. This is still part of the regulation but exchanges may come up with more effective and clearer clause. Existing circular says broker shall be responsible for all acts of omission and commission of the authorised person. All acts of omissions and commission of the authorised person shall be deemed to be that of the broker.
The capping of fee for referral fee is likely to be out of the revised regulation. As per another source, aware of the discussion, “the regulator is against the capping of fee and limit on how much authorized person one broker can have, as this may also limit the growth of the authorised persons as well as brokers”. One exchange had earlier issued a circular on the capping of the fee but later it was withdrawn after consultation with SEBI.
The issue of uniform regulation across exchanges is also likely to be part of the consultation paper. Currently all exchanges have their own norms, though largely aligned with the SEBIs intent but operationally are somewhat different.
An email sent to SEBI seeking comments on the proposed regulation did not elicit any response.
With the increasing number of new investors, the complaints against authorized persons are increasing, especially of guaranteeing return on market bets, selling unregulated products etc. To deal with this issue SEBI, exchanges were in discussion to review the regulation concerning authorised persons.
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