Brokers' penalty structure rationalised but oversight tightened on these key violations

Stricter Norms Over Misuse of Client Funds

In cases where brokers are found using client funds for proprietary trading or where client funds are unavailable, a penalty of 0.07 percent per day of the shortfall amount will be levied for up to two days in a calendar month. If the shortfall continues for more than two days, the penalty will increase to 0.10 percent per day. If the shortfall is not recouped within 30 consecutive days, the matter will be referred to the relevant authority for disciplinary action.

Fine on Misuse of Client Securities

For misuse of client securities or commodities, the exchange will impose a 2 percent penalty on the amount misused, subject to a maximum of Rs 1 lakh on the first instance. For repeat offences, the penalty will rise to 3 percent of the misuse amount, with a maximum cap of Rs 2 lakh.

Non-settlement of Clients’ Accounts

For cases involving non-settlement of client accounts, brokers will face a monetary penalty of 0.5 percent of the unsettled amount, subject to a maximum of Rs 10 lakh. In the event of a repeat offence, the penalty will be escalated by 50 percent, and additional disciplinary actions may be imposed based on the seriousness of the violation. Also, in case of misrepresentation of client ledger balances resulting in misuse or non-settlement of client funds, disciplinary action could be taken such as bar on new clients, suspension or disablement of trading terminals, or even expulsion of the broker may be considered by the exchange.

Wrong and Delayed Payment Charges on Clients

If a broker has incorrectly levied delayed payment charges on clients, the member shall be directed to refund the excess charges collected, along with the imposition of a monetary penalty. In cases where the amount of non-compliance is up to Rs 1 lakh, a penalty of Rs 10,000 shall be levied. For instances where the amount of non-compliance exceeds Rs 1 lakh, a penalty of Rs 25,000 shall be imposed. Brokers will also face action in case they pass the penalty to clients which was applicable on them.

Excess Charges to be Returned to Clients

If a broker is found to have recovered excess Securities Transaction Tax (STT), Commodities Transaction Tax (CTT), stamp duty, or Market Infrastructure Institution (MII) transaction charges from clients, penal and corrective action shall be taken. Where the amount involved is less than 0.1 percent of the total collection or Rs 10,000, whichever is higher, the broker will be advised and directed to refund the excess amount to clients or remit it to the relevant authorities. If the amount involved exceeds Rs 10,000, a penalty equivalent to 100 percent of the excess amount - subject to a maximum cap of Rs 1 lakh - will be imposed along with a direction to refund or remit the excess amount.

Also Read: Sebi bars mutual funds from investing in Pre-IPO placements

Excess Invocation of Pledged Securities

If a trading member invoked client-pledged securities in excess of the client’s obligation to the broker, a monetary penalty shall be imposed. On the first instance, the penalty shall be one percent of the incorrect invocation value, subject to a maximum capping of Rs 1 lakh. For the second and subsequent instances, the penalty shall be 2 percent of the incorrect invocation value, subject to a maximum capping of Rs 2 lakh.

Delay in Releasing Pay Out to Clients

Stock exchanges will impose monetary penalties on brokers for delays in releasing pay-outs of funds, commodities, or securities to clients beyond the specified deadlines. According to the framework, up to two instances of such delay will attract only an advisory, while up to five instances will lead to a penalty of Rs 20,000, and up to ten instances will invite a penalty of Rs 60,000. In cases where the number of delays exceeds ten, the quantum of penalty will be linked to the percentage of total sample instances.

Offering Fixed Return to Clients?

Brokers found offering fixed, assured, or periodic returns to clients, or mobilizing deposits from investors, will face severe disciplinary actions. These may include restrictions on onboarding new clients, suspension or disablement of trading terminals, and even expulsion from the exchange, depending on the gravity of the violation and as determined by the relevant authority.

Failure to Maintain Pre-confirmation Record

If a trading member fails to maintain pre-order confirmation records of trades, the exchange will take penal action based on the nature of the lapse. In cases where the client has provided post-facto confirmation of the trades, the broker will be issued an advisory. In all other cases, a monetary penalty of Rs 10,000 per client, subject to a maximum of Rs 1 lakh, will be imposed. If clients dispute the trades, then the monetary norms applicable to unauthorised trading shall apply. For repeat instances of non-compliance, the penalty will be escalated by 50 percent for the second and subsequent occurrences.

Also Read: Relief for brokers as Sebi rationalises penalties by exchanges as part of ease of business

Other Measures

Some other measures include, brokers executing proprietary trades from unauthorised locations or dealing with clients without a Unique Client Code (UCC) will face penalties starting at Rs 15,000, with escalations for repeat offences.

Failure to display mandatory F&O risk disclosures on websites or apps will attract Rs 10,000 penalty. Incorrect reporting or shortfall in net worth will draw a penalty of 5 percent of the deficit.

Excess pay-out of client funds beyond available balances will result in a warning or up to Rs 25,000 fine. Exchanges may also initiate additional disciplinary action for repeated or serious violations.