Less cumbersome inspections likely for brokers as SEBI discussing proposal with exchanges: Sources

Brokers had raised the issue of disruption in their routine operations by frequent inspections.

Brokers may have less disruptive inspection visits at their offices in future as market regulator Securities and Exchange Board of India (SEBI) is in talks with broker associations, exchanges, clearing corporations and depositories etc., people familiar with the discussions said. Brokers had raised the issue of disruption in their routine operations by frequent inspections. As per one source, aware of the ongoing discussion, said, “It's being discussed if one MII of that vertical visits for routine inspection, then another may not visit for the same reason, but share its findings with other MII." Exchanges, clearing corporations, depositories are called MIIs or market infrastructure institutions and are also first line regulators under SEBI regulations.

Like, if exchange A carries an inspection of a broker it will share its findings with exchange B and vice versa. Similar mechanism for depositories and clearing corporations also can be thought of. The brokers were pitching defined number of inspections as well as advance calendar of inspections from MIIs. They are also pitching for reduced number of visits. Though SEBI and exchanges are not agreeing to putting a number on inspection visits but there is a discussion going on how to make it less inconvenient. SEBI and exchanges believe that on account of specific inquiry, inputs, news alerts etc. the number of visits cannot be fixed.

Brokers are expected to comply not only with the SEBI’s regulations but also exchange circulars, bylaws, depositories regulations, clear corporation regulations. Some times each exchange, clearing corporation or depository’s representative visit separately.

One broking industry insider said, “Lately, the trend of joint inspection of MIIs has started, sometimes a large contingent visits office and it becomes difficult to manage so many people at a smaller office." SEBI and other MIIs are working to further streamline it. The focus is shifting to off site inspections, as exchanges get all the data online. Another industry insider on the condition of anonymity said, “Largely things at broker end are getting streamlined after big regulatory changes in recent years, especially the settlement part, but many a times other issues like KYC, UCC mismatch, technology and cyber safety etc. are observed”.

Routine inspections are carried by exchanges to ascertain if all the prescribed rules are being followed by brokers, to ensure market integrity and investor protection. It may include inspection of books and accounts, know your customer (KYC) norms, client’s funds usage, if margins are properly collected from clients, if call data records are being maintained, broker is operating from the same premise as informed to the exchange or some other location, sufficient measures are there for cyber safety and also if authorised person or sub-broker is compliant or not etc.

Exchanges and SEBI also conduct thematic exercises like if grievances are properly dealt with or quality of call records is useful or not. SEBI and exchanges also conduct surprise visits at branches of brokers and sub-brokers.

E-mail sent to SEBI seeking comments on the proposal did not elicit any response.