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SEBI considering strengthening settlement norms

Captial markets regulator wants to ensure that accounts of all clients be made nil once in 30 or 90 days in the books of the stockbrokers, depending upon the preference of clients. It has already sought the feedback from various stakeholders.

October 29, 2020 / 01:36 PM IST

The Securities and Exchange Board of India (SEBI) is considering strengthening the settlement norms in the equity segment, sources said.

The SEBI moves comes in the backdrop of the Anugrah Broking default scam, where clients’ money has been lying with the broker for years. SEBI has also received several complaints against one large brokerage for transferring client money into liquid funds just before the settlement dates.

“SEBI had the sought the views of brokers and other stakeholders last month,” a source said.

“It is understood that SEBI has flagged out exchange officials for introducing norms to ensure that accounts of all clients be made nil once in 30 or 90 days in the books of the stockbrokers, depending upon the preference of clients,” a source told Moneycontrol.

A source close to development told Moneycontrol: “SEBI may allow to give securities and fixed deposit of banks as an option for margin for open position of trade, especially in the derivatives segment”.


Currently, Clearing Corporations norms insist that at least 50 percent of the margins placed by stockbrokers should be in the form of cash or cash equivalent.

The periodic settlement system requires brokers to return excess funds and securities to clients. It was introduced on December 3, 2009.

However, if the client debits the account, it is also considered settlement. Further, 225 percent of the margin dues and an additional amount of up to Rs 10,000 could be retained by the broker, subject to client consent.

For example, if a client has credit balance of Rs 1 crore with the broker, and margin dues on open positions of Rs 10 lakh, the broker can hold back up to Rs 22.5 lakh, and has to compulsorily return the remaining Rs 77.5 lakh to the client as settlement.

SEBI is now toying with the idea of making the account nil and not permitting debit balances as settlement. The limit of Rs 10,000 is also proposed to be done away with.

Mixed reaction from brokers

The proposal has led to mixed reaction from the broking community. A majority of brokers are unperturbed as they settle the client account periodically and these are seen as minor tweaks to existing norms. However, another section is disturbed for a different reason.

“Clients get daily updates of their positions and ledger balance. If any broker is not giving them their money, they can jolly well complain to the authorities. If clients don’t trade, anyways we are supposed to return the money,” one broker said.

“If the client is in debit and does not pay up, are you going to penalise the broker for not squaring up the client position? If we square up, the client complains. If we don’t, SEBI penalises. How does one handle this?”

Clients place both cash and securities as margin with the broker, who, in turn. places both with the Clearing Corporation. Brokers need to withdraw the funds form the Clearing Corporation, give it to the clients and then take the money back the next day and reverse the process. This will need to be done at each settlement.

An office-bearer of a brokers’ association said: “I believe that SEBI has got its heart in the right place. As long as clients are not inconvenienced in their trading experience, we will support the SEBI proposals. The pledge- repledge system for example has been amazing in identifying the black sheep in the market. These bad actors deserve exemplary punishment for tarnishing the image of the entire community. Monitoring of funds is also essential, and brokers have never objected in any measures that increase transparency.”

An Association of National Exchanges Members of India (ANMI) representative told Moneycontrol: “There should not be any penal provisions on brokers, who, on account of default or delay from the client’s side, is unable to collect the debit balance from the client.

“At present, intermediaries are already settling quarterly credit balances of clients after retaining Rs 10,000 as per mandate. There should not be any change in the extent regulations of the settling of credit balances where the market/ broker’s interest is safeguarded by retaining certain amounts of margins on open positions in any of the segment, or unsettled buy and sale transactions, threshold of permissible limits for smooth operations”.

Narinder Wadhwa, President of Commodity Participants Association of India, told Moneycontrol: “Yes, there are a number of cases of defaults by brokers. But it is more because of misuse of clients’ securities. Capital market is a place which provides liquidity. Returning money to clients every quarter is not a good idea. We have observed that once money goes out of the system, it is very difficult to bring it back. Moreover, there are stringent compliances and daily and monthly reporting by brokers. So, misuse of funds is difficult and unlikely.”

Market experts feel SEBI should tighten the rules to boost investor confidence. “If any broker play mischief with the retail investors, it shatters the confidence of the whole market,” one expert said.

 What is Anugrah Broking scam? 

Anugrah Broking had defaulted on client money worth around Rs 200-300 crore. It was promising a fixed return around 2 percent per month, and keeping cash margins in their books, which they were required to return to investors on a quarterly basis.

The bulk of investors in Anugrah have come through an associate firm called Teji Mandi Analytics, which was apparently running a derivatives portfolio of over Rs 1,000 crore, like a Ponzi scheme with assured monthly returns, reports had said.

Tarun Sharma
first published: Oct 29, 2020 01:34 pm
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