SEBI may soon implement stricter norms for brokers to safeguard client money

The Securities and Exchange Board of India (SEBI) plans to revamp the structure of brokers handling client money over the next 3-6 months. Revamping this structure and involving clearing corporations and depositaries would be one of the main agendas of the regulator in the next six months.

The SEBI plan follows many instances of brokers using client money without their knowledge or decamping with funds. SEBI had first discussed a revised structure in 2017 but was not prepared fully for implementation.

Under the revised structure, client money will continue to be kept with depositaries such as NSDL and CDSL and can be transferred to a broker only under the direction of the clearing corporation.

For instance, if there is a loss in a client account, the depositories can transfer the money to brokers only after permission from the clearing corporation. The client will be kept informed through the whole process.

However, if a client has kept a fixed deposit as security, then the existing system will be followed to transfer money.

A SEBI source told Moneycontrol, “We will make this structure like a banking system where client money doesn’t get misused."

Another source in an exchange told Moneycontrol, “SEBI is getting a large number of complaint of misusing client money by brokers. Recently, in the IL&FS case also one of the Delhi-based brokerage house used client money for its own purpose to clear dues at the time of losses."

Another senior SEBI official said, “This would be one of the greatest reform in the capital market to increase the confidence of investor who traded through brokers."

In the past, we have seen many brokers such as Unicorn, Kasa finvest and Amrapali that allegedly misused client money. In such cases, the investor protection fund is the last resort for the investor to get back the money. However, even the fund has a cap of Rs 15 lakh.