Why Indian brokers are crying foul

The capital market regulator, Securities and Exchange Board of India, has asked stockbrokers to come out with a status report on the implementation of the new client-broker agreement, which becomes effective from 30 June.

What is the agreement about? The agreement requires brokers to keep a record of regulatory action taken against clients and also maintain a record of people introducing new clients, among others.

But what has caused a lot of heartburn among the brokers is the clause that makes it mandatory for the broking firm to settle the funds and securities at the end of the calendar quarter/month.

Brokers say this would lead to operational and systemic complexities, or plainly, it would not be practically possible to implement it.

The difficulties. A good number of clients of these broking houses are based in tier-II and tier-III towns.

Says Santanu Syam, executive director-operations, Angel Broking: "Not all bank branches in remote towns are networked through core banking. When we draw a cheque at the end of the month in favour of clients based in remote towns, it takes two days to reach them through mail and the funds are deposited to their accounts with a lag of at least two more days after they deposit the cheque. Further, if they want to place their next trade, it will take at least three days more for their funds to reach us."

This would make it practically impossible for such clients to trade in the first week of every month. He adds that such norms work in locations such as Singapore and Hong Kong because most of the banking happens electronically there, whereas in India, most of the banking is still paper-based, involving drawing cheques or depositing them manually.

Further, derivatives positions often are carried forward to the following months. So, brokers need to maintain a margin even at the month-end to protect their interests against the possibility of client's positions incurring losses in the derivatives segment.

Brokers say that given the current banking infrastructure, this kind of huge payout of funds and bringing them back in a timely manner would be difficult.

What now? The Association of National Exchange Members of India, a broker body, has made a representation to the market regulator in this regard.

The Sebi's rationale behind introducing such a norm is to ensure that clients' funds are not utilised for proprietary trades by brokers.

Some brokers have, therefore, suggested that Sebi could make it mandatory for them (brokers) to issue a monthly statement of trading account of each of the clients reflecting all the transactions executed by the client during the month and the available cash balance at the month-end.