After the finance minister P Chidambaram said last week that India was not ready for complex financial products, the capital market regulator on Monday said brokers should ensure fair dealing with investors when making recommendations or accepting orders for derivative contracts and new financial products. Sebi said as new peroducts are introduced from time to time in the market, it is imperative that brokers make every effort to familiarise themselves with each investor?s financial situation, trading experience and ability to meet the risks involved with such products and to make efforts to make customers (read investors) aware of the pertinent information regarding such products.
Sebi also proposed for the first time certain minimum net worth requirement norms (around Rs 5 Lakh) for an investor to trade in the derivatives segment. A net worth certificate from a practicing chartered accountant (CA) or acknowlodgement for income tax return filed should be accepted in this regard. Sebi has also proposed that while registering any client for derivaties segment, apart from signing a risk disclosure document, the trading also should ensure that adequate training vis-a-vis risk associated (including margin requiremenr) with it is imparted to the clients. Sebi said, brokers should not encourage or induce excessive trading or speculative activity with a client that is not in accordance with the objectives, risk appetite and financial situation of the client involved.
Sebi has proposed these above mentioned and slew of more policy changes with respect to broker-client relationship in a discussion paper, on which public comments have been invited.
Commenting on the Sebi?s slew of suggestions, Rajesh, Vahedi, director, Cross Seas Securities, said, ?Sebi should simplify the procedures and let risk management be the function of broker?s relations hip with his clients. And, if in the process, some brokerages and/or clients go bust, its healthy thing to clean up the system in a natural manner.?
On the issue of conflicts of interest, Sebi said, brokers must maintain a Chinese wall among its various activities such as proprietory trading, investment banking, research etc. No broker may directly or indirectly offer favourable research or a specific price target to a company as consideration or inducement for the receipt of usiness or compensation. Sebi also wants research analyst tracking the stock not to have any exposure in that stock 30 days prior to and five days after the publication of report.