Sebi mulls prudential governance norms for stock brokers

Written by PTI | New Delhi | Updated: Sep 21 2014, 20:24pm hrs
After prescribing a new Corporate Governance Code for listed companies, capital markets watchdog Sebi is now mulling over a new set of Prudential Governance Norms for stock brokers to safeguard investors' interest.

The proposed norms, which are currently at draft stage and are going through consultations, would considerably enhance the disclosure requirements by stock brokers and can subject them to tightened regulations with regard to related party transactions and audit of their books and other dealings.

Besides, the brokers may also be required to put in place a whistle-blower mechanism and frame an effective 'code of conduct' for their directors and senior management personnel, in line with similar norms for listed companies as prescribed by Sebi and in the new Companies Act, sources said.

These norms have been proposed by Sebi to ensure that any adverse impact on the interest on investors as well as on the integrity of securities markets can be avoided in the event of any lapses at the end of stock broker.

Sebi is aiming to "minimise/prevent occurrence of circumstances leading to default in making payments by stock brokers to stock exchanges or clients due to lack of due diligence in their risk management system, due to mis-management leading to instability or failure in operations of stock broker including insolvency etc" with these norms.

The new corporate governance norms for listed companies are coming into effect from October 1. However, Sebi recently relaxed some provisions after representations from the industry bodies and the government and it has given time till April 1, 2015 for a key provision of having minimum one woman director on the boards of listed companies.

A senior official said that the brokers have also already begun making representations before the regulator with concerns that any tightening of corporate governance norms could hurt their business due to high compliance costs.

The brokers are arguing that they are already operating in a highly regulated business and the new Companies Act has already provided for significant tightening of norms for the corporate brokerage firms.

Among others, the proposed norms would require brokers to submit their audited annual reports within 60 days of end of a financial year and a half-yearly networth certificate within two months of the end of a half-year to the stock exchange.

The quarterly financial results would be required to be submitted within 45 days of end of each quarter, while annual audit would need to be done by "an independent, competent and qualified auditor".

No stock broker would be allowed to re-appoint an individual as an auditor for more than one term for five consecutive years. In case of an audit firm, it can be appointed for maximum two terms of five consecutive terms.

In their periodic financial disclosures, the brokers would have to separately mention the advance or margins received from their clients, as also any advance or loans given by them.

Details of loans, advances or investments in subsidiaries, associates or group companies, as also all material information about their financial position, performance, governance and ownership, would need specific disclosures.

The brokers would also need to disclose all exceptional income and expenditure, along with auditors' observations, while their quarterly and annual financial results would need to be approved by the board of director and CEO/CFO along with a certification of "absence of falsity or omission".

The board of directors would need to lay down a code of conduct for all board members and senior management of the company, and also devise an effective whistle blower mechanism enabling all stakeholders, including employees, to freely communicate their concerns about any illegal or unethical practices.

The board would have to ensure that the interest of a whistle-blower is not prejudicially affected.

With regard to investor grievance, a compliance officer would need to ensure that they are redressed in a stipulated manner and within a given timeline. The status of all investor complaints would need to be reviewed and analysed every six months and corrective steps would be required to be taken by the compliance officer to "minimise recurrence in future".

The CEO of the company would need to certify that "there are no transaction entered into by the stock broker during the year which are fraudulent, illegal or violating the stock broker's code of conduct".

The certification would also include that the auditor has been informed about any significant changes in the internal control over financial reporting or in accounting policies, as also about the "instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee".