The Securities and Exchange Board of India (Sebi) has proposed a new, stricter policy for improving the sales practices of stock brokers. The proposed policy has put a slew of obligations on the brokers with respect to their non-institutional clients, or retail investors.
Sebi wants to strengthen the know your client (KYC) norms for retail investors. It wants retail investors to know more about the brokers with whom they are entering into a trading relationship. Sebi also wants brokers to know more about their clients, their financial standings and, based on these details, the broker should hand the clients investment advice.
The capital market regulator has proposed this policy following the suggestions it received. In a discussion paper posted on its website on Monday, Sebi said the matter was discussed with the stock exchanges (SEs). There is a need, it said, to enhance the regulatory framework and also to create a sense of awareness among investors. Based on the suggestions received from SEs, it is proposed that brokers adopt the guidelines prescribed in this paper. Sebi has invited public comments in this regard till April 15, before taking any final decision on the matter.
According to sources, Sebi?s proposed move comes in the wake of suggestions made by the parliamentary panel. The panel was formed following the meltdown in the stock market from January this year. The benchmark indices have corrected more than 30% from their peaks and it was alleged that during most of the corrections, it was the retail investors? positions that were squared off by the brokers, even if they were maintaining proper margins. This resulted in scores of innocent investors losing heavily for no fault of theirs. This was brought to the notice of the Parliamentary panel. Following this, the panel took up the issue and the regulator convened a series of meetings with SEs, where the possibility of the proposed policy was discussed in detail, sources said.
On strengthening the KYC norms, Sebi?s policy says the exposure limit set by the broker for its clients should be commensurate with the financial detail of the clients reported in the KYC. The said limit must be specified in the KYC and strictly adhered to or the details in the KYC must be suitably modified. It says only persons with financial standing at least comparable to that of the client he is introducing should be accepted as the introducer.
Brokers agitated with these proposals reacted to this by saying that Sebi has set a new standard by introducing this proposal. Nowhere in the world such practices exist, brokers argued. ?The world over, the business of broking is nameless and faceless and it is system-driven. As a regulator, Sebi should concentrate more on automation,? an NSE broker said.
Sebi said brokers are duty-bound to provide suitable investment advice for clients. The basis of sales efforts should reasonably represent fair treatment for the persons towards whom sales efforts are directed.
