Karvy may have defaulted, but all brokers should not be seen with suspicion; these 3 reforms are needed

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Updated: November 28, 2019 1:17:03 PM

Even as Karvy Stock Broking defaulted on clients’ payments worth Rs 2,000 crore, all brokers should not be seen with suspicion, head of a broking firm said.

The capital markets regulator SEBI is active in protecting the interest of investors, Jimeet Modi, Founder & CEO, Samco Securities said.

Even as Karvy Stock Broking defaulted on clients’ payments worth Rs 2,000 crore, all brokers should not be seen with suspicion, head of a broking firm said. The capital markets regulator SEBI is active in protecting the interest of investors, Jimeet Modi, Founder & CEO, Samco Securities told Ashish Pandey of Financial Express Online. Adding, he said that financial, governance and disclosure reforms are needed to plug any loopholes in the system. Reforms affected on these lines would further empower the clients about their broker and enable them to make informed decisions, Jimeet Modi also said in the interview.

Here are the excerpts of the interview:

What’s your take on the current Sensex, Nifty rally? What are your market expectations for the near term?

Nifty and Sensex are currently trading at their all-time highs. But markets have now developed cracks which are visible by the marginal volumes which are not sufficient to keep the markets afloat at these levels. Since there is a wide divergence between the large caps and mid/small caps and large caps are trading at sky-high valuations, there will be a correction in the near term. However, from a long-term perspective, markets are in a bull run.

What’s your take on the Karvy issue?

Since the matter is subjudice we will not comment, however, this episode should not paint all brokers in the same colour. SEBI is proactive and will protect the interest of investors and at the same time formulate rules that such things do not happen in the future.

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Do you think the entire issue may be bad news for the stock market and especially the discount brokers?

The news may not affect the stock market as a whole, but from a safety point of view discount brokers are as safe as any other traditional brokers but they are better placed because they are tech-driven and have more robust compliance following mechanism to take care of all the latest rules and regulations prescribed.

In fact Traditional brokers work on the basis of personal relationships which at times becomes risky because then clients blindly have faith in whatever the broker is doing, however with discount brokers, there is an arms’ length distance while initiating the relationship, to begin with, and generally the client does proper pre background research online before opening the account with a discount broker.     

How can these broker defaults be prevented?

Broker defaults broadly occur to meet the broker’s own financial obligations or genuine fraudulent intent. Now when a broker is involved in proprietary trading or unrelated businesses and if it ends up losing a large sum of money then the financial obligation mounts which cause misuse of securities.  Various reforms that address these loopholes are divided into 3 broad categories – Governance Reforms, Financial Reforms, and Disclosure Reforms.

Governance Reforms – There should be at least one mandatory independent director on the board of a broker entity. This will bring about transparency and will prevent the company from taking any law-defying steps.

Financial Reforms – It should be mandatory to maintain a dynamic capital adequacy ratio not static, with regards to the size of the business of a broking company. Moreover, there has been no change in the net worth requirement of brokers for the past 20 years. This needs to be addressed.

Disclosure Reforms – Brokers should actively disclose any related party transactions done by them with any associates/subsidies/others, proprietary turnover and proprietary gains or losses at regular intervals to all their clients. These details will make them aware of the way their broker is functioning and any red flags can give them the insight to re-evaluate the current relationship with their broker if any. Brokers can also mandatorily disclose annual statements at least on their Company website for clients to know about their financial position.

These reforms if undertaken will empower the clients about their broker and enable them to make informed decisions.

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