The Hindu Business Line : `Brokers don't toe SEBI line on payment, deliveries'

DESPITE a clear diktat from the Securities and Exchange Board of India barring routing of payment and delivery of shares to investors through sub-brokers, this practice is continuing unabated while the stock exchanges and the regulator are at a loss on how to stop it.

Earlier, routing of payment and delivery of shares to clients through sub-brokers was allowed. However, last year, for the sake of investor protection and transparency, SEBI decided to follow the model in vogue in the insurance sector and emulate it in stock trading.

Market sources said that SEBI's efforts have failed to yield results as brokers and sub-brokers are in connivance, leading to increased risk to ordinary investors.

In a typical insurance transaction, the person who buys a policy makes the payment directly to the insurance company and not to the insurance agent. The insurance company, after encashing the cheque, pays the agent his commission. In stock market transactions, however, investors were allowed to issue cheques to sub-brokers as payment for the purchase of shares.

In a circular last year, SEBI had instructed the stock exchanges that "all payments shall be received and made by the brokers from and to clients strictly by `account payee' cheques or demand drafts or by way of direct credit into the bank account through electronic fund transfer or any other mode allowed by the Reserve Bank of India. The brokers shall accept cheques drawn by only the clients and also issue cheques in favour of the clients only for their transactions."

The step, which came into effect from November last, has not found favour with the sub-brokers who are still collecting payments as margins or full costs from the clients and clubbing the transactions while dealing with the main broker. And the brokers also, many of whom are dependent on the sub-brokers for a substantial chunk of their volumes, are preferring to pretend ignorance and so are the exchange authorities, according to market sources.

As a result, these clients are also not being issued contract notes by the brokers but are getting only a confirmation memo issued by the sub-broker, which is not recognised by the market regulator as a proof of transaction.

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`Brokers don't toe SEBI line on payment, deliveries'