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Our Bureau

Mumbai, Aug. 22 The market regulator, Securities and Exchange Board of India, has asked the stock exchanges to direct their brokers and clearing members to carry out complete internal audits on a half-yearly basis by independent qualified Chartered Accountants.

The first such audit period would be the half-year ending March 31, 2009, SEBI said in a circular on Friday. Earlier exchanges used to appoint auditors who would check brokers’ books on a random basis, said a broker.

According to a broker, some brokers misrepresent accounts for their own benefit, but with the internal audit made mandatory, all those who fake their profits or losses will find it difficult to do so. There are many leakages and loopholes in the way the brokers function, with the new regulations there will be more transparency in the system, said another broker.

The market regulator will be able to keep a check on whether the brokers are adhering to the KYC norms, following the mandatory margin requirements and other such activities.

There will be more transparency and accountability wherein proprietary trades of brokers are concerned, said marketmen. Importantly, internal auditors would also be more strict about checking margin funding by brokers and sub brokers. Often sub-brokers extend margins that are way above their clients’ credit worthiness warrants.

In choppy market conditions, the market regulator might want to minimise unwarranted risks due to the way some brokers trade and this new regulation will help SEBI curb that menace, said the director of a broking firm based in Mumbai. The market regulator needs to keep a check on questionable activities of marketmen, in such choppy markets, said a broker.

In addition to asking the stock exchanges to bring the new regulation of internal audit to the notice of the member brokers/clearing members and disseminating the same on the Web site, the markets regulator has also asked the stock exchanges to make the necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision immediately. The exchanges should also communicate to SEBI the status of implementation of the new regulation through their monthly development reports.

The audit will cover the scope and efficiency of the internal control system, compliance with the provisions of the SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, SEBI (Stock Brokers and Sub-Brokers) Regulations 1992, circulars issued by SEBI, agreements, KYC requirements, bye-laws of the exchanges, data security and insurance in respect of the operations of stock brokers/clearing members.

More Stories on : Financial Services | Auditing | Regulatory Bodies & Rulings

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