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Virendra Verma

Mumbai , May 30

THE stock broking business of regional stock exchange (RSE) subsidiaries is likely to take a hit from next month.

This is due to a new norm that will be implemented by SEBI from June barring the RSE members from dealing directly with clients.

RSEs contribute around 5-6 per cent of daily turnover of BSE and NSE though they do not contribute much business on NSE's derivatives market segment.

Around 18-20 RSEs have floated their own subsidiary companies and taken membership of BSE and NSE to facilitate trading by its member brokers. The RSE members have become registered sub-brokers of this subsidiary and have been carrying out trading for their clients, issuing contracts and other compliances.

Earlier, in March this year, SEBI had exempted RSE subsidiaries from the regulation, while asking members of BSE and NSE to abide with this norm.

Speaking to Business Line, the Federation of Indian Stock Exchanges (the body representative of RSEs) Chairman, Mr V. Ramu Sharma, said, "The new circular of SEBI issued in May would affect the business of RSE members as the clients would have to deal with the subsidiaries of RSEs instead of the sub-brokers."

The big brokers, who are members of BSE and NSE, would benefit from this loss of business, he said.

SEBI officials were not available for comment on the rationale for making this reversal in stance in a period of only two months.

"SEBI has said that there cannot be dual systems, " Mr Sharma said.

A member of an RSE said: "Clients and sub-brokers have developed a one-to-one relationship over many years; and if the clients are to directly deal with RSEs, this personal touch will be lost and they may opt to deal with some other brokers instead of the stock exchange."

Moreover, the subsidiaries of RSEs do not have the necessary infrastructure and expertise to handle high number of retail clients, he said.

"At one stroke this eliminates 3,000-odd sub-brokers," he said, adding that once the RSE brokers are out of this business, reviving RSEs will become difficult.

However, some brokers said the uniform rule was made on account of stock price manipulation and lack of compliance by the clients and sub-brokers of RSEs.

In April, the Finance Minister, Mr P Chidambaram, had said at a function organised by stockbrokers in Mumbai: "There are some disturbing news about some unscrupulous persons using RSEs and sub-brokers. In fact, a few people who may have been debarred from broking perhaps are operating from behind the scenes using sub-brokers and RSEs. If these suspicions are confirmed, stringent actions will have to be taken against these persons."

He went on to say, "If this means that some regional stock exchanges will have to be shut down, so be it. If this means that sub-brokers will have to work in restricted conditions, only as franchisees of brokers, then so is it."

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