Upset over stiff penalties, brokers knock at the doors of exchanges, SEBI

Domestic brokers have locked horns with the National Stock Exchange of India (NSE) on the issue of recurrent penalties being levied by the bourse.

Brokers have been on the receiving end of flat penalties ranging from ₹ one lakh to ₹ five lakh on a host of issues related to fund allocation, short margin penalties, upstream-downstream management of client funds, bank balance monitoring, and other reporting requirements.

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Meeting with SEBI

Several brokers recently met with the exchange to air their grievances, said three people in the know. The Association of National Exchanges Members of India (ANMI), an industry body, has separately written to the exchange on the same. On Tuesday, brokers met the Securities and Exchange Board of India, which has given verbal assurances on redressing some of the issues, said a person familiar with the matter.

“The cumulative weight of these penalties has been daunting for the brokers as they strive to survive in the fiercely competitive financial landscape,” said a senior broking official.

There could be instances when brokers face genuine IT-related issues, are unable to upload the required files on time, or capture the amounts for margin penalty correctly, said another broker. The timelines for meeting some of the new regulations are very, very short, and there could be delays in meeting them. Relaxations ought to be given by the exchanges and the regulator in all such cases, he said.

SEBI has mandated the upstreaming of all client funds by the stock brokers to clearing corporations as of September 1. The former are not allowed to retain clients’ funds on an end-of-day basis. The clients may request the release of funds during the day, referred to as downstreaming.

Margin penalty

The margin penalty is a fee charged when a trading account does not have enough funds to cover the required margin. Clearing corporations capture the segment-wise intra-day trading positions of brokers and impose a penalty if there is a margin shortfall.

“Brokers have made a compelling representation to the NSE (and SEBI), urging a reconsideration of the punitive measures. In response, the NSE is now thinking about a potential respite and considering the possibility of reevaluating and potentially deferring upstream-downstream penalties for a quarter as the sums involved are significant,” said the first broker quoted above.

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For instance, violations above ₹10 crore attract a flat penalty of ₹5 lakh in cases of upstreaming and downstreaming of client money.

An email sent to NSE and SEBI did not get a response. An ANMI spokesperson declined to comment on the matter.

“Broker associations had a fruitful discussion with the regulator, which has assured them that the issue of upstreaming and KRA mandates will be relooked at,” said an industry official.

Clients are not allowed to trade if KYC is not verified. Risks during the account opening process include submission of incomplete KYC forms, fake information, and non-updation of information. The common irregularities observed among stock brokers include a lack of ‘in-person verification’, a copy of KYC and Rights and Obligations not provided to clients, or proof of dispatch not maintained.

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