SEBI’s new rules to make brokers pay for defaults

SEBI has come up with new rules that will make the stock and commodity market brokers pay through their nose if they default on the client’s money.

Around 28 brokers have defaulted in the past few years and the largest among them being Karvy, BMA Wealth Creators, Anugrah Stock Broking, IndiaNivesh and Allied Financials, among others. In many cases, the stock exchanges have rejected claims citing trivial or unknown rules and procedures, following which clients have had to approach courts leading to long-drawn litigations.

SEBI’s new norms say in 30 trading days from crystallisation of balances, stock exchanges (SEs) or clearing corporations (CCs) will have to endeavour to settle the claims of maximum number of clients by way of interim measures under their supervision, prior to issuing show cause notice (SCN) for declaring the trading member a defaulter. Clients can raise their claim only after the SE has declared the broker as a defaulter and the SE would take their own sweet time doing so. 

Settle small investors first

Now, a broker will have to pay small investors out of available funds and own resources involving movable and immovable assets under the supervision of the SEs. Further, the unencumbered deposits available with the SEs or CCs, after adjusting their dues and maintaining the minimum base capital requirement, will also be utilised for settling the credit balance of investors starting from the smallest amount, SEBI said. 

“Such amount shall be paid in full to all such investors having credit balance up to the amount of ₹25 lakh, subject to availability of funds. Further, investors having credit balance of more than ₹25 lakh shall be paid on pro-rata basis from the remaining funds,” SEBI said.

Also, any surplus available with any SEs or CCs will be utilised for settling the credit balances of clients with respect to other SEs. Moreover, bank guarantees of the TM will be invoked and also the fixed deposit receipts will be encashed for utilisation.

Settlement proof

According to the regulator, SEs or CC may settle such clients in tranches. For this purpose, the client balances will be netted across exchanges to arrive at the final credit balance due to such clients. Brokers will have to furnish the proof of payment to the clients, to the SEs. In this regard, the related parties of the TM will not be considered for settlement, for which the TM will have to provide an undertaking to the SEs or CC.

Further, the TM will have to provide indemnity to the SEs to make available the funds to meet any shortfall in meeting investors’ claims. Clients withdrawing their claim will have to submit an unconditional withdrawal letter to the SEs. The modified framework will come into force with immediate effect, SEBI said.