Stock exchanges: Experts question direct action against clients

In a rare move, the National Stock Exchange (NSE) has sought undertakings directly from investors and traders to furnish their bank statements. NSE has cautioned the clients of a few brokers that if they did not furnish the documents then they may face action under the SEBI (Securities and Exchange Board of India) Act.

Experts say that exchanges like the NSE and BSE cannot compel clients of brokers to sign any such undertaking since there is no provision to take direct action against them. It has become a standard practice of the NSE to seek bank statements from clients whenever it investigates brokers, sources said. Business Line is in possession of one such undertaking.

Dealings between brokers and clients are subject to a contractual agreement between them. The exchange has no direct jurisdiction over the clients of a broker. According to a former board member of SEBI, the powers under SEBI Act and regulations are vested in the SEBI Board, which delegates them to SEBI officials.

“An exchange has powers to regulate its members but not their clients. You would not see exchanges punishing clients for any abusive trading. Therefore, exchanges invoking these powers while dealing with clients of members is totally illegal and ill-advised. It sets a bad precedent,” a former board member of SEBI said.

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A former SEBI official said, “The million-dollar question is whether the exchanges have powers to investigate all aspects of a client’s finances in general. They don’t have such statutory powers and they are infringing on the Right to Privacy.”

There is no precedent of an exchange taking direct action against the clients of brokers. But the clients have the right, under the SEBI Act, to complain against a broker. Exchanges in India have to follow their by-laws and have jurisdiction over member brokers.

Brokers have been using NSE’s undertaking to dig out the personal financial details of clients, and sometimes misusing them too, the sources said.

When contacted, an NSE spokesperson said: “During the regular course of examining the trading activity of clients, Exchange seeks bank statements of the clients from the Trading Member. In order to ensure that all the bank statements are submitted by the clients, the attached undertaking is required to be signed by the client. This exercise is to ensure correctness and completeness of information for the purposes of examination of trading activity.”

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