A new rule in India’s stock markets, where brokers are supposed to transfer unused funds back to the client accounts at least once each quarter, has revealed a big mismatch of funds.

The accounts settlement process as mandated by market regulator SEBI kicked in on October 7, the first Friday of the current quarter. During the exercise, it was revealed that while brokers withdrew anywhere between ₹16,500 crore and ₹20,000 crore from the clearing corporation (CCs) of stock exchanges, the actual amount they returned to the clients stood somewhere around ₹25,000-30,000 crore, sources close to the regulator’s office told businessline.

The mismatch has led to doubts that some large brokers were not depositing entire client money with CCs and preserving part of it as liquid float, the sources said.

Due to the spate of broker defaults in the past few years and the episode involving Karvy Broking’s misuse of client collateral, SEBI is against brokers’ collecting excess collateral from clients. In July, SEBI said it had devised the “framework to mitigate the risk of misuse of client funds”. For this reason, SEBI had directed brokers to segregate the money of each client and not club it in a pool account, which started in February. Yet, there are a few brokers who are yet to comply with this rule as well, sources said.

“Starting this October 7, every first Friday of the month, all brokerages must transfer unused funds back to the customer’s bank account as part of the new process. I guess it will be more than ₹25,000 crore across the industry. The regulation is kind of unique to India. In most countries, brokers, like banks, can hold unused funds forever & also use them for working capital requirements. In India, client funds can only be used for that customer’s trades after all the regulatory change. It would be hit on broker income from float,” Nithin Kamath, CEO and Founder of Zerodha, Tweeted on October 6.

A regulatory official said the mismatch could lead to further tightening of norms by SEBI to curb broker handling of client money. However, a large retail broker said the mismatch could be mainly because brokers had started returning client money before Friday and hence may not have deposited with the CCs. Otherwise, since brokers have started daily reporting on client collateral, the scope for malpractices has reduced.

Even though last Friday’s settlement happened smoothly, brokers fear that they have a few issues to manage. It included operational risks of sending large amounts in one single day, the requirement of higher working capital, especially on Monday following Friday’s account settlement hit on float income, etc. Also, payment gateways settle funds with brokers on today plus one basis. So, if a broker allows clients to trade instantly with funds transferred using payment gateway, the broker’s own capital is blocked.

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