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The securities market has been marred by several frauds and scams over the years, with many of them involving brokers. While all those unsavoury episodes dented the trust of investors in varying degrees, malevolence by big, well-established brokerages like Karvy, and that too after three decades of reforms in the markets, generated serious shocks and called for urgent rethinking on enhancing the integrity of the broking industry. It prompted SEBI to take several steps — insulating client funds and securities; shortening settlement period; introducing a new concept of Qualified Stock Brokers (QSBs), etc., — through amending the SEBI (Stock Brokers) Regulations 1992 in early 2023.
On February 6, 2023, SEBI issued a circular on ‘Enhanced obligations and responsibilities on Qualified Stock Brokers (QSBs)’. The criteria for designating a stock broker as QSB were based on the total number of active clients available, the total assets of the clients, the trading volume of the stockbroker, and the end-of-day margin obligations of all clients of a stock broker. Based on these criteria, exchanges issued the first list of 15 stock brokers on March 3, 2023, designating them as QSBs.
After a year’s experience with the QSB framework, SEBI, through a Circular on March 11, 2024, added three more criteria to the QSB framework and extended the QSB status to more stock brokers. The new criteria/parameters are compliance score, grievance redressal score and proprietary trading volumes of the stockbroker.
The values for each of the parameters is calculated on an annual basis and the list of QSBs released by the stock exchanges in consultation with SEBI. Further, SEBI also welcomed the stock brokers to voluntarily designate as QSBs in order to encourage them to upgrade their systems and practices in tune with the QSB parameters.
Changing contours
Brokers are key players in the securities market. They perform crucial roles in facilitating transactions, providing investment advisory services, ensuring compliance with regulatory norms and in promoting the integrity of the market. The industry has witnessed significant changes over time, particularly after the introduction of e-trading in 1995, with NSE being the first e-trading stock exchange. These changes have led to substantial shifts in the rules and regulations for brokers, reflecting the evolving nature of the industry.
The Indian securities markets, which were initiated by brokers through the Native Share and Stockbrokers Association in 1875, have a rich historical significance. Initially, brokers held a dominant position in the market and were even part of the management of the Bombay Stock Exchange.
However, with the establishment of SEBI and subsequent demutualisation of stock exchanges, brokers transitioned into being members of the stock exchange, separate from its management. This shift, coupled with technological advancements and increased compliance requirements, led to the closure of many broker houses. Today, brokers are registered members of stock exchange/s and need to register separately for each segment they operate in. The number of brokers has seen a significant decline over the years. Authors’ calculations based on data from SEBI Handbook show that the compounded annual growth rate (CAGR) for the 10- and 5-year period for brokers in the cash segment declined by 9 per cent and 4 per cent, respectively. The equity derivatives brokers declined by 3 per cent and 1 per cent; and currency derivatives by 3 per cent and 3 per cent, respectively, for the same period.
In addition, the brokerage industry itself evolved over-time in terms of shifting from physical to e-platform models, full-service to specialisation, etc. These trends have also resulted in substantial concentration of volume and value of trading with a few brokers. As of end 2023, the top 10 brokers had a market share of 53 per cent and the top 100 brokers account for 82 per cent, leaving the rest as competitive fringes.
Despite the decline in the number of brokers, participation of the investors and trading volumes have gone up substantially over the years, particularly in the last three years.
Further, the debt segment has seen a surge in brokers, with a 25 per cent CAGR over five years. This indicates that the participation in the debt market, both by the intermediaries and investors, is increasing. This is a much awaited positive sign for the development of the Indian financial market.
The recent inclusion of Government of India bonds in the Emerging Markets Bond Indices will lead to more foreign inflows and greater liquidity in the debt market.
The road ahead
Expanding and refining the QSB framework is a major positive step that will increase investors’ confidence and improve corporate governance and market integrity. However, over-ambition may also result in over-regulation. Qualitative criteria such as grievance redressal and compliance scores need to be clearly objectified so as to avoid any ambiguity and tick-boxing.
Improving and improvising the conduct of the broking industry through regulatory steps is a delicate task, but one that can pay rich dividends in terms of improving the securities market ecosystem.
Nair is former Director of National Institute of Securities Markets, and Panda is Assistant Professor at IIM Raipur
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