SEBI To Bring Stricter Qualifying Rules For Sub-Brokers, Brokers To Face Default Liabilities — Exclusive

The Securities and Exchange Board of India is preparing a proposal of stricter eligibility norms for Authorised Persons, who operate on behalf of brokers. The upcoming regulations will impose increased liability on brokers for defaults made by their sub-brokers, according to people familiar with the matter.

Under the new rules, SEBI plans to raise the bar for APs by requiring them to hold at least a graduate degree, and have at least three years of market experience. It is also being considered that if someone does not possess a graduation degree, the number of years of market experience will have to be increased. 

The regulator may also bring a qualifying exam that the sub-brokers will have to pass to be recognised.  

The move is being made to ensure that brokers are better equipped with knowledgeable representatives, reducing the risks posed by sub-brokers with insufficient qualifications or experience, the people quoted above said. Brokers, in turn, will be held fully accountable for any defaults made by their APs.

The broker industry, however, is divided on the clause of full liability for the actions of the APs, as per people in the industry, who spoke on the condition of anonymity. While more qualified APs are the need of the hour, the brokerages that drive significant business from APs may not be in favour of accepting full liability, a person told NDTV Profit.

The decision to implement these changes follows a dramatic increase in the number of demat accounts over the last few years and instances of false promises being made to the investors. As per the people that NDTV Profit spoke to, this shift in demat accounts is also associated with the exuberance in the F&O segment.

The consistent surge in demat accounts can be seen in the data from Motilal Oswal Financial Services, Central Depository Services Ltd., and National Securities Depository Ltd.

Demat accounts surged from 130 million in September 2023 to 179 million in October 2024.

With more people entering the market, SEBI is focused on ensuring that these investors are protected from misleading practices, often propagated by some APs making false promises or engaging in unethical behavior. By tightening the criteria for APs, SEBI aims to ensure that sub-brokers are adequately equipped to serve investors, ultimately contributing to a more transparent and secure trading environment.

As the new regulations take shape, they will replace the current eligibility criteria for becoming an Authorised Person, which includes a minimum of a 10th-grade education, a good reputation, and the necessary capital or infrastructure to handle trading responsibilities. Additionally, applicants must be Indian residents and not have been convicted under the Indian Penal Code.

The SEBI circular is expected to focus on areas like NISM certification, in addition to educational qualifications, stricter checks on individuals, and higher security deposits for brokers, people familiar with the matter told NDTV Profit.

Brokers have mixed reactions to SEBI's proposal making them liable for defaults by Authorised Persons, but many welcome the move to tighten AP qualifications and improve regulatory compliance, as per Vamsi Krishna, chief executive officer of StoxBox.

Nirbhay Vassa, whole time director and chief financial officer of Abans, echoed this. This could lead to a need for advanced monitoring systems to mitigate risks.

Suggestions from the industry include establishing clearer boundaries for liability, introducing co-liability mechanisms for APs, and creating regulatory tools that support brokers in managing and monitoring their AP networks effectively, Vassa mentioned.

While these are welcome measures, regulators must also weigh their impact on the younger generation aspiring to enter the broking business, said Praveen Naidu, head of partnership, Mirae Asset Capital Markets.

Higher deposit norms, for instance, may discourage new entrants, particularly where broking yields have significantly declined, making the business challenging, he said.