Brokers found to be short-changing investors, to face Sebi ire

Amid a large number of investor complaints being received by the NSE for non-receipt of funds and securities against some member brokers, regulator Sebi plans to soon take strict penal action against the wrong-doers after a thorough probe into the matter.

The National Stock Exchange (NSE) has issued a circular to "alert" its members against any non-adherence to norms about timely settlement of funds and securities in the investor accounts, after its inspections and internal audits found some of them were not "diligently adhering" to such guidelines.

"Sebi has now decided to thoroughly look into the matter to ensure that investors are not taken for a ride and their grievances are addressed effectively", a senior official said.

Noting that such inadequacy of funds indicated "serious liquidity concerns" on the part of the concerned brokers, the NSE had asked all its members to strictly ensure timely settlement of funds in their client accounts.

When contacted, an NSE spokesperson said, "As a front-line regulator, NSE, in keeping with exchange bye laws and Sebi regulations, keeps taking appropriate action where required.

"This circular was issued to alert members and investors and ensure that the interest of market participants and the market as whole is safeguarded."

The spokesperson, however, did not reply to specific queries on whether it has taken or initiated action against the members who have been found to be "not diligently adhering to the requirement of settling client accounts" in a timely manner.

With regard to a "recent case in which investor complaints have come," the spokesperson said, "Coordinated efforts are required between the NSE, BSE and the Regulator.

What is required is a joint processing of claims, for the best resolution (of the claims) and we are trying to work out commensurate modalities."

However, the exchange did not disclose any further details about the case. It also did not reply to queries about the number and further details of non-compliant members and about the concerned client accounts.

While the exchange and its officials refused to speak further on the "serious liquidity concerns" it had flagged, sources said that the issue was very serious and involved large amounts of funds.

Some brokers have not fulfilled the arbitration awards decided against them, while collaterals given by them have also been found to be inadequate, sources said, while adding that the Exchange needs to declare such brokers defaulters.

At least two well-known brokerage firms are suspected to have short-changed the investors and they would face action by Sebi if the matter is not effectively and conclusively resolved by the Exchange.

Without disclosing the names of the concerned brokers, the NSE had said in its circular that some of them were not adhering to the requirement of settling client accounts once a month or a quarter, as desired by the investor.

"It is also observed that the funds available with the member were reported to be short of the amount payable to the clients as per the settlement cycle, which indicates serious liquidity concerns," the exchange had said, while warning the brokers of serious action for lapses on their part.

"In the recent past, the exchange has also received large number of investor complaints for non-receipt of funds and securities against some members," it added.

As per Sebi guidelines for settlement of client accounts, the exchange regulations require "clear segregation between client funds/securities with that of the member and the permissible purposes for which the funds and securities can be transferred from client accounts.

The brokers are also required to settle the client accounts once a month or a quarter, as per the consent obtained from the client.

"Members may appreciate that the facility of running account is provided for operational convenience and should be used responsibly and judiciously. However, it is observed during exchange-conducted inspections and the half-yearly internal audits conducted by member-appointed internal auditors that some members are not diligently adhering to the requirement of settling client accounts once a month or quarter as per the consent of client," the NSE circular said.

The exchange has asked its members to ensure that the funds and securities available in the client accounts, together with balances available with the clearing member and funds with clearing corporation, are not less than the funds and securities payable to the client at all times.

"Members are also advised to reconcile client beneficiary accounts and the register of securities on a quarterly basis and maintain complete audit trail and documentation of such reconciliation", said NSE.

"Any discrepancy between amounts/securities payable to clients and the actual balances available in client's bank and beneficiary accounts together with the balances available with clearing member/clearing corporation and any instance of actual settlement not done shall be viewed very seriously," the NSE said.

The exchange has directed all members to ensure compliance to this circular.