Sebi increases checks and balances for brokers

Capital market regulator Securities and Exchange Board of India (Sebi) on Monday introduced a slew of checks and balances on stockbrokers, aimed at improving risk management and transparency in the system.

Sebi has directed stock exchanges to conduct stress tests for stockbrokers and closely monitor investors’ money lying with them. The regulator has also directed enhancement in reporting, appointment of internal auditors and to obtain PAN details of directors and other key personnel at stockbrokers’ establishments.

Sebi has said stock exchanges and depositories will have to conduct “monitoring of financial strength of stockbrokers so as to detect any signs of deteriorating financial health of stockbrokers and serve as an early warning system to take pre-emptive and remedial measures”.

Sebi has asked exchanges to put in place “sophisticated alerting and reconciliation mechanism” to detect any misutilisation of clients’ funds lying with stockbrokers.

The regulator also wants exchanges to make changes to their existing internal audit system. The new system should be able to monitor appointment and rotation of internal auditors and timeline for submissions of internal audit reports by brokers.

The measures announced by Sebi on Monday are based on recommendations made by an expert committee on “Enhanced Supervision of Stock Brokers”. The panel comprised of representatives from stock exchanges, depositories and brokers.

The move is believed to have come in the wake of instances of several irregularities against a few brokers in the National Spot Exchange (NSEL) fiasco. Sebi is probing the matter and had in April also ordered auditing of the respective brokers. The audit was on the basis of evidences of contract notes issued by brokers not matching trade records of the exchange. Besides, there were also instances of discrepancies and manipulation of books of accounts, which are now under examination.