The market regulator’s effort to curb misuse of investor funds may change the way stocks are traded in India. Brokers will no longer handle money and their role will be limited to matching orders.
The Securities and Exchange Board of India is considering direct fund transfers to client accounts. A panel headed by Indian Institute of Management professor JR Varma discussed the proposal on September 11, an official aware of the development told BloombergQuint on the condition of anonymity.
The proposal follows SEBI’s order against a brokerage, Amrapali Aadya Trading & Investment, for alleged misuse of investor money. If implemented, it would help settle trades the same day, compared to two days later, as is the case now. And the responsibility of clearing payments would shift from brokers to custodians like banks, in line with global standards.
The panel is looking to separate trading and clearing roles as that helped expand the market for institutional investors, Deven Choksey, managing director at brokerage KR Choksey Shares and Securities Ltd., told BloombergQuint. “There has never been a default or a fraud after that.”
Brokers BloombergQuint spoke to don’t agree. They will continue to be guarantors for trades even if payouts are made directly, said a broker at the Bombay Stock Exchange requesting anonymity.
Choksey thinks otherwise. If an institutional trade presented to the custodian does not match or is denied, it immediately reverts to the broker, who can square it off. That doesn’t happen for broker-client trading. The risk of default exists if an investor fails to release funds, Choksey said. When retail investors trade online, that risk is minimal as securities and funds are blocked upfront, he added.
Brokerage Fees May Fall
The proposed change could bring down fees for brokers. They are paid for placing and clearing an order. If the clearing part of the transaction goes to someone else, investors will have to pay both custodian and broking charges separately, said a senior exchange official requesting anonymity. Since clients won’t agree to pay the same fee twice, the brokerage fee will drop and there will be no incentive provide services, the official said.
It would also deter equity investments in smaller cities and towns, said the broker cited above. A chunk of retail customers comes from tier-2 and tier-3 cities and pay-ins and payouts are largely made through cheques, the broker said.
The impact will be similar to the regulator’s ASBA (applications supported by blocked amount) norm for initial public offerings, the broker said. An amount in an investor’s account is blocked, but debited only after shares are allotted. The change brought down retail participation and only bank customers who don’t have to fill forms apply for IPOs, said the broker.
Several small brokers handle proprietary and client money through a common account when regulations mandate otherwise, another broker said. Taking away client money may cause liquidity issues, the broker said.
SEBI’s objective is to streamline stock market transactions. The proposal is a short-term disruptive move with a long-term impact, a senior official at a leading domestic brokerage, who has worked with the regulator and a custodian, said. It helps fintech, aids price discovery and brings transparency, the person said.
Choksey said it’s important to evolve with technology as stock market volumes are expected to rise five to seven times in the next 10 years. By then, blockchain, the virtual ledger technology behind bitcoin, will be prevalent. If brokers don’t change their mindset, they may find life difficult, he added.