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To avoid fraud, SEBI moves to end transfer of funds to brokers

January 18, 2023 

Says move will safeguard clients’ money from broker frauds, which could happen when handling the money

Soon, you may not be required to transfer money to your broker for buying stocks. The amount, for which you intend to buy the stock, can remain blocked in your own account and debited in the favour of the clearing corporation (CC) of the stock exchange once the trade is executed.

This way the role of brokers will be limited to providing a risk management platform along with trade execution..

Market regulator SEBI has proposed such a move saying it is to ensure there is no malpractice in handling of client money by brokers and also for the clients to keep earning interest even when their money is blocked for trading.

India, a pioneer
India will be the first market in the world to usher-in this new era of market transactions once SEBI turns its proposals into a rule. Currently, the regulator is seeking public comments on it. SEBI will issue the nitty gritties once the proposal is finalised; it would happen before March, the sources said.

“Under the proposed model, funds shall remain in the account of the client but will be blocked in favour of the CC till the expiry date of the block mandate or till the block is released by the CC, whichever is earlier. CC can debit funds from a client account, limited to the amount specified in the block,” SEBI proposed.

The move would widely hurt brokerage business as they lose the vital float of money that they used to avail bank guarantees and to deposit with exchanges for position limits. Large brokers even earned interest on the float.

No impact on payout
According to SEBI, this will make independent and reliable identification of ownership of cash collateral available to CCs without the need to rely on reporting by brokers. It will eliminate the risk of fraudulent reporting by intermediaries, eliminate custody risk of client collateral retained by the brokers, and direct settlement with CC without passing through intermediaries’ pool accounts. Thus the risk of commingling of client funds and securities does not arise, SEBI said.

Moreover, there will not be any impact on client payout even in case of defaults by some. Funds can be blocked by clients using UPI app based on the blocking request initiated through the stock broker app, said the regulator.

[The Hindu Business Line]

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