SEBI’s relaxation of rules that govern broker-client relationship really amounts to beating about the bush

The market regulator’s rules which aim to protect investors are toothless, because they don’t take into account the ground realities

The attempts by the securities market regulator to curb malpractices such as the misuse of investors’ funds, by tightening running account authorisation and other norms, are not likely to address the real issues that give rise to a plethora of investors’ grievances. This is mainly because the regulator, which continues to be out of touch with how investor interests are affected by the current system, is not looking at the issue holistically.

With an aim to bring more transparency into the broker-client relationship, the Securities and Exchange Board of India (SEBI), in December 2009, issued a circular that detailed a new model. Under the new model, brokers have to return the money lying in a client’s account at least once in a calendar quarter or a month, depending on the client’s preference; otherwise brokers are required to get running account authorisation. This step was taken to protect the gross misuse of investor’s funds and shares. Moneylife has repeatedly highlighted this issue since way back in 2006-2007. (Read, Powerless by PoA’, ‘Brokers blatantly ignore SEBI instructions on Power of Attorney’)

But the ground reality is quite different.

For instance, Mandar Dixit, a Moneylife reader has a demat account in Religare Securities. Every quarter, his shares are transferred from his pool account to the demat account for which, he says, he is being charged unnecessarily. In January 2011, he was charged Rs 700. Mr Dixit says, he also has an account with another brokerage firm, Kotak Securities, which sends him cheques of the amount lying with them.

According to SEBI guidelines, the running account should be settled both for funds as well as securities. Settlement can be done by transferring unused funds and securities lying with the broker to the customer’s mapped bank/depository account.

When Mr Dixit discovered that Religare was adopting the practice of transferring the shares from the pool account to the demat account, he protested. Responding to our query, a Religare spokesperson said, ”Since Mr Dixit has opted for a quarterly settlement, the securities lying with us are transferred to his depository account and unused funds (if any) are transferred to his bank account at the end of every quarter.”

About the charges, the spokesperson said, “No charges have been levied on Mr Dixit’s depository account, apart from the AMC (annual maintenance charge) and transaction charges for the delivery made to the Religare pool account.”

The company said that the stock and the funds lying in the account are settled as per the running authorisation process. However,

Mr Dixit claims that he does not know when and if at all he signed the running account authorisation.

While Religare might be correct, there exists some confusion due to a lack of information and clarity about the system. So, even if the company has followed the guidelines, it seems that this may not have been communicated clearly to the customer. It is possible that the investor is not aware about the way the running account operates and its possible misuse, and so turned to Moneylife for help. This experience indicates that the rules need to be re-examined, since brokers are following the options as per their convenience, without any fear of the regulator.

This is not just one isolated case. There are millions of investors who are in the dark about SEBI rules and the distorted manner in which they are implemented, usually at the expense of investors. These perverse systemic issues are the main reason behind the ever-dwindling participation of retail investors in the Indian stock market, which Moneylife alone has regularly highlighted.

The fact is that SEBI has framed the rules for settling trades-payment of cheques for purchases and delivery of shares for sales–without taking into account ground realities. The payment of cheques within two days and delivery of shares within one day is too stringent for a variety of reasons.

Most importantly, funds transfer through banking channels is not instant, outside some select cities. It could even be a problem outside the financial system, namely prolonged power cuts. To get around, investors are forced to blindly sign authorisations to brokers and let them handle both cash and shares, through the pool account and get demat slips signed by them to ensure smooth delivery of shares. Almost all big brokers insist that a new investor open a new demat account with them for ease of share delivery, even when they already have one. Some brokers attached to banks (like ICICI Direct), even ask investors to open a new bank account as well, so that both funds and shares are fully under their control.

These facilities are needed by brokers because of impossibly strict norms imposed by the regulator. Unfortunately, such carte blanche to brokers is often misused. The misuse has been so widespread that investors are shunning the stock market as also mutual funds.

Though SEBI has set many rules to protect the interest of investors, malpractices are common. Last year, SEBI imposed a penalty of Rs40 lakh on HSBC InvestDirect Securities for misusing client’s funds and securities. It is true that investors are naiive and sign away documents without reading. A simple assurance from a broker that he will take care of the investment is fine for common investors and most of us sign documents wherever the broker asks to.

However, while it is impossible to educate millions of investors, it is mmuch easier to control a few hundred brokers. Why don’t we ever see SEBI inflict exemplary punishment on brokers so the entire broking community thinks twice before misusing investors’ money or shares? Though SEBI’s norms to avoid malpractices are well-intentioned, brokers get ample space to play with the investors’ money or shares. While the malpractices can be easily attributed to investors’ negligence, it would be easier to control brokers’ practices that happen under the SEBI’s gaze, provided the regulator chooses to act.



valerian rodrigues

5 years ago

i invested 43 thousand rs in share broker agency.but he himserlf operated and made zero balance now .i didnot give any signuture till now.please advice to recover loss

Vikas Gupta

5 years ago

Very informative details. I totally agree with you but Investors don't have any choice.We had to go what our Dealer says otherwise We are facing a hell of problems created by Dealers. Even SEBI does not help investors. Sebi People cooperate Dealers even if we complain in SEBI against them. I myself has experienced such a case against M/S S S Corporate Securities Ltd., New Delhi.


5 years ago

It happens to all the demat a/c holder.Broker keeps the the stock in there pool a/c and again transfer the same to demat a/c with the same broker and in the bargain charges same money.SEBI claiming doing good is creating more problems even in mutal fund operation.NO advisor is ready to vist the customer.


5 years ago

Speed-e service from NSDL can easily eliminate the need for a PoA.
Not one broker in the market offers it !

The only way to safeguard oneself is to have a separate bank and trading account so that re-conciling can lead to discovery of discrepancies.

Ashok Leyland FY10-11 net up 49% at Rs631.29 crore

The company recorded highest volumes both on the domestic and overseas markets in FY10-11. Domestic volumes jumped by 45% to touch 83,800 vehicles and export volumes touched 10,306 units, up by 72% from 5,979 units in the previous fiscal

Chennai: Hinduja Group flagship company Ashok Leyland reported net profit for the year ending 31 March 2011 at Rs631.29 crore, up 49% over Rs423.67 crore for the year ending March 31 last year, reports PTI.

For the fourth quarter ending 31 March 2011, the company reported a net profit at Rs298.22 crore as against Rs222.66 crore in the same period of the previous year, up 33.39%, Ashok Leyland managing director Vinod K Dasari said while addressing the annual press conference here.

The net sales of the company for fiscal ending March this year stood at Rs11,117.70 crore as against Rs7,244.71 crore reported in the same period of previous year, he said.

For the fourth quarter ending 31 March 2011 the net sales of the company stood at Rs3,828.53 crore as against Rs2,939.04 crore reported in the same period of previous year.

The company recorded highest volumes both on the domestic and overseas markets. Domestic volumes jumped by 45% to touch 83,800 vehicles, as against 57,947 vehicles in the previous fiscal.

On the exports side, the company sold 10,306 units in FY10-11, up by 72% from 5,979 units in the previous fiscal.


Govt creates elite unit to probe financial crimes

The specialised wing—Directorate of Criminal Investigation (Income Tax)—will be manned by hand-picked officers who are experts in financial and forensic investigations

New Delhi: Faced with a plethora of frauds and scams, the finance ministry has decided to set up a specialised wing to probe financial crimes like terror financing, money laundering and trail black money, reports PTI.

The specialised wing—Directorate of Criminal Investigation (Income Tax)—will be manned by hand-picked officers who are experts in financial and forensic investigations.

The I-T department, which has unearthed about Rs30,000 crore black money in the past two years, has begun putting necessary infrastructure for the new unit.

Finance minister Pranab Mukherjee gave his approval for the creation of the new unit earlier this month and this has come as a ‘shot in the arm’ for the department which is currently probing some very high-profile and big-ticket financial transactions in the country and abroad.

This is on the lines of the action plan, called ‘Vision 2020’ unveiled by Mr Mukherjee earlier this year.

The document, among other things, focuses on the department’s efforts to unearth black money.

Under the provisions of the new Direct Taxes Code (DTC) which is set to replace the I-T Act by next year, the department, with the operationalisation of this elite unit, will have powers to investigate and summon for evidence on the lines of the Enforcement Directorate and the CBI.

The new unit will enable the department to deploy additional intelligence and investigation tools to detect and combat terror financing, money laundering, offshore tax evasion and other illegal trades which impact national security.

“The department has begun putting the infrastructure in place for the new directorate which will have enhanced powers than the present investigation and intelligence units of I-T.

“The new unit will function under the provisions of the Income Tax Act but will have additional resources to check terror financing and financial proceeds of crime,” a senior I-T officer said.

The creation of the new unit comes in the backdrop of a new plan of action developed by the finance ministry for the I-T department keeping in view the multitude of financial scams in the country and ramifications of national security through illegal funding and hawala dealings.

“The Income Tax department intends to use innovative methods to supplement its traditional enforcement tools in order to reduce the tax gap during the strategic plan period 2011-15. A conscious effort will be made to move towards non-intrusive targeted enforcement tools,” the ‘Vision 2020’ document of the department said.


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