SEBI’s Plan to Separate Brokers from Investors Trade Money

Brokers have been enjoying a dream run as the numbers of Demat accounts in India have more than doubled in last two and a half years. From just 40.9 million in March 2020, they have now crossed 110 million marks. The brokers have benefited from this jump in number of Demat accounts through increase in brokerage fees, increased investor participation, and increase in interest income for brokers, accrued to them from investor money kept with them for trading.

Securities and Exchange Board of India (SEBI) does not want brokers handling investor money anymore. Since 2019, SEBI has been working to finish brokers’ entry to buyers’ securities and money and if SEBI’s plans go forward, brokers will solely execute purchase or promote trades and no money from an investor’s checking account will go right into a dealer’s account. This change is predicted to hit the brokerages’ income, notably interest earnings. Brokerage houses have been earning huge amount of interest on investors fund and those balances are not small by any measure. Zerodha’s, IIFL Securities and Motilal Oswal’s cash balance as of March 2021 was ₹13,175 cr., ₹1,794 cr. and ₹478 respectively. To be clear, the broker’s cash balance does not only comprise of client funds, but a substantial portion is investor money.

Below are 10 biggest stock brokers in India based on the number of active clients as on 31st March, 2022:

How it’s going to work?

The clearing house will be able to block a maximum of ₹5 lakh in one instance in the investor’s account. There can be three such blocks in one day. Money will be debited from the blocked amount basis the securities purchased. So, if somebody buys ₹1 lakh worth of shares, then only ₹1 lakh will be debited from the blocked amount.

Advantages for buyers within the new system –

~ No entry for brokers into investors’ money will eliminate shady brokers.
~ Money stays in investors account hence interest will accrue to the investor and not the broker.
~ System provides investors with extra management; this reduces broker- investor disputes.

The brokers have risen following concerns -

~ Concern over trading limit, the limit of ₹5 lakh per block and ₹15 lakh per day will impact the trading activity of many brokers.
~ Concern over collection of brokerage fee by the brokers

Impact on Brokers Balance Sheet

Earlier, brokers had to transfer unused funds of the investors at end of every quarter. This now has been changed to a period of 30 days. This cash is shown in broker’s book as part of cash and bank balance. The broker’s cash balance does not only comprise of client funds, but a substantial portion is investor money.

SEBI’s Rationale

From 2016 onwards, SEBI made it mandatory for all retail investors to use Application Supported by Blocked Amount (ASBA).SBA is an application made by an investor, containing an authorization to Self-Certified Syndicate Bank (SCSB) to block funds available in applicant’s Savings Bank Account or Current Account (other than Overdraft or loan accounts),or subscribing to an Issue, to the extent of application money. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/ failed. Now, the regulator wants to have a similar system in place for secondary market transactions or regular trading. In the regulator’s view, since this is already being done in the primary market, keeping investor funds safe in their own bank accounts, it can easily be replicated in the secondary market.

What we think on it?

If SEBI plans to go ahead then it will require a huge process, and for that, it will require banks and clearing corporations to work very effectively. SEBI’s plan to implement a system of blocking money for the said purpose, might impact the daily trade limits, and may also lead to increase in brokerage fees from broking houses. By returning unused funds to investors’ bank accounts, brokerages will have to be more transparent about how they use client money. This will help to build trust between investors and brokerages, and ensure that all investors are treated fairly.