SEBI’s circular on funds transfer to client accounts creates confusion  

March 30, 2010

A little-discussed circular of the Securities and Exchange Board of India (SEBI) to protect investors’ interests has got brokerage houses worried about its practical ramifications and how it will affect individual traders and investors. To bring clarity and accountability into a client-broker relationship, SEBI had issued a circular that described a new model agreement on 3 December 2009. As part of that agreement, brokers have to return the money lying in clients’ accounts “at least once in a calendar quarter or month, depending on the preference of the client.” This was an important step in investor protection since a major cause for disputes between brokers and clients has been the misuse of funds by broking firms. In 2007 and 2008, many customers woke up late to the fact that the balance in their accounts dwindled to nothing after brokers merrily traded with their money, backed by a power of attorney.

While the SEBI circular will certainly help a client detect such mischief early on, its implementation may create a few hiccups. According to the SEBI circular, “The stock brokers shall take necessary steps to implement this circular immediately and ensure its full compliance in respect of all clients—existing or new—at the latest by 31 March 2010.”

According to market players, many brokers have not implemented this decision of returning the money once a month/quarter within the current quarter (ending 31^st March). Brokers have not contacted them about their preference either. If they haven’t, they have just one day left to completely return the money. One investor told us that neither the broker has contacted him about it, nor is he demanding the money back. Clearly, it is certain that his money will not be returned by 31^st March, which is required as per the circular.

Indeed, if the SEBI circular has to be taken seriously, brokers have to ask clients to square off their derivatives trade and also refrain from buying in the cash market.

Apart from this short-term issue, there are other practical problems of following this circular. According to one broker, even though the SEBI circular does not specify a fixed date of settling a client’s funds, the exchanges have interpreted this to mean that every client will have to specify a fixed date per month/quarter when his account will be fully settled. This means that the client will not be able to trade (especially in derivatives) for a few days until his account gets fully funded again after fresh transfer of funds.

The other aspects of SEBI’s 3^rd December circular will go a long way in creating investor confidence—especially since brokers have not handled clients with due fiduciary responsibility. Among the laudable changes is a mandatory document wherein the broker will have to make clear the policies and procedures regarding refusal of orders for penny stocks, imposition of penalty/delayed payment charges by either party and the right to sell clients’ securities or close clients’ positions, without giving notice to the client, on account of non-payment of dues by the client. Interestingly, among the changes that SEBI has insisted in its 3^rd December circular is that all documents shall be printed in minimum font size of 11.

When Moneylife contacted SEBI, sources told us that they are looking into the issue. Meanwhile, BSE Brokers Forum members are discussing various matters regarding the circular today at the BSE. The members will be discussing SEBI’s norms on know your customer (KYC) and the Prevention of Money Laundering Act (PMLA) requirements, among other issues. — Moneylife Digital Team