Mint explainer: Sebi moots reboot of 1992 broker rulebook
Mint breaks down what changes most for brokers, investors, and markets.
What are the proposed definitions?
Sebi has included definitions of 'algorithmic trading', which is order generated using automated execution logic and 'execution only platform (EOP)', a digital/online platform that facilitates subscription, redemption and switch transactions in direct plans of mutual fund schemes. Sebi also deleted the definition of a 'small investor' as the threshold of ₹50,000 was considered an outdated classification.
Legal experts who advise brokers believe the proposed definitions may be too broad or missing out on spelling out exceptions.
Sonam Chandwani, managing partner of KS Legal, said the proposed algorithmic trading definition is so broad that it risks capturing everything from basic order-routing tools to high frequency trading (HFT). 'This approach could subject low-risk participants to disproportionate compliance obligations designed for far more sophisticated and potentially disruptive trading systems." Chandwani said.
How will registration and governance change?
Sebi's consultation paper has specified that at least one designated director must be resident in India (182+ days per financial year) for broker-companies at registration consideration. It also specified that brokers must intimate Sebi (via an exchange) and other market infrastructure institutions (MIIs) of any 'material change" in registration information, not just change in control. Change-in-control approvals are to be routed through an exchange.
Lawyers said the new 'material change" intimation will raise compliance overhead and may trigger disputes unless Sebi/exchanges clearly define scope, timelines, and formats through circulars.
'What is material change has not been defined in the proposed regulations. This additional requirement may increase the compliance burden on brokers, and the absence of a clear definition for 'material change' could lead to differing interpretations and potential disputes," said Akshaya Bhansali, managing partner at Mindspright Legal.
What is changing for large brokers designated as QSBs?
Sebi has proposed to rely on size/scale metrics only for Qualified Stock Brokers (QSB) designations. The metrics will now include active clients, client assets held with the broker, trading volumes, end-of-day client margin obligations, and proprietary trading volumes. Compliance and grievance scores, Sebi suggested, will not be qualifying criteria, as it puts additional burden of compliance on an aspect that is already monitored.
Experts said this move is essential. 'While these requirements do increase compliance and operational costs, the large customer bases and high transaction volumes handled by QSBs make it essential for ensuring transparency and maintaining the credibility of market intermediaries," said Prakarsh Gagdani, chief executive officer (CEO) at Torus Digital.
However, Narinder Wadhwa, managing director & CEO of SKI Capital Services Ltd, said the debate of compliance burden for QSBs being proportionate or overly stringent remained, potentially affecting competitiveness.
How is recordkeeping and digitisation being streamlined?
Sebi has proposed permitting electronic maintenance of books or records, essentially removing physical-security-era requirements, which includes paper contract note copies. Brokers must inform exchanges (not Sebi directly) where books/records are maintained, Sebi said, aligning submissions and communication through the exchanges.
'Changes in documentation, compliance technology, and reporting structures could require significant investment. There could be possible shifts in client onboarding norms, record-keeping formats, and real-time reporting obligations", Wadhwa said.
How will fees and net worth requirements change?
The consultation paper removes references to the outdated 1990s transition-year and has standardised fee payment processes and timelines through exchanges and online gateways. Exchanges collected these fees segment-wise.
Sebi also proposed to remove the fixed base net worth and the formula-based variable net worth in the current regulations tied to client cash balances at brokers. The regulator reasoned that the provisions became less relevant after it introduced the mandatory upstreaming of client funds to clearing corporations. Through this, the investors' clear credit balances are transferred by the broker to the clearing corporation every day.
Experts said the absence of clarity on how 'variable net worth" will be computed created uncertainty for capital planning. 'The shift of variable net worth to circulars means Sebi can change the formula quickly. Helpful if upstreaming lowers balances, but risky if they widen what counts. Large brokers can absorb swings; smaller ones may face sharper, less predictable capital demands", Ajay Kejriwal, executive director at Choice Equity Broking, said.
What is the new power to relax strict enforcement?
The regulator proposed an enabling provision to relax strict enforcement in specified circumstances such as undue hardship, procedural or technical issues, factors beyond control, and non-relevance for a class. It proposed including a mechanism for confidential treatment of requests or responses for up to 180 days.
Legal experts said the discretion seemed inherently subjective. 'Without clearly defined parameters, market participants may challenge decisions as being arbitrary. Further, the provision allows for confidential treatment of such requests and Sebi's responses. So, such relaxations will not be in the public domain for up to 180 days (or not at all if withdrawn)", Bhansali said.
Chandwani echoed the view and said that without precise criteria and published interpretive guidance, this flexibility could fuel interpretational uncertainty and litigation.
Will inspections increase or be better coordinated?
Beyond Sebi's inspection powers, recognised stock exchanges, clearing corporations, and depositories may conduct inspections as per their by-laws, the consultation paper said. Sebi and MIIs will be allowed to conduct joint inspections, aiming to avoid multiple duplicative checks.
Lawyers said without a clearly defined jurisdictional hierarchy, regulated entities could be subjected to overlapping inquiries into the same issues. 'This not only creates procedural inefficiency but also heightens the risk of conflicting conclusions between authorities", Chandwani said.
What timelines and operational impact should brokers expect?
Industry sources note that adaptation windows for paperwork/policy updates could be a few months, with longer lead times for tech/algo controls and full QSB governance uplift; Sebi historically staggers implementation via circulars and master circular updates.
'Most brokers could adapt in six months for paperwork and policy updates, nine months for tech/algo compliance, nine months for full QSB governance upgrades, with likely phased timelines for any new net worth formula, giving smaller brokers extra breathing room", Kejriwal said.
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