Unhappy with broker partners (APs), SEBI may tighten regulations

Subject :Economy

Section: Capital Market

Context: SEBI may tighten norms for broker partners/APs to curb unauthorised trades, misselling.

Key Points:

The Securities and Exchange Board of India (SEBI) has raised concerns on the proliferation of authorised persons (AP) and has asked brokers to keep a closer tab on their activities.
Several large brokers now have thousands of APs, which can make compliance and oversight on these entities difficult.
Stockbrokers have to conduct periodic inspection of branches assigned to APs, according to current SEBI norms, along with an annual audit.

What is an AP?

Any individual, partnership firm, LLP or body corporate appointed by a broker who provides access to trading platform of an exchange
The broker and AP have to enter into a written agreement covering scope of activities, responsibilities, confidentiality of information, commission sharing and termination clause.
The broker is responsible for all acts of omission and commission of the AP
All receipts and payments of securities and funds to be in the name or account of the broker.
All acts of omission and commission of the AP are deemed to be those of the stockbroker. The AP is not supposed to receive or pay any money or securities in its own name or account.

Criteria for AP

Current norms allow anyone over 18 years with tenth standard or equivalent certification to become an AP.
Some brokers have already put in measures to dissuade entities from becoming an AP.
These appoint referral partners or business associates for a time period, track their performance and only then allow them to become APs. Some ask for deposit money, over and above the registration fees.

What is SEBI planning to do?

The regulator may bring out tighter norms for these entities given the increasing complaints about APs offering assured returns, taking payment in cash, carrying out unauthorised trades, non-payment to brokers and absconding with client money, said two people familiar with the matter.
Any changes may jack up compliance costs for APs and brokers.

Why this surge in number of APs?

The market rally in the aftermath of the pandemic and higher retail participation has led to a commensurate rise in the number of APs, also known as franchisees, in industry parlance.

Why is the huge number of APs a matter of concern?

There have been instances of APs promising high returns, trading on clients’ behalf or using their money for own trades, indulging in dabba trading, accepting cash and shutting shop after making losses.
In some cases, APs have not passed on the client payment to the broker, resulting in disputes between the broker and the client.
APs have access to a very powerful thing called an equity terminal. A lot of money can be made or lost at the press of a button. There’s a bit of concern as to whether the APs are professionally qualified to do the business.