Exclusive: Sebi reviews authorised person regulations; discusses minimum qualification, NISM certification and deposit amount criteria

Regulations for authorised persons are set to change. Sebi is reviewing eligibility criteria and enhancing the responsibility of brokers.

Market regulator Securities and Exchange Board of India (Sebi) is considering tightening the eligibility criteria of authorised persons (APs).

APs are sub-brokers who act as agents of brokers. According to various sources, the regulator is considering enhancing the eligibility criteria for APs, which are linked to education and experience.

Educational criteria with experience

Like, the authorised person should be a graduate with 3 years of experience in the stock market.

If an AP is not a graduate and has passed just the 10th standard, they must have 10 years of experience in the stock market.

One source added, “As per the proposal, all existing APs will have to clear the NISM 7 series test, once final regulations are out and a timeline is set, they may be given 6 months to clear it”. 

NISM 7 series is related to the basics of the securities market, broking operations, risk management, clearing operations, the settlement process, investor grievances, and resolution-related issues.

Existing regulations require only a 10th pass as criteria for onboarding of APs.

A minimum deposit from APs

Another source added, “Besides education, there is also a discussion if brokers need to have a good deposit amount from authorised persons. In the initial discussion, it was proposed that brokers should collect a sum of Rs 5 lakhs as a deposit from individual authorised persons and Rs 25 lakhs from corporate authorised persons”. 

In final regulations, the actual amount may be brought down for individual APs as brokers are not keen to take huge deposits from APs.

Brokers see it as a deterrent in addition to APs, and, hence, bad for expansion in smaller towns and semi-rural areas.

Enhanced due diligence

To enhance due diligence on APs, it is proposed that brokers will have a strong monitoring mechanism.

Brokers will have an alert mechanism if there is a sudden increase or decrease in the volume from the AP's terminal, similar alerts will be generated in case of unusual profit or loss and raise a query with the client and the AP.

Also, brokers and exchanges will not permit multiple trading terminals at the same location.

Brokers to pay for loss due to APs

The broker's responsibility for acts of the AP is set to increase as Sebi will define it in regulations clearly.

Brokers will have to take full responsibility for loss to clients due to acts of APs, in final regulations it is expected to be clearly defined.

Existing regulations say that all acts of omission and commission of the AP shall be deemed to be those of the broker.

Sebi wants it to be more clearly defined.

No capping on the referral fee

The other critical issue of the referral fee is also expected to be resolved in the new regulation.

One industry source said, “It’s proposed that there should be no capping of referral amount or commission”.

Currently, only NSE has issued a circular on the capping of referral fees.

BSE and MCX have not put any restrictions on such fees.

Initially, the view within Sebi was that there should be a cap on referral amount/commission and types of referral incentives given to APs like vouchers, cash back, etc.

There is also a view that referral APs should be put under low compliance and charged lower registration fees because their role and responsibilities are limited compared to regular APs.

No cap on the number of APs

Initially, it was proposed that there should be a cap on the number of APs that a broker can associate with, based on parameters such as the clientele of the broker.

But, after discussion with broker associations and exchanges, the idea of capping may be abandoned.

Brokers are of the view that APs are the last mile connect in small towns and semi-rural areas, capping the number may be disadvantageous for traditional brokers, as APs help people to channel their savings to the capital market and aid in financial inclusion.

Uniform regulations across exchanges

Sebi also wants that if the registration of any AP is cancelled, then exchanges will inform each other.

Uniform regulation across exchanges for APs is also under consideration.

It is also proposed that APs will use the official email ID provided by the broker to communicate with clients.

It is also under consideration that, in case of unauthorised trade, all terminals will be cancelled.

With the increasing number of APs, Sebi has been observing that the number of complaints has also gone manyfold.

Sebi is equally concerned with some of the APs encouraging clients to bet on risky and complex equity derivates.

Issues of promising guaranteed returns to investors and involvement in activities other than the securities market were also issues; hence, Sebi is reviewing the regulations.

Zee Business wrote to Sebi for a response, but the email didn’t elicit any response.