Sebi moots higher net worth for brokers to tackle possible risks as investor participation rises

08:49 PM Sep 27, 2021 | PTI

Sebi on Monday proposed hiking the net worth requirement for trading members to at least Rs 1 crore in two years as well as the net worth thresholds for clearing members as part of efforts to mitigate possible risks amid increasing investor participation in the securities market.

Apart from trading members, the watchdog has suggested increasing the net worth requirement in a phased manner for self clearing members, professional clearing members and depository participants.


Coming out with a consultation paper, Sebi said the existing base net worth requirements are very miniscule compared to the business that Trading Members (TMs) are undertaking and the number of clients that they have.


The proposal is to raise the base net worth for TMs to Rs 1 crore by October 2023. At present, the minimum net worth requirements for TMs varies from Rs 10 lakh to Rs 1 crore for various segments or different stock exchanges.

Also, Sebi has proposed hiking the base net worth requirement for Trading-cum-Self Clearing Members (TM-SCM) to Rs 3 crore by October 2022 and to Rs 5 crore by October 2023.

However, the existing requirement of minimum net worth of Rs 5 crore will remain applicable to the TM-SCM in the currency derivatives segment.

In the case of Trading-cum-Clearing Member (TM-CM) and Professional Clearing Member (PCM), the base net worth proposed is Rs 10 crore and Rs 25 crore, respectively, to be fulfilled by October 2022. The thresholds will further increase to Rs 15 crore and Rs 50 crore, respectively, by October 2023, as per the consultation paper.

Comments have been sought on the consultation paper till October 18.

According to Sebi, net worth requirements for members should be base net worth or variable net worth, whichever is higher.

For the variable net worth, the regulator has proposed that 10 percent of average cash balances of client retained with members across segments and/ or exchanges, in previous six months should be taken.

"The net worth should focus on protection of client fund and also to create an entry barrier and therefore net worth requirement which was stipulated years ago, needs a significant increase," Sebi said.

Moreover, the current regulations specify a minimum net worth requirement for intermediaries, determined almost 20 years ago and is not defined on the basis of the quantum of exposures or the level of business activity of the intermediary.

Sebi noted that the Indian capital market operations involve prudential margining of trades, holding of client securities by centralised depositories and restrictions in the use of client securities by brokers under Power of Attorney (PoA) and requirement for settlement of running account of client funds, which is held by the TM/ CM.

The failure of the capital market intermediaries to meet client obligations may arise out of the operational risk, using client money for other client or proprietary trading. The current minimum capital norms do not adequately address these risks, it noted.

"In view of the considerable increase in turnover in various segments of the stock exchanges over the period of years and that the significant increase in number of investors participating in the securities market, it seems appropriate that a review of net worth of the members in different segments of the stock exchanges may be carried out," Sebi said.

Further, the watchdog said the net worth requirement will go up linked to client's funds retained with the member. In case, a TM deposits the client's fund with CM/ CC (Clearing Corporations), then maintenance of additional net worth as TM would not be required.

Only the trading member retaining client's funds with them will be required to keep net worth equivalent to 10 per cent of the average client funds retained by them during previous six months or base minimum net worth as prescribed, whichever is higher.

Where the TM deposits the client funds with CM, the computation of variable net worth at the level of CM will also include the funds of the clients of TM, deposited by TM with the CM.

In case a stock broker seeks to act as a Depository Participant (DP), Sebi has proposed that the net worth of the DP should be equivalent to that proposed for TM-SCM, which is Rs 3 crore by October 2022 and subsequently Rs 5 crore by October 2023.

The aggregate value of portfolio of securities linked to net worth will not be required.

The existing minimum net worth requirement for stock broker depository participant is Rs 3 crore at NSDL and Rs 2 crores at CDSL.

Further, Sebi said DPs will have to eventually achieve the net worth equivalent to that of a SCM/CM/PCM. The TM will not be recognised as DP and they would use the depository participant services of their respective CMs. Only CM or PCM will act as a standalone depository participant.

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