New Delhi:Stock brokers are protesting Securities and Exchange Board of India’s (Sebi) decision to make them responsible for verifying retail investors’ exposure to derivative products.
Brokers are considering to send a representation to the regulator saying that the regulator’s proposal is impractical and unfair. They said that this will make the broking business which is struggling under low margins even less lucrative.
“Such an onus on brokers is neither practical not fair. All the returns are linked with PAN (Permanent Account Number) so the government can do a fair review of the consolidated data. Asking brokers do a pre-check will burden the brokers who are anyways struggling under low margin," said Prakash Gagdani, CEO, 5paisa Capital, a low cost brokerage unit of IIFL Holdings.
Sebi on Wednesday after the meeting of its board introduced the so-called product suitability framework to ensure that individual investors have a safety net when investing in equity derivatives.
“There is something called product suitability. Just because markets are doing well, it does not mean that all should invest in these complicated products," said Sebi chairman Ajay Tyagi.
According to Deven Choksey, group managing director at K.R. Choksey Investment Managers Pvt. Ltd verifying individual investors exposure to derivatives products should be left to investigative or regulatory authorities.
“A broker is not an investigator, this will not just deter brokers but also investors," said Choksey.
According to the Sebi press release issued on Wednesday, an individual investor can freely take exposure in the market up to a computed exposure based on their disclosed income as per Income Tax Return(ITR). For any further exposure the broker would be required to undertake rigorous due diligence.
But all do not agree. According to Deena Mehta, managing director at Asit C. Mehta Investment Intermediates Ltd and a former director of BSE Ltd, the mandatory need for return filing will help brokers do a detailed KYC (Know your client).
“Brokers do act responsibly and if they are not responsible then liability falls on them to meet market commitments. Customers are hesitant to give their IT (income tax) returns, either they do not pay tax or their returns do not show their true wealth. This announcement will make it mandatory for clients to give their IT return and also help brokers do more detailed KYC. Yes, speculation may come down in the short run, but people will get used to the system and it will be business as usual since all customers have PAN card and are registered with tax department," said Mehta.
“How will broker verify such details. Such restrictions will prevent the growth of the market. We will send a representation to the regulator that offcourse there should be checks but not such steps as we have would have the wherewithal for such verification," said Anil Shah, director at Association of National Exchange Members of India (ANMI).