BSE, NSE shortlists Zerodha, 5paisa, HDFC Sec, others as qualified stock brokers

Stock exchanges BSE and NSE have designated 15 trading platforms as Qualified Stock Brokers (QSBs) with effect from July 1, 2023. These shortlisted stock brokers are required to meet enhanced obligations and discharge additional responsibilities. Some of the notable stock brokers in the QSB list are Zerodha Broking, 5Paisa Capital, HDFC Securities, IIFL Securities, ICICI Securities, Motilal Financial Services, Kotak Securities, and Sharekhan among others.

Other designated QSBs are --- Angle One, Anand Rathi Share & Stock Brokers, Global Capital Market, Jainam Broking, Nextbillion Wealth and Investment, and RKSV Securities India which is operated under the brand Upstox.

In January, Sebi issued guidelines to designate certain stock brokers as QSBs, having regard to their size and scale of operations, likely impact on investors and the securities market, as well as governance and service standards.

The guidelines came after Sebi noticed that certain stock brokers, due to various factors like their size, trading volume, and amount of clients' funds handled by them, have come to occupy a significant position in the Indian securities market which is leading to the concentration of activity among few stock brokers.

Hence, the designation of QSBs is to ensure the orderly functioning of the securities market and to protect the interest of investors in the securities market.

What does this mean?

As per the Sebi guidelines, the stock brokers designated as a QSB shall be required to meet enhanced obligations and discharge responsibilities to ensure appropriate governance structure, appropriate risk management policy and processes, scalable infrastructure and appropriate technical capacity, framework for orderly winding down, robust cyber security framework, and investor services including online complaint redressal mechanism.

QSBs are identified on four parameters --- the total number of f active clients of the stock broker; available total assets of clients; trading volumes excluding the proprietary trading volume; and end-of-day margin obligations of all clients excluding proprietary margin obligation of the stockbroker in all segments.

Exchanges will also assign scores to stock brokers. To calculate the individual score of a stockbroker for a particular parameter --- that respective stock broker’s count of active clients will be divided by the aggregate count of active clients of all stock brokers. The same will be used for other parameters as well.

Further, as per Sebi, then the total score shall be calculated by adding individual scores of all the parameters. For calculating the scores for a particular financial year, parameters as of December 31st of such fiscal year shall be considered.

Initially, stock brokers with a total score greater than or equal to five based on the parameters enumerated in para 7.1 above, shall be identified as QSBs. Sebi directed that the first such list of QSBs be prepared on the basis of parameters as on December 31, 2022.

This framework may be extended to more stock brokers in due course, if necessary. Hence, the scores will be calculated on annual basis (financial year) and the revised list of QSBs shall be released jointly by stock exchanges, in consultation with SEBI.

QSBs that no longer belong to the revised list, shall continue to comply with the enhanced obligations and responsibilities, for an additional period of three financial years or such time, as may be specified by SEBI/stock exchanges.

Some of the key roles of QSBs as per Sebi guidelines are:

- The Board of Directors (BoD) or analogous body of QSBs shall

exercise oversight over incidents/vulnerabilities having an impact on the functioning of the QSB in the securities market and investor protection including data security breaches that can affect investor data.

- QSBs shall devise a clear and well-documented risk management policy.

- The risk management framework shall have measures for carrying out surveillance of client behaviour by analyzing the pattern of trading done by clients, detection of any unusual activity being done by such clients, reporting the same to stock exchanges and taking necessary measures to prevent any kind of fraudulent activity in the market in terms of the regulatory requirements prescribed by SEBI and MIIs.

- QSBs shall maintain adequate human resources, systems, processes, and procedures for the seamless running of operations and protection of investor data.

- The staff of the QSBs shall be given the necessary resources and support to carry out their duties effectively and efficiently. The QSBs shall train their employees at regular intervals in matters relating to the activities being handled by them.

- QSBs shall put in place a policy framework, approved by its IT committee, for the upgradation of infrastructure and technology from time to time to ensure smooth functioning and scalability for delivering services to investors at all times. Such a framework should be reviewed on a half-yearly basis.

- QSB shall put in place, a framework for orderly wind-down of its business to ensure continuity of services to its clients in case of closure of business by the QSB due to its inability to provide services to its clients or meet the prescribed regulatory requirements or any other reason.

- QSBs shall have additional features in their cyber security framework which would be commensurate with the amount of data handled by them. The cyber security committee of the QSB shall review the framework on a half-yearly basis and review the instances of cyber-attacks, if any, and take steps to strengthen the cyber security framework of the QSB.

- QSBs shall carry out continuous assessments of the threat landscape faced by them and on a half-yearly basis, conduct vulnerability assessments to detect security vulnerabilities in their IT environments exposed to the internet.

- QSB shall put in place a comprehensive Business Continuity Plan (BCP) and such policy shall be reviewed on a half-yearly basis to minimize the incidents affecting the business continuity.

- QSBs must have investor service centers in all cities where they have branches.