1.    Definition of a Stock Broker as per SEBI norms:

By general definition, a stockbroker is an intermediary having the authority to trade in stocks and securities them on a stock exchange on the behalf of investors.

As it is difficult for the investor to directly trade in the stock exchange, he takes the assistance of a broker to buy a stock or sell a stock through exchanges, to provide a platform for the investor to arrive and trade in securities.

Such intermediate or what we commonly refer to as a broker could be any person or company authorized by the Securities and Exchange Board of India (SEBI) who is authorized to buy and sell stocks and other securities the behalf of the investor.

Primarily, stockbrokers are generally associated with a stockbroking entity, but such a person can also work independently and in turn, they charge a certain amount of consideration as their remuneration. In other words, a stockbroker is a person who provides trading services on behalf of his client and helps the investor to make a more informed decision in charge of the commission.

2.    Functions of the Stock Broker:

Following are the roles and responsibilities of a broker-

a.    Advising Clients to make informed decisions-

Generally, the brokers inform and advise their clients to make trading decisions on the buying or selling of stocks as they keep themselves updated about the market situations and thus can recommend stocks /securities for higher profits.

b.    Handle the Trading platform and related paperwork-

Stockbrokers facilitate trading on behalf of their customers and further perform concerning paperwork and maintain records of all transactions and statements.

c.     Managing Client’s Portfolio-

Brokers handle their client’s portfolios and provide updates of any changes in the same. Also, they clarify customer queries in investment matters.

d.    Advise investment strategies or opportunities-

It is a known fact that the securities market is a dynamic one and undergoes frequent changes and thus a stockbroker is the one who suggests changes in the investment strategies and the new investment opportunities that may help the client to gain in the market.

3.    Regulation of stockbrokers in India:

Though stockbrokers play an important role in ensuring profits for their clients however, it is also important to consider that stockbrokers being in an authoritative position may harm the clients by misusing the confidence reposed on them. Thus, the SEBI defines, administers, and issues guidelines for their functioning in the interest of the public.

Accordingly, stockbrokers have been defined and administered under theSecurities and Exchange Board of India Act 1992, Securities Contract Regulations Act, 1956, and also the Securities and Exchange Board of India (Stockbrokers and sub-brokers Regulations), 1992.

For commencing its role as a stockbroker, every person needs to enter as a member of stock exchanges and to undergo compulsory registration under SEBI. Such registered person needs to display their details of registration on their official websites and every official document. Also, their names can be double-checked under the official website of SEBI.

Types of stockbrokers:

 Depending upon the category of services being offered, stockbrokers could be distinguished into the following two types-

A.    Full-service stockbrokers:  

Stockbrokers offering a full range of services to its clients generally come under this category, they do provide trading facility along with the advisory role. They are fully established in their roles and have branches all over India to serve their clients. Thus, such brokers charge a high amount of commission for their services.

B.    Discount stockbrokers:  

Such stockbrokers are primarily working through an online platform and provide trading services and not full services like advisory or research facilities and charge a comparatively lesser percentage for commission.

4.    What do the new provisions prescribed for the brokers say?

Earlier this year in the month of January, SEBI has provided a notification through a circular seeking to provide a remedy in cases related to misuse of client’s securities by a stockbroker and have passed new guidelines in this regard. According to this, now the brokers will have to collect their margin before the effecting trade by their clients. 

According to SEBI’s new margin trading norms-

a.    Brokers must align their systems with that of clients and accept customer’s collateral and margin funded stocks by way of pledging.

b.    They are permitted to hold funded stocks for margin funding in their client’s securities accounts till Aug 31.

c.    Existing Demat accounts tagged as the client’s margin or collateral must be closed till August 31, 2020. To this date, stockbrokers will be required to transfer all securities lying in such accounts to their client’s Demat accounts.

d.    SEBI directed stock exchanges and depositories to broadcast such information through their websites.

The regulations have been intended to prevent cases of possible potential misappropriation of client securities by the implications of broker’s actions after the reputed stockbroker firmKarvy Stockbrokers allegedly pledged client shares to raise funds from the lenders for their own use.

Further, SEBI has also restrained brokers from taking new customers till Nov 22 and shares till then shares have been transferred from the broker’s pool account to the client’s account.

In other words, the following will be the implications as a result of the guidelines-

a.    Investors shall be unable to receive sale proceeds from selling stocks holdings and to buy other stocks on the same day;

b.    Investors shall be required to wait till at least for two days from selling stocks for using the earnings from the sale of stock to buy the new shares;

c.    Cash- market transactions will invite margins;

d.    The penalty shall be levied for non-collection of upfront margin on the broker and not on the client concerned;

e.     Stock Exchanges may necessitate margin for a sell trade.

The norms were expected to come in effect from June this year had but were postponed till August 1, due to COVID-19 pandemic situations. Therefore, the new norms are expected to run parallel to the previous format until August 31.


eStartIndia Team

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