SEBI’s new rule discloses funds mismatch

As per a new rule in India’s stock markets, brokers are supposed to transfer unused funds back to the client accounts at least once each quarter. But it has revealed a big mismatch of funds.

During SEBI’s first quarter, it was revealed that while brokers withdrew anywhere between ₹16,500 crore and ₹20,000 crore from the clearing corporation (CCs) of stock exchanges, the actual amount they returned to the clients stood somewhere around ₹25,000-30,000 crore. The mismatch has led to doubts that some large brokers were not depositing entire client money with CCs and preserving part of it as liquid float.

Due to the spate of broker defaults in the past few years and the episode involving Karvy Broking’s misuse of client collateral, SEBI is against brokers’ collecting excess collateral from clients. In July, SEBI said it had devised the “framework to mitigate the risk of misuse of client funds”. For this reason, SEBI had directed brokers to segregate the money of each client and not club it in a pool account, which started in February. Yet, there are a few brokers who are yet to comply with this rule as well, sources said.

“Starting this October 7, every first Friday of the month, all brokerages must transfer unused funds back to the customer’s bank account as part of the new process. I guess it will be more than ₹25,000 crore across the industry. The regulation is kind of unique to India. In most countries, brokers, like banks, can hold unused funds forever & also use them for working capital requirements. In India, client funds can only be used for that customer’s trades after all the regulatory change. It would be hit on broker income from the float,” Nithin Kamath, CEO and Founder of Zerodha, Tweeted on October 6.