The Securities and Exchange Board of India is conducting inspection of stockbrokers, who act as depository participants (DPs) and are also into margin-funding business, as there have been instances of client-account mismanagement.
The Sebi move follows complaints from some retail investors about misuse of their shares by brokers.
According to Sebi officials, a few brokerage houses are violating the Sebi (Depositories and Participants) Regulations, 1996.
Under margin funding, brokers accept either 20-30 per cent cash or securities as collateral and the rest is funded by them to clients to take position in the market. The required procedure states that these collateral shares will be placed in separate accounts registered with the DP, earmarked as margin from clients.
This is to help differentiate the shares of client A from client B and also distinguish the beneficiary. Also, there has to be a specific agreement between the brokerage and the client for this operation.
However, instead of opening separate beneficiary accounts in the name of each customer, brokers open a single account with the DP in the name of their own securities firms. According to sources, in most of the cases, brokers do not enter into agreements with clients, something that is a must as per Sebi guidelines.
This account is then used for transfer of shares, purchased by the client, and since it is operated directly by the brokerage, the client cannot sell these shares.
According to a Sebi official, in respect of some demat accounts, the regulator has found that these accounts were being used as a temporary in-transit account for crediting or debiting the clients' obligations of respective branches of a particular broker. This practice was in clear violation of Sebi norms, he said.
The DP cannot stop these inter-branch transfers as there is no agreement between the broker and DP. Brokers desist from making any agreement with the DP in the pretext that it has to be bilateral and since, in their case, the DP and the margin funding entity are the same, there cannot be an agreement.
However, Sebi officials find fault with this practice, saying that although this is a case of same entity, actually they are acting in different capacities.
