SEBI Expanding Qualified Stockbroker Framework

Monisha Chaudhary

30 Mar, 2024

SEBI has issued notifications SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2024/14 to recognized stock exchanges and stock brokers to enhance confidence in the securities market. The notification expands the scope of Qualified Stockbrokers (QSB) to include more stock brokers. Parameters for designating a stockbroker as a QSB now include compliance score, complaint redressal score and proprietary trading volume, in addition to the previous parameters. The process of identifying QSBs involves calculating the percentages of various parameters and identifying those that meet specific thresholds. The designation of QSBs is reviewed annually, and the revised list is jointly published by the stock exchanges and SEBI. Stockbrokers who no longer qualify as QSBs will still be subject to deferral obligations for a while. Additionally, the notification also introduced a provision allowing stockbrokers to voluntarily appoint themselves as QSBs subject to certain conditions being met. The notification will be implemented in a staggered manner, with different QSBs having different effective dates based on specified parameters. Additionally, changes to the Stockbroker Master Circular are outlined. Each exchange should issue this notice, make necessary modifications and publish the revised QSB list. The purpose of this notice is to protect the interests of investors and regulate the securities market.

What is a Qualified Stock Broker?

Qualified Stock Broker (QSB) is a group of certain stockbrokers, that have the tag or a qualified designation provided to them based on qualifying on a few parameters, which have been specified by the regulatory authorities. This would mainly be based on the counting number of active clients, total assets under management, trading volumes, compliance record, grievance redressal mechanism, and proprietary trading volumes. Qualified Stock Brokers would reflect a high standard of compliance, investor protection, and transparent securities markets.

How does the circular help the Stock Brokers?

The circular expands the QSBs framework to include parameters such as compliance score, grievance redressal score and proprietary trading volume by introducing a method for identifying the QSBs based on the calculation of the percentage as per the various parameters with the specified thresholds. This circular also issued a voluntary designation process for the stockbroker who previously did not qualify as Qualified stockbrokers. The circular was implemented to allow stockbrokers sufficient time to make the necessary adjustments as per the QSBs setting different effective dates as stated in the parameters. The revised parameters for the designation of Stockbrokers as QSBs include compliance and grievance resolutions to ensure the protection of investors. The provision for stockbrokers who no longer qualify as QSBs is to continue to comply with the expanded obligations for some time to ensure continued compliance with the regulations and establish a process for the exchanges to issue the revised list of QSBs to censure market transparency and accountability. The main focus of this circular is to protect the investor’s interest and promote the security market and regulation through the implementation of the circular.

Parameters to Designate a Stock Broker as a Qualified Stock Broker

The parameters stated by the SEBI to designate a stock broker as the Qualified Stock Brokers are:

• The total number of active clients of a stockbroker.
• The total assets offered to clients by a stockbroker.
• Trading volume of stock brokers excluding proprietary trading volume.
• End-of-day margin commitments for all clients of a stock broker, excluding proprietary margin commitments.
• Stockbroker’s proprietary trading volumes.
• Stockbroker Compliance Score.
• Stockbroker Grievance Resolution Score.

Procedure for Identifying a Stock Broker as a Qualified Stock Broker

The parameters for designating a stockbroker as a Qualified Stock Broker involve the computation of percentage for each parameter as stated in the paragraphs of the circular because paragraphs 4.1.1 to 4.1.7 of the circular state the percentage of the parameter is computed by dividing the individual count or score by the total count or score across all the stock brokers and multiplying that by 100. Below are the parameters:

• Paragraph 4.1.1 of the circular states the per cent executions for retail orders in securities listed on a recognized stock exchange.
• Paragraph 4.1.3 stated the per cent of complaints disposed of within the stipulated redressal period.
• Paragraph 4.1.4 states that the percentage of intimations regarding the opening of demat accounts is completely maintained by stock brokers in their database.
• Paragraph 4.1.5 states that the per cent of stock broker branch offices are located in smaller towns and rural areas of India.
• Paragraph 4.1.6 states the compliance score of the stockbroker, SEBI directives. 4.1.7 The grievance redressal score of the stockbroker.

A stock broker would be designated as a QSB as stated in the percentage in paragraph 4.2 of the circular:

1. the total individual percentages of the stock broker for 4.1.1 to 4.1.5 is equal to or greater than 6.25 %,
2. the compliance score of the stock broker is equal to or greater than 2% and
3. the grievance redressal score of the stock broker is equal to or greater than 5%. This process would leave no room for speculation when designating QSBs.

Impact of the Circular on the Securities Market

The amendments and the circular have a remarkable impact on stock brokers and the security market at large. This broadens the scope of the qualified stockbroker and the specific stringent criteria for the designation to enhance transparency and accountability to improve the protection of investors in the security market. The designated stock brokers as QSBs must maintain higher compliance standards and fulfill expanded obligations, which will help gain trust and confidence among investors. However, the stockbroker is given six months to become QSBs, and this timeline of staggered implementation allows sufficient time for the stockbroker to adopt the measures gradually for smooth and sound compliance. In the end, these measures will enable integrity in the security market, reduce risks, and make the system of the security market robust and resilient.

Conclusion

In conclusion, it is stated that the circular introduced a positive impact on building more trust and strong confidence in the security market. The amendments stated that the QSBs could perform more functions to strengthen the positions of the regulators and improve policies and frameworks. It maintains the accountability of the brokers in the market by emphasizing a broader and strict set of requirements that need to be met by the designations. This circular has issued the implementation for the stock brokers and provided them enough time to adapt and upgrade their system to higher compliance standards. The Securities Exchange Board of India strives to build and grow a more open, stable, and reliable securities market structure for everyone, including investors and market participants.