I] INSPECTIONS AND INQUIRIES
Stock Exchanges, Stock Brokers and Sub Brokers
Section 11(2) of Securities and Exchange Board of India Act, 1992 provides that the SEBI would register and regulate the working of stock brokers and sub brokers. In fulfillment of the above, the SEBI carries out inspections of the books and records of stock brokers to verify whether:
- Books of accounts, records and other documents are being maintained in the manner specified by the Securities Contracts (Regulation) Rules, 1957 and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
- The provisions of the SEBI Act, the Securities Contracts (Regulation) Act and the provisions made thereunder are being complied with by the broker.
- Adequate steps for redressal of grievances of the investors are being taken and the conditions of registration as a stock broker are complied with.
As more than 9000 brokers are registered with the SEBI, it is not possible for SEBI to inspect all the brokers with its limited resources. Brokers are, therefore, selected for inspection, on sample basis, by the SEBI. Apart from the SEBI, Stock Exchanges as self regulatory organisations are also expected to carry out inspection of 10 of their active brokers.
During 1997-98, 157 brokers from the 22 Exchanges across the country were inspected by the SEBI. For inspection of brokers of BSE and NSEIL, the services of chartered accountants were availed of while inspection of brokers of other stock exchanges were undertaken by the officers of the SEBI. During the course of inspection, following features were noticed :
- Brokers of regional stock exchanges had witnessed a slump in their business. Many of them were either inactive or working for the brokers of bigger stock exchanges.
- Clientele business, in general, had come down across the entire country.
- Brokers were reluctant to execute orders which may result into delivery because of impending fear of deliveries turning out to be bad.
- A large number of brokers were giving indirect inducement to their clients to close their position at the end of settlement by charging much lower brokerage for squaring up business compared to delivery business.
- The rate of brokerage had come down drastically over last few years. The bye-laws of the stock exchanges provide for brokerage up to 2.5 per cent of value of the contract. In reality the brokerage ranged between .05 per cent to .5 per cent,
Common irregularities noticed during inspection were :
- Non maintenance of proper books of accounts.
- Non issuance of contract notes in proper format and non fixing of brokers note stamp on contract notes.
- Non reporting of ‘off the floor transactions’ to the exchange.
- Misuse of the Exchange Settlement Mechanism to secure certain loan transactions which do not have any relationship to securities business.
- Dealing with unregistered sub brokers.
- Non segregation of clients and proprietary funds.
However, better compliance was observed towards margin requirements on the part of brokers. This can be attributed to active role taken by the SEBI in standardising the margin requirements by prescribing gross turnover cap as multiple of capital deposits and mark to market margin.
A comparative statement of inspections carried out during the year, enquiries ordered and penalties imposed on the brokers for the year 1996-97 and 1997-98 are given in the table III.8.
Table III.8 : Action Taken against Stock Brokers