The new SEBI rule may increase the brokerage cost. The new rule protects your money from broker misappropriation, but as brokers’ need for working capital rises, brokerage fees may go up in the future.
On October 7, the first Friday of the month and a Sebi (Securities and Exchange Board of India) working day, a new regulation will take effect. Every broker must settle accounts with their clients on the first Friday of every month or quarter, depending on the option selected by the clients, in accordance with the rule.
This indicates that your broker will transfer all unused funds in your trading account to your bank account on the designated day. Nithin Kamath, the founder of Zerodha, estimates that this could cost the industry more than Rs 25,000 crore.
While the new rule prevents your funds from being misappropriated by your broker, it may eventually result in higher brokerage rates as brokers’ working capital needs rise.
In a tweet, Kamath predicted that the numerous regulatory changes would put upward pressure on brokerage rates in the coming years. “These changes will increase the working capital requirements for the broking industry, even though they are good for customer safety.”
The new rule states that brokers who allow you to trade immediately after transferring funds to them or who allow you to buy immediately after stocks are sold must use their own funds the following Monday.
Due to the fact that neither the clearing corporations that transfer money for sold stocks nor the payment gateways you use to transfer money immediately settle accounts, this is the case. At the very least a day will pass.
Payment gateways reportedly settle funds with brokers on T+1, according to Kamath (transaction plus one day). As a result, he continues, “the broker’s own capital is blocked if a broker permits you to trade instantly with funds transferred through payment gateways. In the other instance mentioned above, it was the same. Brokers will need more working capital as a result of this.
“Even though the new AS (account settlement) procedure is good for customer safety, the broking sector will face some difficulties: 1) The operational risk of transferring large sums in one day; 2) Increased working capital needs, especially on the Monday after account settlement; and 3) Impact on float income, “Kamath clarified.
Companies like Robinhood offer zero brokerage accounts in the US. However, India does not have any such offerings (despite the fact that we have copycat apps for virtually every service). Simply because it is not possible due to Indian regulations.
Because they can use client funds as working capital, brokers in the United States are able to offer zero brokerage accounts. Additionally, they can profit from lending out customer securities. Due to a plethora of rules passed in recent years, none of this is allowed in India. The most recent regulation is yet another blow to India’s zero brokerage companies.
How did the procedure for settling accounts work? How is it changing?
Unused funds in the trading account were consistently transferred to bank accounts on a quarterly basis as part of the account settlement process.
You can now choose whether you want unused funds in your trading account to be transferred to your bank account every month or every three months. Depending on your preference, your money will be transferred to you on the first Friday of every month or every quarter. By doing this, you can make sure that your broker doesn’t misuse your money and only uses it for trading.
Consider that you have chosen a monthly balance transfer, as have all ICICI Securities customers who are also your customers. The money will be credited to your bank account by Saturday because transfers typically take a day.
The broker will either need to use his own funds or wait for your funds to be received before trading on your behalf if he transfers all unused funds to his client’s bank on Friday and wants to execute a contract on Monday. He’ll probably use his own money to trade for you on Monday in order to avoid losing potential profits. The shares will reflect after 2 days because shares arrive T+2 days, so when he executes a trade, the money will either immediately leave or enter his account.
Assume that on Monday, you add any additional funds to your trading account. The T+1 logic states that it will appear on the account by Tuesday. Therefore, your broker is only permitted to use your funds through Wednesday.
What effect is there for SEBI? Three risks exist for brokers in this circumstance:
- The operational risk of making large transfers in a single day, especially on a Friday of a month or quarter.
- The need for working capital is greater on Mondays after settlement on Friday.
- Their float income dropping
Brokers will consequently feel the need for working capital and will now be required to make their own investments. Brokerage fees might go up over time because they will have to borrow money to execute trades on the following Monday since they will be paying for everything themselves from Monday through Wednesday.
Although this is a good way to make sure that your broker doesn’t waste your money, anticipate an increase in brokerage fees. The payment gateways you use and the clearing corporations that transfer money for stocks both take at least a day, even if you return any unused funds to your broker.
Brokers are permitted by Sebi to submit bids on the RFQ platform on behalf of customers in order to stimulate the corporate bond market.
On Wednesday, Sebi, the authority over capital markets, permitted stock brokers to submit bids on the RFQ platform on behalf of their customers, enabling greater participation in the corporate bond market.
According to a circular released by the Securities and Exchange Board of India, this is in addition to the currently available option of placing bids in a proprietary capacity (Sebi).
The electronic RFQ or Request for Quote platform is used to request and/or provide quotes.
The platform was launched as a “participant-based” model, enabling registration, access, and transactions for all regulated entities, listed corporate bodies, institutional investors, and Indian financial institutions.
To increase liquidity on the RFQ platforms of the stock exchanges, Sebi has mandated that registered mutual funds and portfolio management services conduct a specific proportion of their total secondary market trades in corporate bonds through the RFQ platforms. Similar demands have also been made of insurers by the IRDAI.
Sebi has decided to “allow stock brokers registered under the debt segment of the stock exchange(s) to place or seek bids on the RFQ platform on behalf of client(s), in addition to the existing option of placing bids in a proprietar capacity.”
The first of January 2023 will see the implementation of these new rules.
The RFQ platform allows for the trading of non-convertible securities, securitized debt instruments, municipal debt securities, commercial paper, government securities, state development loans, and treasury bills.
For participants, including stock brokers, to access and use the platform, stock exchanges have been asked to set up the necessary infrastructure. They have also been asked to issue the required circular(s) addressing operational issues.
The Sebi has given four businesses permission to launch initial public offerings:
The initial public offerings of four companies—BIBA Fashions Ltd., Keystone Realtors Ltd., Plaza Wires Ltd., and Hemani Industries Ltd.—have received Sebi approval.
These companies have received their respective observation letters from Sebi, according to a website update posted on the regulator’s website on October 14.
The issuance of the observation letter, in Sebi lingo, signifies the regulator’s endorsement of the proposed IPO. The Draft Red Herring Prospectus (DRHP) for an IPO was filed by Biba Fashion in April. Biba Fashion is an ethnic wear fashion brand supported by Warburg Pincus and Faering Capital.
The draft papers state that the proposed IPO includes an offer for sale (OFS) of 2.77 crore equity shares by the promoter and current investors as well as a new issuance of equity shares valued at Rs 90 crore.
A Rustomjee group company, Keystone Realtors, submitted preliminary documents in June to raise Rs 850 crore through an IPO. The DRHP states that it consists of a fresh issue of equity shares with a maximum value of Rs 700 crore and an OFS by the promoters with a maximum value of Rs 150 crore.
Agrochemical producer Hemani Industries Ltd. filed the DRHP in March in order to raise Rs 2,000 crore through an initial share sale. The IPO consists of a fresh issue of equity shares with a maximum value of Rs. 500 crore and an OFS by the IPO’s promoters with a maximum value of Rs. 1,500 crore.
The DRHP for the share sale, which included a new issue of 1,64,52,000 equity shares, was submitted by Plaza Wires in May. The company, which has its headquarters in New Delhi, produces, distributes, and retails wires, aluminum cables, and quick-moving electrical goods.
The courts have repeatedly reminded SEBI of its meager control over disobedient auditors.
The Securities Appellate Tribunal (SAT) reversed SEBI’s decision to sanction the auditors for alleged false reporting on October 12. The justification is the same as in prior instances: SEBI lacks the authority to punish auditors for willful misconduct, false reporting or certification, and other offenses. Only if auditors were actively involved in financial or accounting fraud can SEBI take action against them.
The Bombay High Court established a precedent for SEBI action against auditors in 2010, which is when this all began. It made it crystal clear that unless SEBI can show that the auditors were complicit in financial or accounting fraud, it cannot take action against them for faulty reports. In other words, even if auditors were careless or gave false reports or certificates, SEBI cannot take action against them.
Even under corporate law, this power limitation has been expanded by an NCLAT decision. This restriction has a clear justification. The Institute of Chartered Accountants of India (ICAI) oversees the profession and has the authority to take corrective action in the event that audit reporting or certificates are inaccurate or incomplete. By doing so, multiple actions by various regulators are avoided, which could result in contradictory strategies.
Additionally, this guarantees that the expert body established for this purpose and familiar with the audit process is in possession of the necessary authority. In addition, there is a distinct difference between situations where the ICAI can act (fraud) and those where the SEBI can act (i.e. in case of negligence, or not complying with auditing standards).
Despite this unambiguous decision, SEBI has since taken action against auditors and issued unfavorable orders numerous times. Each time, it discovered that the orders were being reversed.
A publicly traded company made a statement to the public in accordance with the most recent SAT order. If the IPO proceeds were used for the stated purposes in the offer document, the auditor must certify as to this in the certificate they issue. In doing so, shareholders are reassured that the money they contributed was used for the objectives outlined in the offer document.
SEBI compared each item of expenditure made possible by the IPO to the utilisation detailed in the auditor’s certificate. It was discovered that the certificate contained false information, and even SAT agreed. According to SAT, “We find that the AO has only proven that the appellants falsely certified the Unqualified Utilization Certificate” (emphasis provided).
The Adjudicating Officer of SEBI (the AO) decided that the auditors have an unqualified certificate despite allegedly being aware of the facts. The auditors, according to his claim, “falsely certified a Unqualified Utilization Certificate containing distorted information that they did not believe to be true but certified knowing that when published, the same would be relied upon by investors as true and fair.” The AO consequently fined the auditors Rs 15 lakh.
It is important to note that this certificate is necessary according to securities laws. A comprehensive report on the financial statements is also given by the auditors. This report did express some concerns regarding the application of the IPO funds. The certificate made reference to the report.
The central aspect was the focus of the problem before the SAT. Was the fabrication of the accounts assisted or hampered by the auditors? Did they take part? SAT claims that SEBI has not proven this. Applying the ruling of the Bombay High Court, SAT annulled the penalty order.
SEBI might contend that as a result, it is resentful and helpless. It cannot take action against a person even if they have made a false statement or otherwise failed to exercise due diligence, even if a certificate is required by a law that directly falls under its jurisdiction. It has the power to take action against independent directors, merchant bankers, brokers, portfolio managers, and even members of the general public. Of course, auditors are not registered with SEBI, whereas merchant bankers are.
If the auditors themselves engage in fraud or manipulation, SEBI is not prevented from taking action. True, there is a fine line between making an untrue statement while being aware of the truth (as in this instance) and knowingly engaging in falsification or fraud. Now that the Supreme Court has ruled that the “preponderance of probability” test is applicable in cases of fraud, this issue only gets more confusing, like splitting hairs.
Therefore, if SEBI can show that a person was more likely than not guilty of fraud in civil proceedings such as penalties, etc., SEBI’s finding of guilt is upheld. The same rule ought to hold true for auditors.
A recent development has made SEBI’s position even stronger. The manipulation of books of accounts or financial statements was specifically included in the amendments SEBI made to its fraud regulations in 2020. It is argued that SEBI could issue orders against auditors that would be contested in court with a change in strategy in the proceedings and in the order.
It should be noted that auditors are not completely protected. Only negligent auditing, false statements, and similar actions are covered by the action bar. Auditors (and chartered accountants in general) could be held accountable for crimes like insider trading and fraud.
Don’t keep kicking a dead horse.
However, SEBI needs to stop beating a dead horse by pursuing legal action for careless auditing or even inaccurate audit reporting. It must concentrate on figuring out whether the auditors assisted or participated in the fraud. The Supreme Court’s lowered threshold for proving fraud and the regulations’ explicit inclusion of accounting frauds have made SEBI’s job easier.
Naturally, this brings up the issue of multiple regulators. The National Financial Reporting Authority (NFRA), as we have recently observed, has been very active in issuing adverse orders, punishing, and/or barring auditors. However, with SEBI focusing on fraud, these orders might be crossing the wrong line.
When corporate accounting and financial fraud is found, perceptions need to be revised. Recent rulings show that the law places restrictions on SEBI’s authority. Even if there are false statements, flagrant negligence, or other violations, it cannot take action against auditors. For that, there is ICAI/NFRA.
It also demands a review of the proceedings and SEBI orders, though. The main goal of the proceedings must be to establish, under the relatively lenient standard of “preponderance of probability,” whether and how the auditors themselves committed fraud or fabricated the accounts.
SEBI orders must meticulously document and support this. Instead of issuing the same orders against auditors for negligence and inaccurate reporting and anticipating different outcomes on appeal, doing it this way will be seen as fulfilling its responsibility to keep the capital markets free of fraud.