The Securities and Exchange Board of India (SEBI) is on course to introduce a new ruling to enable investors interested in trading to freeze trading funds in their own account without the necessity of transferring funds to broker engaged by them for trading stocks.
The intent of proposed ruling is to cut down probability of misuse of investors’ money who intend to make trading investments via engagement of a broker for trading stocks.
Under existing mechanism, investors’ money may be credited to the account of brokers to buy stocks for investors – This provision of direct credit of funds into broker accounts could provide brokers (who has the greed to make quick money at any cost) with an opportunity to make a handsome money by manipulating clients.
To change this proposition of fraud element involved in the process of direct crediting of trading funds into the broker’s account – SEBI proposed ruling, if implemented, will enable investors to block trading funds in their own account and release the funds to clearing corporation of the stock exchange following execution of trade – This will elude the requirement of channelizing the funds via brokers instead open the window for investors to directly credit trading funds into clearing corporation account.
However, brokers may not be involved in mobilizing of funds, yet they have crucial role in supporting investors to enable investors to make investments in right stocks with mitigation of risks associated with trading and to ensure investors do get appropriate economic returns for their investments.
It is interesting to note that India could be first nation to implement such a ruling for the benefit of investors and save investors from a probable economic looting by brokers (with greed for making quick money at cost of investors lack of trading knowledge).
As of now, SEBI is seeking public comments and recommendations and based on the collective feedback of all stakeholders SEBI is planning to turn proposed ruling into a binding law by March, 2023.
Despite of benefit it could deliver to investors, enforcement of such a ruling could hurt earning prospects of brokers in different ways.
SEBI is of the opinion there are multiple benefits of new ruling:
a) Genuine authentication of owner of funds
b) Removing dependence on brokers for clients and clearing corporation for every minute detail and limiting role of brokers to trading of stocks
c) Reduce the risk of misuse of funds
d) Direct accountability on owners of funds in case of any fraudulent activities involved in the funds
e) Direct settlement of any dispute between the investors and clearing corporation
It is hoped implementation of proposed ruling could bring in more transparency in trading of stocks and accountability on owner of the funds and cut down probability of misuse of funds by brokers and allegations of fraud or misuse funds by brokers.
