SEBI Plans to Tighten Broker Net Worth Requirements

In the last couple of years there have been more than 25 cases of major broker defaults. There have been some high profile names like Karvy, Anugrah Broking, Arcadia Stocks, Bezel etc. In a number of these cases, the trading license was cancelled by the stock exchanges after the brokers were found to be illegitimately pledging client shares to raise funds.

To address the issue of broker defaults and to protect the interests of the small investors, SEBI now plans to hike the broker net worth requirements. While, this may not address all the challenges, it will at least ensure that well capitalized serious players will remain in the interest. That way, the customers will not have to worry about the safety of their shares.

Currently a Professional Clearing Member (PCM) or a Trading cum Clearing Member (TCM) requires a net worth of Rs.3 crore for clearing transactions in cash market. If they also clear transactions in the F&O market, then the net worth requirement doubles to Rs.6 crore. Going ahead, this number is likely to be increased manifold.

SEBI has now proposed that the base net worth requirements for PCM and TCM be raised in tranches. For example, the base net worth requirements will be raised to Rs.25 crore by Oct-22 and increased further to Rs.50 crore by Oct-23. Brokers may have to show higher variable net worth if 10% of average client balance retained exceeds Rs.50 crore.

One of the justifications given by SEBI for this move is that the current limits were set about 20 years ago. In the last 20 years, the capital markets have changed drastically in terms of size, breadth, institutional participation and complexity. Also, in the light of the proliferation of the number of trading accounts in the last one year, SEBI has called for this move.

While the larger brokers are already well capitalized, this move will actually impact the small and mid-sized brokers. The smaller brokers have remonstrated that this would push most of them out of business. However, SEBI is right that they cannot afford another big default in the stock markets, and prevention is always better than cure.

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