SEBI Proposes Stricter Norms for Authorised Persons in Broking

The Securities and Exchange Board of India (SEBI) is working on a proposal to enforce stricter eligibility norms for Authorised Persons (APs), who operate on behalf of brokers. The proposed regulations aim to hold brokers more accountable for any defaults committed by their sub-brokers. 

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According to sources familiar with the matter, SEBI plans to introduce new qualifications for APs, such as requiring at least a graduate degree and three years of market experience. For those without a graduate degree, the required market experience may be extended. Additionally, the introduction of a qualifying examination for APs is under consideration.

This initiative is intended to ensure that brokers are represented by individuals with sufficient knowledge and experience, reducing the risks associated with underqualified APs. Under the new framework, brokers would be held fully responsible for any defaults or misconduct by their APs, a move aimed at fostering greater accountability in the industry.

However, the proposal has sparked debate among brokerage firms. While the need for better-qualified APs is widely acknowledged, some brokerages, particularly those heavily reliant on APs for business, are hesitant to accept full liability for their actions. Industry insiders note that the issue is divisive, with concerns about how the changes might impact operations and profitability.

This regulatory shift comes amid a surge in the number of demat accounts in recent years, accompanied by cases of false promises made to investors. According to data from Motilal Oswal Financial Services, Central Depository Services Ltd., and National Securities Depository Ltd., the number of demat accounts rose from 130 million in September 2023 to 179 million by October 2024. 

Much of this growth has been attributed to increased activity in the derivatives market, which has attracted new investors.

SEBI’s goal is to protect these investors from unethical practices, such as misleading claims often propagated by certain APs. By raising the bar for eligibility, the regulator aims to ensure that sub-brokers are better equipped to serve their clients, thereby fostering a more transparent and secure trading environment. This effort represents a significant upgrade from the current eligibility criteria for APs, which only require a 10th-grade education, a clean reputation, and basic trading infrastructure.

In addition to higher educational and experience standards, SEBI is expected to include other measures, such as mandatory NISM certifications, more rigorous background checks, and increased security deposit requirements for brokers. These changes reflect a broader push to improve compliance and enhance the regulatory framework governing APs.

Opinions within the industry are mixed. While many applaud the move to tighten AP qualifications, others express concern about the potential impact on smaller players and new entrants. Vamsi Krishna, CEO of StoxBox, supports the idea of improved compliance, while Nirbhay Vassa, CFO of Abans, suggests the need for advanced monitoring systems to manage risks. 

Meanwhile, Praveen Naidu of Mirae Asset Capital Markets warns that higher deposit requirements might deter aspiring brokers, especially younger professionals looking to establish themselves in an increasingly challenging market.

As SEBI finalizes these new rules, it is also considering feedback from the industry, including suggestions for shared liability models and tools to help brokers oversee their AP networks more effectively. While these reforms are designed to strengthen investor protection and enhance the credibility of the broking ecosystem, the regulator must balance these objectives with the practical challenges faced by smaller businesses and industry newcomers.