SEBI introduced the Qualified Stock Brokers (QSBs) framework in February 2023 to address the growing concentration risk arising from the dominance of a few top brokers and safeguard market integrity and stability.
The framework considered designating certain stock brokers as QSBs based on specified parameters based on the size and scale of operations of a broker, their likely impact on investors and the securities market, as well as governance and service standards and stipulated additional regulatory, risk, governance, and service standards requirements.
In March 2024, SEBI revised the QSB framework and introduced additional parameters (compliance score, grievance redressal score, proprietary trading volumes) for designating a stock broker as QSB.
The framework entrusted Market Infrastructure Institutions (MIIs) with enhanced monitoring and surveillance of QSBs for the discharge of their obligations and responsibilities. Accordingly, exchanges (NSE, BSE, MSE, MCX, and NCDEX) came up with the list of 15 stock brokers designated as QSBs in March 2023 and the compliance requirements came into effect on July 1, 2023.
Further, based on SEBI’s revised guidelines and revised parameters, exchanges re-assessed the 2023 list of QSBs and 14 designated QSBs by a revised list in March 2024. QSBs in the first list who did not find place in the revised list still needed to comply with the requirements for an additional three financial years.
Breaches, alleged violations
In theory, the regulatory intent of devising the QSB framework is commendable from the perspective of preserving market integrity and resilience.
However, despite close to two years since the launch of the QSB framework, the ground level situation reflects many gaps. These emanate from some of the QSBs not fully complying with the basic provisions of stock broker regulations and related code of conduct and also from the lack of capabilities of MIIs to address the enhanced regulatory requirements.
A close review of SEBI orders, including settlement orders, concerning QSBs, since February 2023, reveal poor implementation of the framework. During this period, SEBI issued about a dozen adjudication orders involving seven QSBs, and two Section 11 orders involving three QSBs and seven settlement orders involving five QSBs for various violations.
These violations relate to front running, artificial trading volume, non-compliance with client due diligence, non-conformity with margin trading facility, misutilisation of funds, incorrect reporting, technical glitches, and breach of cybersecurity frameworks, among others.
These orders raise questions about the effectiveness of governance, conduct and internal control practices on the part of QSBs while underlining the low efficacy of regulatory oversight.
Implementation gaps
The effective functioning of the QSB framework remains critically dependent on the governance structure, processes, managerial and infrastructure resource commitment of MIIs who are overtly stretched with their frontline supervisory responsibilities.
While the framework was hastily launched in July 2023, it is unclear if the market regulator had duly factored in the availability and adequacy of requisite capabilities on the part of MIIs for realistically discharging these newly added responsibilities.
So far, neither MIIs nor the regulator have come out with a post-implementation qualitative/quantitative analysis of the impact and outcomes of the QSB framework.
Time for a holistic review
SEBI issued more than a dozen circulars concerning stock brokers in the last two years.
Notable provisions related to upstreaming of client funds by brokers, institutional mechanism for prevention and detection of fraud and market abuse, enhanced supervision of brokers and depository participants, a framework for monitoring and supervision of system audit of stock brokers, updated investor charter for stock brokers, among others.
It is time SEBI conducted a holistic review of the framework by reckoning different facets of regulatory requirements as in these circulars.
To add teeth to its enforcement power, it must address the noticed gaps and irregularities observed during investigations and enforcement actions on QSBs.
SEBI must keep in mind that stakeholders’ consultation, while very important, should not be hijacked by self-serving views of the broker industry.
Beefing up supervision
Towards a forward-looking approach of effective supervision and monitoring, SEBI may revisit the idea of an SRO, that would focus on supervision of all categories of brokers across exchanges and market segments.
SRO should be empowered with disciplinary powers and provide prompt support to SEBI on regulatory enforcement actions.
Supplemental to MIIs and structured on the lines of the US FINRA-based SRO model, building a new SRO platform with capabilities and expertise can go a long way in making the Indian market ecosystem efficient and well-governed.
Backed by appropriate legal provisions, establishing a separate entity, co-promoted by MIIs, can also deliver the QSB mandate more effectively and with accountability in the near term.
Chourasia is Industry Adviser, Tata Consultancy Services Ltd; and Nair is former Director, National Institute of Securities Markets
