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“Sebi banning brokers from creating bank guarantees on client funds will have an immediate impact on the working capital requirement,” said Prakarsh Gagdani, CEO of 5paisa.com. “Small brokers will find it difficult to raise capital or debt, while it will have less impact for large, well-capitalised brokers. But overall, our markets will become stronger and more transparent.”
In a circular on Tuesday, the Sebi barred stockbrokers from creating bank guarantees by pledging clients’ funds starting from May 1. Brokers must close all existing bank guarantees by September 30. The move aims to curb misuse of investors’ money.
“With Sebi’s recent decision to disallow brokers from using client funds to create new BGs (bank guarantees), the need for a broker to infuse own capital in the business increases further,” said Venu Madhav, COO, Zerodha.
“This is because, now brokers cannot use the non-funded portion of the BG to legitimately fund certain client transactions like instant credit against the sale of securities, margins against unapproved securities etc.”
Vijay Mehta, president of the Association of National Exchanges Members of India (ANMI), said the new norms could put further pressure on small brokers.
“Bank guarantee was used to fund the working capital requirements of the Clearing Corporation due to the 50:50 cash-non-cash ratio,” he said. “Exposure of up to 90% of client collateral and the limited list of non-cash collateral was accepted by the Clearing Corporation. The call on the unfunded portion was taken by the lending banks based on the financial capacity of the broker, and there was no apparent risk in the system due to this.”Currently, brokers pledge clients’ funds with banks, and banks issue bank guarantees (BGs) to clearing corporations that they use as working capital.
After the Karvy Broking fiasco, Sebi has been concerned about the safety of clients’ funds and their potential misuse by brokers. In the past couple of years, the regulator introduced several measures to safeguard clients’ funds and securities. In 2020, Sebi banned the transfer of clients’ securities to demat accounts of trading and clearing members.
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