Crackdown! This is what SEBI plans to do to prevent default by brokers

In order to ensure that a corrective action is taken before any actual incidence of stock market brokers’ default happens, market regulator Securities and Exchange Board (SEBI) of India has devised a plan. The move comes amid a rising number of broker default cases being reported that have hurt the interest of investors. The plan outlines actions that puts the onus on exchanges to take action against brokers.    
The new directions are being taken on the back of increasing number of defaults by the brokers being reported and especially after investors faced problems due to default by Karvy Stock Broking.

According to Sebi these are the actions exchanges will have to take based on the initial indications or information:

— Close terminals, freeze demat accounts and carry forensic audits

— Brokers will not be allowed to withdraw from banks and other securities

— Before declaring a default, focus will be on maximum settlement

— No settlement for people close to or related to the brokers

— More Information Required: Instructions for Exchanges and Clearing Corporation  

— Action required on funds or security shortage worth Rs 10 cr or more

— Alert even on default by trading member, clearing member

— Sudden rise in complaints against trading members and clearing member

More actions to be taken:

— Ensure that documents are produced by the director of trading/clearing member within 3 trading days

— After 3 trading days of reply, the joint team of the exchange need to do inspection

–Inspection of accounts, securities and client register, details of banks need to be done

— Ensure who to pay money to, from whom to receive money

— Analysis of reply within 7 days; order for closure of terminal if need be

— Notice required before closing the terminal, will have to square off the position

— Depositories need to be informed about closure of terminals to ensure freezing

— Work will be suspended; no trading will be allowed

— On the basis of need, exchange can ask clearing members to encash  bank guarantees

— Appointment of forensic auditor to audit accounts of the trading member within 15

— SEBI will have to be informed within 30 days of any indication of default

— After the freezing of terminal, the Depositories cannot open a new demat account for the broker

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After knowing the financial status, closure of payment of dues to the investors need to be completed within 30 days