NSE issues guidelines for action against brokers for misuse of client funds

In a bid to tighten regulatory compliance, the National Stock Exchange (NSE) has issued a slew of guidelines for stock brokers against the misuse of client funds. In a circular dated June 13, the NSE said that in the recent past, the exchange has observed instances of misuse of client funds during its inspections as well as in the alerts generated under offsite supervision. The guidelines will come into effect from September 1, 2023.

"The exchange, from time to time, reviews the existing regulatory policies and framework to improve regulatory compliance by the members. Further, the exchange also periodically evaluates the penal provisions for non-compliance by the members regarding various regulatory requirements to make it more effective and act as a deterrent," the circular said.

According to the circular, in order to initiate immediate actions in critical cases of misuse of client funds in any of the "principles of enhanced supervision," the proprietary deposits/collaterals of the trading member available with the clearing house, NSE Clearing Ltd (NCL) shall be blocked to the extent of the shortfall/misuse amount for ₹10 crore, which is lower. NSE Clearing Limited (formerly known as National Securities Clearing Corporation Limited), NSE Clearing, a wholly owned subsidiary of NSE is responsible for clearing and settlement of all trades executed on NSE and deposit and collateral management and risk management functions.  

In case misuse is observed in "all principles", an amount equivalent to an aggregate amount of all principles shall be blocked. 

The exchange said that the proprietary deposits/collaterals shall be blocked after two trading days "from the date of communication of the direction regarding the blocking of such deposits/collaterals to the trading member." According to the circular, such deposits/collaterals shall be blocked for a period of 10 days and no exposure will be granted to the trading member on such deposits/collaterals.

"Such administrative actions shall be in addition to the existing disciplinary actions/penalties prescribed in Exchange Circular No. NSE/INSP/53530 dated September 2, 2022, for misuse of client funds," the exchange said.

Earlier this week, the exchange also signed a tri-partite memorandum of understanding (MoU) with the government of Maharashtra and Moneybee Institute Pvt Ltd, which aims to create awareness amongst the public about the various aspects of investing in the capital markets, provide relevant and practical knowledge to investors, enabling them to make informed investment decisions.

"Financial literacy is the need of the hour today. Maharashtra Government is going to try to make lakhs of people literate through the agreement made by NSE and MoneyBee. Maharashtra being the first state, through this initiative will be guided to avoid cyber fraud, create awareness about Ponzi schemes and how and where to invest," said Devendra Fadnavis, deputy chief minister, Maharashtra.

Earlier this month,  NSE, BSE and the Securities and Exchange Board of India (SEBI) introduced enhanced surveillance mechanisms for companies having a market cap of less than ₹500 crore, in a bid to limit volatility in micro-small companies. The enhanced surveillance mechanism (ESM) framework has become effective from June 5, 2023.