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Complaints from investors may force Sebi to regulate prepaid plans of brokerages
MUMBAI: Stock brokerages offering prepaid schemes to investors may find their business affected with the Securities & Exchange Board of India (Sebi) discussing plans to regulate such sales.
Increasing investor complaints of misuse and strong-arm tactics employed by brokerages has forced the market regulator to consider plans to regulate, and possibly curb them in some way.
Top Sebi officials told ET the regulator wants to ensure that brokerages don't forfeit investors' money in case the person fails to fully utilise his or her quota for the year under the prepaid plan. The regulator also wants to minimise cases of complaints and harassment, and ensure that investors get a fair play, the officials said.
The proposal was discussed in the regulator's July 5 meeting with market intermediaries, including top exchange officials and investor associations.
Brokerages fear that any curbs could affect their attempts to improve business in a weak economic environment marked by investor apathy and low volumes. Prepaid plans account for a fourth of new businesses for many brokerages, including Angel Broking, Sharekhan, Motilal Oswal and Anand Rathi.
"There are instances where aggrieved clients have raised the matter with the stock exchanges. The regulator will consult broking firms and is expected to issue guidelines or a circular regarding prepaid schemes," said a top official familiar with the situation.
Brokerages Facing Tough Time
"Of the 10,000 new accounts we add every month, about 30% customers opt for these plans. There is no need to meddle with broking schemes as it is a free market," said the senior vice-president (client acquisition) of a domestic brokerage, who did not want to be named as he is not authorised to speak to the media. Brokerages have been facing a tough time in the past few years due to the slump in equity markets. Stock prices of leading firms have fallen by 10-75% in the past three years and profitability of most has nosedived this year.
"Revenues from retail broking have dipped in the past few quarters. More than half of the client accounts are inactive. Around one-fourth of new accounts are for prepaid plans that lure investors to pay upfront and trade heavily. Any clampdown may have an adverse impact on future cash flows of retail-dominated broking firms," said a financial services analyst with a domestic company.
Prepaid plans were launched in 2007, but picked up pace last year. They are aimed at investors who are heavy traders with the ability to do large volumes. Though the schemes differ amongst brokerages, it essentially works like this: An investor is offered a plan where the price per trade is heavily discounted on the payment of a lump sum amount every year. The brokerage gets upfront payment and is assured of continuous business through the transactions. The investor, on the other hand, gets a discount on regular transactions, which he would not have got otherwise. For instance, if a client pays Rs 25,000 advance brokerage, he or she is required to trade stocks worth Rs 75 lakh in a year to use this amount, or Rs 7.5 crore of intra-day or derivatives volume.
The plan varies from brokerage to brokerage. While in some cases, it is refundable, in other cases, it can be refunded only after a certain period but without interest. In some cases, clients can trade only in a particular set of asset class. While some are valid for 'lifetime. in other cases there is a validity period. Further, the discount varies from plan to plan.
This was supposed to work well in theory, but a number of problems have cropped up in practice. Investors who did not make the required number of trades found their lump sum amount forfeited. Brokers blame the problem on the forfeiture of unutilised amount, which happens with only a few firms. Sometimes, this is not mentioned in the fine print.
"If the schemes are not banned in toto, every broker would start offering a new scheme with its own conditions, which will be difficult to monitor," said a person who attended the Sebi meeting. In a recent case, investor Paul John D Cunha, a client of Angel Broking, went to arbitration at the BSE to seek refund of the forfeited amount. The client paid around Rs 25,000 as prepaid brokerage for a year but could utilise only about 10% of the amount. The client disputed the forfeiture and slapped an arbitration case against the company. The case was withdrawn earlier this year after both parties agreed to settle. According to sources, Angel Broking paid Rs 27,389, including an interest of 18%, to the client.
An Angel Broking spokesperson declined comment on the matter. Some brokerages have promised to refund the unused amount. For instance, the validity for ICICIDirect prepaid plan is 15 years. "At the end of 15 years, the unutilised amount will be refunded to the client," said Vineet Arora, executive vice-president and head (product & distribution), ICICI Securities.
Rakesh Somani, president of the Association of National Exchange Members of India, said that so far the regulator has not approached them. "If the regulator is concerned, it is possible that it has seen some practice which could be against investor interest," he said.
