Stock exchanges have proposed a major overhaul of the regulatory framework governing authorized persons (APs), raising entry barriers through stricter eligibility criteria, mandatory certifications, net-worth requirements and tighter supervision by stock brokers. Industry executives say the changes are expected to significantly increase compliance costs. APs are broker-appointed agents who acquire and service clients on behalf of stock brokers.

Key Highlights

• Stock exchanges propose minimum net worth of Rs 5 lakh for individual authorised persons, raising entry barriers significantly.
• Framework mandates NISM certification, higher age limit of 21 years, and CCTV surveillance at AP trading terminals.

In a consultation paper released, the stock exchanges, along with the Securities and Exchange Board of India (SEBI), proposed introducing minimum net-worth criteria for APs. Individual APs would be required to maintain a minimum liquid net worth of Rs 5 lakh, while companies would need a minimum net worth of Rs 25 lakh. Additionally, APs would have to maintain a minimum deposit of Rs 1 lakh with their stock broker, although brokers may prescribe a higher deposit depending on factors such as business volume and clientele. Currently, no such requirement exists.

Higher Age Limit and Mandatory Certification Proposed

The proposal also seeks to raise the minimum age for individual AP registration to 21 years from the current 18 years. Applicants would need to have passed Class 12 or an equivalent examination, possess at least two years of work experience with a stock broker or within the securities market, and satisfy the fit-and-proper criteria under SEBI's Intermediaries Regulations. The stock exchanges have also proposed making National Institute of Securities Markets (NISM) certification mandatory for all APs.

Enhanced Surveillance for Trading Terminals

For APs operating trading terminals, the consultation paper prescribes additional safeguards, including geo-tagging of terminals, CCTV surveillance, facial recognition or biometric authentication, centralised storage of pre-order placement evidence, and stringent data-security standards. Trading terminals located at AP premises would be treated as branch offices of the stock broker, making brokers directly responsible for liabilities arising from such locations, according to the paper.

Brokers Face Expanded Compliance Responsibilities

The proposals also significantly expand the compliance responsibilities placed on stock brokers. Brokers would be required to conduct surprise and mystery audits, generate monthly off-site alerts, monitor APs' social media activity, physically verify AP premises before onboarding, organise annual compliance training, make recorded welcome calls to AP-sourced clients warning them against promises of assured returns, and publish details of active and cancelled APs, along with complaint statistics, on their websites.

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Industry Warns of Rising Compliance Costs

According to broking industry officials, the proposed changes are expected to raise compliance costs substantially for both APs and brokers. D P Singh, Head-Compliance at Ventura Securities, said the proposed framework introduces a significant entry barrier by prescribing minimum liquid net worth, broker deposits and enhanced infrastructure requirements. He noted that, unlike balance sheet-based net worth, the proposed liquid net worth excludes fixed assets and unlisted securities, making compliance more demanding. Combined with geo-tagging, CCTV, facial recognition and tighter broker oversight, he said these measures could substantially raise compliance costs and potentially push many small and mid-sized APs out of the business.

A senior executive at a broking firm said the framework is primarily aimed at preventing the misuse of client funds by APs, addressing risks such as APs collecting money directly from clients or promising assured returns - both practices prohibited under existing securities regulations. The executive noted that while the framework's minimum eligibility, infrastructure and oversight standards aim to strengthen accountability and investor protection, the tighter norms could also make it difficult for many small and mid-sized APs to continue operating.

Framework to Replace 2009 Regulations

The proposed framework seeks to replace the existing regulatory regime for Authorized Persons introduced in 2009, with the stated objective of strengthening supervision of APs and enhancing investor protection. The Indian exchanges have invited public comments on the proposals until August 27.