Sebi has done well to crack down on brokers misuse of their clients money and securities.
Errant brokerages should be penalised, heavily, but in a manner that protects their clients investments.
This might entail giving the brokerage in question some time to arrange for funds to settle their clients dues, instead of a total and immediate clampdown that freezes all operations.Its appalling that two decades since stock dematerialisation, uniform, T+2 settlement and derivatives, brokers could play around with idle stocks of unsuspecting investors.
For some intermediaries, it was a neat business model to quietly raise money.
Every fraud feeds on a weak link.
Investors, attracted by low fee and trading convenience, ran demat accounts with brokers (instead of banks), freely borrowed from them to buy shares, and gave intermediaries the power of attorney to operate accounts.
In this world built around a cosy relationship, shares part-financed by brokers often stayed in the brokers pool account instead of being transferred to clients account.
Brokers pledged these shares, which technically belonged to their clients, to raise money.
The funds were used to speculate in derivatives, finance other clients, and even bet on illiquid assets such as property.
These deals are irregular and opaque, and mask the true extent of leverage in the financial market.
Four months after Sebi directed brokers to form separate accounts for clients unpaid or partly-paid shares and brokerage stock pool, errant intermediaries are yet to unwind their positions, recover funds and regularise the accounts.
These brokers should be punished even if one supports Sebis decision to give them time to arrange funds and probably avert any contagion effect.Sebis new rules make unauthorised pledging of clients shares virtually impossible.
But, time and again, crooked operators have taken advantage of unwary investors.
A system, in which investors are intimated as soon as their shares are pledged just as they come to know of any purchase or sale of shares will help.