All brokerages must transfer unused funds back to the customer’s bank account as part of the new account settlement process, starting today. Nithin Kamath, founder and CEO at Zerodha estimated that these funds will be more than ₹ 25,000 crores across the country.
Capital markets regulator, Securities and Exchange Board of India (SEBI) has issued a circular according to which, account settlement has to be done on the first Friday of either each month or quarter, as per the client’s choice, under the new guidelines.
Therefore unused funds lying with brokers will have to be transferred back to the customers’ accounts after considering end-of-day (EOD) obligations of funds as on the date of settlement across all the exchanges on the first Friday of the quarter or the first Friday of the month, as per the client’s choice. If the first Friday is a trading holiday, then the settlement will happen on the previous trading day.
Nithin Kamath tweeted that if he were to bet, he’d say that there will be upward pressure on brokerage rates over the next few years due to these regulatory changes. He added that while these changes are good in terms of customer safety, they will lead to increased working capital requirements for the broking industry.
However, he clarified that they (Zerodha) have no plans to increase brokerage for now. He just said that there is a high probability of it going up due to higher working capital requirements.
Kamath believes that this is another way to test if brokers are misusing client capital in any way. He also said that an individual’s account balance on Zerodha might reduce or he/she may receive funds in their bank accounts this Saturday.
He said that the AS regulation is unique to India and that in most countries, these unused funds can be held by brokers and banks forever and that they can be used for working capital requirements. However, in India, client funds can only be used for that customer’s trades after all the regulatory changes.
The process of transferring back the unused funds of the clients to their accounts by stock brokers is called running AS, in market parlance.
Further, he listed a few issues with the industry:
1. The operational risk of sending large amounts in one single day.
2. Much higher working capital requirement, especially on Monday after AS. 3. Hit on float income.
4. Higher working capital
Giving an example, he tweeted that payment gateways (PG) settle funds with brokers on T+1. Therefore, if a broker allows customers to trade instantly with the funds transferred using PG, the broker’s own capital is blocked.
On the Monday after AS, more funds might be transferred to trade using PG. If a broker allows buying stocks with proceeds from stocks sold immediately, the broker’s own funds will be blocked until the exchange settles by T+2 days, he added.
As per SEBI, the actual settlement of funds and securities shall be done by the member depending on the mandate of the client and there must be a gap of a maximum of 90 / 30 days (as per the choice of the client viz. Quarterly / Monthly) between two settlements of running accounts.
Funds will be returned to the client within the next three working days irrespective of the date when the running account was previously settled if clients have not done any transaction in the 30 calendar days.
Written by Simran Bafna
