SEBI proposal to reduce market risk

The surge in retail equity investors and the manifold increase in cash and derivatives trading since the pandemic has ramped up the risks faced by stakeholders — namely, stockbrokers, investors looking for quick returns and the markets ecosystem. The existing rules of the Securities and Exchange Board of India on net worth requirements for stockbrokers do not adequately cover risks in this regard. In a welcome move, the regulator has proposed an improved formula on net worth requirements. Spelt out in a consultation paper, the formula addresses higher risk arising from aggressive client acquisition by the broking fraternity.

Existing regulations lay down that brokers must maintain a minimum net worth, which is the higher of the base net worth or variable net worth. Base net worth is currently ₹1 crore for trading members and the variable net worth is fixed at 10 per cent of average daily cash balances of clients across exchanges, computed over the previous six months. However, with the new rules requiring brokers to move clients’ funds to clearing members, the average daily cash balance with brokers has dropped. The variable net worth norm is not in line with the operational risks faced by them. The paper instead proposes that the variable net worth be linked to daily average credit balance and the number of clients a brokerage has. Substituting cash balance with credit balance is a good idea, since the latter is a better marker of a broker’s volume of business.

Linking brokers’ net worth to number of clients appears aimed at deterring brokers from trying to grow their client base too rapidly. SEBI proposes a variable net worth of ₹50 lakh for brokers with direct clients between 10,000 and 50,000 and ₹50 lakh for every additional 50,000 clients. If the clients are acquired and serviced through authorised persons (AP), brokers must maintain higher reserves. For instance, if 50,000 clients are acquired through APs, the variable net worth requirement increases to ₹2.25 crore. The regulator would be right in doing so since supervision and compliance requirements are lower for APs. They are not directly supervised by SEBI, but are registered with the stockbrokers, who take the onus of monitoring their business. SEBI’s proposals suggest that there could be higher default risk in clients acquired through APs. While larger stockbrokers can easily meet the additional reserve requirement, smaller ones may run up against a liquidity crunch.

The proposals will also help slow down entry of new equity investors. The number of unique investors registered with the NSE has increased from 3.1 crore in March 2020 to 12.9 crore in March 2026, at a compound annual growth of 26 per cent every year. Stockbrokers and the APs have driven the entry of new investors in recent years. By linking variable net worth to number of clients, SEBI seems keen to rein in the frenetic pace of client growth. This is desirable to suck out market froth.

Published on May 6, 2026