[Nikita Singh and Aishana are the third year law students at Gujarat National Law University.]
The Indian stock broking industry is undergoing a major change with the introduction of a new facility for investors to voluntarily freeze or block their online access to their trading accounts. This facility, which was introduced by the Securities Exchange Board of India (SEBI) on 12 January 2024 through a circular and will be implemented from 1 July 2024, is aimed at enhancing investor protection and regulating the securities markets in India. The facility will allow investors to safeguard their trading accounts from any suspicious or unauthorized transactions, and give them more control and autonomy over their online access.
In this post, we will analyse the background to this framework as well as the legal implications of the new facility. We will also discuss how it will affect the various stakeholders in the industry, such as investors, brokers, and regulators.
Challenges in Online Trading: The Call for Enhanced Security Measures
The Indian stock broking industry has witnessed a major transformation in the past few years, thanks to the advancement of technology and digitalization. According to a report by NSE, the online mode of trading accounted for 87.5% of the total turnover in the cash segment and 99.9% of the total turnover in the derivatives segment in 2020-21. This shows that more and more investors are opting for the online mode of trading, as it offers convenience, speed, and accessibility. However, the online mode of trading also poses some challenges and risks for the investors. There have been several cases of suspicious activities in the trading accounts of investors, such as unauthorized transactions, hacking, phishing, and the like. For instance, in 2019-20, SEBI received 1,819 complaints related to unauthorized trading, which accounted for 12.5% of the total complaints received by SEBI. These activities can cause financial losses and damage the reputation of the investors. Moreover, investors do not have the option to freeze or block their trading accounts in case of such situations. This exposes them to further risks and vulnerabilities.
A similar facility is already available for the demat accounts of the investors. Investors can freeze/block their demat accounts through the depository participants (DPs) or the depositories (NSDL or CDSL). This helps them to prevent any unauthorized or fraudulent transactions in their demat accounts. According to the SEBI circular, the facility of freezing or blocking of demat accounts has been well received by the investors and has resulted in a reduction of complaints related to unauthorized transactions in demat accounts. However, there is no such facility for the trading accounts of the investors. The trading accounts are those where the investors can buy and sell securities in the market. The trading accounts are maintained by the stock brokers or the trading members (TMs) of the stock exchanges. Investors have to rely on the TMs to safeguard their trading accounts from any suspicious activities. Therefore, there is a need for a similar facility for the trading accounts of the investors, where they can voluntarily freeze or block their online access to their trading accounts. This will help them to protect their trading accounts from any unauthorized or fraudulent transactions. This will also enhance their confidence and trust in the stock broking industry and the securities markets in India.
The New Framework or Facility for Voluntary Freezing/Blocking
The SEBI circular mandates the introduction of a new framework for the voluntary freezing or blocking of online access to trading accounts by clients in the Indian stock broking industry. Spearheaded by the Brokers’ Industry Standards Forum (ISF) in collaboration with stock exchanges under SEBI’s guidance, this framework will encompass detailed policies on communication, acknowledgment, and processing time for client requests. It will outline the actions TMs should take upon receiving requests for freezing or blocking or re-enabling online access, along with the process for re-enabling after the designated period. The framework will prioritize transparency, accountability, and client convenience, ensuring minimal disruption to normal trading activities. Stock exchanges will oversee TM compliance, implementing guidelines from 1 July 2024, with reporting requirements and a compliance report submission to SEBI by 31 August 2024. The stock exchanges will also undertake necessary steps, including system implementation and amendments to bye-laws, rules, and regulations, while disseminating circular provisions to TMs and investors. This new framework signifies a significant move toward improving the business and investment environment in the Indian stock broking industry, offering investors a safeguard against suspicious activities and assigning TMs a new responsibility in compliance with ISF and SEBI guidelines.
Impact on Investors, Brokers and Other Stakeholders
The SEBI circular introducing the option for clients to voluntarily freeze or block online access to their trading accounts is poised to positively impact the stock broking industry and its stakeholders. For investors, this facility offers crucial advantages. At the outset, it acts as a safeguard against suspicious or unauthorized transactions, mitigating the risk of financial losses and reputational harm. Additionally, it provides investors with greater autonomy, allowing them to exercise control over when and how they freeze or block online access based on their preferences and circumstances. This initiative enhances overall investor protection and confidence in the Indian stock broking industry and securities markets, fostering a sense of security in utilizing online trading. Furthermore, it is anticipated to reduce disputes and complaints between investors and trading members, enabling verification and validation of transactions and minimizing conflicts.
The alignment of this new facility with the existing option for freezing or blocking demat accounts creates a uniform mechanism, offering consistent protection and convenience to investors across both demat and trading accounts. A survey conducted by the ISF indicates strong investor interest and satisfaction, with 87% expressing their willingness to use this new facility. The survey also suggests that the voluntary freezing or blocking of online access to trading accounts will contribute to increased market efficiency, liquidity, transparency, and stability in the Indian stock broking industry.
The introduction of the facility for clients to voluntarily freeze or block online access to their trading accounts carries implications for brokers and other stakeholders in the stock broking industry. To comply with this development, TMs must implement guidelines issued by the ISF and SEBI, encompassing detailed policies, communication methods, acknowledgment issuance, request processing time, TM actions, re-enabling procedures, and client notifications. TMs need to ensure the smooth and efficient provision of this facility, leveraging the latest technology and security measures. Maintaining meticulous records and documentation of related requests and actions is imperative, with TMs responsible for tracking the status and history and providing necessary information to clients, stock exchanges, and SEBI when required. TMs are also obligated to report and disclose details of this facility to stock exchanges and SEBI in the prescribed format and frequency, submitting a compliance report to SEBI by 31 August 2024. Furthermore, TMs must actively educate and inform clients about the benefits and implications of this facility through various communication channels. It is crucial for TMs to ensure that this facility does not compromise their compliance and regulatory obligations, requiring adherence to stock exchange and SEBI rules and regulations. While implementing the voluntary freezing or blocking facility poses challenges, such as infrastructure investment and adjustments to business models, it also presents opportunities for brokers and stakeholders to enhance services, products, and offerings, differentiating themselves in a dynamically evolving market.
Navigating the Legal Terrain
The SEBI circular introducing the option for clients to voluntarily freeze or block online access to their trading accounts carries substantial legal implications for the stock broking industry in India. Issued under the authority of section 11(1) of the SEBI Act, 1992, and regulation 30 of the SEBI (Stock Brokers) Regulations, 1992, the circular aligns with SEBI’s mandate to safeguard investor interests and regulate securities markets. This legal framework mirrors existing provisions within the SEBI (Depositories and Participants) Regulations, 2018, allowing for the freezing or blocking of demat accounts. Additionally, it complements the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, aimed at preventing fraudulent practices in the securities market. The circular upholds principles of natural justice, transparency, and accountability by outlining due process, communication, acknowledgment, and intimation procedures for requests related to the voluntary freezing or blocking of online access to trading accounts by clients. Importantly, the circular establishes new legal rights for investors to exercise control over their online access and imposes obligations on TMs to comply with ISF and SEBI guidelines. It delineates the scope, conditions, and procedures for both rights and obligations, specifying the roles and responsibilities of investors and TMs. Breach or violation of the circular subjects parties to penal provisions under the SEBI Act, 1992, and SEBI (Stock Brokers) Regulations, 1992, triggering disciplinary actions by stock exchanges and the ISF. The circular also outlines a redressal mechanism and grievance handling procedure for dispute resolution, contributing significantly to the legal landscape of the stock broking industry in India.
Conclusion
SEBI’s recent circular allowing clients to voluntarily freeze or block online access to their trading accounts is a significant milestone for the Indian stock broking industry. This move addresses investor concerns, providing them with increased control. Beyond benefiting investors, the circular promotes industry-wide improvements, aiming for a more uniform and efficient mechanism. Legally, it establishes a new framework, reinforcing regulations for investor protection and market regulation. Despite posing challenges for brokers, such as the need for investment and adaptation, the circular also presents opportunities for innovation and differentiation in services. Overall, this development has a profound and lasting impact, aligning with the goal of safeguarding investor interests and paving the way for industry growth and development.
– Nikita Singh & Aishana