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This article is written by Jagdish S. Kaisare, pursuing a Diploma in Entrepreneurship Administration and Business Laws, from Lawsikho. He is a fourth-year law student at Alliance School of Law, Alliance University.

To be a successful stockbroker, one must remember two quotes concurrently! One by Churchill, who said, “You have to lose many a battle to win the War” and the other by Soros, who said, “It’s not important whether you are right or wrong, it is more important how much you lose when you are wrong and how much you make when you are right”.

Leonardo DiCaprio’s depiction of Jordan Belfort, a million-dollar stock broker in the blockbuster movie “The Wolf of Wall Street” was well appreciated. However, in reality, we have successful traders like Sir Warren Buffet, Sir Rakesh Jhunjhunwala, Sir Ramesh Damani etc. who have built a fortune by trading in the stock market.

The story of Sir Rakesh Jhunjhunwala is personally very inspiring for me. A Chartered Accountant by profession, he entered into the markets in 1985 and began trading. His first trade was Tata Tea, that he bought for Rs. 43 and sold at Rs. 143. His next big deal was Sesa Goa, which was a game-changer for him. Today, he is widely regarded as the king of stock markets in India and his portfolio is worth over Rs. 20,000 crores, and consists of Titan, Lupin etc.

Another inspiring story is of, Sir Ramesh Damani who commenced his journey in the 1990s. His most famous investment was in Infosys. He believes in long term investing and suggests one to prepare an exit strategy before making the investment.

I’m sure the above stories may have inspired you to become a stock broker. The immediate question now is, how to become a stock broker?

Introduction

At the outset, it is important to delve into the concept of  “stock market”. “Stock Market” is a secondary marketplace that facilitates the trade of financial securities. Stock Markets and Stock Exchange are term that can be used interchangeably. India’s major stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSC). They are regulated and governed by the Securities and Exchange Board of India (SEBI) which was constituted under the Securities and Exchange Board of India (SEBI Act, 1992.

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A stock broker a category of licensed intermediary who trade securities listed on the exchange for a commission. Another category of licensed intermediary is the sub broker, who is essentially a person not being a member of a Stock Exchange per se but acts on behalf of a member stock broker. In other words, he is an agent to a stock broker. Stock brokers and sub brokers are expected to stay abreast of the market and owe a fiduciary duty to protect the interests of his clients.

Both the intermediaries essentially perform the role of an agent and are governed by the Securities Exchange Board of India Act, 1992, Securities Exchange Board of India (Stock Brokers and Sub Brokers) Regulations 1992, Securities Contracts Regulation Act, 1956, Conduct Regulations, 1992, various rules and regulations and directives of SEBI and the stock exchange of which he is a member. A stock broker ought to be registered under Section 12 of the SEBI Act, 1992.

 How does the stock market work?

A company is that intends to go public lists its share in the primary market via initial public offering. The investors are encouraged to bid for the shares, and they are then accordingly allotted. Further, these shares are traded in the secondary markets. Stock exchanges facilitate the secondary market trade. It is here that a stock broker plays a vital role. They act as intermediaries between the investor who wishes to sell his stock and the buyer who wishes to buy the stock. They broker the deal for a commission. Once the order is placed, the exchange then facilitates the transfer of ownership of the shares by a process called settlement.

How to be a Stock Broker?

In order to apply for registration, a person has to meet the eligibility criteria laid out by the SEBI.

  1.   Registration

The SEBI has introduced a common registration certificate for different market segments.  Approval has to be obtained from the stock exchange and the clearing corporation. In order to register, the entity is required to apply via the regulator through the respective stock exchange in the manner prescribed. The entity would be issued a certificate bearing a unique registration number. The applicant has to meet the “Fit and Proper” Criteria set by the SEBI.

  1.   Fees

Upon SEBI’s approval of the application, the Broker has to pay membership fees to the exchange on which he intends to trade. Sub Brokers also need to pay a similar amount.

  1.   Base Minimum Capital Deposit

Upon securing membership, a base minimum capital deposit as prescribed has to be paid as security with the stock exchange. For stock brokers doing proprietary trading without algorithm, the deposit is Rs. 10 lakhs. For stock brokers trading without algorithm, on behalf of clients, it is 15 lakhs. For those doing both, the deposit is Rs. 25 lakhs. Lastly, for stock brokers doing algorithmic trading, the deposit is Rs. 50 lakhs.

Those brokers not having nationwide presence, the deposit requirement would be 40%.

  1.   Test and Training

Upon submitting an application, one may have to secure certification from the National Institute of Securities Markets, created by the National Stock Exchange of India.

For more information, one can visit the link provided here (https://www.sebi.gov.in/legal/circulars/apr-1992/registration-of-brokers_19382.html)

Functions of a Stock Broker

The Stock Broker/Sub Broker ought to display his registration details on his website and on all official documents which can be cross-verified on the SEBI website.

The Securities Exchange Board of India (Stock Brokers and Sub Brokers) Rules and Regulations 1992 in Schedule II provides for the code of conduct of the stock brokers. The apex court in the case of Securities & Exchange Board of India v Kishore R. Ajmera (AIR 2016 SC 1079) held that,

“The code of conduct for stock brokers, inter alia, lays down that the stock-broker shall maintain high standards of integrity, promptitude and fairness in the conduct of all investment business and shall act with due skill, care and diligence in the conduct of all investment business. The code also enumerates different shades of the duties of a stock broker towards the investor, details of which are not being extracted herein except to say that all such duties pertain to the high standards of integrity that the stock-broker is required to maintain in the conduct of his business”

The stock broker ought to enter into a contract with a sub-broker, which, lays out the duties and responsibilities of both parties.

Liability of a Stock Broker

Chapter VI of the Conduct Regulation, 1992 deals with the liability for contravention of the provision of the Act/Regulations. It provides that, a stock broker or sub-broker who indulges in fraudulent and unfair trade practices relating to securities, who fails to exercise due skill, care and diligence and contravenes the provision of the Act/ Regulations shall be liable for monetary penalty specified under Chapter VIA of the Act and/or Penalties specified under Chapter V of the SEBI (Intermediaries) Regulations 2008, including suspension, cancellation of registration etc.

Practical Guide to Starting a Stock Broking Business

This section will cover the practical aspects ranging from approximate capital requirements to statutory formalities.

 What does it take to be a stock broker?

Like the stock market legend, Sir Rakesh Jhunjhunwala, once said, “a good trader requires qualities like knowing what and how much to risk, knowing when and how to take a loss, discipline, control over emotion and tremendous conviction”.

According to Sir Rakesh Jhunjhunwala, the top ten commandments for trading are:

  •         Be realistic
  •         Pursue trading as full-time profession
  •         Know the rules
  •         Never aspire to be the market’s master. Rather, be its slave.
  •         Leverage your skill
  •         Have a broad idea of direction
  •         Don’t be afraid to make a mistake
  •         Play Seen’, not Blind’ for market opportunities
  •         Assess risk
  •         Pyramid your profit
  •         Trading can only be learnt, not taught.

Capital Requirements

  1. The entity, other than a proprietorship concern, will first require registering with the Ministry of Corporate Affairs. It would require a one-time capital investment of approximately Rs. 20,000 to Rs. 25,000 depending upon fees of the chartered accountant/company secretary and stamp duty of the respective state.
  2. The stock broker might have to pay the one-time base minimum capital deposit (explained above). Further, a sub-broker may have to pay a one-time deposit amount ranging from Rs. 25,0000 to Rs. 3,00,000 depending on the broker.
  3. The stockbroker/sub-broker would also require a capital investment of approximately 7-10 lakhs for infrastructure, computers, workstations, televisions and ancillary expenditure.

Other Registrations

Apart from the SEBI requirements, a stock broker will require registration with tax authorities, goods and service tax registration, intellectual property registration like a trademark, shops, and establishment registration.

Conclusion

To conclude, India’s market is among the best-regulated markets in the world. India’s accounting standards are closer to International standards. The SEBI has made corporate governance guidelines, trader regulations stringent. Despite that, stock broker plays a pivotal role in the stock market. They are indispensable for trade. However, despite the shift to electronic trading, there is a need for greater integration with International markets in terms of capital flows, products, and processes. There is a need to introduce new, cutting edge financial products.


 Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.                    

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