In a reprieve to brokers having erred genuinely in their share sale or purchases, capital market regulator Sebi and the stock exchanges have decided not to penalise them if the trades executed in wrong names are declared as annulled. To escape penalisation, brokers would have to transfer the trades executed in the wrong client name or code to an ‘Error Account’, and not to some other client, and then liquidate the same.
However, brokers would face monetary penalties, being imposed from this month, if the trades are transferred to some other client by citing error in punching the name of the client, even if such an error is genuine.
The error being genuine would only save them from further regulatory actions. If brokers find that the errors have not happened at their end, they might pass on the liability to the investors, but the exchanges would collect the penalty from the brokers.
The genuine errors include those due to communication, punching or typing in cases of the original and modified client code or name being similar to each other. The changes made within ‘relatives’, as defined under the Companies Act, 1956, are also considered genuine errors.
The penalties came into effect from August 1 after Sebi decided to penalise brokers for transfer of trades from one client to another, citing errors. It was feared that the practice was aimed at facilitating flow of black money and evasion of taxes in stock market.
However, the rules have been relaxed a bit after consultations held by the Sebi with various stock exchanges.
Subsequently, the capital market regulator issued a fresh circular to the stock exchanges informing them of changes, effective from Monday.
“Any transfer of trade to error account of the broker would not be treated as modification of client code and would not attract any amount of penalty, provided the trades in error account are subsequently liquidated in the market and not shifted to some other client code,” Sebi said.
For easy identification of error account, brokers will have to register a fresh client code as ‘ERROR’ with the stock exchange for the account classified by them as error account.
Also, brokers would have to put in place well-documented error policy approved by their board and management, and would be required to inform the exchange on a daily basis the reasons for modification of client codes.
Subsequently, penalties would be still levied on all client modifications, except those transferred to ‘error accounts’, Sebi said.