The capital market regulator Securities and Exchange Board of India (SEBI) has circulated a draft circular regarding use of single e-mail and mobile number for multiple non-individual client accounts. The draft circular, if approved, will make life easier for stock brokers but open can of worms for clients. It may lure scamsters and encourage fraudsters with lucrative risk-reward ratio. Let us examine the draft circular in detail.
The existing provision: As per prevalent rule, the stock brokers are required to upload e-mail id and mobile number of clients at the time of account opening. This provision was introduced by SEBI way back in 2011 vide circular CIR/MIRSD/15/2011 dated August 02, 2011. The stock exchanges were asked to use e-mail id and phone number of clients to inform them regarding transactions in their trading account. The e-mail and messages you receive from stock exchange is a result of aforesaid circular only. SEBI was of the view that e-mail and messages to clients from an independent agency like stock exchange will increase transparency and keep a check on unauthorized transactions.
Exceptional provision: Although the SEBI Circular CIR/MIRSD/15/2011 dated August 02, 2011 floated the provision of one e-mail id/mobile number per account but it had some exceptional provisions. Under exceptional circumstances, the stock broker was allowed to upload the same mobile number/E-mail address for more than one client provided such clients belong to one family. ‘Family’ for this purpose would mean self, spouse, dependent children and dependent parents. Yes, the family members had to give it in writing that they wanted to use common e-mail/mobile number for their trading account. This exceptional provision was available only to individual clients. There was no such provision for non -individual clients like HUF, Trust, Companies etc. The draft circular suggests widening of exceptional provisions for non-individual clients as well.
What will change? The Draft circular of SEBI, if approved, will allow non-individuals like HUF, Companies, Trusts, Partnership firm etc. to use one email/mobile number for opening a trading account. The draft circular dated 28th October 2024 says as follows:
‘….. under exceptional circumstances, the stock broker may, at the specific written request of a client, upload the same mobile number/E-mail address for more than one client provided such client belong to one family (in case of individual clients) or such client is the authorized person of an HUF, Corporate, Partnership or Trust (in case of non-individual clients). Family / Authorized person for this purpose shall include:
- In case of individuals, self, spouse, dependent children and dependent parents.
- In case of HUF, Karta or any of the Co-parceners as per prior approval of Karta.
- In case of Partnership firm, any of the partners as per prior approval of all / authorized partners.
- In case of a Trust, any of the trustees or beneficiaries as per resolution passed by the Trust.
- In case of Corporates, the Authorized person operating the trading account as per the Board Resolution passed by the Corporate.
The Impact: E-mail and mobile number of a client is gateway to stock market activities. A client receives information like contract notes, trading alert, margin shortfall, monthly and quarterly settlement and other relevant information at his e-mail id. Contract notes have a time validity and no-claim could be made after expiry of that specific period. In some cases, ageing clients were not able to check their e-mail id for months and the brokers took advantage of it. To check this menace, SEBI came out with the idea of single e-mail and mobile number for self, spouse, dependent children and dependent parents. This provision checked the menace to some extent but the stock brokers started using ‘family’ accounts as surrogates. The account holders were paid some petty amount as ‘rent’ for specific usage. Provision of dependent parents led to dispute among brothers and sisters. Each one claimed that the parents were dependent on him/her leading to dispute. For scamsters and fraudsters, cracking single e-mail id and mobile number meant robbing the accounts of entire family.
The Lacuna: Similarly, the use of single e-mail id and mobile number (of an authorized person) for non-individual accounts like HUF, Partnership Firm may increase the ease of compliance but would lead to legal disputes and encourage corporate frauds. There may be a case where authorized person of a company would be afraid of reporting trading loss to his boss. There may be a situation where a partner/director might be using an authorized person to grab entire trading profit for his personal gains. In a recent corporate fraud, one of the directors of the company was using companies’ financial assets for his personal gains. He had got his trusted employee authorized through the Board and used his e-mail id/mobile number to pocket the benefits.
In my view, SEBI should think of capturing e-mail id and mobile number of all the partners/trustees/directors/parceners in case of partnership firm, Trusts, companies and HUF and keep all stakeholders in the loop. The regulator may choose to use e-mail/mobile number of authorized persons for legal purposes but cc all communications to all the stakeholders. Since, the system captures KYC of all the partners/trustees/directors/parceners at the time of account opening, it won’t be difficult to CC relevant e-mails to the stakeholders. It will infuse transparency and keep a check over greedy partners/trustees/directors/parceners. After all, e-mails are free till date. It won’t be prudent to open can of worms in the name of easing compliance.
