Common SEBI Inspection Findings for Stock Brokers — An Illustrative Checklist

SEBI inspections of stock brokers routinely uncover a range of common violations relating to KYC, contract notes, investor services, funds and securities, and terminal operations. The illustrative list of common violations and deficiencies observed by SEBI during inspections of trading members is circulated by exchanges to help brokers avoid these pitfalls. This article provides a comprehensive checklist of these findings to help brokers identify and address potential compliance gaps before an inspection.

I. Relating to KYC

• In-person verification not done while opening the account.
• Photo copy of KYC & Rights and Obligations document not provided to clients; if provided, proof of delivery/dispatch is not maintained.
• Adding clauses in Rights and Obligations document which are contrary to the clauses as prescribed by SEBI.
• Voluntary clauses not highlighted as 'voluntary' and signatures of clients taken on all the documents.

II. Relating to Contract Notes

• Contract notes not bearing serial numbers, SEBI registration numbers, Order no. & time.
• Contract notes not issued in the prescribed format / not issued within twenty-hours of trade execution / not signed properly by the broker or his authorized representatives.
• Duplicates / counterfoils / acknowledged copies of the contract notes issued not being maintained or maintained with inadequate details.
• Not issuing contracts in the prescribed format while acting as principal.
• Appropriate stamp duty not paid and charging Securities Transaction Tax (STT) on non-equity funds transactions.
• Brokerage not shown separately on contract notes. The correct rate at which the transaction was executed is not passed on to the client.
• Charges other than brokerage and statutory charges levied on the clients which are not specifically agreed upon by the clients or charging more than the limits prescribed.
• In case Electronic Contract Notes (ECN) are issued, the same are not made available on brokers' websites / sending ECN on single email-id for a group of clients / not maintaining ECN logs.

III. Relating to Investor Services

• Deficiency in service to the clients.
• Non-maintenance of investor grievance register and lack of proper system for receipt and reconciliation of investor grievances / not taking adequate steps for redressal of grievances of investors within one month from the date of receipt of the complaint.
• Non-maintenance of client database or details captured wrongly in the database.
• Delays between pay-out by the exchange to their members and the transmission of shares/money received in such pay-out to their clients by brokers without any record of reasons for such delay.
• Non-dissemination of email ID created for receiving investor grievances to the investors.
• Freezing of accounts of clients without giving adequate reason.
• Providing multiple client codes to one client / using same PAN no. for more than one client.
• Frequent trade modification / client code modification done in client account.
• Daily margin statement and quarterly statements not sent to clients.
• Relationship managers acting as portfolio managers by entering into verbal agreements with clients for trading on their behalf.

IV. Relating to Funds and Securities

• Unauthorized trading activities carried out in client's account.
• Not having separate account for clients' funds/securities or having separate accounts for clients but not segregating clients' funds/securities from its own funds/securities.
• Brokers found involved in funding activities — with the exception of those in connection with or incidental to or consequential upon the securities business.
• Non-collection of margin from clients / wrong reporting of collection of margins to exchanges/clearing members.
• Accepting cash from the clients. Accepting/giving third party payments/receipts.

V. Relating to Terminals

• Not putting the unique client code (UCC) of clients while placing orders in the trading system.
• The broker granting the trading terminals at places other than that specified by SEBI e.g. registered office, branch office.
• Terminals operated by personnel without having proper qualification / persons operating the terminal are not employees / remisiers / sub brokers of stock brokers.

VI. Others

• Non-maintenance or improper maintenance of Books of Accounts which are required to be maintained.
• Non-compliance with provisions relating to spot/negotiated deals.
• Instances of the broker / dealers / others connected with the broker, involved in front running, circular trading, creating false markets, misuse of the exchange mechanism for securing financing transactions, entering fictitious transactions and illegal transactions.
• Non-submission of audit report/internal audit reports within the prescribed time limit.
• Non-payment / inadequate payment of SEBI registration fees by the stock brokers.
• Not complying with the provisions of advertisements / internet based trading.
• Non-appointment of compliance officer.
• Discrepancy in computation of Net-worth.
• Non-display of Notice Board & SEBI registration certificate at the inspection location.
• Trading member has not captured the IP address (from where the orders are originating) for all IBT/ STWT orders.
• Broker has not conducted proper inspection of Authorized Persons.

How We Help

At Anuj Desai & Associates, we help stock brokers conduct pre-inspection compliance reviews, identify potential violations, and implement corrective measures before an inspection. If you want to proactively address compliance gaps, reach out to our regulatory compliance desk.