SEBI has a risk-based calculation scheme for variable net worth of brokers

The Securities and Exchange Board of India (Sebi) on Friday proposed revising the way stockbrokers calculate their variable net worth, seeking to align capital requirements with actual business risks and client scale. Currently, variable net worth is pegged to 10% of the average daily client cash balance maintained by brokers.

However, with the introduction of the upstreaming framework, under which clients’ funds are up-streamed by brokers to clearing corporations, there is a minimum amount of client’s cash balance that is maintained by the stockbroker, the regulator said.

“Considering that, calculation based on availability of funds with stockbrokers may not be an effective way to calculate variable net worth,” Sebi said in a discussion paper.

The regulator has proposed a more comprehensive, risk-based approach. Variable net worth, it said, would be calculated as the aggregate of two main components: one linked to client funds and the other linked to the size of the client base.

The first component will require brokers to maintain 10% of the average credit balance of all clients over the previous six months. The second presents a slab based on the number of active customers. Brokers with 10,000 to 50,000 direct clients will require an additional ₹50 lakh, with additional increments for each additional 50,000 clients.

In addition, grade requirements are prescribed for customers onboarded by authorized persons.