SEBI asks brokers to collect investors' income proof

To begin with, SEBI has asked the brokers to bar those traders and investors, who do not furnish the adequate proof for the source of their funds, from trading in derivatives market. Sources said that the direction would be soon extended to the cash market segment also.

To seek a speedy and more effective compliance from the brokers, the Securities and Exchange Board of India has also directed the stock exchanges to enforce the new requirements.

Sources said that SEBI might consider asking the bourses to put a mechanism in place through which the non-compliant brokers and clients could be denied access to the market. As per a circular from Bombay Stock Exchange to its member brokers, "In respect of clients trading in derivative segments, the member shall collect documentary evidence for financial information."

"The illustrative list of documents to be collected from the clients include copies of Income Tax Return (ITR) acknowledgement, annual accounts (for institutional clients), Form 16 for salary income, net worth certificate, salary slips, bank account statements for six months, demat account holding statements and asset ownership certificates," it said.

Besides getting these documents at the time of opening an account for the client, the brokers have also been asked to collect fresh documents every year as part of an annual updation of financial information exercise.

Sources said that the move is aimed at checking illicit money, including those coming through money laundering or for terror financing as also from tax defaulters, from entering the stock market.

The first move has been taken for derivatives market as the trading volume and turnover is much higher in this segment as compared to the cash market, sources said. Although they find it a daunting task to get the income details from lakhs of investors, brokers have started asking their respective clients for these details.

SEBI had first asked the brokers to adopt these measures in December 2009, but brokers have been buying time on the ground of the enormity of the exercise. However, SEBI is now considering stringent measures to guard against any further delay in the compliance to these directions, sources said.

Accordingly, the brokers are writing to their clients that "Submission of documentary evidence of financial details is must in case if you wish to trade in Derivatives Market" and they need to immediately submit the relevant documents.

For company accounts, the clients are also required to submit copies of balance sheets for the last two financial years and copy of latest shareholding patterns, including list of all those owning more than five per cent stake.

These documents need to be attested by the company secretary, whole time director or managing director of the client company. For both individual and company clients, all the documents would be valid for only one year and these would need to be submitted every year for continued access to trading.