The Securities and Exchange Board of India (SEBI) has proposed a major revision in how stockbrokers calculate their “variable net worth”, shifting from a fixed formula to a more risk-based system that reflects their actual business size and exposure.
Under the current rule, brokers are required to maintain net worth linked to 10% of the average daily client cash balance they hold. However, SEBI says this method has become outdated after changes in how client funds are handled in the market. With the introduction of the upstreaming mechanism, client money is now transferred to clearing corporations, leaving brokers with very little cash on their books.
Because of this shift, SEBI believes the old calculation no longer accurately reflects the risks brokers face. The regulator has now proposed a new framework that ties capital requirements more closely to both client exposure and business scale.
In the new model, one key component of net worth will be based on 10% of the average credit balance of clients over the past six months. This replaces the earlier focus on funds retained by brokers.
The second component is linked to the number of active clients. Brokers will need to maintain additional capital in slabs depending on their client base. For example, firms with more clients will be required to hold higher minimum net worth, with incremental increases as their customer base grows. Separate requirements are also proposed for clients brought in through authorised persons.
SEBI has said the net worth requirement acts as a “second line of defence” after margin obligations and must be strong enough to absorb risks not covered elsewhere.
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