Who is a Sub-Broker?

According to the NSE, a ‘Sub-Broker’ is not a Trading Member of a Stock Exchange but acts on behalf of a Trading Member as an agent or otherwise for assisting investors in dealing in securities through such Trading Members.

All Sub-brokers are required to register themselves with SEBI and obtain a Registration Certificate. As per guidelines laid down by SEBI, their registered member-brokers are not permitted to deal with any unregistered sub-broker or a person who is acting a sub-broker unless and until they are registered with SEBI and have a valid Certificate of Registration. SEBI also states that is the responsibility of the member-brokers to ensure that none of their clients acts as a sub-broker unless they have a valid registration with SEBI as a sub-broker. It is compulsory for all member-brokers to enter into a written agreement with all the sub-brokers associated with them which lays down the rights and responsibilities of member-brokers as well as sub-brokers.

Who can Become a Sub-Broker?

In India, anyone with the knowledge of the financial market and products can start a sub-broker business in India. Presently, the sub-broker industry has immense scope in India, as a significant proportion of the Indian population is financially illiterate, and India is a largely untapped market with less than 3% of the billion plus population of India participating in the financial markets.

Any person with a graduate degree, knowledge of financial markets and computers can register with the SEBI and obtain a Certificate of Registration to start a sub-broker business. Anyone with good marketing and excellent communication and interpersonal skills can help a large number of Indians to make money in the financial and stock market. As mentioned earlier, less than 3% of the Indian population participates in the financial market, which indicates a significant proportion of Indians are investing their savings elsewhere  

One of the reasons a low percentage of the Indian population is involved in transacting on the financial markets is misconceptions of broker and sub-broker, a one-off case of unethical behaviour and fraudulent transaction undertaken by a miscreant sub-broker which plants the seed of fear and misconceptions regarding the broker and sub-broker business in India. Find below some facts and myths about sub-brokers which potential and regular investors need to know to gain confidence in investing in the financial and stock markets and avail services of sub-brokers.

Facts About Sub-Brokers

  • Registered with SEBI – Sub-Brokers are required to register themselves with the Securities and Exchange Board of India or SEBI obtain a Certificate of Registration to commence operations as a sub-broker. Sub-brokers also need to enter into a written agreement with their member-broker with lays down all rights and responsibilities of the member-broker as well as the sub-broker.

  • Knowledgeable and Experienced – According to SEBI guidelines, a sub-broker is required to be at least 12th pass, but most broking firms prefer to enter into agreements with sub-brokers who have a minimum graduation qualification. Sub-brokers have in-depth knowledge of the financial and stock markets as they are required to clear basic NISM modules on equities, mutual funds, commodities and futures and options. According to SEBI regulation, no sub-broker can commence any sub-broking operations without clearing the said modules.

  • Sub-Broker to move towards Authorised Persons or the AP Model – SEBI has decided to do away with sub-brokers and move towards the Authorised Person or AP Model. SEBI is no longer granting new registrations for sub-brokers and has given time to existing registered sub-brokers to migrate to act as authorised persons or a trading member. Though there is no significant difference in the working of a sub-broker and an authorised person, the authorised person model provides more security to investors. The main member-broker is also held accountable in case of an event where an Authorised Person registered with them is found indulging in fraudulent and unethical trading activities.

Myth of Sub-Brokers

  • The stock market is a Gamble and sub-brokers gamble with investor's money – The notion that investing in the financial and stock market is equivalent to gambling in a casino is entirely false and incorrect. Due to this misconception, many Indians do not prefer investing in the stock and financial markets. Whereas, in reality, it is a proven fact, that investors who have made money on the stock market are backed by knowledge of the stock market and in-depth research and make investment decisions based on hard facts and market information.

 

Investing in the stock market without any knowledge and purely on emotion can be a form of a gamble but it is untrue that sub-brokers are glorified gamblers who gamble on the stock market using the money of their clients. Their knowledge, experience and research back all investment decisions made by a sub-broker and all investment related advice handed out by a sub-broker.

  • Sub-brokers stick to traditional tricks such as investing in low earning multiple stocks or fast-growing companies – Though it is theoretically correct the investing in companies with a low earning-multiple stock or a fast-growing company can result in reasonable returns, there is no guarantee to their theory. The company's stock price and dividend payout is the result of its sound financial performance. It is not necessary that a fast-growing company can sustain its growth rate for an extended period as it might have enjoyed a short-term success and witnessed a high growth rate, but past success cannit guarantee future success. Similarly, in cases of companies having stocks with low earning multiple, its appreciation in share value and dividend payout is the result of its performance and not its low earning-multiple, which means that investing in stock of a company with a high earnings multiple can also deliver good returns with the said company showcases good financial performances year after year.

  • Investors need lots of money to make money – This is one of the major myths and reasons holding back a significant proportion of Indians in investing in the financial and stock markets. Investment discipline is more important than the volume of investment. Financial markets in India and around the world have witnessed many cases wherein an investor has made millions with years of disciplined investing. A good sub-broker should educate small and retail investors on the importance of investment decision rather than investment volume.

Indian has a population of over 1.2 billion, and yet remains an untapped market hugely when it comes investing in the financial markets and the stock exchange with only under 3% of the population participating in the stock exchange. It is essential to break the myths and misconceptions regarding investing in stock markets and regarding people's perceptions about stockbrokers with proper investor education, with sub-brokers need to play a more prominent role in the same.

Published by Peter Garlow