Stock brokers violate loan documentation rules

SECP says it is giving last opportunity for complying with regulations

KARACHI: The apex regulator has found that several stock brokers are violating regulations pertaining to properly documenting acquisition of subordinated loans, their utilisation and terms of repayment, according to a notification issued on Tuesday.

The Securities and Exchange Commission of Pakistan (SECP) found the violations while performing a compliance review of selected Pakistan Stock Exchange (PSX) brokers. “Non-compliance has been observed commonly,” the SECP said in a notice to the PSX.

In the past, the stock market had endured a massive crisis in 2008 when the undocumented securities financing system, called badla, was found as one of the leading reasons.



Brokers have time and again demanded that the regulators allow them revive the old financing system. On the other hand, many brokers have been unofficially running the system, it has been learnt.

“Subordinated loan in no way be utilised for any other purpose including margin financing/margin trading (which replaced the old badla system),” a prior circular of the SECP said.

Apart from this, the brokers were not allowed to render banking services like accepting deposits, it said.



“Subordinated loan will only be utilised by the broker for the purpose of increasing equity/net worth, liquid capital or for any other purpose approved by the Commission,” it added.

The latest SECP circular noted that subordinated loans were not documented through a formal agreement between the loan provider and the broker and minimum tenure, terms of repayment and repayment schedule were not part of the loan agreement.

Certificate from an auditor is also not available with the brokers for the injection of funds as subordinated loans.

No details are mentioned regarding the utilisation of loan. Prior approval of the SECP for repayment of the subordinated loan is not obtained in case of repayment.

“Commission has taken a lenient view this time around and is providing last opportunity to the non-compliant brokers to ensure compliance…in letter and spirit,” the notification read.

Earlier in 2017, the SECP had noted that some of the securities’ brokers were involved in unauthorised deposit taking in one form or the other. This act of brokers was not only in contravention of the Companies Act 2017, but was also against the Securities Act 2015 as deposit taking was not a permissible activity under the Act.



“A broker including his representatives and agents shall not accept any money or deposit or borrowing … in whatsoever manner from any person including an individual or any segment of public or directors and sponsors of a broker including their representatives and agents,” the notice said.

Published in The Express Tribune, June 6^th, 2018.

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