Claiming that it had the best of the mechanism to protect clients and cut their losses during the stock market meltdown, ICICI Securities has said brokerage firms should be rated in the interest of investors.
"An investor needs to know with whom he or she is dealing with," ICICI Securities' MD and CEO Madhabi Puri Buch said.
Besides, it would be beneficial for the broker as well to be rated, as the exercise would filter those players with strong risk management practices from others who might be behind on such metrics, she said.
Hundred days into the job at the brokerage and investment banking arm of the country's top private sector financial services player ICICI Bank, Buch said, "I would certainly endorse the demand for rating of brokerages, as it is consistent with the overall philosophy of transparency and disclosure in the market."
Narrating the experience of ICICI Securities, she said that during the worst of the crisis at the bourses, the company had wherewithal and technology to act within seconds and cut clients' margin losses and avoid payment defaults.
Asked if rating of brokers would help investors keep away from scams like the one at Pyramid Saimira, demat scam and the multi-crore Ketan Parekh stock scam, Buch, however, said that these issues might not be tracked by the rating mechanism.
"I dont think that the rating mechanism can capture the intent of promoter or the management (in the case of fraud). However, what it can capture is the extent of how well is the company (brokerage) capitalized."
"When you should know your client then it is natural the client should also know you. When a person puts in huge money in some instrument or stock it is also logical that he should know as to who he is routing his money through," Buch said.
"The first case when rating came in was for debt instrument. The rating gives summary of instrument to the investors. Subsequently, the IPO ratings came and offered the investor a third-party quality judgment on the offering."
"Now it is a very natural progression to say that apart from what people invest in, who they invest through, which is the broker, also get rated," she felt.
"Because whether it is rated or not, it is possible that a client or an investor can suddenly get back in term of settlement of either cash or securities because his broker has gone under," she said.
"It is very important to understand this risk and also the facts that how well capitalised is the broker (and) what is the quality of its risk management practices," she added.
Buch said that some brokers might not be fully equipped and capitalised to meet the investors' expectations and grading would help in such cases.
"No grading mechanism is fool-proof, but investors can get a sense of security, if they know things like whether their brokers were well capitalised etc," she noted.
Citing the example of I-Sec itself, Buch said that during the recent meltdown in markets, the brokerage firm managed to cut down the positions of its clients when heavy losses were imminent, as it had a technical mechanism in place.
When investors noticed this mechanism, which was not there with a large number of other brokers, they shifted to us, she said, adding that it was a major factor behind the surge in the company's market share during the last fiscal.
