INTRODUCTION
Digital Investment Platform, as the term suggests, is a fusion of automated platform and financial services, which provides a comprehensive set of tools to the investors to invest, manage, and track investment made in stocks on an online platform in a single click.
The Digital Investment Platforms, as a result of profound customer demand, Digital India initiative, higher tech awareness, growing investment platforms, favourable demographics, and enabling Government policies has witnessed exponential growth in India over the past few years.
The rise of Digital Investment Platform is testimony of the impact in the shift towards digitization had over the investment sector is exponential. From the days when stocks were brought on the floor, to the days when bids were placed on the screen, to the most recent trend of buying and selling shares using mobile applications, India’s investment sector has come a long way.
The much-needed push prompted by the Covid-19 outbreak, which pushed the investment tech industry over the edge and by the year 2025, it is predicted to have market size of $14.3 billion.
Earlier, High Networth Individuals (“HNIs”) and Ultra High Net worth Individuals (“UHNI”) could transact in the stock market by paying high brokerage charges. However, with the introduction of Digital Investment Platforms providing ease in accessibility to the stock market, the brokerage charges has percolated to a much more convenient level.
In this article we attempt to provide insights about what a Digital Investment Platform is; Regulations governing such platforms; and how it is helping India’s Investment Sector grow exponentially.
DIGITAL INVESTMENT PLATFORM AND STOCKBROKER – A LINKAGE
A “Stock Broker” is considered as a financial market representative, who has authorisation to trade stocks and securities on behalf of investors on a stock exchange because it is difficult for an investor to trade securities directly on a stock exchange. Therefore, market investors take help of the eligibility, expertise, and dynamic knowledge of these stock brokers to invest in stock market in India.
The stock markets in India are made up of two major stock exchanges –
- The Bombay Stock Exchange (“BSE”); and
- The National Stock Exchange (“NSE”).
The primary goal of the Digital Investment Platform is to provide access to the investors to invest, manage, and track investment made in the shares in an easier, secured, speedier, and efficient manner and in order to provide these services to the investors, these Digital Investment Platforms are required to be registered as an intermediary i.e., Stock Broker with the Securities and Exchange Board of India (“SEBI”) regulating the securities market in India.
Types of Stock Brokers:
Stockbrokers may be classified into two categories based on the services they provide:
1. Full-service Stockbrokers – This category includes stockbrokers that provide wide range of services to their clients, including trading and advisory services. They are well-established in their jobs, with offices across India to service their customers and as a result, these brokers demand higher commission for their services.
2. Discount Stockbrokers– This category of stockbrokers operate primarily through an internet platform, providing trading services only, rather than comprehensive services, such as advice or research, and charges a minimal commission percentage and the current Digital Investment Platforms in India is following this model for their services.
THE FRAMEWORK
1. Register as Stock Broker
The Digital Investment Platforms established with the agenda of providing services to the investor to invest in stock is required to be registered as Stock Broker under Section 12 of the Securities and Exchange Board of India Act, 1992 (“The Act, 1992”).
The stages of registering as a Stock Broker are as follows:
Step 1:
The Digital Investment Platforms is required to furnish Application in ‘Form A’ of Schedule I, where it intends to be accepted as a member.
Step 2:
The stock exchange must transmit the application to the SEBI within 30 days after receiving it.
Step 3:
Once a thorough review of the application is done, if the Board determines that all of the requirements set out in Securities Laws (Amendment) Act, 1995 (“Regulation”) have been met, the registration certificate is issued, and the stock exchange is notified. The registration certificate will be issued in ‘Form D’.
Step 4:
If the Board is dissatisfied with the application’s submission, the rejection must be conveyed to the applicant and the stock exchange within 30 days of the denial date. Provided that the applicant must be given a chance to be heard.
Step 5:
Any applicant whose application has been refused has the option to resubmit the application within 30 days of receiving notification of the refusal, which will be evaluated by the Board.
The Do’s and Don’ts –
- One must be eligible to be admitted as a member of a stock exchange;
- Is a fit & proper person;
- Have the required infrastructure, office space, and equipment to ensure that activities are carried out smoothly;
- Shall not undertake any activity, which is not in compliance with SEBI’s applicable rules and regulations, as well as the Bye-laws of the stock exchange;
- The stockbroker who holds a certificate must follow the Code of Conduct outlined in Schedule II of the relevant rules at all times;
- Fulfil the minimum capital requirement criterion – The minimum net worth required for brokers varies by segment and function. A professional clearing member (“PCM”) or a trading member and clearing member (“TM & CM”) must have a net worth of Rs. 3 Crore in the cash market and another Rs. 3 Crore in the equity derivatives segment.
Fees Payable:
- When the annual turnover does not exceed INR 1 Crore during any financial year, then INR 5000 is to be paid as fees;
- For the registration certificate to be in force, an amount of INR 5000/- needs to be deposited to the SEBI for the sustenance of the certificate upon five years of completion.
2. Register as an Intermediary
That once the Digital Investment Platform is registered as a Stock Broker with the SEBI, they are required to be registered as an Intermediary under Section 3 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (“The Regulation 2008”).
The stages of registering as an Intermediary are as follows:
Step 1:
The Digital Investment Platforms is required to furnish Application in ‘Form A’ of Schedule I, with such additional information required and the applicable fees as stated above for availing the registration certificate.
Step 2:
The Digital Investment Platform must submit the application to the intended stock exchange within a period of 30 days.
Step 3:
That the concerned Stock Exchange to whom such application is submitted after verifying the eligibility criteria, shall transmit the application to the SEBI within 30 days after receiving it.
Step 4:
That once a thorough review of the application is done, if SEBI determines that all of the requirements set out in have been met, the registration certificate will be issued, and the stock exchange shall be notified.
Eligibility Criteria
- The applicant or any of its associates shall not have been refused in the past issuance of such registration certificate by the SEBI;
- There shall be no pending litigation connected with the securities market on the applicant, its directors or partners, or trustees, or its principal officer, which have an adverse bearing on the business of the applicant or on development or functioning of the securities markets;
- That the applicant shall satisfy the other requirements as specified in the regulations required to be complied with.
3. Onboarding Customer/Investors
The Digital Investment Platforms for a secured framework requires individuals wishing to become an investor and invest in the stock market with the help of these platforms to register themselves, to ensure that such individuals are eligible to invest and to avoid any fraudulent activities.
Prerequisites for onboarding –
As discussed in the previous blogs, Know Your Customer (“KYC”) is an efficient mechanism, which allows businesses to instantly verify and validate a customer’s identity. The use of KYC for companies providing financial services i.e. FinTech is crucial.
In India, as per the RBI norms, the FinTech companies are mandated to validate their customers with the help of KYC to prevent the occurrence of any illegal or fraudulent activities. The RBI vide Master Direction – Know Your Customer (KYC) Direction, 2016 (“KYC Direction”) dated 25.02.2016 governs KYC process in India.
Therefore, the Digital Investment Platforms established with the agenda of providing services to the investor to invest in stock online while onboarding its customers are required to undertake KYC to verify proof of Address and proof of Identity of such customers to ensure such person is genuine and have valid credentials to avoid any illegal or fraudulent activity.
KYC Onboarding Process (Online) –
WHY KYC
ISSUES AND CHALLENGES –
- Low Financial Literacy – India is home to over 17% of the world’s population, with a literacy rate of around 74%. However, only around a quarter of the population is financially literate. This emphasises the urgent need to educate the general public about saving and investing so that individuals might accumulate wealth. People need to be educated about financial goods, which is difficult for Digital Investment Platforms. In 2014, Zerodha launched Varsity, a free web-only learning platform, to simplify its consumers. In the recent past, YouTube has also emerged as a leading platform that spread legal literacy.
- Low Technical Knowledge – Trying to onboard and cater to the masses have been difficult for investment tech platforms. As a result, the core of financial intermediation and prosperity often eludes India’s huge population, and despite the market potential, companies fail to lift off.
- Threats to Cyber security – The abnormal rise in cyber crime has made people hesitant to invest online. It had created a fear and apprehension in the minds of people that they might become the victim of a cyber crime. The hackers frequently attempt to steal identities and even money by exploiting security flaws in the system. The following are some of the security risks associated with internet trading:
- Breach of personal information;
- Identity theft;
- Phishing;
- Malware and viruses
Digital investment companies should address these cyber security threats by establishing highly secure service platforms.
AMLEGALS REMARKS
The Covid-19 pandemic, which broke out in 2020, negatively impacted various industries. It required for all companies to adopt digitisation to be operational and competitive. The same could be said for Digital Investment Platforms.
Due to the surge in digitalisation and people’s desire to stay at home, investment tech platforms received a much-needed boost during Covid-19. In fact, close to 738 lacs demat accounts were opened during 2021-22 (up to October 31, 2021), according to the SEBI.
The Digital Lending Platforms for stock exchange in the present scenario acts as a vital platform to function. The rapid changes and digitization has also brought enormous challenges along with significant development as it being a novel sector for people across the country.
Regulations and compliances issued by SEBI time and again are crucial to understand and implement for smooth functioning of such platforms and eventually for FinTech sector in India in achieving the envisioned development.
Team AMLEGALS assisted by Mr. Hraday Jaiswal
For any queries or feedback, feel free to get in touch with arushi.vyas@amlegals.com or tanmay.banthia@amlegals.com.
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