NSE defends personal guarantee

CHENNAI, June 18: The object of the personal guarantee is to isolate unscrupulous brokers who are trying to misuse the counter party settle...

CHENNAI, June 18: The object of the personal guarantee is to isolate unscrupulous brokers who are trying to misuse the counter party settlement guarantee by introducing fake documents intentionally, said Ravi Narain, Deputy Managing Director, the National Stock Exchange (NSE). The exchange is currently looking into various suggestions made by the Mumbai members and a via media would emerge soon.

Speaking to the newspaper, he said that NSE would not allow certain members to take undue advantage of the settlement guarantee fund. NSE has been taking various steps to counter the introduction of bad paper which is assuming alarming proportion. These include tagging members once the value of bad papers crosses Rs 5 crore, insisting on the broker to deposit the full value of the delivery made by the client who introduced the fake shares, know your client’ requirement etc.

The personal guarantee that is sought to be introduced would serve as a moral and psychological pressure on the member and prevent him from indulging in any unwanted activities.

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Today, if a broker whose net worth is Rs 1 crore introduces bad paper worth Rs 5 crore, there is no way we can recover the money in full from him. Hence the need for a personal guarantee.

Narain said that most members are private limited companies and would have given personal guarantee to the banks for their fund requirements. The case, he said, is very similar.

If a broker introduces fake shares worth Rs 2 crore and the settlement guarantee compensates the amount, then is the amount so compensated not equivalent to a loan, he questioned.

He said that since most brokers were clean, they need not worry about the personal guarantee. A few brokers were spreading fear in the minds of other brokers as they would be affected by this move. In some cases the memberships have changed hands without informing the exchange and the erstwhile member is now required to furnish the bond as he is still the member as per the exchange records. But the erstwhile member will not give itas he has already sold his membership.