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Stockbrokers Caught Violating Loan Documentation Rules

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The Securities and Exchange Commission of Pakistan (SECP) has discovered 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.

The apex regulator has found that several stockbrokers are violating regulations relating to properly documenting the acquisition of subordinated loans, their utilization and terms of repayment.

“Subordinated loan in no way be utilized 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 utilized 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. The broker and minimum tenure, terms of repayment and repayment schedule were not part of the loan agreement.

The required 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 utilization of the 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 the 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 unauthorized deposit taking in one form or the other.

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 to revive the old financing system. On the other hand, many brokers have been unofficially running the system, it has been learned.

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