Other Services Provided by Brokers: formula sheet

Key formulas

Discretionary PMS

Manager decides and trades → no client approval for each trade

Done under the authority given in the portfolio management agreement.

Non-discretionary PMS

Manager advises → client approves each trade

Manager acts only as per the client's directions.

Registration rule

Broker registration ≠ portfolio manager registration

A broker needs a separate SEBI registration as a portfolio manager to offer PMS.

Minimum investment

Minimum ₹50 lakh per client (₹50,00,000)

Under the SEBI (Portfolio Managers) Regulations, 2020. Confirm against your workbook edition.

PMS vs mutual fund

PMS = individual portfolio in client's name; MF = pooled scheme

A common comparison question.

Research analyst

Research analyst = prepares or publishes research reports or recommendations on securities (SEBI (Research Analysts) Regulations, 2014)

Registration with SEBI is needed. The output is general, not tailored to one client.

Investment adviser

Investment adviser = gives personalised investment advice to a client for consideration (SEBI (Investment Advisers) Regulations, 2013)

Advice is based on the client's profile and risk tolerance. A fee is the key feature.

Conflict management rule

Conflict of interest → disclose + separate activities + act in client's interest

Do not pick an option that allows hiding or ignoring a conflict.

Qualification rule

Individual advisers and research analysts must hold the prescribed NISM certification

For advisers this is NISM-Series-X-A and X-B. For research analysts it is NISM-Series-XV.

MTF funding split

Funding by broker = Trade value − Client margin

The client pays the margin upfront. The broker funds the rest and charges interest.

MTF margin amount

Client margin = Trade value × Margin %

Use the margin percentage given in the question. Do not assume one.

Purpose of MTF

MTF = funding to buy; shares bought are held as collateral

It is not meant for selling shares you do not own.

Purpose of SLB

SLB = lender gives shares to borrower for a fee against collateral

It runs on the exchange platform through approved intermediaries, with the clearing corporation handling settlement and collateral. It is not a direct deal between investors.

Value after a price fall

Loss = Quantity × Fall in price per share

The loss falls on the client. It exceeds the margin paid only when the percentage price fall is greater than the margin percentage (for example, a fall of more than 50% with a 50% margin).

Chain of roles

Investor (beneficial owner) → DP → Depository (NSDL / CDSL) → Issuer / registrar

The investor deals only with the DP. The DP is the depository's agent.

Who can be a DP

DP = SEBI-registered entity with a depository agreement (e.g. bank, financial institution, stockbroker)

A broker needs separate DP registration. Trading registration alone does not allow it to offer demat services.

Ownership in demat form

Depository = registered owner; Investor = beneficial owner

Beneficial owner enjoys the benefits (dividends, bonus). Registered owner is the name in the issuer's records.

Account types and basic documents

Demat account opening = KYC + account opening form + DP–client agreement

The agreement sets out rights and duties of both sides. Details follow the depository's rules, so read the workbook wording.

Mutual fund distribution requirement

Broker sells mutual funds = valid AMFI registration (ARN) + NISM-Series-V-A certification for the individuals dealing + AMFI code of conduct

Without ARN, a broker cannot distribute mutual fund schemes as a distributor.

Commission disclosure

Distributor earns commission → investor must be informed of it

Disclosure addresses conflict of interest. It is a code of conduct requirement, not optional.

Product to regulator

Mutual funds → SEBI/AMFI norms | IPOs and bonds → SEBI | Insurance → IRDAI

Use this to eliminate wrong options in regulator-matching questions.

Role split

Issuer creates and manages the product; distributor sells it

The distributor does not hold investor assets as owner and does not manage the scheme.

Internet-based trading

Client → broker's internet or mobile platform → broker's risk checks → exchange

Orders go through the broker's system and checks. The broker remains responsible for the client's orders.

Direct market access (DMA)

Client order → broker's infrastructure (automated checks) → exchange, without manual order entry

Mainly used by institutional clients. Pre-trade risk controls remain with the broker.

Algorithmic trading

Computer program decides order parameters → order generated automatically

Needs exchange approval of the algorithm, testing and risk controls. Orders should be identifiable as algo orders.

Key safeguards

Approval + testing + pre-trade checks + audit trail + security + kill switch

Remember this set. Questions often ask which safeguard applies or who is responsible.

Quick revision

• A broker needs the right registration for each additional service; a broking licence alone does not cover everything.
• Portfolio management involves discretion over client money; advisory leaves the decision with the client.
• Advice and research are different activities with different regulatory frameworks.
• Margin trading funding means the broker finances part of the client's purchase against collateral.
• In securities lending, shares are lent for a fee and must be returned; ownership benefits need careful reading in the workbook.
• A depository participant is the client's link to the depository; the broker needs separate registration to act as one.
• Mutual fund distribution by a broker needs the applicable AMFI-linked registration and qualification.
• Algorithmic trading uses pre-programmed rules; risk controls and exchange approvals are central.
• Internet-based trading requires secure systems, client authentication and exchange-prescribed safeguards.
• The paper has negative marking of 25%, so skip a question only when you cannot eliminate any option.
• Read qualifiers such as 'not', 'except' and 'only' before choosing an option.

Common mistakes

• Thinking every stock broker can offer PMS. Fix: Remember PMS needs its own SEBI registration as a portfolio manager.
• Swapping discretionary and non-discretionary. Fix: Discretion means the manager has freedom to decide. Non-discretionary means the client must approve each action.
• Treating research analyst and investment adviser as the same role. Fix: Remember: adviser is personalised advice to a client for a fee. Analyst produces research reports. They fall under separate regulations.
• Thinking a broker can give advice freely because it is already registered as a broker. Fix: Broking registration covers trading only. Advice or research needs its own SEBI registration.
• Treating MTF as a way to short sell. Fix: MTF funds a purchase. Borrowing shares for delivery is SLB.
• Thinking the client pays the whole value in MTF. Fix: The client pays only a part. The broker funds the rest.
• Thinking an investor can open a demat account directly with NSDL or CDSL. Fix: Remember that the depository serves through DPs only. The DP is the contact point.
• Assuming every stockbroker is a depository participant. Fix: Trading membership and DP status are separate registrations. A broker is a DP only if registered as one.
• Thinking every stock broker can sell mutual funds automatically. Fix: Remember that mutual fund distribution needs a separate AMFI registration (ARN).
• Treating the broker as the issuer of the mutual fund. Fix: The AMC runs the scheme. The broker only distributes and earns commission.

Exam tips

• Questions often give a short scenario. Look for who takes the trade decision to name the type of PMS.
• Expect a direct question on registration: PMS needs separate SEBI portfolio manager registration.
• Learn the minimum investment figure and its unit. A wrong unit is a common trap option.
• Under negative marking, skip only if you cannot remove two options. Rules like these usually allow quick elimination.
• Questions are usually scenario-based. Identify the role first, then apply the rule.
• Look for the conflict of interest. If you spot one, the answer almost always involves disclosure.
• Series VII has negative marking of 25% of the marks for the question, so skip an option set only if you cannot eliminate at least one choice.
• Check your current workbook for the exact regulation details. Do not rely on old notes.