Navigating SEBI’s Directive on MITC: Simplifying Broker-Client Relationships

[By Subhasish Pamegam & Hrishikesh Goswami]

The authors are students of Gujarat National Law University.



While advertisements regularly encourage retail investors to ‘read all investment related documents carefully’ prior to investments in the securities markets, reading through voluminous documents and making sense of the complex legalities discussed in them is nearly impossible for an uninitiated individual. Wouldn’t it be simpler if there were a set of terms and conditions that were declared as the most important ones? Keeping these concerns in mind, the Securities Exchange Board of India (SEBI), through its November 13, 2023 circular, declared that the Most Important Terms and Conditions (MITC) shall be notified by competent authorities in order to simplify the following documents which were declared to be crucial in formalizing the broker-client relationship- 

i. Account opening form

ii. Rights and obligations

iii. Risk disclosure documents  

iv. Guidance note

v. Policies and procedures

vi. Tariff sheet

This circular revises the Master Circular for Stock Brokers and marks a pivotal shift in the broker-client relationship within the Indian securities market. This also represents the initiation of a concerted effort to streamline and enhance transparency in the often complex and voluminous documentation governing these relationships to make sure clients understand the important terms and conditions associated with the investments they make. Additionally, SEBI has set strict timelines for brokers to intimate both new and existing clients about the MITC guidelines. This was done after considering the readiness of the market participants with the an intention to allow a smooth transition to the new regime.

The authors in the present article attempt to analyze the dynamics of broker-client relationships and the implications of MITC on these relationships. This article also examines SEBI’s role in protecting investor’s interests and MITC’s conformity with this function.  Additionally, this paper aims to explore the potential challenges that might arise out of this circular and suggest appropriate measures to mitigate them.   

Broker-Client Relationship

A broker is legally defined as a ‘member of the stock exchange’ who is duly certified by SEBI. However, for a layman, a stock-broker is a person who acts as an intermediary and assists retail investors in buying and selling securities from registered stock exchanges.  

Brokers in India are bound by a code of conduct which specifies standards of professional conduct and holds brokers responsible for faithfully executing orders on behalf of investors without discriminating based on the volume of business involved. This code further rests a responsibility on brokers to refrain from engaging in malpractices that can prove detrimental to the interest of investors and also requires them to fairly disclose details, including conflicts of interest, while also holding that brokers shouldn’t provide investment advice to investors.  

SEBI, over the years has expressly recognized the fact that the securities markets often fall prey to fraudulent activities, which endanger the interests of retail investors, who are often unfamiliar with the technical intricacies involved. In recognition of this threat, Mr. U.K Sinha, ex-chairman of SEBI, stated that the protection of retail investors from such exploitation is one of the key objectives of the regulator. 

MITC as a Solution to Voluminous Documentation: 

When considering MITC as a solution to voluminous documentation, it is crucial to acknowledge the challenges SEBI faces in effectively regulating intermediaries like stock brokers. Brokers form the backbone of the capital market, yet instances of technical glitches caused by errors on the part of these intermediaries have inflicted significant losses upon investors. These documents often distract investors from noticing critical aspects of their relationship with brokers due to their complex and voluminous nature. This surplus of information tends to obscure the essential terms and conditions, making it difficult for investors to discern the crucial elements, which exposes them to risk. MITC emerges as a focused solution to mitigate this issue by streamlining the extensive and complex documents governing these broker-client relationships. By providing the most critical terms and conditions in a standardized format, MITC will provide investors with clearer and more comprehensible information. This focused approach not only simplifies the information overload but also provides a shield against potential misinterpretation or manipulation by stock brokers.  

In Reliance Securities Ltd vs Vivek Sharma, the stock brokers were made liable for losses incurred by investors due to technical glitches and lack of understanding of their online trading platform. This case highlighted the responsibility of brokers to protect investors from losses due to technical shortcomings.  The complexity and volume of documentation often exacerbate these technical issues. MITC’s implementation would also solve such issues by formalizing the broker-client relationship with clearer terms.

SEBI’s Role in Protecting the Rights of Investors

In Adjudicating Officer, Securities and Exchange Board of India v. Bhavesh Pabari, the Court underscored the objective of the SEBI Act to establish a board for protecting the interests of the investors in the securities market. SEBI mandates that stockbrokers safeguard the investors by ensuring protection regarding dividends, bonus shares and similar rights related to transactions. They are obligated to reconcile accounts, issue detailed contract notes promptly after trades and ensure swift payout of funds or securities within prescribed timelines, thereby securing the interests of the investors/clients.

The mandate upon stockbrokers under Schedule II of the SEBI (Stock Brokers And Sub-Brokers) Regulations, 1992, to act in the interests of the investors and ensure fairness to their clients is in line with the role of MITC to ensure transparency and simplifying the broker-client relationship. In line with SEBI’s mandate to protect investors, MITC focuses on critical aspects and empowers investors to make informed decisions, which aligns with SEBI’s commitment to promote transparency and investor awareness through initiatives like the Investor Charter. This charter ensures that investors have access to standardized and understandable documentation, fostering trust, confidence and informed decision-making in the market. But the real challenge for SEBI will lie in ensuring compliance to these standards across the vast spectrum of brokers and investors, thereby raising concerns about uniformity and consistent adherence to MITC. This will impose a new obligation on SEBI to ensure compliance with these standards and to conduct regular audits to maintain comprehensive compliance reports.

Under section 15B of the SEBI Act, 1992, penalties will be imposed on intermediaries such as stockbrokers for failure to enter into agreements with clients, mandated by SEBI. This provision can be linked to SEBI’s circular requiring intermediaries to inform clients about MITC and obtain their acknowledgment. Similarly, in the case of N Narayanan v. SEBI, the Court emphasized that the role of SEBI under section 11 of the SEBI Act was to protect the interests of the investors by curbing manipulative practices in the securities market that negatively impacts market integrity and investor competition. This case highlights the importance of maintaining openness and clarity to ensure market integrity, emphasizing SEBI’s crucial role in safeguarding investors and fostering transparency within the securities market. Thus, SEBI is mandated to address the complexities that often lead to investor exploitation or misunderstandings.

Potential Challenges in Implementation and Way Forward

Heraclitus famously proclaimed that “change is the only constant.” However, over the course of human history, it has been seen that no change is devoid of its unique challenges and course-corrections. As a significant change to the established standards, MITC would thus be faced with both promising prospects and daunting challenges.  

A study conducted by IOSCO in March, 2023, focused on the need to employ technological interventions to create a format of disclosures and technical information, similar to that facilitated by MITC, in order to have an investor-friendly securities market.  

Another significant ordeal would be to ensure that the MITC guidelines are followed by the brokers. A critical safeguard in this regard is the mandate prescribed by the circular which would require all registered stock brokers to report the extent of implementation of the MITC regulations to the respective Stock Exchanges, who would then be required to pass on this information to SEBI through their monthly development reports.  

Further, a major flashpoint would be the scheduled publication of the standards for implementation of MITC by the Brokers’ Industry Standards Forum (ISF) on 1st January, 2024. Following the amendments to the respective Stock Exchange rules and the prescription of standards by ISF, the real-life scenario created by MITC would become clearer.  

However, while going about creating these fine-prints, one must keep in mind the fact that a layman might not be well versed with the convoluted reporting structures of Stock Exchanges, Brokers and SEBI. Thus, it would become pivotal to ensure that retail investors should be acquainted with a single source where they would be entitled to receive information about their rights w.r.t MITC as well as what documents are counted as MITC and why these documents are so crucial. Further, in a day and age where most retail investing is done using mobile applications, most of which eliminate the need for direct interaction between the investor and brokers, there will be a pressing need for targeted guidelines for such online investing platforms. This will ensure that investors are exposed to the requisite documents while also guaranteeing that brokers, who function through such online platforms, regularly comply with the upcoming regulations to be formulated by Stock Exchanges, the ISF as well as SEBI. 


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