Watch out: Prepaid party of brokerages may just get busted

A few bad apples are ruining the prepaid party of brokerages.

A report in The Economic Times says the Securities and Exchange Board of India is planning to regulate prepaid schemes offered by brokerages, as customer complaints of misuse increase.

Brokerages had started offering such services in 2011. Under the scheme, customers deposit an amount with a brokerage house as fee and trade until it exhausts. In other words, he need not pay brokerage for each transaction he makes.

But the catch is what happens if the customer does not exhaust the deposited amount completely.

Though most of the companies are returning the unused money, the capital market watchdog has found that some are not. There have been complaints that these companies are even using strong arm tactics to make an undue gain.

This definitely warrants the regulator’s intervention.

The report says the Sebi had discussed the proposal in a meeting with market intermediaries on July 5.

However, brokerages are not enthused. They complain that any regulation of this sort will hurt an already slowing business.

As much as 30 percent of their new business comes in this category of service, the report says.

“There is no need to meddle with broking schemes as it is a free market,” a senior official of a brokerage has been quoted as saying in the report.

A free market does not mean customers can be fleeced for an unfair profit. If prepaid schemes are helping these companies tide over the present crisis, they are sure to launch more such plans.

That calls for effective regulation. Otherwise, the danger is the innovative business strategy will turn out be counter-productive.