The Securities and Exchange Board of India (SEBI) may soon propose a framework to regulate referral partners who refer clients to brokerages, outlining their eligibility, compensation, and compliance requirements, sources said.
The soon-to-be-proposed framework is likely to give more clarity on who can be referral partners, what they can do, how they will be compensated, and who will ensure their compliance with the SEBI norms, sources close to the development told Moneycontrol.
The market regulator will soon issue a consultation paper that has been drafted following discussions, they said.
The consultation paper may suggest compensating the partners with a fixed fee, rather than a brokerage commission, to ensure that the partners do not give investment advice to generate more trades and thus more brokerage.
In a response to Moneycontrol's query, SEBI said that discussions are still ongoing. The statement said, “The issue has been discussed with the Stock Exchanges and is under further deliberations of the Brokers’ Industry Standards Forum for Stock Brokers, pursuant to which a consultation paper shall be jointly issued by all the stock exchanges."
It added, "SEBI is committed to address all issues raised by stakeholders through consultative process."
Referral partners have not been regulated until now, and earlier referral programmes were stopped following directions issued by the exchanges but the directions were later withdrawn.
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Referral rules so far
Referral partners have played a crucial role in the development of capital markets in recent years, educating investors and contributing to the growth of online brokerages.
In fact, Zerodha's founder and CEO Nithin Kamath wrote in 2023 that referral programme, along with the partner programme, gave the brokerage around 10 percent of its new business.
However, several referral programmes of various brokerages directly or indirectly, deliberately or inadvertently supported illegal investment advisories.
Since referral partners were paid a share of the brokerage they generated, they began running advisories on social media channels such as Twitter and YouTube. They started giving investment advice without being registered as Research Analysts or Investment Advisors.
Therefore, the regulator, through a circular issued on October 22, 2024, restricted the association of regulated entities, such as brokerages, with unregistered entities, such as finfluencers—particularly those who provided investment advice or assured returns without SEBI’s permission. In a circular issued on January 29, 2025, SEBI further clarified that even referring a client (or referral partner programmes) would be covered under the definition of association.
However, exchanges had issued regulatory directions on referral programmes even earlier.
Authorised Person vs Referral Partner
On August 14, 2024, the National Stock Exchange (NSE) issued a directive to brokerages, stating that it had come to its notice that certain referring persons were not registered as authorised persons (APs) of the respective trading members.
APs are regulated entities like sub-brokers, and their associated brokerages have to ensure that the APs comply with SEBI norms.
The NSE circular said, "With a view to safeguard the interest of investors, it is hereby clarified that any person referring a client to the Trading Member shall be appointed as an AP of the Trading Member after obtaining specific prior approval from the stock exchange for each such person."
Until then, even customers of brokerages could be referral partners. But with this directive, most brokerages closed their referral programmes.
After the industry made representations to regulatory authorities, the exchange withdrew the August 14 directive.
A January 24, 2025, circular from NSE said that the exchange had received representations from trading members/members associations that a certain category of persons/entities may be allowed to refer the clients without being registered as an AP of the trading member. It added that the proposal was under consideration.
Moneycontrol has written to NSE and the report will be updated with its responses when they come in.
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