Centre has issued a clarification allowing to brokers deploy funds that they raise through the business, so long as the deployed investment is not from a client’s fund or it does not result in any liability for the broking unit.
Government’s clarity by amendment in Rule 8 of Securities Contract Regulation Rules (SCRR) is related to qualification of brokers as members of exchanges. Provisions of rule 8 prohibit brokers from engaging as a principal or employee in ‘any business’ other than that of securities or commodity derivatives except as a broker or agent in any other business, but not involving any personal financial liability.
These rules were to ensure safety of the market and ecosystem, but the term ‘any business ‘was not clearly defined under the rules, and was subject to interpretation by Sebi and exchanges.
Amended SCRR rules have now given a clarity, Rule 8 (1) (f) says, that investments made by a member shall, at all times, “not be construed as business except when such investments involve client funds or client securities, or relate to arrangements which are in the nature of creating a financial liability on the broker”.
Finance Ministry’s Department of Economic Affairs (DEA) notified the amendment on May 19.
After taking note of concerns raised by various stakeholders on the term ‘any business’, DEA had released a consultation paper in September 2024. In its consultation paper, DEA had said, in normal course, conduct of a business and the investment of net profits are two different activities. Prohibiting the making of any investments by a broker, including in group companies, may place unreasonable restraints on the ability to use its earnings as per its commercial prudence. Unless it can be shown that such investments are not bona fide.
The Finance ministry in a press release said the amendment is expected to provide regulatory clarity to enhance ease of doing business for brokers.
Kamlesh Shah, MD of Share India Securities and past president ANMI said, “Amended rule 8 of SCRR brings clarity that Broker can invest in Group company using own or borrowed funds without breaching rules, if liabilities are limited. This will enable brokers to use retained earnings and additional capital effectively for investment purpose”. He further added that the removal of unreasonable restriction will encourage brokers to boost capital, and will also permit its effective use.
Finance Ministry said that given the growth in the scale and interconnectedness of the financial sector and the evolution of nature of business of brokers with time, the DEA felt it necessary to review the appropriateness of safeguards embedded in the Rules so that the intent of the Rules is served without constraining activities of the stakeholders.
As per the notification, amendment has been made in Rule 8 (1) (f) and 8 (3) (f). For clarity a new clause is added “Provided further that investments made by a member shall, at all times, not be construed as business except when such investments involve client funds or client securities, or relate to arrangements which are in the nature of creating a financial liability on the broker.” An identical worded clause has been added in rule 8 (3) (f). Rule 8 (3) (f) is related to compliance by brokers.
Why the Amendment?
Rule 8, of SCRR became a matter of concern for brokers after multiple interpretations by regulator and exchanges in various cases.
In a case involving Kotak Securities, the NSE had observed that investments of Rs 624 crore made by brokerage firm in four associate entities were not in connection with securities or commodities market and hence, were not in accordance with Securities Contract Regulation Rules.
In another case involving Geojit BNP Paribas, Sebi was of the view that loans given by the broker to its subsidiary cannot be treated as a business activity and hence not a violation of Rule 8(3)(f) of SCRR.
In the case of Inventure Growth and Securities, Sebi had a different view that as a stockbroker had given a loan to its subsidiary, it had engaged in business activity other than of securities and hence violated Rule 8(3)(f).
NSE’s direction in the case of Kotak Securities was challenged in the Bombay High Court, where the Centre was also made a party. In the High Court, Central government assured clarity on the regulation, after which a consultation paper was floated in September last year and now amendment has been notified.
NSE and BSE had issued a circular on 7th January 2022, and at that time total of 100 brokers at NSE and four brokers at BSE have been found in non-compliance of their activity prior the amendment of the SCRR Rules.
Dr Keyur Shah, Advocate, Prakash Shah & Associates believes that this amendment will also resolve old matters. He said, Insertion of Proviso in SCRR in rule 8, as mentioned, will apply “…at all times...” retrospectively. Therefore, will apply to existing cases as well.
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