Consultation paper on stock broker's referral programme in the works, discussions underway, says Sebi

The market regulator told Moneycontrol that it is committed to address all issues raised by stakeholders through a consultative process.

The consultation paper on referral programmes run by stock brokerages is in the works, and discussions on the matter are still ongoing, capital market regulator Sebi has confirmed.

Earlier on March 4, Moneycontrol had reported the referral programme will return with the capital market regulator likely issuing a consultation paper shortly. Sources had told Moneycontrol that the consultation paper would cover who can be a referral partner, along with the compensation and compliances for the entity.

In response to a query sent by Moneycontrol, the Securities and Exchange Board of India (SEBI) said that the issue is still under discussion and a joint paper will be issued along with the stock exchanges once the deliberations are complete, reiterating the commitment to a consultative process.

The regulator 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."

The regulator added, "SEBI is committed to address all issues raised by stakeholders through consultative process."

The referral partner programme run by stock brokerages rewards any person or entity that channels clients to the brokerages, with partner getting a share of the brokerage spent by the clients.

The arrangement helped the stock market grow, and especially helped the online brokerages expand its client pool. However, it also led to the direct and indirect funding of unregistered investment advisories and portfolio management services, according to industry sources.

Finfluencers, or financial influencers, who were not registered with SEBI and therefore had no regulatory oversight, started giving investing advice, and subsequently on trading as well. Industry insiders said that this was due to their pursuit to get referrals (brokerage's clients) to trade more, so that they too could earn from brokerage commissions.

The regulator stepped in with various directives, after this became evident. The National Stock Exchange (NSE) issued a clarification on August 14, 2024 and said that any person referring a client to a trading member (stock broker) would need to be registered as an authorised person (AP) of the brokerage. APs are regulated entities like sub-brokers, and their associated brokerages have to ensure that the APs comply with SEBI norms.

On October 22, 2024, SEBI issued a circular restricting the association of registered entities such as stock brokers to unregistered entities, and banned any association between brokers and any entity that gives investment advice without SEBI's permission and any entity that assures investment returns without SEBI's permission.

Following these directive, the referral programmes run by stock brokerages were wound up.

On January 24, 2025, the NSE said that it had received representations from trading members/members associations that certain category of referral partners be allowed without them having to be registered as APs. The exchange therefore withdrew its August 14 directive until the industry inputs were incorporated.