Govt gives stockbrokers flexibility in group companies' investments

The DEA has amended Rule 8 of SCRR to clarify that brokers can invest in group companies using own or borrowed funds without breaching rules if liabilities are limited

In a major relief to stock brokers, the Ministry of Finance on Monday provided the long-awaited clarification on investments and fund-based activities by a broker under the Securities Contracts (Regulation) Rules (SCRR).

 

The amendment allows more flexibility on investments and opens up more avenues, said brokers.

 

The Rule 8 of SCRR prohibits brokers from engaging 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.

 

The main intent behind the restriction was to prohibit brokers from investing client’s money in other businesses and safeguard the client’s funds.

 

However, it was noted that the term ‘any business’ was not clearly defined by the Rule and was subject to interpretation. With the amendments issued on Monday, the government has provided clarity.

 

“The amendment says that stock brokers can invest from their own net worth or borrowed funds in group companies that are not engaged in securities business, provided the liability is limited to the extent of the investment. It applies to all investments, not only group companies, so it is an excellent amendment,” said Dhiraj Relli, managing director (MD) and chief executive officer (CEO), HDFC Securities. 

 

The Department of Economic Affairs (DEA) had undertaken consultations with stakeholders between September and October 2024. In the consultation paper, it was noted that prohibiting investments by a broker, including in group companies, places 'unreasonable fetters' on its ability to use its retained earnings as per its ‘commercial prudence’.

 

“..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,” stated the amendment issued on Monday.

 

According to the consultation paper, around 100 brokers at the National Stock Exchange (NSE) and four at the BSE were found to be in non-compliance after the exchanges clarified the list of prohibitions in January 2022.

 

“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,” stated the ministry.

 

The norms by Securities and Exchange Board of India (Sebi) governing stock brokers already have prescribed minimum net-worth requirements for brokers. It excludes investments made by them in group companies and considers investments in marketable securities at a discount of 30 per cent.