New rule lets brokers expand beyond stocks and derivatives
The ministry of finance has amended certain provisions of the Securities Contracts (Regulation) Rule, allowing brokers to invest their own surplus funds in businesses apart from capital market-related activity, which was barred earlier. For instance, in real estate or non-banking finance companies, so long as there is no liability on the broker making such investments.
The changes were highlighted by a National Stock Exchange (NSE) circular on Tuesday. It will let new-age investors tap brokers as a one-stop shop for all needs, while increasing the ease of doing business for market intermediaries.
Dinesh Thakkar, chairman & managing director at Angel One, the third largest retail broking house in the country after Groww and Zerodha, summed up the significance of the amendment: offering multiple services on an integrated platform.
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'With the finance ministry's clarification, brokers can now deploy surplus capital into businesses beyond broking—so long as client assets remain untouched and no personal liability is assumed," he said.
"This enables us to go beyond distribution—into manufacturing products that may not be Sebi-regulated but are essential to completing a customer's financial journey: all forms of credit, insurance, and more," Thakkar said. 'The digitally savvy Indian customer is no longer looking for piecemeal solutions; they expect a complete financial experience, offered seamlessly on an integrated platform. This is our opportunity to build exactly that."
The amendments to provisions of Rule 8 of the SCRR 1957 clarify that investments made by brokers will not be construed as "business" if they don't involve client funds or securities or relate to arrangements that create a financial liability for the broker.
'Business' implies that brokers have either used their client funds or securities for such investments or that the investment would impose a personal liability on the broker beyond the shareholding in a firm. To be sure, these rules are meant to ring-fence client funds and prevent brokers from taking on liabilities which could impact the broking business, creating systemic risks.
Recalibration of regulatory perimeter
Given the changing nature of financial services wherein new-age investors prefer platforms that offer a full range of financial services, the amendments are a "recalibration" of the "regulatory perimeter" for brokers, said Sandeep Parekh, founder of Finsec Law Advisors.
"The new rule issued by the ministry of finance both clarifies and expands the scope of what a broker can do outside of broking," Parekh said. 'Given the increasingly integrated bouquet of services global brokers provide, it was time that the overly strict interpretation by Sebi and NSE was diluted so that more services could be provided by brokers without jeopardising client interest."
Prior to the amendments by the department of economic affairs (DEA), these rules stated that a broker can only act as an agent, and not a principal, in the securities and commodities derivatives business; and he should not serve either as a principal or employee of any business apart from the aforesaid businesses, where he acts only as an agent.
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A principal refers to an owner or a person having substantial ownership within a firm. An agent is a person authorised to act on behalf of another individual or firm.
NSE's clarificatory circular on 7 January 2022 stated, "...Members are not permitted to engage in any business or activities or transactions, directly or indirectly, other than that of securities or commodity derivative, except as a broker or agent not involving any personal financial liability."
The circular also barred brokers from investing in businesses such as NBFC and real estate, among others, which were not incidental to or consequential upon the securities or commodity derivatives business.
Kotak Securities, a subsidiary of the Kotak Mahindra Bank, had petitioned the Bombay High Court against the circular, which necessitated divesting its stake in a non-banking financial services company. It had invested 49% in car financier Kotak Mahindra Prime, also a subsidiary of its parent bank, well before NSE's clarificatory circular. The outcome of the case is awaited.
A Kotak Securities official declined to comment as the matter was "sub juidce", while queries emailed to NSE remained unanswered until press time.
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