Rule 8 of the SCRR sets out the qualifications for a person to be elected as, and continue as, a member of a recognized stock exchange. It prohibits brokers from engaging as 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.
The DEA had released a discussion paper in September 2024, over the need for possible changes in provisions of SCRR Rules. In the paper, DEA had said that “any business” mentioned under Rule 8 is not clearly defined and is subject to interpretation.
Therefore, the amendment, carried on Monday, has added a new prevision in Rule 8, sub-rule (1), which says that no person shall be eligible to be elected as a member of the stock exchange if provided 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.”
The press-release states 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.
The amendment has been carried out after due consideration of feedback from the stakeholder and is part of the broader emphasis of the government to provide regulatory clarity and enhance ease of doing business in the financial sector, it said. “It will ensure that market intermediaries continue to support the development of India’s capital markets in a transparent and well-regulated manner,” the release added.
The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) issued circulars dated January 7, 2022, for their trading members (brokers), clarifying rules 8(1)(f) and 8(3)(f) of SCRR. The circular observed that “members are engaged in businesses other than securities or commodity derivatives business like entering loan agreement with clients/entities, collecting money in the form of deposit or otherwise by offering fixed/guaranteed/periodic returns, extending corporate guarantees etc, which is in contravention to of Rule 8(3)f of SCRR”, noted the DEA in the discussion paper.
The January 2022 circular seems to have expanded the scope of ‘any business’ as embedded in the Rules 8(1)(f) and 8(3)(f), said the paper. “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 fetters on its ability to use its retained earnings as per its commercial prudence,” the paper had said.
“Unless it can be shown that such investments are not bona fide, such as the investor exercises complete control over the day-to-day affairs of the investee company or has considerable influence over the functioning of the investee company, the business of the investee and the business of the investor are considered separate,” it had said.
Experts welcomed the move, saying the amendment will bring clarity.
“Rule 8 of the SCRA along with certain circulars issued there under created constraints in terms of the ability of brokers to even make investments out of their own balance sheet into subsidiaries and or other group companies. This proposed amendment brings clarity to this aspect and is a welcome move, said Keyur Shah, Partner and Tax Financial Service leader, EY India.
