Relaxed investment regulations for stockbrokers establish a balanced, governing framework
The Securities Contracts (Regulations) Rules, 1957, framed by the Central government to regulate the business of dealing in securities, has undergone a significant amendment on May 19, 2025. This update relaxes the earlier restrictive provisions on stockbrokers' engagement in non-securities businesses.
Previously, rule 8(1)(f) and 8(3)(f) of the Rules prohibited stockbrokers from acting as principals or employees in any business other than securities or commodity derivatives unless it was as a broker or agent without personal financial liability. With the recent amendment, brokers are now granted greater freedom to invest surplus funds and engage in ancillary non-securities businesses, provided they do not use client funds or securities for such activities and ensure separation from their brokerage business.
The amendment strikes a balance between stockbrokers' fundamental right to conduct business, invest their surplus funds, and the obligation to protect client interests. However, calls for clearer definitions—especially of "financial liability"—remain critical to avoid inconsistent interpretations that could impact brokers’ investment decisions.
The National Stock Exchange (NSE), a recognized stock exchange, would be responsible for ensuring compliance with these regulatory norms by its members (stockbrokers), monitoring their business activities, and enforcing prohibitions on the misuse of client funds as outlined by the amended rules.
In 2022, Kotak Securities Limited was penalized by the NSE for investing in four of its associate companies, which was deemed a violation of rule 8(3)(f) of the Rules and the NSE Circular. The Central government subsequently issued a consultation paper inviting comments on Rule 8 from all stakeholders, leading to the recent amendment.
Muskan Agrawal, an Associate at Luthra and Luthra Law Offices India, comments on this amendment, stating that it "represents a significant regulatory evolution aimed at enabling stockbrokers to optimize their capital deployment within a safeguarded framework." She adds, "This shift marks a liberalised, commercially pragmatic approach to the regulation of stockbrokers, aiming to foster innovation and diversification in their business activities while protecting client interests."
This amendment is a step towards modernising the regulatory framework for stockbrokers, providing them with the opportunity to invest their surplus funds in other companies, including group companies, while ensuring the protection of client interests. The opinions expressed in this article are those of the author(s).
[1] Muskan Agrawal, "The New Amendment to the Securities Contracts (Regulations) Rules, 1957: A Game Changer for Stockbrokers," Bar & Bench (not written by), May 25, 2025. [3] "Securities Contracts (Regulations) Rules, 1957: Amendment Eases Restrictions on Stockbrokers' Non-Securities Businesses," Economic Times, May 20, 2025.
In the updated Securities Contracts (Regulations) Rules, 1957, stockbrokers are now permitted to invest surplus funds and engage in ancillary non-securities businesses, as a part of the modernized regulatory framework for stockbrokers. This change, according to Muskan Agrawal of Luthra and Luthra Law Offices India, signifies a significant evolution in regulatory practices, aiming to optimize capital deployment while ensuring protection of client interests and fostering innovation and diversification in business activities.
