MUMBAI: The markets watchdog Securities and Exchange Board (SEBI) has overhauled its more than three-decades-old stockbroker regulations, allowing brokers to engage in other activities in areas regulated by other financial regulators/authorities, in a move aimed at providing ease of compliance as well as ease of doing business.
The new framework replaces the SEBI stock brokers regulations of 1992 and comes with simplified regulatory language and removes outdated provisions, and introduces clearer definitions, while laying down clear boundaries on incidental investment advice and underwriting operations, in the revamping of the over three-decade-old stockbroker regulations.
The overhaul simplifies language, removes outdated provisions, introduces clearer definitions, and allows brokers to operate under the framework of other financial regulators and replaces the 1992 stock brokers regulations. In the new stock brokers regulations notified Thursday, Sebi stated, “a stock broker may carry out an activity under the regulatory framework of the other financial sector regulators or any other specified authorities in the manner as may be specified by the board”.
The new regulations are aimed at allowing operational flexibility for brokers while strengthening investor protection and ensuring disciplined risk management in underwriting activities. Under the new framework, brokers are allowed to carry out activities that fall under the jurisdiction of other financial sector regulators such as the RBI, Irdai, Pfrda, IFSCA, the corporate affairs ministry and the IBBI, subject to certain conditions.
Such activities will be governed by the respective regulator and not Sebi, ensuring regulatory clarity and avoiding overlap, the Sebi said. The new regulations are structured into 11 chapters, comprehensively covering key aspects of the regulatory regime for stockbrokers. A part of the restructuring, SEBI has deleted certain schedules that are no longer required and integrated relevant ones directly into the regulations as chapters to improve readability and understanding.
In addition, the overall structure has been streamlined through the removal of repetitive provisions and the consolidation and re-arrangement of sections relating to underwriting, code of conduct, and other activities permitted for stockbrokers. The regulator has also rationalised the criteria for identifying qualified stockbrokers, ensuring that entities with a large number of active clients or higher trading volumes are brought under enhanced supervision and compliance requirements.
Reflecting the role of stock exchanges as the first-line regulators, SEBI has revised reporting obligations, including the reporting of non-compliance, submission of financial statements, and intimation of the place where books of accounts are maintained. At the same time, the regulator has removed obsolete and non-applicable provisions, such as those related to physical delivery of shares, the Forward Market Commission, and sub-brokers.
This amendment came after the SEBI board last month approved a proposal in this regard. Highlighting the extent of simplification, SEBI had stated the drafting has been done to enhance ease of reading and understanding, with the total number of pages reduced from 59 to 29, and the word count cut from 18,846 to 9,073.Sebi has also clarified that stock brokers may provide only incidental investment advice to their broking clients, limited to advice that clients may reasonably rely on for buying, selling or holding securities.
However, brokers must comply with the relevant provisions of the SEBI (investment advisers) regulations of 2013, reinforcing the distinction between broking and full-fledged advisory services. The revamped stock broker regulations have also clarified various old terms and also defined new terms. Like “proprietary trading”, clarifying that it means trading by a stockbroker in its own account, in any segment of a recognised stock exchange.
Similarly, “proprietary trading member” means a stock broker whose trades are exclusively in the nature of proprietary trading, and “professional clearing member” means a clearing member without having the trading rights in the same segment of any of the recognised stock exchange for which it is acting as a clearing member. It has also clarified that “suspicious activity” shall mean any fraudulent activity in respect of KYC requirements, order placement or trading activity.
On underwriting, Sebi has reiterated that stock brokers are eligible to act as underwriters but only using their own net worth or funds and has also capped total underwriting obligations at 20 times the broker’s net worth and barred brokers from earning any benefit beyond the agreed commission/brokerage.
Brokers must also subscribe to securities within 45 days of being called on and enter into detailed written agreements with issuing companies outlining responsibilities, timelines and fees, the SEBI said. The existing stock broker regulations date back to 1992 and has undergone multiple modifications to address operational requirements. As part of its ease of doing business initiative, SEBI had constituted a working group to review the stock broker regulations, to introduce regulatory changes and simplifying the drafting to align with the evolving regulatory landscape and the need for greater ease of compliance.