Those within the broking industry would be familiar with Rules 8(1)(f) and 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”), which imposed severe restrictions on other business activities of a stock broker. In a much anticipated positive development, on May 19, 2025, the Central Government amended the SCRR, clearing the regulatory obstacles that prevented stock brokers from effectively deploying excess funds available with them. These regulatory obstacles had been exacerbated by various orders of the Securities and Exchange Board of India, the Securities Appellate Tribunal, and some High Courts.
The following paragraphs provide an overview of what these rules are, and how the latest amendment would benefit the broking industry.
Understanding the Scope and Impact of Rules 8(1)(f) and 8(3)(f)
Rule 8 of the SCRR lays down the qualifications required for one to become a member of a stock exchange, i.e., a broker. The relevant excerpts are reproduced below:
“Qualifications for membership of a recognised stock exchange.
8. The rules relating to admission of members of a stock exchange seeking recognition shall inter alia provide that:
[…]
(1) No person shall be eligible to be elected as a member if—
[…]
(f) he is engaged as principal or employee in any business other than that of securities or commodity derivatives except as a broker or agent not involving any personal financial liability unless he undertakes on admission to sever his connection with such business.
[…]
(3) No person who is a member at the time of application for recognition or subsequently admitted as a member shall continue as such if—
(f) he engages either as principal or employee in any business other than that of securities or commodity derivatives except as a broker or agent not involving any personal financial liability […]”
(Emphasis supplied)
On May 07, 1997, SEBI issued a circular wherein it clarified that borrowing and lending of funds by a trading member in connection with, or incidental to, or consequential upon the securities business, would not be disqualified under rules 8(1)(f) and 8(3)(f).
Accordingly, there are three main parameters that have to be looked at while determining if a particular business activity falls foul of Rule 8(3)(f). Firstly, the concerned business cannot be a securities business, and hence, cannot be the primary business of the stockbroker. Secondly, the concerned business cannot be in connection with, or incidental to, or consequential upon the securities business. Thirdly and lastly, the said business must not result in the stockbroker assuming any financial liability.
In subsequent years, however, this interpretation became increasingly constrained. Thereafter, in January 2022, the National Stock Exchange of India Limited (“NSE”) issued a circular, drawn up in consultation with SEBI, wherein it inter alia provided a list of illustrative activities prohibited in terms of Rules 8(1)(f) and 8(3)(f). This was followed by NSE’s circulars in July 2022, and September 2022, wherein it inter alia prohibited stockbrokers from certain additional arrangements (collectively “Clarificatory Circulars”).
By virtue of the Clarificatory Circulars, stock brokers were barred from carrying out various activities with their surplus funds. For instance, brokers were barred from extending loans to any entity (whether within the group of the broker or otherwise), which were not incidental to or consequential upon the securities business. Further, brokers could not invest in group companies such as subsidiaries and associates, if such investment was not in connection with or incidental to the securities business. Thus, brokers could not invest in group companies which are engaged in real estate, or NBFC activities, etc.
While limited exceptions existed, there existed confusion around the same as well. For instance, members could form subsidiaries to undertake activities connected with, incidental to, or consequential upon the securities business without prior approval. However, for activities considered useful or necessary for capital market development, such as setting up IT subsidiaries to develop back-office or trading software, prior approval from the Exchange was required.
Taken together, the measures outlined in the Clarificatory Circulars substantially curtailed the operational and investment flexibility available to brokers, and reinforced a clear boundary around permissible business activities under the regulatory framework.
Amendments to the SCRR
On May 19, 2025, the SCRR was amended, whereby, the following proviso has been inserted:
“Provided further 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.”
As a result of the above, ‘investments’ made by a broker using its own funds, which do not create any financial liability on the broker, would be excluded from the scope of ‘business activities’. Thus, effectively, the pre-amendment position has been overturned by virtue of this proviso. It may be noted that the proviso only excludes ‘investment’ from the scope of business activities, and not activities performed by the broking entity itself. Thus, brokers would have to create a subsidiary to carry out business activities (by investing in such subsidiary), and must ensure that as a result of the same, no financial liability is incurred on the broker.
Our view
The amendment is a welcome move and has brought in much needed clarity to the contours of Rules 8(1)(f) and 8(3)(f). Brokers are now free to deploy their earnings and other funds available with them as per their commercial prudence, without the restrictions that applied on their activities prior to the amendment. This is expected to enable more efficient use of retained earnings and additional capital for investment purposes, encourage capital augmentation, and promote its effective utilisation within the regulatory framework.
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