On June 23, 2026, the National StockExchange of India Limited (“NSE”) issued a circular on the scope ofpermissible business activities for stock exchange members under Rules 8(1)(f)and 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”) (“Circular”).The Circular modifies the illustrative list of non-compliant activitiespreviously prescribed by NSE on January 07, 2022 (“2022 Circular”), and introduces a revised Frequently AskedQuestions (“FAQ”) framework to replace it.
Background
Rules 8(1)(f) and 8(3)(f) of the SCRR restrictstock brokers from engaging, either as principal or employee, in any businessother than that of securities or commodity derivatives, except as a broker oragent not involving any personal financial liability.
Previously, the Securities and ExchangeBoard of India (“SEBI”) had clarified that if a trading member borrowsor lends money for purposes connected to its securities business, this will notlead to disqualification under Rules 8(1)(f) and 8(3)(f) of the SCRR. SEBIlater issued another clarification saying the same rule also applies to thecommodity derivatives business.
Despite the above clarifications, it wasobserved that the confusion remained in the industry and brokers were engagingin activities outside the securities or commodity derivatives business. Inresponse, the 2022 Circular prescribed an illustrative list of twelvecategories of activities that would be construed as non-compliance with Rules8(1)(f) and 8(3)(f) of the SCRR.
Separately, on May 19, 2025, theDepartment of Economic Affairs, Ministry of Finance, published the SecuritiesContracts (Regulation) Amendment Rules, 2025 (“Amendment Rules”) wherein a second proviso was added toboth Rules 8(1)(f) and 8(3)(f), which clarifies that a broker’s investmentswill not be treated as “business”, unless they involve client funds or clientsecurities, or relate to arrangements that create a financial liability on thebroker.
The Circular operationalises the AmendmentRules by revising the illustrative list of non-compliant activities andreplacing the prior compliance guidance with a revised FAQ framework.
Key Changes
Modification of theIllustrative List
The 2022 Circular had prescribed twelve categories of activities as illustrative instances of non-compliance with Rule8(1)(f) and Rule 8(3)(f) of the SCRR. The Circular effects two distinct changes to this list.
First, Points 1 and 2 of the 2022 Circular havebeen modified. Under the 2022 Circular, these points treated the issuance ofcorporate guarantees towards credit facilities availed by group companies(Point 1) and the pledging of deposits with banks for overdraft facilitiesavailed by group companies (Point 2) as non-compliant, but only where suchactivities were not in connection with or incidental to or consequentialupon securities or commodity derivatives business. The Circular removesthis qualifying language by treating the same as non-compliant withoutreference to any connection to the securities business. Therefore, theoperative test is now derived from the new proviso to Rules 8(1)(f) and 8(3)(f)of the SCRR, that is, whether the arrangement involves client funds, clientsecurities, or is in the nature of creating a financial liability on thebroker.
Second, Points 3 through 12 of the 2022 Circularstand deleted. Consequently, activities such as borrowing funds to extend loansto associates or group companies, issuing commercial papers for non-securitiespurposes, and similar arrangements are no longer expressly prohibited under theillustrative list, provided they satisfy the new proviso inserted in Rules8(1)(f) and 8(3)(f) of the SCRR. The scope of what remains permissible becomesclearer on a reading of the FAQs issued alongside the Circular, discussedbelow.
Revised FAQ Framework
The Circular contains an Annexurecomprising six FAQs, which reiterate the existing prohibitions under Clause 20of the SEBI (Stock Brokers) Regulations, 2026 (the “SB Regulations”) andother SEBI and NSE circulars in the context of Rules 8(1)(f) and 8(3)(f) of theSCRR. The FAQs are discussed below:
1. Running unauthorised collective investment schemes (“CIS”) or portfolio management services (“PMS”) (fixed, guaranteed or regularreturns, or capital protection) is prohibited and will be treated as a violation of the SB Regulations.
2. Brokers cannot finance securities transactions except inaccordance with the regulatory provisions for Margin Trading Facility (“MTF”)and Securities Lending and Borrowing (“SLB”).
3. Borrowing of funds from clients (except from those who are alsodirectors, associates, or group companies for working capital requirements)will be treated as providing unregistered PMS or CIS.
4. Pledging client securities with banks or NBFCs to raise fundsremains prohibited.
5. Accepting client securities other than through the approved SLBmechanism is prohibited.
6. Anythird-party product offered on a broker’s platform must be regulated by anappropriate financial sector regulator. Since digital gold is unregulated, itcannot be distributed on any broker’s online platform.
Our View
The Circular changes the compliance framework forstock exchange members in two ways.
First, the test for corporate guarantees and pledged deposits hasbecome broader. Under the 2022 Circular, such arrangements were treated asnon-compliant only where they had no connection, direct or indirect, to thebroker’s securities business. The Circular removes this connection-basedqualification. The only question now is whether the arrangement involves clientfunds, client securities, or creates a financial liability on the broker,regardless of any link to the securities business.
Second, the deletion of Points 3 to 12 of the 2022 Circular may notresult in automatic allowance of such activities. Activities such as borrowing,lending to group companies, and issuing commercial papers will still need to beassessed under the SB Regulations and the new proviso to Rules 8(1)(f) and8(3)(f) of the SCRR, along with the framework noted in the FAQs whereapplicable.
You can mail us your queries and comments at Yash Vardhan.
