
The “Securities Contracts (Regulations) Rules, 1957” (“Rules”) were framed by the Central government to prevent undesirable transactions in securities by regulating the business of dealing by various stakeholders, including stock-brokers (designated as ‘members’ or ‘brokers’ under the Rules).
Recently, rule 8(1)(f) and 8(3)(f) of the Rules have been amended. However, to understand the amendment, it is essential to first examine the provisions and the historical context in which the amendment was introduced. Rule 8 of the Rules deals with the qualifications for membership of a recognised stock exchange, as follows:
“(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.”
The first part of rule 8(1)(f) and 8(3)(f) of the Rules prohibits stock-brokers from engaging in non-securities businesses to protect client funds, while the second part of the Rules permits them to act as a broker or agent in such businesses, provided no personal financial liability is incurred. However, issues arose as the term ‘business’ was not clearly defined in the Rules, leaving it open to interpretation.
To address the issues, the National Stock Exchange (“NSE”) issued a circular dated January 7, 2022 (“NSE Circular”), clarifying the scope of ‘business’ activities and including an illustrative list of prohibited activities. Paragraph 10 of the circular listed, as one such prohibited activity, investments in group companies such as subsidiaries and associates that are not in connection with or incidental to or consequential upon the securities or commodity derivatives business. This restricted stockbrokers from investing in group companies and imposed unreasonable limitations on their ability to deploy surplus funds or retained earnings based on their commercial judgment.
In 2024, the NSE penalised Kotak Securities Limited for investing in four of its associate companies. The NSE observed that these investments violated rule 8(3)(f) of the Rules and the NSE Circular, as these were not in connection with, incidental to, or consequential upon the securities or commodities derivatives business. In an appeal from Kotak Securities, the Bombay High Court stayed the NSE order since, during the hearing, the Central government sought time, stating that it did not concur with the NSE order and the NSE Circular, as it was issued without due consultation. It further submitted that that prima facie, the NSE Circular appears to impose excessive restrictions on the normal investment of surplus funds, without adequately reflecting the intent and rationale of the Rules. Subsequently, the Central government issued a consultation paper inviting comments on Rule 8 from all stakeholders.
Following such consultation, on 19 May 2025, the Department of Economic Affairs, Ministry of Finance, amended rules 8(1)(f) and 8(3)(f) by adding the proviso set out below:
“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.”
The proviso clarifies that stock-brokers may invest their retained earnings, provided such investments do not involve client funds or client securities, or create any financial liability on the stock-broker. Paragraph 10 of the NSE Circular has also been deleted by the amendment, indicating that stock-brokers are now permitted to invest their surplus funds in other companies, including group companies. The amendment creates an enabling environment for stockbrokers to invest their surplus funds, provided such investments do not create any financial liability for the stockbroker.
The amendment is a welcome move, as it strikes a balance between stock-brokers’ fundamental right to conduct business, invest their surplus funds, and the obligation to protect client interests, as it expressly prohibits the use of client funds or securities for any business activity of the stockbroker.
About the authors: Muskan Agrawal is an Associate at Luthra and Luthra Law Offices India.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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