Brokers get a side hustle

India's broking industry has long operated under a framework that restricted its ability to diversify or expand, despite evolving client expectations and the changing nature of financial services.

- SANDEEP PAREKH

New-age investors increasingly prefer platforms that offer a full range of financial services, beyond just stock trading. For decades, rules 8(1)(f) and 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), imposed a blanket prohibition on brokers from engaging in any business outside securities or commodity derivatives. This regulatory architecture, rooted in a different era of market activity, came under increasing stress as new-age brokers evolved into multi-service platforms, competing not only with peers but also with fintechs, non-banking financial companies (NBFCs), and wealth managers.

In a significant move poised to recalibrate the regulatory perimeter for brokers, the Department of Economic Affairs (DEA) issued a gazetted notification dated May 19 amending rules 8(1)(f) and 8(3)(f). The amendment clarifies that investments made by brokers from their own surplus funds will no longer be deemed as engaging in "business" provided they do not involve client assets or create financial liability for the broker. This change addresses longstanding ambiguity that had clouded investment activity, particularly in group entities and other adjacent sectors.

Rules 8(1)(f) and 8(3)(f) of the SCRR have long stifled brokers, restricting them from engaging, either as principal or employee, in "any business" other than that of securities or commodity derivatives, except as a broker or agent not involving personal financial liability. It intended to ensure a broker, whether applying for admission to a stock exchange or already registered, did not expose itself to unrelated business risks that could compromise client interests or undermine market stability. The aim was straightforward: to ring-fence client assets and ensure a broker's other activities don't undermine its core responsibilities in the capital markets.