Finmin proposes changes in qualification norms for stockbrokers

The Finance Ministry intends to bring clarity in qualification norms for stockbrokers. Accordingly, it has come out with a consultation paper for changes in Securities Contracts (Regulation) Rules, or SCRR, 1957.

“Given the growth in the scale and interconnectedness of the financial sector and the evolution of brokerage business from a traditional brick-and-mortar model to a modern fintech-based model, the Government felt it necessary to review the appropriateness of safeguards embedded in the said Rule so that the intent of the Rule is served without constraining activities of the stakeholders,” the Economic Affairs Department said in the consultation paper.

Rules for brokers

Rule 8 of the SCRR sets out the qualifications for a person to be elected or continue as a member of a recognised Stock Exchange. It prohibits brokers to engage as a principal or employee in any business other than that of securities or commodity derivatives. However, she or he could be a broker or an agent in any other business, but not involving any personal financial liability. “The term ‘any business’ is not clearly defined by the said Rule,” the paper said while advocating for the review.

It has listed three issues on which clarity is needed. First, should investment of proprietary/own funds in excess of the net worth in other companies, including group companies, that are not in securities business, be treated as ‘business’? Second, should being on the Board of a group companies imply being engaged as a ‘principal’ in that business even if he/she is not a Key Managerial Personnel or Whole time Director? And third, should holding a majority stake or substantial stake in any company, including group companies, that is not in securities business, imply that such a holder is in such business?

The paper has proposed adding a proviso to the Rule 8 stating, “Investments made by a member shall not be construed as business except when such investments involve client funds or client securities, or relate to arrangements which create a financial liability on the broker.”

Points put forth

The paper underscores that the purpose of the Rules and Regulations should be to provide appropriate safeguards for activities in the securities market without placing unreasonable restrictions on normal investment and business activities. With this objective, stakeholders are required to share their views on whether or not there is a need to clarify the Rule further and should an indicative list of activities be included in the Rule.

From the perspective of market integrity, views are sought on whether or not there is a requirement to place additional safeguards or limits on investments in companies or other entities. The purpose of the proposed proviso in ringfencing client funds, imposing reasonable restrictions on normal investments & business activities and providing for market integrity has also been questioned.