FinMin Amends Securities Contracts Regulation: Broker Investments Not Business Unless Client Funds or Liabilities Involved [Read Notification]

The Ministry of Finance has issued Notification No. G.S.R. 318(E) dated 19 May 2025, amending the Securities Contracts (Regulation) Rules, 1957, to clarify that broker investments will not be treated as business activities unless they involve client funds, client securities, or create financial liabilities on the broker. The amendment is effective immediately upon its publication in the Official Gazette, i.e., 19 May 2025

This notification introduces a clarification under Rule 8 of the Securities Contracts (Regulation) Rules, 1957, specifically in sub-rules (1)(f) and (3)(f). It deals with how investments made by a member (broker) are to be interpreted for regulatory purposes, whether they are treated as business or not.

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Key Amendment

The amendment inserts a new proviso (i.e., exception clause) in both sub-rule (1)(f) and sub-rule (3)(f) of Rule 8. The inserted clause states:

“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.”

In simple terms, Normally, a broker’s own investments will not be treated as part of their business activities. However, if the investment involves client funds or client securities, or if it results in a financial liability on the broker (such as borrowing or margin funding using investments), then such investments will be treated as business.

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This clarifies what counts as "business" activity for a stockbroker under Rule 8, which prescribes the qualifications and conduct for becoming a member of a recognized stock exchange. It aims to protect clients’ interests by ensuring that only client-involved or liability-linked transactions are seen as business activities. It also helps segregate personal investments of brokers from their regulated business activities, which is crucial for compliance, risk management, and audit.

Background:

The original Securities Contracts (Regulation) Rules, 1957 were framed under the Securities Contracts (Regulation) Act, 1956. Rule 8 outlines eligibility and business conduct requirements for members (brokers) of stock exchanges. This is the first major amendment since G.S.R. 664(E), dated 27 June 2017.

To Read the full text of the Order CLICK HERE

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