Analysing the Revised SCRR Framework – IndiaCorpLaw
[Manit Sharma is a 5th year student at Gujarat National Law University, Gandhinagar]
The Indian broking industry has long been hemmed in by a web of regulatory constraints that severely limited the scope of its non-securities business activities. Central to this regulatory landscape are rules 8(1)(f) and 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”), which not only govern eligibility for membership in a recognised stock exchange but also place significant limitations on the ancillary or other business engagements of stockbrokers. For years, these rules operated as a barrier against innovation and operational diversification, particularly stifling the use of surplus funds by brokers.
Amidst an evolving financial market environment and increasing calls for reform, the Central Government introduced anamendment to the rules on May 19, 2025. This marked a significant shift in the regulatory stance towards broker investments, moving away from a restrictive framework to a more liberalised and commercially pragmatic approach. The amendment, stemming from the consultation paper released by the Department of Economic Affairs in September 2024, provides a welcome relaxation. However, it also leaves open certain critical interpretational gaps that demand closer scrutiny. This post explores the evolution of the law, the substance of the amendment, its impact, and the areas where further clarity or reform may be necessary.
Background
Under rule 8 of the SCRR, certain qualifications are prescribed for a person to become, and to continue as, a member of a recognised stock exchange. Specifically, rules 8(1)(f) and 8(3)(f) prohibited a stock broker from engaging in any business other than that of securities or commodity derivatives, unless the activity was in the nature of broking or agency and did not involve any personal financial liability.
In other words, a broker could not simultaneously carry on any non-securities business unless they severed all connection with such business at the time of admission. Even after admission, the restrictions continued to apply. These provisions were aimed at ringfencing the core brokerage business and limiting the broker’s risk exposure. While there was a limited carve-out for broking or agency functions that did not entail personal financial risk, the language of the rules imposes a wide and strict prohibition on all other business engagements.
The language of the rule is deceptively simple but was historically interpreted with a narrow lens. According to a 1997 SEBI circular, borrowing and lending by brokers in connection with, incidental to, or consequential upon, their securities business was permissible. This clarification established three interpretational pillars: the business must not be a securities business per se, it must not be connected to the securities business, and it must not involve any personal financial liability on the part of the broker.
However, over time, the application of these principles became increasingly rigid. In 2022, the National Stock Exchange of India Limited and Bombay Stock Exchange, in consultation with SEBI, issued clarificatory circulars that explicitly enumerated activities deemed impermissible under rules 8(1)(f) and 8(3)(f). These circulars significantly tightened the regulatory noose around brokers. Brokers were effectively barred from deploying their surplus funds into a wide array of investment avenues. Lending to group entities, investing in subsidiaries engaged in activities outside the securities domain, or deploying capital into real estate or non-banking finance company (NBFC) ventures were all placed out of bounds. Even within the framework of capital market development, exceptions existed, but these too were entangled in a mesh of conditional approvals and prior permissions. For instance, brokers could establish subsidiaries to develop trading software or manage back-office functions, but only after obtaining explicit approval from the Exchange.
SEBI’s informal guidance in VLS Finance Limited further entrenched the restrictive interpretation of rule 8(3)(f). In that guidance, SEBI relied heavily on the clarificatory circulars issued by the stock exchanges and concluded that certain activities proposed by VLS Finance would not comply with the rule. Notably, SEBI did not address VLS Finance’s reference to the Geojit BNP Paribas adjudication order, a 2017 order that had adopted a more liberal interpretation, holding that the main objective of rule 8(3)(f) was to prohibit the use of client funds in unrelated businesses. This omission signalled a shift in SEBI’s approach, elevating the clarificatory circulars over earlier interpretations and reinforced the binding nature of these circulars on brokers, even in the absence of formal rulemaking.
This regulatory climate, created by an accumulation of circulars and restrictive interpretations, rendered the operational environment for brokers increasingly stifled. The inability to freely invest retained earnings or excess capital had significant business implications, curbing both growth and innovation. The earlier framework may have been built on concerns of conflict of interest or financial risk, but in practice it generated confusion, compliance complexity and, in many cases, stifled legitimate business expansion.
The Amendment
On May 19, 2025, in a move widely seen as progressive and timely, the Central Government introduced an amendment to the SCRR. A new proviso was inserted to rules 8(1)(f) and 8(3)(f), which significantly redefined the treatment of investments made by stock brokers. The amendment states that investments made by a member shall not be construed as “business”, provided such investments do not involve client funds or securities and do not create a financial liability on the broker.
This simple yet powerful change carries with it far-reaching implications. At its core, it distinguishes “investment” made with a broker’s own funds from the category of disallowed “business activities”. For the first time in decades, brokers are now free to invest their surplus capital into ventures or instruments of their choosing, so long as these investments do not impose a financial liability or involve client assets.
What this change effectively does is overturn the long-standing prohibition against a broker making investments outside the securities business domain, at least to the extent that such investments are made from proprietary funds and do not result in liabilities that can affect the broker’s solvency or client interests. It is important to note, however, that the amendment distinguishes between investments and active business operations. The actual business activity, even if carried out through an investment in a subsidiary, remains regulated under the earlier framework. Thus, while brokers can now invest in, say, a technology company or a real estate venture, they must route such investments through a subsidiary, rather than directly engaging in the business through the broking entity itself.
This shift represents a formal retraction of the restrictive reading that had been adopted through SEBI’s, NSE’s and BSE’s clarificatory circulars. It aligns the SCRR more closely with the practical commercial needs of the broking industry, while maintaining safeguards related to client interest and financial prudence.
Analysis
The amendment is unquestionably a step forward, aligning with SEBI’s interpretation in its 2017 Adjudication Order in the matter of Geojit BNP Paribas, where it was observed that “the main purpose of Rule 8(3)(f) is to prohibit the brokers from investing the clients’ money in other businesses”. This indicates that the core intent of the rule has always been to protect client funds from being diverted into unrelated or risky ventures. The amendment simplifies the compliance landscape and provides brokers with a long-awaited flexibility to make prudent commercial decisions with their own funds. It marks a return to a more liberal and business-friendly interpretation of the SCRR. It offers brokers the opportunity to generate returns on idle capital and participate in broader market activities through carefully structured investments. However, the amendment is not without its shortcomings and opens up a new set of ambiguities that could hamper its effective implementation.
The most pressing issue is the absence of a clear definition of “financial liability”. The proviso excludes from the restriction only those investments that do not create such a liability. It is unclear whether this includes contingent liabilities such as guarantees or underwriting commitments, or whether equity investments in highly leveraged entities would fall within its ambit. Additionally, investments that require periodic capital infusion may also potentially be construed as giving rise to financial liability.
The lack of clarity on this front leaves the amendment vulnerable to inconsistent interpretations. Stock exchanges and SEBI may, once again, resort to issuing clarificatory circulars, leading us back into the same maze of overregulation that this amendment sought to simplify. The risk is that in attempting to remain compliant, brokers may become overly conservative in deploying their funds, effectively diluting the benefits of the amendment.
Another issue that remains unresolved is the requirement that actual business operations be carried out only through a subsidiary. While this structure may offer a layer of regulatory insulation, it imposes structural and operational costs. Setting up and maintaining subsidiaries involves legal, administrative, and tax-related overheads that may discourage smaller or mid-sized brokers from fully capitalising on the amendment.
Moreover, the amendment does not retrospectively validate past investments or business arrangements that may have been penalised under the earlier regime. There remains a grey area surrounding ongoing litigation or enforcement proceedings based on the pre-amendment position. Brokers who faced regulatory action prior to May 2025 may find little solace in this new, liberalised framework.
Recommendations
To ensure that the intent of the May 2025 amendment is realised in practice, certain regulatory and interpretative clarifications are urgently needed. The foremost among these is the need to define “financial liability” in a clear, exhaustive, and legally binding manner. This definition should consider different categories of financial exposure, including direct liabilities like loans, indirect liabilities such as guarantees, and contingent liabilities that may arise from capital commitments. A bright-line definition would prevent inconsistent interpretation and foster confidence among brokers when making investment decisions.
There is also a need for guidance on structuring investments through subsidiaries. While the amendment allows proprietary investment in group companies, it stops short of providing operational clarity on the threshold of control, financial oversight, or disclosure requirements expected from such subsidiaries. A detailed framework from SEBI or the stock exchanges could remove uncertainty and prevent future disputes. It would also help streamline compliance for smaller brokers who may not have the resources to seek legal clarity on every potential investment.
Further, regulators should adopt a principles-based approach, rather than a prescriptive approach to implementation. Instead of reverting to a regime of circulars that enumerate permitted or prohibited activities in detail, a broader framework that prioritises risk mitigation, transparency, and fiduciary duty would better serve both the industry and investor protection goals.
Lastly, it would be prudent for SEBI to consider some degree of transitional relief or amnesty for past actions that may have technically breached the earlier interpretation but would now be permissible under the amended rule. Such a move would reduce ongoing litigation burdens and allow brokers to reset their compliance framework based on the new norms without fear of retrospective consequences.
Conclusion
The recent amendment to the SCRR reflects a welcome shift towards a more rational and market-friendly regulatory approach. By freeing brokers from the archaic restrictions of rules 8(1)(f) and 8(3)(f), it opens new avenues for investment, innovation, and more efficient capital allocation. However, like many regulatory reforms, its ultimate impact will depend on the clarity of its implementation. Without clear definitions and interpretive guidance, the amendment risks falling short of its full potential. The regulators must now follow through with precision, consistency, and transparency to ensure that the broking industry can confidently move forward under this refreshed regime.
– Manit Sharma