Govt Seeks To Grant Brokers Extra Flexibility With Surplus Funds

The proposed amendment aims to clarify that broker investments will not be classified as "business" unless they involve client funds, client securities, or generate financial liabilities

The government has proposed an amendment to the Securities Contracts Regulation Act (SCRA) to grant brokers more flexibility in managing their surplus cash. Rule 8 of the SCRA currently restricts brokers to engaging only in securities or commodity derivatives businesses. However, the vague definition of "other business" under this rule has led to confusion and limitations on brokers' investment opportunities.

The Department of Economic Affairs (DEA) has issued a consultation paper to gather feedback on this proposed change. The paper suggests allowing brokers to engage in reasonable investment and business activities, provided client funds remain safeguarded. The government argues that the current prohibition on investments, including those in affiliated companies, imposes undue constraints on brokers' ability to effectively utilise their retained earnings.

The proposed amendment aims to clarify that broker investments will not be classified as "business" unless they involve client funds, client securities, or generate financial liabilities. This change is intended to balance market integrity with greater commercial flexibility for brokers.

The consultation paper also invites feedback on several specific issues. It asks whether investments of proprietary funds beyond a broker's net worth in other companies, including affiliated group companies, should be categorised as "business." Additionally, it seeks opinions on whether brokerage officials should be permitted to serve on the boards of other group companies.

"The proposed amendment aims to strike a balance between maintaining market integrity and granting brokers commercial flexibility. By explicitly permitting investments that do not impact client funds or create liabilities, the amendment addresses concerns that the current rule imposes overly restrictive limitations on brokers' ability to make legitimate investments. Simultaneously, it reinforces the protection of client assets by ensuring that any high-risk or financially burdensome activities are subject to stringent regulation," said Anjali Malhotra, partner-regulatory at Nangia Andersen India, reported Business Standard.

The government is soliciting feedback on the consultation paper until October 10. If enacted, the amendment could enable brokers to manage their investments and utilise their surplus cash more effectively while still safeguarding client funds.