Co-authored with Navneeta Shankar and Manas Dhagat, associates at Finsec Law Advisors.
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. 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.
But over the years, these rules began to suffer from excessive literalism, and the lack of clarity over what would “any business” entail, leaving the phrase vulnerable to increasingly restrictive interpretations for brokers. A series of circulars issued by the National Stock Exchange ("NSE"), probably with the Securities and Exchange Board of India’s ("Sebi") directions, in 2022 to clarify the scope of permissible activity went on to prohibit brokers from investing even in group firms engaged in non-securities businesses. These included passive, capital-only investments made from retained earnings, and not involving client funds. The circulars expanded the scope of “any business” so broadly that virtually any strategic capital allocation outside traditional broking could be construed as a violation.
The result was interpretive overreach and regulatory uncertainty. The distinction between business operations and capital deployment began to blur, making it difficult for brokers to determine what was permissible and what was not. This interpretation found its way into enforcement actions and market-wide compliance pressure, pushing brokers into a position where even commercially sound decisions became regulatory risks.
In one such high-profile case, Kotak Securities challenged NSE’s circular before the Bombay High Court, arguing the stock exchange had no legislative mandate to effectively rewrite the contours of rule 8 or, consequently, to direct Kotak to submit a restructuring plan over its legacy investments. The finance ministry through its department of economic affairs, in an affidavit in court, endorsed this view, emphasising that only the Centre could make interpretative or substantive changes to the SCRR. Importantly, the DEA in its affidavit drew a critical distinction between doing business and making investments, noting that the former entails recurring engagement and financial liability whereas the latter — when ring-fenced and responsibly managed — did not pose systemic risks.
Recognising the operational challenges created by the earlier regime, the DEA issued a consultation paper in early 2025 to revisit the rule. It acknowledged the broking ecosystem had moved beyond traditional models and now demanded flexibility to manage surplus funds, expand services, and grow responsibly. Crucially, it argued that blanket prohibitions on investment were excessive, especially when brokers were already segregating client assets under Sebi’s framework. This paved the way for public feedback, evaluating whether the interpretation of 8(1)(f) and 8(3)(f) had outlived their regulatory utility, eventually culminating into the new amendment.
The amendment strikes a careful balance. It does not dismantle the guardrails around client asset protection, nor does it open the gates to indiscriminate diversification. It simply affirms that investments made by a trading member shall not be construed as engaging in “business”, except where such investments involve client funds, client securities, or arrangements that create financial liability on the broker. This is not a blanket exemption. The carve-out is narrowly tailored, preserving the regulatory objective of protecting client assets and maintaining systemic integrity. What it does change is the treatment of surplus fund deployment. Brokers may now invest in group firms or other businesses, provided such investments are made using proprietary funds, do not lead to contingent liabilities, and are routed through appropriate corporate structures.
For the broking industry, this reform brings both relief and opportunity. Diversification into non-securities businesses can provide brokers with additional revenue sources. Restricting them to narrowly defined securities-related activities not only stifles innovation but also distorts competition, especially against unregulated or differently regulated players like fintech platforms, NBFCs, or wealth managers. The ability to invest in adjacent verticals offers brokers a path to reduce reliance on transaction-linked income. For instance, a group entity may provide tax planning, estate advisory, or loan distribution services which complement core broking activities but fall outside the regulatory definition of securities business. This, in turn, enhances financial resilience, particularly in cyclical markets where trading volumes may fluctuate sharply.
For too long, the interpretation of rule 8 was guided by maximum compliance rather than risk-based assessment. This change marks a shift towards regulatory proportionality, where conduct is assessed based on its effect on market integrity and investor protection. For a sector that plays an increasingly vital role in capital intermediation, especially among retail investors, the course correction was overdue. It reinforces the principle that regulation must keep pace with innovation, not to encourage risk but to avoid rigidity. The move to realign regulatory intent with market realities is an example of responsive governance that listens to feedback. It not only restores balance but also sets a precedent for financial regulators for evidence-based policymaking, one that preserves the fine balance between prudence and progress.
The article was originally published in the Financial Express and can be accessed here.
