Decoding the 2025 SCRR Amendment: What it Means for Broker Investments

[Khushi Kalyani Gautam and Ira Tiwari are fourth-year law students at the Hidayatullah National Law University, Raipur]

Introduction

The Department of Economic Affairs amended Rule 8 of the Securities Contracts (Regulation) Rules 1957 (SCRR) by adding identical provisos to Clauses 8(1)(f) and 8(3)(f) through a notification dated 19 May 2025. Before the amendment, the two provisions had long prohibited stock brokers and aspirant members from engaging in such “business” that is not connected with securities trading and which levies personal financial liability on them. In the industry, it meant that brokers could not undertake businesses like real estate or money lending on their own account.

Post amendment, the new proviso clarifies 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.” Now, a broker’s personal investment will not count as business under Rule 8 unless it uses client funds or securities or involves the creation of financial liability for the broker.

Although it’s a modest step towards regulatory pragmatism, a closer analysis reveals that the key terms like “client funds or client securities” and “arrangements in the nature of creating a financial liability” are undefined, which can create room for ambiguity going forward. This blog examines the Rule before and after the amendment and weighs the benefits and risks it poses.

The Pre-Amendment Framework

Previously, it was provided that no person could be admitted as a member of the stock exchange under Rule 8(1)(f) of SCRR, and no broker could continue as a member under Rule 8(3)(f) if he engaged as principal or employee in any non- securities business. It had only one exception, which was to act as a broker in businesses where personal financial liability was not incurred. The intention was to protect the funds of the client and keep a check on the broker’s malpractices. However, the rule did not define terms like “any business” or “financial liability”, which necessitated judicial interpretations about its scope.

This rule has been interpreted in different ways through the course of time. In MSE v. S.S.R. Rajakumar, the Court confirmed the two-part test. Under the test, firstly, a broker may not be a principal/employee of any non-securities business, and secondly, he may only act as a broker in other businesses as long as no personal liability is incurred.

A SEBI Circular dated 7 May 1997 elucidated that borrowing and lending funds can be consistent with the securities business so long as it is “incidental or consequential”. In another, Geojit BNP Paribas Financial Services Limited Order (Geojit) in 2017, SEBI held that a loan given by a broker to its subsidiary from surplus funds did not count as an impermissible business because “to be classified as business activity there should be several activities with several clientele”. Thus, SEBI affirmed that using extra capital did not create personal financial liability unless the broker owed money to others.

However, in 2022, SEBI adopted a stricter approach in an order against Inventure Growth & Securities Ltd, where it held that the term “business” should be interpreted broadly to encompass any activities that could result in personal liability to the broker, even if they are not established as a formal business enterprise. This was a deviation from the earlier stance established by the Geojit Order. To clear the air, SEBI and NSE issued their circulars listing the impermissible activities. Some examples of acts forbidden were “arrangements to extend loans or deposits to any entity, including group companies, not incidental to the securities business” and “investments in group companies (subsidiaries/associates) not in connection with the securities business”.

In toto, the brokers faced a complicated compliance regime where the exchanges disallowed several types of proprietary investment. In contrast, some SEBI guidance suggested a liberal view if client money was kept separate. The practical effect was substantial. For example, in 2023, the NSE ordered Kotak Securities to divest ₹624.66 crore in four group companies. The NSE held that these investments were “neither in connection with, nor incidental to” Kotak’s securities business, and thus violated Rule 8(3)(f) as interpreted. This decision was challenged by Kotak in the Bombay High Court, highlighting regulatory uncertainty. The court put a stay on the order of divestment and the case is still ongoing. Consequently, the law before the 2025 amendment was unclear.

Post-Amendment Standpoint

The amendment inserts a proviso to both Rule 8(1)(f) and 8(3)(f) of SCRA. It intends to expand the scope of this section by creating a positive exclusion. Now investment made by a member shall not be regarded as business at all times, subject to two exceptions, which are i) client funds or securities, and ii) arrangements in the nature of creating a financial liability on the broker.

It has been a long-standing practice of separating client funds and securities from the broker's assets. The phrase ‘client funds and securities’ refers to any money or securities entrusted by the client to the brokers to make investments on their behalf, for example, dematerialized shares held in client accounts, cash balances, etc. The new proviso explicitly singled out using client assets for investment.

The more novel phrase used is “arrangements in the nature of creating a financial liability”. No definition is provided for the phrase, which might lead to a spectrum of interpretations.  It can be inferred from the context that it refers to situations where the broker itself takes on indebtedness or guarantees. For example, if a broker took out a loan or provided a guarantee in someone else’s debt, these would create “financial liability.” However, simply lending from one’s own cash or buying equity does not create any liability to third parties. Previously, SEBI has maintained this position that a broker who invests extra funds in another company or extends a loan from its own excess funds does not incur “personal financial liability”. Therefore, this proviso also conveys its primary purpose of prohibiting the use of client funds by brokers for their benefit.

In the industry, this amendment means that ordinary proprietary investments, such as a broker buying stocks of a sister company or funding a new technology venture from its retained earnings, would no longer trigger a Rule 8 violation. The purpose of bringing in this shift was explained in the press release which said,  “the change allows brokers to “deploy funds that they raise through the business, so long as [the] investment is not from a client’s fund or...result in any liability for the broking unit” Thus if brokers keep client funds totally segregated and not participate in any guarantees or borrowings, their personal portfolio will fall outside the scope of “business” under Rule 8.

Shifting Regulatory Philosophy

This amendment marks a shift from a strict and formal approach to a more purpose-oriented and ease-of-doing-business mindset. Official statements indicate that this amendment was motivated by the “growth in the scale and interconnectedness of the financial sector” and the evolution of brokers’ business models. The regulators recognised that the original Rule 8 could not oversee the revolution of financial markets, including hybrid broker models. However, removal of such regulatory roadblocks was the need of the hour. The new amendment reduces regulatory ambiguity, which will further reduce proactive litigation over brokers’ investments.

For the brokers, this amendment comes as a sigh of relief. It will ease their compliance burdens as they won’t need to seek intermittent approvals from exchanges for their regular investments. Now they are free to invest retained earnings without the fear of triggering Rule 8 violations.  Consequently, this will liberalise and boost their capital and entrepreneurial abilities. For instance, mid-sized brokerages often invest their profits into fintech and technology-related startups, which might have attracted regulatory scrutiny previously.

Grey Zones

Even though the amendment has benefits, it still leaves room for ambiguities in its interpretation, affecting its proper implementation. Firstly, the phrase “arrangements in the nature of creating a financial liability” is vague and undefined. It puts the brokers in a tricky spot as to ascertain whether their investments, like simple trade credit arrangements with partners or forward contracts, would trigger a violation of this rule. Further,  no threshold or metric is provided to ascertain the financial liability. Secondly, the use of the phrase “at all times” in the amendment could potentially bring in the risk of post-facto enforcement negatively affecting previous investments made by brokers. For instance, regulators could challenge an investment years later, claiming that it created an implicit liability. Thirdly, the rule mandates a strict separation of the broker’s own funds from the client’s funds. In the industry, brokers often tend to mingle the two due to operational reasons and ease of doing business. But now the standards of compliance have become stricter. Even a temporary use of client money could trigger a violation of the rule. The pre-amendment risk—misusing client funds was more concrete. However, the new risk is more theoretical. The devil now lies in the details of categorisation of such transactions into a phrase that remains ambiguous in itself.

Conclusion

In a nutshell, the new proviso reflects an encouraging step towards allowing brokers’ legitimate investment activities. By this move, India tries to align itself with the established international practice by specifically prohibiting what is undesirable—misuse of client funds, rather than a blanket ban of any kind of investment done by a broker. The regulatory body must make an active effort to clearly define the key terms. Exchanges should release proper guidance for the smooth implementation of the rule, so that even after this regulatory overhaul, the rule does not become a battleground for interpretations.