ARTICLE · 06 JUNE 2023

Stockbrokers Prohibited From Obtaining Bank Guarantees Based On Clients' Funds

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In recent regulatory developments, there has been a significant change regarding the practices of stockbrokers and their interaction with clients' funds.

IndiaFinance and Banking

Nitish Solanki

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In recent regulatory developments, there has been a significant change regarding the practices of stockbrokers and their interaction with clients' funds. A new rule has been implemented by the Securities and Exchange Board of India ("SEBI") by its Circular No. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/061 dated 25.04.2023 prohibiting stockbrokers from obtaining a Bank Guarantee ("BG") based on clients' funds from 01.05.2023. Also, the existing BGs established with clients must be closed by 30.09.2023.

Prior to the new regulation, stockbrokers could secure a BG using the funds entrusted to them by clients. This served as a form of security or collateral for their operations, creating a potential risk for investors in case of broker default or misappropriation of funds. The prohibition on stockbrokers obtaining BG based on clients' funds has a few advantages to investors like:

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