SEBI bars stock brokers from using client funds as bank guarantees

Capital market regulator SEBI (Securities and Exchange Board of India), in a fresh circular, has asked stock brokers to stop creating bank guarantees by using client funds. The regulator has said brokers must use their own funds to submit bank guarantees in order to avail of trading limits.

"Currently stock brokers or clearing members pledge client's funds with banks, which in turn issue bank guarantees (BGs) to clearing corporations for higher amounts. This implicit leverage exposes the market and especially the client's funds to risks," says SEBI.

The regulator adds that following discussions with stakeholders, it has decided that to implement some measures to safeguard the interests of the investors: From May 01, 2023, no new bank guarantee will be created out of clients’ funds by stock brokers or clearing members.

The existing bank guarantees created out of clients’ funds will be wound down by September 30, 2023, says SEBI. "The stock exchanges and clearing corporations will take stock of the current position of the BGs issued out of clients’ funds by SBs/CMs and monitor the wind down to ensure implementation of the circular without any disruption of services to clients," SEBI has advised. It said for this purpose, stock exchanges and clearing corporations will put in place periodic reporting mechanisms for stock brokers and clearing members.

SEBI has also clarified the provisions of this framework will not be applicable to proprietary funds of stock brokers or clearing members in any segment and stock brokers' proprietary funds deposited with clearing members in the capacity of a client.

Besides, stock exchanges and clearing corporations have been directed to submit the data on total bank guarantee amount, total bank guarantee amount (out of clients’ funds) and total bank guarantee amount (out of prop funds) as collateral on fortnightly basis from June 01, 2023.

Stockbrokers and clearing members will also be required to provide a certificate, by its statutory auditor confirming the implementation of this circular, said SEBI. Stock exchanges and clearing members will also verify compliance with the provisions of the circular in their periodic inspections.

Earlier this month, SEBI issued a circular on the formulation of price bands for the first day of trading after the initial public offering (IPO), re-listing, etc., in the normal trading sessions. It said call auction sessions will continue to be conducted separately on individual exchanges. After discussion with stock exchanges and Secondary Market Advisory Committee, SEBI has said orders will be matched by respective exchanges after the computation of the equilibrium price.

SEBI said if the difference in the equilibrium price between exchanges in percentage terms (i.e. absolute difference or a minimum of equilibrium prices, expressed as %) is more than the applicable price band for the scrip, a common equilibrium price (CEP) will be computed by exchanges. The CEP will be a volume-weighted average of equilibrium prices on individual exchanges as determined by the call auction. The exchanges will set the aforesaid CEP in their trading systems and apply uniform price bands based on the CEP.