SEBI Overhauls Stock Broker Rules After 30 Years, Permits Cross-Sector Forays With Strict Riders

The Securities and Exchange Board of India has introduced a revamped regulatory framework that permits stock brokers to undertake activities regulated by other financial sector regulators.

These include activities governed by authorities such as the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority of India (IRDAI), the Pension Fund Regulatory and Development Authority(PFRDA), the International Financial Services Centres Authority (IFSCA), the Ministry of Corporate Affairs and the Insolvency and Bankruptcy Board of India (IBBI).

However, SEBI has underlined that this permission comes with strict riders. Activities falling under the jurisdiction of other regulators will continue to be governed by the respective sectoral regulator and not by SEBI. Brokers engaging in such activities are required to ensure clear segregation of businesses, including separation of accounts, systems, personnel and risk management frameworks.

The regulations also explicitly prohibit regulatory arbitrage and conflicts of interest, signalling that the intent is to facilitate integrated financial services without weakening regulatory oversight.

With this reform, the capital markets regulator has brought into force a comprehensive overhaul of the regulatory framework governing stock brokers in India after more than three decades. The new regulations replace the SEBI (Stock Brokers) Regulations, 1992, which had been the cornerstone of broker regulation since the early years of India’s modern securities markets.

The new framework also draws a clear line on the issue of investment advice. Stock brokers are permitted to provide incidental investment advice that is directly related to their broking activity. However, they cannot function as full-fledged investment advisers unless they are separately registered under SEBI’s Investment Adviser Regulations. This distinction is aimed at protecting investors by preserving the separation between advisory and execution functions, a concern that has been repeatedly flagged by the regulator in the past.

SEBI has also laid down detailed conditions governing underwriting by stock brokers. Under the regulations, underwriting must be undertaken using the broker’s own funds, and total underwriting obligations are capped at 20 times the broker’s net worth.

Brokers are not permitted to earn anything beyond the pre-agreed commission or brokerage in underwriting arrangements. In the event of devolvement, brokers acting as underwriters are required to subscribe to the securities within 45 days of being called upon. These safeguards are intended to allow brokers to participate in capital-raising activities while limiting excessive leverage and risk-taking.

Another important change is the expansion of the definition of “suspicious activity” under the regulations. The revised definition now explicitly includes fraud related to know-your-customer processes, order placement, trading behaviour and misuse of client accounts. This places a higher onus on brokers to monitor client activity and strengthens SEBI’s ability to act against market abuse and misconduct.

Despite the emphasis on easing compliance and modernising the rulebook, SEBI has retained strong governance and client protection measures. The regulations reinforce requirements for segregation of client funds and securities, adherence to fit-and-proper criteria for promoters and key management personnel, and prior SEBI approval for any change in control or ownership of broking entities. The regulator has stressed that simplification of regulations does not imply dilution of accountability or investor safeguards.

The revised framework is aimed at simplifying compliance, modernising regulatory language, improving ease of doing business for intermediaries, and aligning broker regulation with the realities of today’s technology-driven and multi-product capital markets. SEBI’s move follows years of incremental amendments to the 1992 rules, which had increasingly become fragmented and difficult to navigate as trading shifted to digital platforms, algorithmic strategies expanded, and brokers diversified into multiple financial services.

Market participants have broadly viewed the overhaul as a step towards aligning India’s broker regulation with global best practices. By clarifying regulatory boundaries, reducing procedural complexity and updating definitions to reflect current market structures, the new framework is expected to reduce operational friction, particularly for smaller brokers, while providing greater certainty for diversified intermediaries.

While the regulations are now in force, SEBI is expected to issue further circulars outlining implementation timelines, reporting formats and transitional arrangements. Brokers and exchanges are expected to closely track these clarifications as they migrate from the old framework to the new regime and recalibrate their compliance systems.