SEBI Implements Measures to Safeguard Investors' Funds :Bank Guarantees Created Out of Clients' Fund

June 01,2023

SEBI (Securities and Exchange Board of India) has issued a circular, SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/061, outlining new measures to protect investors' interests. The circular addresses the creation of Bank Guarantees (BGs) using clients' funds by Stock Brokers (SBs) and Clearing Members (CMs). In an effort to mitigate risks associated with implicit leverage, the following measures will be implemented:

1. No new BGs created out of clients' funds by SBs/CMs will be allowed starting from May 1, 2023.

2. Existing BGs created out of clients' funds must be wound down by September 30, 2023.

These measures aim to ensure the safety and security of investors' funds in the market. However, proprietary funds of SBs/CMs and SB's proprietary funds deposited with CM in the capacity of a client are exempt from this framework.

To monitor and facilitate the implementation of this circular, stock exchanges and clearing corporations are required to provide periodic reports on the current position of BGs issued by SBs/CMs. The data will include collateral information and BG amounts categorized as collateral from clients' funds or proprietary funds. Additionally, SBs/CMs must submit a certificate from their statutory auditor confirming compliance with the circular by October 16, 2023.

Stock exchanges and clearing corporations are directed to verify compliance and take necessary actions against SBs/CMs failing to adhere to the circular's provisions within the specified timelines. The circular modifies certain existing SEBI circulars related to collateral, dealings between clients and stockbrokers, enhanced supervision, margin obligations, and segregation and monitoring of collateral at the client level.

Stock exchanges and clearing corporations are instructed to disseminate the circular, amend relevant bye-laws, rules, and regulations, and report the status of implementation to SEBI in their monthly development reports. SEBI's issuance of this circular falls under its authority granted by the Securities and Exchange Board of India Act, 1992, in its mission to protect investor interests and regulate the securities markets.

For more details, please refer to the circular SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/061 issued on April 25, 2023.