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Regulatory Alert : Integration of Stock and Commodity Broking under a Single Entity

25 September 2017

The Government of India and the Securities and Exchange Board of India (‘SEBI’) had recently carried out amendments, respectively to Securities Contracts (Regulation) Rules, 1957 and SEBI (Stock Brokers and Sub-Brokers) Regulations, permitting stock brokers dealing in securities (other than commodity derivatives) to also deal in commodity derivatives and vice-versa, under a single entity.

Further to the above, On 21 September 2017, the SEBI has issued a circular, SEBI/HO/MIRSD/MIRSD1/CIR/P/2017/104, clarifying the following aspects in relation to integration:

  • Existing procedure of single registration mechanism will continue. As per existing procedure, one-time certificate of registration as stock broker / clearing member is granted by SEBI and subsequent permissions to act as a stock broker / clearing member of other stock exchanges / clearing corporations, is granted by the respective stock exchange / clearing corporation after proper due diligence.
  • Prior approval from SEBI will be required to be obtained by the stock broker, if integration leads to change in control of the stock broker/clearing member.
  • Client account may be transferred from one stock broker to the other stock broker, by taking the express consent of the client through a verifiable mode of communication and thereby enabling continuing with the existing set of documentation in respect of broker client relationship.
  • Earlier it was clarified that members of commodity derivate exchange would not be disqualified if they are engaged / engages in the “business in goods related to the underlying” and/ or “business in connection with or incidental to or consequential to trades in commodity derivatives”. This relaxation has now been extended to members of all stock exchanges.
  • Forward Markets Commission (“FMC”) had earlier issued a circular restricting members of commodity derivative exchange or such agents appointed by such members to have words such as “Stock’, “Share’ or “Security” in their names. The said circular has now been repealed, thereby permitting the integrated entity to use the above words in its name.
  • There was a restriction on seeking authorization through non-mandatory documents for any adjustment of funds among securities (stock) exchange and commodities exchange. This restriction has now been removed so long as adjustment of funds (for stock exchange and commodity exchange) is within the same broking entity.

BDO Comments:

This circular is a welcome move as it facilitates carrying stock and commodity broking business in a single entity. Further, the amendment also permits adjustment of funds among securities exchange and commodities exchange. These would certainly reduce operational and administrative difficulties both for the brokers as well as their customers. Having said this, it would be interesting to see how certain aspects like net worth, capital adequacy, margin and exposure norms, etc would be dealt with when both stock and commodity broking businesses are carried in a single entity. In any case, permitting integration between stock and commodity business could pave the way for consolidation in this segment.