Prohibition of raising bank guarantee using customer funds

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Mumbai: It will become more difficult for stock brokers to do business, which means that their working capital requirements will increase. Capital market regulator Securities and Exchange Board of India (SEBI) has banned the practice of stockbrokers pledging customer funds to create bank guarantees.

SEBI, through a circular, has said that stockbrokers will no longer be able to use customer funds to raise bank guarantees. As per the current system, share brokers and clearing members pledge customer funds to banks and issue bank guarantees to clearing corporations for their additional capital requirements.

The Capital Markets Regulatory Authority has ordered that from the beginning of May, no bank guarantee can be raised by stockbrokers and clearing members using customer funds. While at present any such bank guarantees have to be wound up by September 30 of this year.

SEBI has also clarified that the provisions of this framework will not be applicable to proprietary funds in any segment through share brokers and clearing members. Also, the provisions of this circular shall not apply to the deposit of any proprietary fund with the clearing member by the share broker in the capacity of a customer.

In addition, SEBI has imposed additional oversight-monitoring and reporting obligations on stock exchanges and clearing corporations. From June 1, 2023, exchanges and clearing corporations will have to submit collateral figures.

Henceforth share brokers and clearing members have also been ordered to produce a certificate issued by the auditor certifying that this mechanism has been implemented. This certificate has to be submitted to stock exchanges or clearing corporations by 16th October 2023.

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