Sebi prohibits brokers from using client funds for bank guarantees

The Securities and Exchange Board of India (Sebi) has prohibited the use of clients` funds for the creation of bank guarantees. The regulator has expressed concerns that this implicit leverage could expose the market, and particularly the clients` funds, to risks.

Currently, stockbrokers (SBs) and clearing members (CMs) pledge clients` funds with banks, which issue bank guarantees (BGs) to clearing corporations for larger amounts. However, after consulting with various stakeholders, Sebi has decided to implement measures to safeguard the interests of investors.

Effective from 1 May 2023, SBs/CMs will not be permitted to create new BGs using clients` funds. Existing BGs created out of clients` funds must be wound down by 30 September 2023.

It is important to note that these provisions will not apply to proprietary funds of SBs/CMs in any segment, as well as SB`s proprietary funds deposited with CM in the capacity of a client.

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