SEBI Stops Brokers From Using Client Funds To Create Bank Guarantees

The Securities and Exchange Board of India (SEBI) has barred the brokers from creating bank guarantees using client funds.SEBI on Tuesday said that such practices will be barred with effect from 1 May and all existing bank guarantees have to be terminated by 30 September 2023. The order is a step taken by the regulator to safeguard clients’ funds and securities from misuse by brokers.

According to reports, as per SEBI, the practice of using client funds as collateral instead of bank guarantees for larger sums put the market and the assets at danger. However, the outstanding value of existing bank guarantees could not be ascertained immediately.

The process is being monitored by stock exchanges and clearing companies, who must also provide updates on the total bank guarantees made on client funds and proprietary funds every two weeks. Stockbrokers will still be permitted to create guarantees using their own money.

Brokers have been instructed to produce a certificate on the implementation from a statutory auditor by October 16.

This most recent move follows recently introduced similar regulations. Last year, SEBI ordered stock brokers to settle customer money on a quarterly basis and to transfer any unused cash back to the client's bank account. In the first cycle, these settlements totaled more than Rs 30,000 crore.