Starting May 1, 2023, stock brokers and clearing members in India will no longer be allowed to use their clients’ funds for bank guarantees, according to a ruling by the Securities and Exchange Board of India (Sebi).
Usually, banks issue bank guarantees on behalf of stockbrokers to stock exchanges for security deposits and margin requirements. These guarantees are submitted at clearing corporations, which then determine the brokers’ trading limits. However, brokers often pledge their clients’ funds with banks, which in turn issue bank guarantees for higher amounts. Banks issues BG at 2 times the amount pledged by the Broker, this exposes the market to risks. As per the circular no new BGs shall be created out of clients’ funds from May 1, 2023. Existing BGS created out of clients’ funds are to be wound down by September 30, 2023
Sebi has expressed concern that this practice exposes the market and clients’ funds to risks. Some brokers reportedly obtain bank guarantees worth twice the amount of fixed deposits they have placed using clients’ funds, creating a significant disparity between their true net worth and the guarantees utilized for trading.