Market News: SEBI stops Stock Brokers from creating Bank Guarantees using Client Funds

Market News: SEBI stops Stock Brokers from creating Bank Guarantees using Client Funds

The last three years have seen unprecedented growth in Capital Markets: in terms of participation, client acquisition, and in exchange volumes. The growing interest in trading and investments by Retail participants also brings added responsibility for market regulator SEBI, Exchanges, Depositories, and Clearing Corporations to ensure that regulations get implemented in place at least at the same pace as volumes are growing. SEBI has so far done a phenomenal job of bringing relevant circulars and making amendments in regulations to protect the market participants’ interest, especially retail clients.

The circulars have brought transparency and the probability of Brokers misusing clients’ funds is almost zero. The recent SEBI Circular (SEBI | Bank Guarantees (BGs) created out of clients’ funds) prohibiting Stockbrokers from creating Bank Guarantees (BG) by using client funds will bring more transparency to the system.

The market regulator has directed that beginning the 1st of May, 2023, no new BGs shall be created out of clients’ funds by stockbrokers and clearing members. Secondly, existing BGs created out of clients’ funds shall be wound down by September 30 of this year. Though the requirement for working capital will go up, the recent circular will prevent:

• Brokers from availing additional limits from Clearing Corporation (CC) without deploying their own working capital. Certain members (brokers) might have been misusing client funds by pledging the Fixed Deposit (FD) made from client funds to avail Bank Guarantee (BG). Usually, the BG is 2 times the FD placed. Say Broker A has client funds worth Rs.100, using the BG route they get an exposure limit worth Rs. 200 from CC.
• The disproportion between brokers’ net worth and BG placed with CC.
• Certain members from misusing the additional limit from CC to create a Proprietary position. Exposing clients to risk in case proprietary trades go wrong. In the past many brokers have gone bust where client money was misused for proprietary trades.

At Dhan, we neither use clients’ money to create any Bank Guarantee - we at all times maintain our own funds / capital with stock exchanges for margins. Additionally, nor do we have any proprietary trading desk that is operated or managed by Dhan or any of its officials. This helps us act as a mere execution platform for our users and stay aligned towards ensuring we build a great technology driven platform.

Overall, I feel this is a great step towards Investor Protection and improves the stability and sanctity of Market Participants & Ecosystem.

Jay Prakash Gupta


It’s always good to know when some of the practices we follow at Dhan end up being market norms or regulations.