The Securities and Exchange Board of India (SEBI) on April 25, 2023, issued a notification regarding the Bank Guarantees (BGs) created out of clients’ funds.
The following has been stated namely: -
• Currently Stock Brokers (SBs)/Clearing Members (CMs) pledge client's funds with Banks which in turn issue Bank Guarantees(BGs) to clearing corporations for higher amounts. This implicit leverage exposes the market and especially the client's funds to risks.
• It has been decided to implement the following measures in order to safeguard the interests of the investors: -
1. Beginning May 01, 2023, no new BGs shall be created out of clients’ funds by SBs/CMs.
2. Existing BGs created out of clients’ funds shall be wound down by September 30, 2023.
• The provisions of this framework shall not be applicable for proprietary funds of SBs/CMs in any segment and SB’s proprietary funds deposited with CM in the capacity of a client.
• Monitoring and Reporting:
1. The stock exchanges and clearing corporations shall take stock of the current position of the BGs issued out of clients’ funds by SBs/CMs and monitor the wind down to ensure implementation of the circular without any disruption of services to clients.
2. Stock exchanges and clearing corporations are directed to submit the prescribed data to SEBI on a fortnightly basis (starting from June 01, 2023)
3. SBs/CMs shall be required to provide a certificate, by its statutory auditor confirming the implementation of this circular. Such a certificate shall be submitted to stock exchanges/clearing corporations by October 16, 2023.
4. Stock exchanges and clearing corporations shall verify compliance with the provisions of the circular in their periodic inspections/reporting. They shall also evolve adequate mechanisms to address cases of SBs/CMs who do not comply with the provisions of the circular by the stipulated dates.
[Notification No. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/061]
