SEBI (Stock Brokers) (Amendment) Regulations, 2021

Ashish M. Shaji

23 Apr, 2021

On March 30, 2021, the Securities and Exchange Board of India notified the SEBI (Stock Brokers) Amendment Regulations, 2021. The regulations were issued to amend the SEBI (Stock Brokers) Regulations, 1992. The regulations were introduced in exercise of powers conferred under Section 30 of the SEBI Act 1992. In this article, we shall discuss the key changes brought in by the amendment.

SEBI (Stock Brokers) Amendment Regulations, 2021: Definitions Inserted

Under the amendment brought in, definitions are inserted in regulation 2 of SEBI (Stock Brokers) Regulations. These include the following definitions:

• Underwriter– is a person who engages in the business of underwriting of the issue of securities of a body corporate.
• Underwriting– This means an agreement to subscribe to or to procure subscription for securities which is issued or offered for sale remaining unsubscribed.
• Issue– Issue means an offer of sale or purchase of securities by body corporate or by any other person or a group of persons on its or his or their behalf, as per case, to or from the public or the holders of securities of such body corporate or person or a group of persons via merchant banker.

SEBI (Stock Brokers) Amendment Regulations, 2021: Other key changes

Some of the other changes include:

• As per regulation 3, it has been provided that every stock broker having a valid certificate of registration would be entitled to act as an underwriter.
• Moreover, every stock broker acting as an underwriter shall enter into an agreement that is valid with the body corporate on whose behalf it acts as an underwriter.
• Every stock broker acting as an underwriter should maintain the following books of account and documents, which includes-
  • In relation to the underwriter being a body corporate- the copy of balance sheet and profit and loss account at the end of each accounting period and the copy of the auditor’s report on the accounts for that period.
  • In relation to the underwriter not being body corporate- records in respect of sums of money obtained and expended by them and the matters in respect of which the receipt and expenditure take place and their assets as well as liabilities.
• Every stock broker, acts as an underwriter, should enter into an agreement with each body corporate on whose behalf it acts as an underwriter, and the said agreement would, amongst other things, provide for-
  • The period for which the agreement would be in force;
  • The allocation of duties as well as responsibilities between the underwriter and client;
  • The number of underwriting obligations;
  • The period within which the underwriter must subscribe to the issue after its intimated by or on behalf of such body corporate;
  • The commission amount or brokerage payable to the underwriter;
  • If any, details of arrangements made by the underwriter for fulfilling underwriter obligations.

Further, the SEBI (Stock Brokers) Amendment Regulations, 2021^[1], state the responsibilities and duties of a stock broker acting as an underwriter.

Responsibilities of a stock broker as an underwriter

The following responsibilities should be fulfilled by a stock broker as an underwriter:

• Every stock broker acting as underwriter should not derive any sort of direct or indirect benefit from underwriting the issue apart from the commission or brokerage payable under the agreement for underwriting.
• The total underwriting obligations under all agreements should not exceed 20 times of the net worth.
• Every stock broker acting as underwriter, in the case of being called upon to subscribe for the securities of a body corporate pursuant to an agreement, should subscribe to such securities in 45 days time of the receipt of such intimation from such body corporate.

Duty as an underwriter

Apart from the responsibilities provided above, the stock broker acting as an underwriter shall comply with the below-mentioned points:

• The stock broker shall make all efforts to protect its clients interest;
• He shall make sure that it and its personnel shall act in an unethical manner in all its dealings with body corporate making an issue of securities;
• He shall not make any statement, oral or written, which can misrepresent-
  • Services that the underwriter is able to perform for its client or has rendered to any other issuer company;
  • His underwriting commitment.
• A stock broker should avoid conflict of interest and should make adequate disclosure of its interest;
• He should put in place a mechanism to resolve conflicts of interest situation that can arise in the conduct of its business or, if it arises, must take reasonable steps to resolve them in an equitable manner;
• He should make appropriate disclosures to the client about its possible source or potential areas of conflict of duties and interest when acting as an underwriter which can impair its ability to provide fair, objective, and unbiased services;
• He should not divulge to other issuer, press, or any other party any confidential information regarding its issuer company that has come to its knowledge and deal in securities of an issuer company without making disclosure to board and to the board of directors of the issuer company;
• The stock broker should ensure that any change in registration status/any penal action by the board or any material change in the financials which can adversely affect interests of clients/investors is informed promptly to the clients, and any business remaining outstanding is transferred to the other registered person as per any instruction of the affected clients/investors;
•  A stock broker or any of the employees must not render any investment advice about any security in the publicly accessible media, real-time or non-real time, unless a disclosure of its interest, including its long/short position in the said security is made while rendering such advice.

If an employee of the stock broker renders such advice, the stock broker should ensure that he shall disclose its interest, dependent family member’s interests, and of the employer, while rendering such advice.

• A stock broker or its directors, partners, manager having management of whole or substantially whole of business affairs, shall not either via account or their respective accounts or via their associates or family members, relatives or friends indulge in insider trading;
• Further, he shall not indulge in any unfair competition, that can be harmful to the entities’ interest acting as underwriters carrying on the underwriting business or likely to place such other underwriters in a disadvantageous position pertaining to the underwriter while competing for, or carrying out an assignment;
•  The underwriter should not be a party to or instrumental for-
  • Creation of false market;
  • Rigging of price or manipulation;
  • Passing of unpublished price-sensitive information in respect of securities that are listed or proposed to be listed on stock exchange to any person or intermediary.

Conclusion

So the SEBI (Stock Brokers) Amendment Regulations, 2021 contains provisions related to agreement with client that has been inserted with general responsibilities and duties as an underwriter. For accurate understanding, refer the SEBI notification regarding the same.

Read our article:Disclosures required under SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011