Vedika Rathi and Vansh Sharma are 4th year B.A. LL.B students at Government Law College , Mumbai
Abstract
The Securities and Exchange Board of India’s (“SEBI”) informal guidance to Relitrade Stock Broking Private Limited (“Relitrade”) raises a question that is likely to become increasingly important as financial businesses become more integrated. Can a stock broker house NBFC operations, under one corporate roof? This article argues that SEBI need neither completely reject such convergence nor permit an unrestricted composite model. Instead, any future framework could be built around strong structural, financial, and governance safeguards.
The Trigger
On 10 August 2026, SEBI issued informal guidance to Relitrade, a SEBI-registered stock broker and depository participant. Relitrade sought to become a Reserve Bank of India (“RBI”) registered Non-Banking Financial Company (“NBFC”) while continuing to run its broking business within the same corporate shell, essentially wearing both a SEBI and an RBI hat.
The application is necessitated by Regulation 12 of the SEBI (Stock Brokers) Regulations, 2026, (“Stock Brokers Regulations”), which permits a stock broker to carry out activities under the framework of another financial sector regulator (such as the RBI) in a “manner specified by the Board”.
Thus, Regulation 12 is better understood as an enabling provision that requires further regulatory action before another regulated activity can be undertaken.
SEBI’s Response
SEBI’s answer was a clean no. Currently; no regulatory framework expressly permits an NBFC to engage in lending activities while also operating as a stock broker. However, the more significant question is not simply whether a broker can “wear two hats”. While Regulation 12 creates a statutory route for a stock broker to undertake activities under another financial-sector regulator’s framework in the manner specified by SEBI, the National Stock Exchange (“NSE”) Circular dated 23 June 2026 (“2026 Circular”) primarily clarifies the continuing application of Rule 8 of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”). Hence, the real question is what safeguards should exist before allowing two regulated businesses to operate under one corporate roof.
Regulation 12: A door, not a license
Regulation 12(1), as an enabling provision has only been operationalized for two narrow carve-outs, the Negotiated Dealing System-Order Matching (“NDS-OM”) platform dealing in government securities (an RBI-regulated activity) and Gujarat International Finance Tech-City – International Financial Services Centre (“GIFT-IFSC”), a platform to undertake securities market activity (an IFSCA-regulated activity) under a Separate Business Unit (“SBU”) of the stock broker entity itself.
These activities were permitted by virtue of SEBI Circulars dated 11 February, 2025, and 02 May, 2025 respectively, which have now been subsumed into the Stock Brokers Regulations by virtue of the ‘Repeal and Saving’ clause.
The earlier consultation on facilitating Stock Brokers to undertaking securities market-related activities in GIFT-IFSC under an SBU shows why such a model was considered: Stock brokers were already required to maintain an arm’s-length relationship in terms of separation of books and records, key personnel, infrastructure and independent regulatory controls between their activities and those of their subsidiary/joint venture in GIFT-IFSC.
The significance is clear: the SBU model allows the same corporate entity to undertake another regulated activity while creating internal walls between the two businesses. The conundrum is whether a similar model can safely be used for the far more balance-sheet-intensive business of NBFC lending.
The Ghost of Rule 8
In the absence of a specified framework, Rules 8(1)(f) and 8(3)(f) of the SCRR continue to do the work they have done since 1957: they bar a broker from acting as principal in any business other than securities, subject only to a broker-agent carve-out involving no personal financial liability. SEBI noted that lending money as an NBFC principal, falls squarely outside this carve-out.
- Judicial Perspective on Rule 8
To appreciate why SEBI relied on a 1957 subordinate rule to answer a 2026 structural question, it is helpful to trace the interpretive weight that Rule 8 has carried over the decades. The provision has never been elegantly drafted. The Madras High Court, in Madras Stock Exchange Ltd v. S.S.R. Rajakumar, observed that the object of Rule 8 is to ensure that a broker is not exposed to the risks of an unrelated business.
SEBI’s own 2017 adjudication in the Geojit BNP Paribas matter sought, for the first time, to give content to the phrase “any business”. The exchanges followed up with a 2022 NSE circular (“2022 Circular”) listing activities that are construed as non-compliance with Rules 8(1)(f) and 8(3)(f) of SCRR. The said list of activities included, under points 7 and 10, client lending arrangements, and investments in group NBFCs unconnected with the securities business.
The Securities Appellate Tribunal (“SAT”), in Jitendra Pukhraj Jain v. NSE, read the rule’s purpose as ‘to prevent negative impact on the balance sheet of a broker and to maintain the integrity of the securities trading ecosystem’.
- Where This Is Headed
The position has since evolved, and numerous clarifications have been issued to the 2022 circular. The Securities Contracts (Regulation) Amendment Rules, 2025, (“2025 Amendment”) were issued providing, clarity on the interpretation of Rule 8. The amendment inserted a proviso into Rule 8(1)(f) and Rule 8(3)(f), clarifying that ‘investments will not be treated as “business” unless they involve client funds, client securities, or create a financial liability on the broker’.
While the amendment is a meaningful liberalization, it is a liberalization of passive investment, not of carrying on a licensed lending business as principal. Relitrade’s NBFC ambition is precisely the latter, which is why the 2025 amendment does not rescue it and why SEBI’s answer in the informal guidance remains consistent with the longstanding regulatory concern that a broker’s balance sheet should not be exposed to risks arising from unrelated businesses.
Following the May 2025 amendment to the SCRR, the NSE Circular dated 10 June 2025 deleted Point 10 of the 2022 illustrative list. Subsequently, the 2026 Circular modified Points 1 and 2 and deleted the remaining Points 3 to 12 of the illustrative list, which listed out activities treated as non–compliant with Rule 8(1)(f) and Rule 8(3)(f). Consequently, the position today is that investments in group companies which were earlier barred cannot sustain a penalty under both sub-rules as the relevant prohibitory provisions have been eliminated.
The SAT, in KBS India Ltd. v. NSEIL, confirmed this chronology and recorded that Rules 8(1)(f) and 8(3)(f) themselves continue to operate, while the relevant clauses of the illustrative list had been deleted.
Investing in an NBFC and becoming an NBFC are not the same. The recent changes make the regulatory regime more accommodating of certain investments, but they do not, by themselves establish that a stockbroker may operate a full-fledged lending business as an NBFC.
Mitigating the one balance sheet problem
The main risk of broker–NBFC convergence is not the existence of two businesses. It is the possibility that the risks from one business may spill over into the other.
First, the issue of client assets arises. A broker deals with client funds and securities, whereas an NBFC has obligations relating to borrowing, lending and creating security interests. Any forthcoming framework must ensure that the lending business cannot access the brokerage clients’ assets.
The fact that Relitrade itself raised the segregation of client assets as one of its questions underscores the importance of this concern. Addressing this question will mitigate the danger of cross-collateralization, guaranteeing that the securities business does not become a source of unrestricted collateral for the NBFC’s obligations. SEBI can emulate the safeguards it adopted for GIFT – IFSC and ensure that both sectors maintain separate bank accounts and access controls.
Notwithstanding this arm’s length relationship, guarantees, loans, investments and cross-collateralization must adhere to clearly defined limits. The framework adopted by the United States of America serves as a helpful illustration: sections 23A and 23B of the Federal Reserve Act place quantitative limits on covered transactions between member banks and their affiliates and require adherence to safe banking practices.
Second, there is the risk of capital contagion. Relitrade also asked how net worth should be calculated under Regulation 47 of the Stock Brokers Regulations if the same entity is subject to both SEBI and RBI requirements. Since the proposed structure involves the same legal entity, the concern is how SEBI and RBI capital requirements would interact and how double-counting of the same capital would be prevented. Regulation 47 should therefore be supplemented by clear rules governing the recognition and allocation of capital where a single entity conducts two regulated activities.
Conclusion
SEBI’s informal guidance does not necessarily close the door on broker–NBFC convergence. It indicates that the door is not currently open, because SEBI has not yet specified the framework required under Regulation 12.
In a market where platform-brokers are increasingly eyeing lending as a revenue line, the real concern is not whether one company can wear two hats, but whether the two hats can operate without exposing investors and the securities business to the risks of the lending business.
SEBI may allow such convergence either through an SBU or, where the NBFC activity is sufficiently large or risky, through a separate subsidiary, as permitted for GIFT-IFSC. SEBI and the RBI may also establish clear information-sharing and supervisory arrangements so that regulatory gaps do not arise simply because both activities sit within one legal entity.
They should not, however, be permitted to share a single, unprotected balance sheet.
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