Stock broker allowed to undertake referral activities for loan, mutual fund distribution etc.

Readers may recollect the SEBI order under the SEBI (Informal Guidance) Scheme 2003 wherein it was stated that a merchant banker cannot undertake referral activities for non-security related products and/or services ("Barclays Case"). SEBI has recently passed an order under the SEBI (Informal Guidance) Scheme 2003 wherein it has stated that stock brokers may undertake referral activities and may act as an agent on behalf of the lenders for referring/distributing third party loans without taking on any personal financial liability. SEBI stated that such activities fall under the exception provided at Rule 8(1)(f) of the Securities Contracts (Regulation) Rules, 1957.

In the recent case, Fullerton Securities & Wealth Advisors Limited ("Fullerton") a stock broker, registered with SEBI, had filed with SEBI a request for 'No Action Letter' under the SEBI (Informal Guidance) Scheme 2003 in relation to its proposed businesses including referral activity. Under its proposed business scheme Fullerton would refer /distribute loans provided by third party NBFCs/banks/HFIs/lending institution to its customers while acting in capacity as agent or broker, with no personal financial liability on Fullerton. Fullerton also proposed to undertake activities like distribution of mutual funds, setting up a corporate agency for distribute insurance products and act as a depository participant. SEBI in its reply stated the following:

(i)    Fullerton may undertake referral activities act as an agent on behalf of the lenders for referring/distributing third party loans without taking on any personal financial liability (as it is allowed under Rule 8(1) (f) of the Securities Contracts (Regulation) Rules, 1957).

(ii)    Fullerton may distribute mutual funds after obtaining requisite registration from AMFI.

(iii)    Fullerton may distribute insurance products in compliance with IRDA directives.

(iv)    Fullerton may provide services as depository participant in compliance with the SEBI (Depositories & Participants) Regulations, 1996.

In the Barclays Case, SEBI had stated that a merchant banker registered with SEBI cannot undertake any business other than in the securities market, under regulation 13A of the SEBI (Merchant Bankers) Regulations, 1992. Thus a merchant banker cannot undertake referral activities for non-security related products and/or services. However in the present case (Fullerton's case) SEBI allowed a stock broker registered with SEBI to under referral activity as there are no similar restrictions (as in the nature of regulation 13A of the SEBI (Merchant Bankers) Regulations, 1992) in the Securities Contracts (Regulation) Rules, 1957.