The capital markets regulator of India has recently proposed a major amendment to the way in which stock brokers calculate their own variable net worth, no longer as a formula based upon the client cash balances.
On Friday, the Securities and Exchange Board of India (SEBI) issued a consultation paper proposing a revised framework of calculating the net worth requirement of stock brokers in an effort to align capital norms more closely with the size and risk profile of their operations. SEBI has asked people to submit comments on the draft until May 15, 2026.
Why the old formula does not work any more
The existing method of calculating variable net worth has become less relevant following the implementation of the upstreaming framework. Under this system, client funds are largely transferred to clearing corporations, leaving minimal balances with brokers. The original formula was introduced in 2022 and linked net worth to 10% of the average daily client cash balances retained by the broker. With those balances now substantially reduced, the formula no longer captures the true operational risk a broker carries.
The upstreaming framework, which SEBI introduced in June 2023, is a framework in which the stock brokers would transfer all client clear credit balances to the clearing corporations on an end-of-day basis. The only ways that client funds can be upstreamed are in the form of cash or Lien on Fixed Deposit Receipts or pledging of units of Mutual Fund Overnight Schemes. The practical impact is that brokers do not now have large amounts of client funds on hand overnight, which has rendered the old variable net worth calculation more and more out of touch with reality.
What SEBI is now proposing
SEBI has suggested an updated method which includes the sums of money being handled by clients as well as the amount of active clients being served. The regulator indicated that net worth is a second line of defence following margins and should be strong enough to absorb risks not taken care of by margins. “It is imperative that the second line of defence should be strengthened by making the net worth requirement commensurate with the size and risks of operations of a broker in terms of aggregate clients’ funds with broker, number of direct active clients as well as number of clients through authorised persons,” SEBI said in the paper.
Under the proposed framework, variable net worth would be calculated as a composite of multiple parameters. These include 10% of the average credit balance of all clients over the preceding six months. In addition, Rs 50 lakh for brokers with more than 10,000 and up to 50,000 active direct clients, with an additional Rs 50 lakh for every incremental 50,000 clients or part thereof.
In the case of clients onboarded by authorised persons, the proposal attracts a progressive requirement: Rs 5 lakh in the event of up to 2,500 clients, Rs 25 lakh in the event of more than 2,500 clients, and Rs 50 lakh in the event of every additional 10,000 clients or part thereof across exchanges.
What authorised persons are and why they are important
Authorised persons are individuals or entities that brokers appoint to increase their reach, especially in smaller cities and towns where the physical presence of the broker may not be as high. They are the sources of clients and also they help in service of the accounts but they work under the name of the broker. A 2025 Master Circular of Stock Brokers by SEBI already tightened the framework around how brokers manage and deploy client funds and prohibited the creation of bank guaranties using client balances and required brokers to upstream all clear credit balances to clearing corporations. The most recent suggestion builds on that argument by mandating that brokers with high volumes of clients (either directly or via authorised persons) must have proportionately larger capital cushions.
What this implies
The transition to a client-count-based structure, in effect, means that larger discount brokers, which have rapidly scaled up retail participation over the last few years, will have higher capital requirements than under the previous structure. Places that have onboarded millions of first-time investors and operate with very thin per-client margins will need to ensure that its net worth keeps up with its growing client bases.
SEBI constituted a working group comprising the NSE, BSE and the broker associations to provide a recommendation on a good and relevant method of calculating the variable net worth. The consultation paper and the draft circular have been drawn up following the report of the working group and further discussions among the various sections.
The new structure is designed in such a way that the financial cushion provided by the new structure to absorb unexpected losses scales with the actual operational footprint of the broker, as opposed to being anchored to a balance sheet entry client cash holdings, which has been largely eliminated by the upstreaming rules.
By May 15, 2026, before the final framework is announced, SEBI has invited stakeholders to submit comments through its website.
