SEBI Working on Consultation Paper for Stock Broker Referral Program

The capital market regulator, SEBI, has confirmed that a consultation paper regarding referral programmes operated by stock brokerages is currently in development, with discussions still ongoing.

On March 4, Moneycontrol had reported that the referral programme was expected to make a comeback, with SEBI likely to issue a consultation paper soon. Sources had indicated that the document would outline eligibility criteria for referral partners, along with details on compensation structures and regulatory compliance requirements.

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In response to a query from Moneycontrol, the Securities and Exchange Board of India (SEBI) stated that the matter remains under discussion. It also affirmed that a joint consultation paper will be issued in collaboration with stock exchanges once deliberations are finalized, reinforcing its commitment to a consultative approach.

SEBI explained, "The issue has been discussed with the Stock Exchanges and is currently under further deliberation by the Brokers’ Industry Standards Forum for Stock Brokers. Following these discussions, a consultation paper will be jointly issued by all stock exchanges."

The regulator further emphasized, "SEBI remains dedicated to addressing all stakeholder concerns through a consultative process."

Referral programmes have played a significant role in expanding the stock market, particularly benefiting online brokerages by increasing their client base. However, industry sources pointed out that such programmes also contributed to the direct and indirect financing of unregistered investment advisory services and portfolio management firms.

The rise of finfluencers—financial influencers who were not registered with SEBI and therefore operated without regulatory oversight—became a concern. Many of these influencers provided investment and trading advice with the intent of driving more referrals to brokerage firms, thereby earning commissions from increased trading activity.

Recognizing these issues, SEBI intervened with a series of regulatory measures. On August 14, 2024, the National Stock Exchange (NSE) issued a clarification stating that individuals referring clients to trading members (stock brokers) must be registered as an authorised person (AP) of the brokerage. APs, similar to sub-brokers, are regulated entities, and their associated brokerages must ensure compliance with SEBI’s regulations.

Subsequently, on October 22, 2024, SEBI released a circular prohibiting registered entities, such as stock brokers, from associating with unregistered entities. The directive explicitly banned brokers from partnering with entities that provide investment advice or promise investment returns without SEBI’s approval.

As a result of these regulatory actions, stock brokerages discontinued their referral programmes.

However, on January 24, 2025, the NSE acknowledged that it had received feedback from trading members and member associations requesting certain categories of referral partners to be permitted without mandatory AP registration. Consequently, the exchange withdrew its August 14 directive, pending further industry input.