In an effort to protect the interests of retail investors, Sebi released a framework on Thursday that outlines "financial disincentives" for stock exchanges and other market infrastructure institutions that fail to identify unusual or suspicious trading activity.
The entire annual revenue of a Market Infrastructure Institution (MII), such as a stock exchange, clearing corporation, or depository, during the preceding financial year and the quantity of surveillance-related lapses that occurred during the financial year would be used to calculate the amount of financial disincentives for such lapses.
These incidents will be considered surveillance-related lapses: any observed lapse in the execution of surveillance operations, insufficient or nonexistent reporting of surveillance-related activities, failure to execute the surveillance measures within the allotted time frame, and any postponement or incomplete implementation of the measures.
"With the notable increase in trading activity over the past few years, increased participation by retail individual investors, increased trading activity in the derivatives segment, and the deployment of new trading methods, practices, and strategies by market participants, the role of surveillance at MII's (Market Infrastructure Institutions) has become crucial in ensuring the safety and integrity of the securities market," SEBI said.
Action Against Offence
Regarding the financial disincentives, Sebi stated that a fine of Rs 25 lakh would be imposed for the first instance of a surveillance-related lapse, Rs 50 lakh for the second instance, and Rs 1 crore for the third and subsequent instance if the total annual revenues of a MII's were less than Rs 1,000 crore.
For the first, second, and third instances, a penalty of Rs 5 lakh, Rs 10 lakh, and Rs 20 lakh, respectively, will be imposed if the total annual revenue of a MII (Market Infrastructure Institutions) is between Rs 300 crore all the way through Rs 1,000 crore and up.
Similar to this, if revenue is less than Rs 300 crore, there will be fines for the first, second, and third instances of surveillance-related lapses of Rs 1 lakh, Rs 2 lakh, and Rs 4 lakh, respectively.
Exception from guiudelines
The regulator stated that in cases where a surveillance-related lapse has an effect on the entire market, results in losses for a significant number of investors, or compromises the integrity of the market, the framework of financial disincentives for such lapses will not apply. Furthermore, procedural matters will be exempt from the guidelines' application.
Following the detection of surveillance-related errors at MIIs, Sebi will give the relevant MII's (Market Infrastructure Institutions) a chance to submit their findings.
The regulator would take the submissions into account prior to levying any penalties. If a penalty is imposed, the relevant MII will credit the money to the Sebi Investor Protection and Education Fund within 15 working days.
