The Securities and Exchange Board of India (Sebi) on June 6, 2024 issued a framework on imposing penalties on stock exchanges and other market infrastructure institutions (MIIs) for their surveillance-related lapses.
These lapses include failure in detecting or reporting abnormal or suspicious trading activities in the securities market. The move is aimed at safeguarding the interest of retail investors and will be applicable from July 1, 2024.
Sebi said the move is aimed at monitoring the market to detect and deter manipulation or abusive trading that affects the integrity of the market, and to provide information that supports the regulator’s enforcement actions.
According to the guidelines, any lapse in the discharge of surveillance activities by MIIs will be considered as surveillance-related lapses. Such surveillance include monitoring the day-to-day activities in the market, including trading or margining, dematerialised transactions, and reporting of abnormal or suspicious activities to Sebi.
Surveillance includes monitoring the conduct of market intermediaries through the generation and processing of alerts, seeking trading rationale, carrying out snap analysis, and promptly implementing the decisions taken in the surveillance meetings.
As such, any lapse observed in such activities or inadequate reporting or non-reporting of surveillance-related activity and any delay in implementing these measures partially or wholly will count as surveillance related lapses.
The financial disincentive or penalty for such lapses would be determined based on the total annual revenue (TAR) in the previous financial year of an MII, such as stock exchange, clearing corporation and depository. Further, the penalty will increase if such lapses are repeated.
For instance, for an MII with TAR of over Rs 1,000 crore, a penalty of Rs 25 lakh will be imposed at the first instance of such a lapse. When lapse is repeated for a second time, the fine for such an MII would be Rs 50 lakh and Rs 1 crore for the third instance onwards.
For an MII with TAR between Rs 300 crore and Rs 1,000 crore, a penalty of Rs 5 lakh, Rs 10 and Rs 20 lakh will be applicable on the first, second and third instance, respectively.
MIIs with TAR less than 300 crore have to pay a fine of Rs 1 lakh, Rs 2 lakh and Rs 4 lakh on the first, second and third instances of surveillance-related lapse, respectively. The framework is not applicable when lapses have led to a market-wide impact, causing losses to a large number of investor and also for instances involving procedural matters.
When such surveillance-related lapses at MIIs comes to Sebi’s notice, it will allow the concerned MII to submit its responses, and if appropriate, fines will be imposed, which has to be credited by the MII within 15 working days to Sebi’s Investor Protection and Education Fund.
