Sebi Fines Stock Exchanges for Surveillance Lapses

New Delhi, Jun 6 (PTI) Sebi on Thursday came out with a framework on "financial disincentives" for stock exchanges and other market infrastructure institutions for their lapses in detecting abnormal or suspicious trading activities to safeguard the interest of retail investors.

The amount of financial disincentives for surveillance-related lapses would be determined on the basis of the total annual revenue of a Market Infrastructure Institution (MII) -- stock exchange, clearing corporation and depository -- during the previous financial year and the number of instances of such lapses during the financial year.

The new framework will be applicable from July 1, 2024, the Securities and Exchange Board of India (Sebi) said in a circular.

"The general objective of surveillance by MIIs is thus to monitor 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," Sebi said.

Market surveillance by MIIs includes monitoring the day-to-day activities in the market, reporting abnormal or suspicious activities, and monitoring the conduct of market intermediaries through the generation and processing of alerts, seeking trading rationale, and carrying out snap analysis.

Surveillance-related lapse includes any lapse observed in the discharge of surveillance activities, any inadequate reporting or non-reporting of surveillance-related activity and failure to implement the surveillance measures in the prescribed time as well as any delay in implementing them or only partially implementing them.

"The role of surveillance at MIIs has become crucial in ensuring the safety and integrity of securities market in view of the significant increase in trading activity during the past few years, increased participation by retail individual investors, increased trading activity in the derivatives segment and deployment of new trading techniques and strategies by market participant," Sebi noted.

With regards to the amount of financial disincentives, Sebi said that if the total annual revenues of an MII is less than Rs 1,000 crore, there would be a fine of Rs 25 lakh at the first instance of surveillance-related lapse, Rs 50 lakh on the second instance and Rs 1 crore for the third instance onwards.

In case the total annual revenue of an MII is between less than Rs 1,000 crore and up to Rs 300 crore, then a penalty of Rs 5 lakh, Rs 10 and Rs 20 lakh would be levied on the first, second and third instance, respectively. Similarly, if the revenue is less than Rs 300 crore, a fine of Rs 1 lakh, Rs 2 lakh and Rs 4 lakh would be levied for the first, second and third instances of surveillance-related lapse, respectively.

The regulator said that the framework of financial disincentives for surveillance-related lapses would not be applicable in instances wherein it has a market-wide impact or caused losses to a large number of investors or affected the integrity of the market. Additionally, the guidelines will not be applicable for matters that are procedural in nature.

After the identification of surveillance-related lapses at MIIs, Sebi will provide an opportunity for the concerned MII to make its submissions. The submissions would be considered by the regulator before imposing any fine. In case of imposition of penalty, the amount would be credited by the MII concerned within 15 working days to the Sebi's Investor Protection and Education Fund.

Also, the regulator has directed MIIs to disclose the details pertaining to financial disincentives on their websites and in their respective annual reports.