Sebi Introduces Joint Inspection Framework for Brokers

New Delhi, Aug 7 (PTI) Markets regulator Sebi on Thursday mandated a unified annual inspection for stock brokers and depository participants to be conducted jointly by all relevant market infrastructure institutions, replacing the existing practice of separate assessments by each entity.

The move aims to reduce repeated visits, saving time and resources for intermediaries.

Presently, annual inspections of stock brokers and depository participants (DPs) are conducted separately by each of the market infrastructure institutions (MIIs) -- stock exchanges, depositories, and clearing corporations.

This practice placed an undue burden on intermediaries due to repeated inspection visits by different MIIs, leading to excessive diversion of resources and disruptions in the routine operations of these entities, Sebi said in its circular.

Accordingly, Sebi said, "Entities selected for annual inspections shall be inspected for all segments jointly by all stock exchanges, along with their depository participant (DP) operations (if the broker is also registered as a DP) and clearing activity (if the broker undertakes clearing for other brokers)".

"DP operations and clearing activities carried out by such entities shall be inspected by the depositories and clearing corporations, respectively," it added.

If a broker is also a DP or undertakes clearing activities, all these operations will be inspected jointly.

Sebi asked MIIs to establish a mechanism to share inspection findings with one another for brokers or DPs holding multiple registrations.

The regulator has revised criteria for annual inspection of entities, whereby the top 25 entities that have paid high and recurring penalties for non-reporting or short reporting of margin, client code modification, or other similar high-risk compliance issues will be inspected regardless of their last inspection date.

Similarly, the top 25 entities with the highest number of investor complaints and arbitration cases as a percentage of active clients, and the top 25 entities identified as high risk under risk-based supervision, will also be inspected, irrespective of when they were last inspected.

Further, entities not falling under these categories will be inspected at least once every three years.

However, entities already inspected in the last two years by any MII or Sebi, or those that have not executed a single trade in the past two financial years, may be excluded. Inspections of professional clearing members will be conducted jointly by clearing corporations once every two years.

Sebi said MIIs retain the right to conduct special or limited inspections based on specific triggers, such as investor complaints or regulatory alerts, regardless of past inspections.

The regulator has directed MIIs to prepare a joint standard operating procedure (SOP) by November 1, 2025, defining inspection processes, information sharing, and appointing a lead MII to coordinate enforcement actions.