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BSE and NSE Clearing, the clearing arm of NSE, have settled an issue between them over certain clearing charges. On Wednesday evening, BSE sent an email to NSE Clearing about the same. However, the regulator had to intervene in the matter.&nbsp;

According to a source, “The regulator had to convey a strong message to the entities to resolve the issue and honor the commitment, as such infighting was sending a wrong message in the market."

BSE had yet to clear dues worth Rs 312.37 crore owed to NSE Clearing. According to sources, out of the total sum, around Rs 310 crore was paid on Wednesday and the remainder was set to be paid after reconciliation of transaction statements.&nbsp;

At the time of publishing this report, it was unclear as to whether interest on the said amount would be demanded. 
&nbsp; 
The issue was highlighted when NSE Clearing’s auditor flagged the issue in the company’s December 2024 financials. NSE also informed to SEBI about a deficit of Rs 176.65 crore in the minimum liquid assets required, primarily on account of non-receipt of Rs 312.37 crore of dues from BSE.&nbsp;

<blockquote class="twitter-tweet">
<a href="https://twitter.com/hashtag/ZBExclusive?src=hash&amp;ref_src=twsrc%5Etfw">#ZBExclusive</a> | BSE और NSE क्लीयरिंग के बीच सुलझा, क्लीयरिंग फीस का विवाद, BSE ने भरी रकम 
 
एक्सचेंज स्पेस में और भी नए डेवलपमेंट<a href="https://twitter.com/BrajeshKMZee?ref_src=twsrc%5Etfw">@BrajeshKMZee</a> से जानिए क्या है पूरी खबर <a href="https://twitter.com/hashtag/BSE?src=hash&amp;ref_src=twsrc%5Etfw">#BSE</a> <a href="https://twitter.com/hashtag/NSE?src=hash&amp;ref_src=twsrc%5Etfw">#NSE</a> <a href="https://twitter.com/BSEIndia?ref_src=twsrc%5Etfw">@BSEIndia</a> <a href="https://twitter.com/NSEIndia?ref_src=twsrc%5Etfw">@NSEIndia</a> <a href="https://t.co/nFqYkiJ2eo">pic.twitter.com/nFqYkiJ2eo</a>
— Zee Business (@ZeeBusiness) <a href="https://twitter.com/ZeeBusiness/status/1890338080063938765?ref_src=twsrc%5Etfw">February 14, 2025</a></blockquote>
<script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>

Minimum liquid assets are required under the mandatory regulatory compliance rules set by market regulator Securities and Exchange Board of India (SEBI).&nbsp;

“This deficit will be replenished by the internal accruals/recovery of the receivables before March 31, 2025. Further, NCL has not factored in interest accrued of Rs. 424.35 crores as of December 31, 2024, while computing said deficit," NSE Clearing added in its earnings statement.

The charges pertain to interoperability arrangements between clearing corporations. Clearing corporations are the entities that settle the trades executed on an exchange and provide counterparty guarantees for executed trades on an exchange.&nbsp;

Initially, there was negligible derivatives volume on BSE, but after certain changes in strategy and regulation, the derivatives volume started to pick up on the bourse and NSE Clearing started to settle a large number of trades due to interoperability among clearing corporations.

Another source said, “I don’t think BSE had any intent of not paying but difference of interpretation may have been an issue, which is not uncommon among entities."&nbsp;

It is believed that initially, the dispute started between NSE and BSE clearing arm Indian Clearing Corporation Limited (ICCL), which later on impacted NSE Clearings payments as well.

At the time of publishing this report, emails sent to exchanges BSE and NSE were yet to elicit any response.&nbsp;

SEBI issued interoperability norms in November 2018, and in June 2019, interoperability was introduced among clearing corporations. Before that, exchanges used to clear trades on their platforms through their respective clearing corporations. This helped in trades executed at BSE getting cleared at NSE Clearing and, similarly, trades executed at NSE getting cleared at ICCL. This linkage helped brokers save funds, as after the introduction of interoperability, they were not required to keep separate funds for both clearing corporations.&nbsp;

Interoperability also helps in trading during disruptions.

Minimum liquid assets are required under the mandatory regulatory compliance rules set by market regulator Securities and Exchange Board of India (SEBI).&nbsp;


Exclusive: BSE settles clearing charges issue with NSE Clearing, say sources

Just like the pre-open session in the cash segment, there can be a similar session for stocks in the futures and options (F&amp;O) segment too. A working group of market regulator Securities and Exchange Board of India (SEBI) is exploring this idea. The working group is discussing the proposal with stock exchanges, clearing corporations, brokers, and independent experts. The idea of the pre-open session is to improve price discovery in the segment. According to one source aware of the discussions: “The idea is to start the pre-open session with Futures... But Options along with next or far month futures contracts not being uniformly liquid may be excluded from such pre-open session."

The idea of having such a pre-open session is to minimise the volatility in securities during the market opening every day. All the buy and sell orders are matched. The demand and supply in this session help to establish the opening price. The pre-market session is conducted between 9:00 am and 9:15 am. During this period, pre-market session orders are collected, modified, or cancelled. After 9:08 am to 9:15 am, no new orders can be placed, but only the orders in place are matched and trades confirmed.

Currently, the F&amp;O segment starts with zero pending orders, which leads to increased opening volatility. In the cash segment, there is a batch auction process, which starts from 9:00 am to 9:07 am, on the basis of which the open price is decided. If there are unexecuted orders, it is carried out to a normal trading session with continuous trading starting at 9:15 am. This process reduces volatility and helps in better price discovery. A similar idea is being explored for single stocks in the F&amp;O segment.

Another source part of the working group and aware of the discussions said, “The derivatives aid in price discovery and not having pre-open segment hampers price discovery in this session. Though, participation in the cash segment in pre-open is also limited but it certainly helps as a process.”

A third source said: “Largely there is agreement on the idea but exchanges have to tweak the system for this so their readiness is important.” He further said that after discussions in the group, the proposal will go to the SEBI committee on secondary market-related matters and will be followed by a discussion paper.

Another market participant not part of the working group said: "It's good to have a pre-open session for single stock derivatives but a post-closing session like the cash market is equally important."

Currently, the biggest exchange, NSE has 227 stocks in the futures and options (F&amp;O) segment. If the idea is translated into regulation, the pre-open session will help the traders to place their bets seeing the trends.

At the time of publishing this story, SEBI was yet to respond to Zee Business's queries about the proposal.&nbsp;&nbsp;

The idea of having a dedicated pre-open session for derivatives is to minimise the volatility in securities during the market opening every day.&nbsp;


Exclusive: Pre-opening session for single stock derivatives? Market regulator's working group exploring idea for better price discovery

If various stakeholders, such as exchanges, clearing corporations and brokers, reach a consensus, traders can be allowed to take further positions in stocks that are in the ban period, as per sources. An expert working group, formed to deliberate on issues of equity derivatives, is discussing this proposal as part of Ease of Doing Business. “A working group is considering this idea, but it will be based on Future Equivalent (Fut Eq) based Open Interest (OI) formula, not with the existing Open Interest methodology," said a person familiar with discussions in the expert working group.

10% Additional Position Even After the Ban

Another source, privy to the discussions, said, “The discussion is at an early stage and the deliberation is if a 10 percent additional position creation can be allowed under new Future Equivalent formula, in next and far month contracts, when a stock goes in a ban so that traders can hedge their open positions."

“The rationale is as the Next month and Far month contracts are not up for settlement and are generally not liquid, so this additional limit can help the participants but subject to a certain overall limit is fixed across expires," said the person.

&nbsp;

In derivatives, futures have a three-month trading cycle, where the 'next month' contract is the 2nd month and the 'far month' contract is the 3rd month. The first month is referred to as the near month.

The future equivalent refers to the quantity of futures contracts required to hedge the risk of the options position of the underlying asset. It is calculated by aggregating change in price (delta) associated with the position. It helps traders understand the number of futures contracts required to buy or sell for hedging so that the options position is neutral.&nbsp; Open interest refers to the total of all futures and or option contracts entered but not yet offset by a transaction.

What Happens Now?

When a stock's open interest crosses 95 per cent of Market Wide Position Limit (MWPL), in stock across stock exchanges, then no additional position is allowed, till the open interest comes down to 80 per cent. However, brokers start getting alert when it's around 85 per cent and advise their clients to square off the positions, as they don’t want problems for clients and themselves. MWPL is the maximum available limit in the stock for trading in the futures and options contract in the stock. It is usually limited to 20 per cent of non-promoter shares. If open interest in a stock exceeds 95 per cent of the MWPL, stock moves in the ban period. A stock going in a ban period is inconvenient for market participants. Hence, the SEBI expert working group is considering, if additional position creation can be allowed when open interest is calculated in future equivalent terms.

What do market participants say?

Market participants are happy with the deliberation but say the additional 10 per cent limit will be exhausted quickly and then the problem will remain the same. So, if clients are allowed to roll over the existing positions to the next calendar on the expiry day, in spite of the ban, as long as future equivalent open interest does not increase, it will be more helpful. If position limits are exceeded then the penalty is imposed, but sometimes traders are happy to pay a penalty if they are getting an overall bigger profit than the penalty amount.

At the time of publishing this report, queries sent to SEBI remained unanswered.&nbsp;

The expert working group formed to deliberate on issues of equity derivatives is discussing this proposal as part of Ease of Doing Business.&nbsp;


Exclusive: Big relief for F&O traders! SEBI exploring additional limits for position creation in stocks that go into ban

To allay the fears in the mind of the market ecosystem, capital market regulator Securities and Exchange Board of India (Sebi) is considering reducing the weightage of top stocks in the sectoral index with derivative contracts. The regulator has appointed an expert working group led by the former executive director of the Reserve Bank of India (RBI), G Padmanabhan, comprising officials from exchanges, clearing corporations, brokers, personal finance experts, and people from academia as the members.

<h2>What’s the proposal?</h2>

According to one source, “The proposal is at an early stage, and it is being discussed if top constituent weightage can be limited to 20-25 per cent and similarly, the top 3 can be limited to a maximum of 50-60 per cent." Also, it's being deliberated that if a certain absolute difference in the weightage of the top 5 constituents is required to have the gradation, the condition of a minimum of 10 stocks may be mandatory for such indices. It's proposed that for existing indices, a new index could be created to meet the new conditions to offer derivatives on them.

Sebi’s whole-time member (WTM) and head of the Market Regulation Department, Ananth Narayan G, also indicated the move.

While delivering his speech on derivatives at the Sebi-Nism symposium, he said, “Structurally, we are considering—subject to inputs from all stakeholders—whether the overall trust in the ecosystem can be better served by placing some limits on the level of individual stock concentration in indices on which derivatives are offered."

<h2>What are the existing rules?</h2>

As per existing practice, the top constituent should be less than 35 per cent and the top 3 constituents should have a weightage of less than 65 per cent.

As per existing rules, benchmark and sectoral indices are permitted for derivatives if 80 per cent of the constituents are eligible for (futures &amp; options) F&amp;O trading.

It also says that no ineligible stock should have a weightage of more than 5 per cent.

The case of Nifty Bank, the popular index derivative, as of December 31, 2024.

Top constituent HDFC Bank holds 28.11 per cent weightage, ICICI Bank holds 24.98 per cent weight, Kotak Mahindra Bank has 8.80 per cent weightage, Axis Bank has 8.54 per cent weightage, and SBI has around 8.45 per cent weightage.

The top 3 banks constitute around 62 per cent of the weightage.

<h2>Why is Sebi considering reviewing the rules?</h2>

In recent times, on multiple occasions, traders on social media raised the concern of manipulation by large players in a few indices, especially on expiry days.

At the SEBI NISM Samvad event, Sebi, WTM, Ananth Narayan G, said, “It is not unusual for a market participant to trade in both cash and derivative markets concurrently. But as a matter of course, every exchange and regulator guards against unfair trading practices. For instance, a burst of outsized market moving activity by a large player in the cash market to engineer moves and hence ensure large profits in the derivative market could be a case of unfair trading practice and manipulation."

He assured that exchanges and clearing corporations have excellent surveillance ecosystems.

<h2>Proposal and consequences</h2>

The ETF investments may get impacted due to changes in indices constituents, so it has to be deliberated at length before any final view is taken.

It also needs to be deliberated whether rebalancing will be a good idea or whether a new sectoral index, especially for derivatives, can be created based on the proposed criteria, which will be better.

What will happen to the continuity of contracts also needs to be sorted before any final view is made.

Sebi has assured that as per its policy-making process, the issue will be extensively consulted, and only then will it be tweaked.

As per a source, “The proposal is at an early stage, and it is being discussed if top constituent weightage can be limited to 20-25 per cent and similarly, the top 3 can be limited to a maximum of 50-60 per cent”. Also, it's being deliberated that, if a certain absolute difference in the weightage of the top 5 constituents is required to have the gradation.&nbsp;


Exclusive: SEBI may limit concentration of top stocks in index with derivatives

To deal with the menace of insider trading, front running, and other suspicious trading activities, the&nbsp;Securities and Exchange Board of India (SEBI) is taking to the board a new regulatory proposal for approval. Under the proposed regulation, people involved in suspicious trading activities will have to prove that they have not done anything wrong. According to sources, “The Prohibition of Unexplained Suspicious Trading Activities Regulation is part of the board agenda; the board may take a call based on the feedback." This regulation is specially drafted to deal with suspicious trading activities. The SEBI board is meeting on December 18. The proposed regulation is in addition to the existing Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) and Prohibition of Insider Trading (PIT) Regulations.

The proposed regulation prescribes action based on unusual trading patterns like repetitive patterns of trades by a person or a group of connected people, substantial change in risk taken, abnormal gains, or averting abnormal losses. It will also include material non-public information (MNPI), which will cover information that is generally not available or impending advice or recommendation by an influencer that can have a reasonable impact on the price of the securities of a company.

SEBI had floated this consultation paper last year and sought views on the regulation aimed at curbing front-running, use of mule accounts, pump and dump, and misuse of influencers. But then the proposal could not be taken to the board due to various concerns. It is believed that after addressing some concerns, the proposal is being taken to the board.

"PUSTA if given effect would be a regressive law. This law would pass on the burden of proof on the person charged with the offence. Any law that presumes guilty should be resisted as the person should be presumed innocent unless proven by a governmental agency to be guilty. Any abnormal profit, which is not uncommon in the securities market, can be now questioned by SEBI and if the person making the profit cannot prove to SEBI that he/she did not have any price-sensitive information SEBI can find that person guilty. I think this is an overreach by the regulator. SEBI should focus more on its investigation tools and resources rather than taking lazy and borderline arbitrary regulations towards securing easy enforcement orders," said&nbsp;Anil Choudhary, Partner, Finsec Law Advisors.&nbsp;

Why such a strict regulation?

SEBI says that with the advent of technology, novel methods are being adopted by market participants to carry out fraudulent/violative activities in the securities market while concealing the identities, connections, and relationships between the entities engaged in such activities. These activities often involve evasive/camouflaging tactics like using mule accounts, layering funds through a complex web of entities, and communicating through encrypted electronic media such as FaceTime, WhatsApp and BOTIM, consequently rendering traditional sources of evidence collection like call data records and bank records ineffective in establishing the preponderance of probability.

Surveillance alerts there but difficulty in gathering evidence

Despite SEBI's surveillance systems repeatedly detecting such instances of insider trading and front running, the use of innovative, vanishing, and encrypted methods of private communication, as well as complex and untraceable funding arrangements makes it impossible to establish the preponderance of probability. These methods pose significant challenges in gathering conclusive evidence and proving the occurrence of such fraudulent activities.

SEBI says that certain activities, which initially appear to harm investors' interests in the securities market, necessitate a robust regulatory framework. This is particularly crucial when direct evidence is difficult to obtain due to the use of sophisticated technology and complex modus operandi by such entities.&nbsp;

What will be considered an unusual trading pattern?

An unusual trading pattern (UTP) will mean and include such repetitive patterns of trading activity by a person or a group of connected persons involving a substantial change in the risk taken in one or more securities over short periods of time that consequently delivers abnormal profits or averted abnormal losses. Repetitive abnormal gainful dealings in a security or a set of securities around the presence of material non-public information would be deemed to be violating the securities laws unless they are able to effectively rebut the said presumption.

UTPs will deal with the unusual trading pattern exhibited by a person or a group of connected persons. There have been instances where the trading pattern of a single person or a group of persons may appear to be normal in isolation, but exhibit UTP-like elements when analysed holistically. Such trading activity will also be considered UTP.

What will be a suspicious trading activity?

A person or group of connected persons exhibiting UTPs in a security or securities, coinciding with material non-public information, will be deemed to have engaged in suspicious trading activity (STA).&nbsp;

What if suspicious trading activity is found?

A person or group of connected persons called upon to explain the suspicious trading activity exhibited by them and not able to effectively rebut or provide an explanation will also be considered to have engaged in unexplained suspicious trading activity (USTA).

The SEBI Board may, at any time by an order in writing, demand a direct investigation under the Act if it&nbsp;has any reasonable ground to suspect that any person or group of connected persons have engaged in suspicious trading activity.

What will the accused be expected to prove?

SEBI will give a chance to suspicious traders to prove their innocence. The proposed regulation states that&nbsp;the persons, in the proceedings initiated against them, may rebut the allegations by demonstrating that the trading activities were not suspicious. They have to prove that the information doesn’t meet the Material Nonpublic Information (MNPI) test. Additionally, they will have to prove that trades were not based on information that was material and trades were not based on information that was not available in the public domain prior to/in the vicinity of trading activity undertaken. They will also have to prove that the trading pattern is not repetitive and does not exhibit a substantial change in risk taken and that the period for which trading was undertaken, cannot be categorised as a short period of time. Besides, they will have to also prove that trading activity did not deliver abnormal profits or avert abnormal losses. The person or the group of connected persons will submit detailed documentary evidence to substantiate any claim made by them in respect of the above.

SEBI’s proposed regulation also puts responsibility on exchanges and brokers. It says that it will be the duty of every stock exchange recognised by the Board and every intermediary registered with it to immediately inform any suspicious trading activity that has been noticed by them or brought to their notice, in the course of their business.

Some traders raised concerns about how algo trades would be looked after by this regulation. Also, one source added: "The concept of presumption is there under Income Tax Act from where SEBI has borrowed this idea but it's not there in SEBI Act. So if the proposal is approved in its current form then may require amendment in SEBI Act also."

"This is going to create a sea of change in the manner SEBI builds cases, gathers and uses evidence. Many times people get away because of lack of proof beyond reasonable doubt. With PUSTA regulations, rebuttable presumption will likely result in the protection of small investors who do not understand the impact of material or non-material information but prices get affected. But enforcement and implementation will be key," said Suhas Tuljapurkar,&nbsp;Founder and Managing Partner, Legasis Partners.&nbsp;

"This legal regime is midway between ‘beyond reasonable doubt’ and ‘preponderance of probability’. With proper implementation of PUSTA Regulations SEBI may expect more successful outcome to its enforcement actions especially when transactions are suspicious," said Tuljapurkar.&nbsp;

Zee Business wrote to SEBI, seeking comments on the proposed regulations. At the time of publishing this story, a response was awaited from SEBI.

Under the proposed regulation, people involved in suspicious trading activities will have to prove that they have not done anything wrong. According to sources, “The Prohibition of Unexplained Suspicious Trading Activities Regulation is part of the board agenda; the board may take a call based on the feedback."&nbsp;The proposed regulation is in addition to the existing Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) and Prohibition of Insider Trading (PIT) Regulations.


EXCLUSIVE: SEBI Board to discuss the toughest regulation to deal with market manipulation 

Market regulator Securities and Exchange Board of India (SEBI) is meeting on December 18 to discuss and finalise various policy proposals. As per the statute, the SEBI board is required to meet every quarter. The last board meeting took place on September 30 and the next is scheduled on December 18. The regulator's board has a slew of items on the agenda for the upcoming meeting. Important proposals are likely to be discussed at the meeting, concerning aspects such as SME IPO regulations, merchant banker regulations, performance validation agency framework, public interest director regulations, and custodian regulations.

Major overhaul of SME IPO rules

According to sources, the board is likely to discuss and approve new regulations related to how small and medium-sized companies tap the capital market. SEBI has proposed a wide range of tweaks in SME IPO regulations including an increase in application size from existing Rs 1 lakh to Rs 2-4 lakh. While one proposal is to double the amount to Rs 2 lakh, another suggests an increase to Rs 4 lakh per application in view of around 4.5 times growth in Nifty and Sensex in the past 14 years. The board is also likely to consider setting up a monitoring agency to track the usage of issue proceeds, limiting the size of an offer for sale (OFS) for promoters to 20 per cent of the issue size. Currently, there is no such restriction on OFS. The condition of Rs 3 crore operating profit in two out of three years and track record is also proposed as a condition for IPO. SEBI is of the view that the allocation of SME IPOs can be aligned with that of mainboard offers. The minimum issue size is proposed to be a minimum of Rs 10 crore and the promoter lock-in increased to five years from the current three years. Quarterly disclosures of financial results restricting fundraising for loan repayment to related parties, opening DRHP for 21 days for public comments, and expenses such as merchant banking fees and the dues of staff PF and ESIC may also be required.

Tightening the scope of insider trading&nbsp;

SEBI intends to widen the scope of the meaning of unpublished price sensitive information (UPSI) to now include activities like fundraising, corporate insolvency and loan restructuring, management and control agreements, regulatory and legal actions licenses, and guarantees.&nbsp; Also, events such as mergers, acquisitions, delisting, major business expansions, awards or terminations of significant contracts outside the ordinary course of business will also qualify as price-sensitive information. A recent study conducted by SEBI revealed that many listed entities are narrowly interpreting the term UPSI. Companies often limited their classification of UPSI to the explicit examples listed in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), ignoring the broader intent of the regulation. This limited interpretation led to non-compliance with the law in spirit and raised concerns about inconsistent disclosures and misuse of sensitive information.&nbsp;

Review of merchant banker regulations

The SEBI board is also likely to discuss and approve merchant banking regulations, according to the sources. The board is likely to discuss and consider the review of net worth requirements for merchant bankers. Currently, merchant bankers require a minimum net worth of Rs 5 crore, which has not been revised since 1995. SEBI is proposing two categories for merchant bankers: Category 1 and Category 2. Category 1 will have a net worth of not less than Rs 50 crore and will be permitted to deal with all kinds of activities. Category 2 will be required to maintain a minimum of Rs 10 crore net worth and permitted to undertake all kinds of activities except mainboard issues. Existing merchant bankers will be given two years to fulfill the revised net worth criteria.&nbsp; Minimum liquid net worth, aligning the net worth with the Companies Act is also under review. The board will also review the multiple registration licenses within the same group. SEBI believes such licenses are prone to misuse, if one is canceled the activities may shift to another. Although banks and public finance groups will be allowed to have more than one others will be restricted to one only, and those having more than one will be given a one-year time frame to surrender. A review of minimum and maximum underwriting obligations is also on the cards, according to the sources. Merchant bankers won’t be allowed to underwrite more than seven times of net worth and 20 times of liquid net worth, as against the current 20 times net worth. SEBI is of the view that 20 times is too high and needs to be aligned with the market risk.

Framework for performance validation agency

The long pending proposal of the performance validation agency may go to the board again for consideration. SEBI had floated a consultation paper on the same. An entity under NSE will be the first such agency. SEBI may initially allow it for investment advisors, research analysts, and algo makers. This will be voluntary for the market participants in order to get their claims authenticated. The proposal was put up in the September board meeting but it was decided that it would be taken up later due to some concerns were raised. The proposal may again be placed before the board with some tweaks.

Review of public interest director&nbsp;appointments&nbsp;

SEBI board may also consider a proposal to review the public interest directors-related regulations. Public interest directors (PIDs) are like independent directors in market infrastructure institutions (MIIs) like exchanges, clearing corporations and depositories. The proposal seeks to incentivise PIDs by offering a fixed remuneration of a maximum of Rs 30 lakh per annum in addition to sitting fees and expenses related to attending meetings. Due to a shortage of quality PIDs, the cooling period may also be relaxed. However, this may apply only to cases where a PID is joining a rival MII or MII associate. MIIs had said to SEBI that there are skilled and well-trained PIDs available that cannot be utilised because of this blanket restriction of one one-year cooling off period. Existing rules say that PIDs after completion of their two terms in one MII and seeking appointment as PID into another MII have to wait one year before such appointment. Additionally, they cannot join the subsidiary of the existing MII before a cooling-off period of three years.

Review of custodian regulations

The SEBI board is also likely to approve the net worth requirements for custodians from Rs 50 crore to Rs 100 crore. Other regulatory changes may include a mandatory business continuity plan (BCP) or disaster recovery system (DRS) like qualified institutional brokers (QSBs); prescribed code of conduct to include a requirement that they don't indulge in any unfair competition practices, mandating an orderly framework for winding down operations if needed, and allowing non-segregation of allied activities that are regulated by other entities. Custodians are prone to fraud and operational risks and such risks can result in financial losses which may lead to erosion of the net worth of the custodian. Higher net worth will provide a cushion against potential fraud losses and operational risks. Custodians with higher net worth may be better equipped to absorb losses, maintain operational stability, and enhance the trust of their clients and stakeholders in the ecosystem.

Proposals related to mutual funds, MSM REITs and InvITs, and AIFs may also be taken up by the board.

Queries emailed sent to SEBI seeking a response remained unanswered at the time of publishing this report.&nbsp;

Important proposals that will likely be discussed in the December 18 meeting include SME IPO regulations, merchant banker regulations, performance validation agency framework, public interest director regulations, and custodian regulations.


SEBI December 18 Board Meeting: Tighter regulations for SME IPOs, wider scope of UPSI, performance validation agency, other proposals for board test

Market regulator Securities and Exchange Board of India (SEBI) has clarified that digital platforms used by regulated entities to associate with third parties are not required to be registered with SEBI. SEBI clarified, “It's not obligatory for any digital platform to be registered as Specified Digital Platform (SDP) and there is no regulation of these digital platforms by SEBI”. Digital platforms include Meta, Google, and others. 
&nbsp; 
SEBI clarification further added that curative actions currently being carried out by some digital platforms are in accordance with law. Preventive steps are contemplated for any digital platform to get notified as SDP is not mandatory and it is for the platform to opt or not opt for getting notified as SDP. 
&nbsp; 
Seeing huge jumps in complaints against unregulated entities, SEBI tweaked the regulation in August this year, which mandated SEBI-registered entities not to associate directly or indirectly with unregistered entities, who provide any advice or recommendation about securities, unless the person is registered with SEBI. Similarly regulated entities are prohibited to associate with any person who makes any claim, of returns or performance expressly or impliedly, in respect of or related to a security or securities, unless the person has been permitted by the Board to make such a claim. 
&nbsp; 
SEBI said the purpose of this provision in the aforesaid regulations is to give confidence to regulated entities that if the regulated entity is associated with an SDP, it is automatically assured of not being held as violating the provisions of regulations. Hence, in case of any violation of Regulation 16A of Intermediaries Regulations, Regulation 44B of SECC Regulations, and Regulation 82B of DP Regulations, it shall be a valid defense for the regulated entity that it has associated with a digital platform which is an SDP. 
&nbsp; 
The clarification noted is that it is not expected that a regulated entity shall associate only with/through an SDP. It can also associate with/through a digital platform which is not an SDP. However, in that case, it has the responsibility to ensure that the provisions of Regulation 16A of Intermediaries Regulations, Regulation 44B of SECC Regulations, and Regulation 82B of DP Regulations are complied with. 
&nbsp; 
SEBI issued the clarification after, various queries from the media and also concerns raised by some big digital media companies and industry associations.

SEBI clarification further added that curative actions currently being carried out by some digital platforms are in accordance with law. Preventive steps are contemplated for any digital platform to get notified as SDP is not mandatory and it is for the platform to opt or not opt for getting notified as SDP.


Not obligatory for platforms to be registered with SEBI; board clarifies on specified digital platforms

Amid concerns about unregulated and unapproved algorithms—popularly known as algos, capital market regulator SEBI is considering the overhauling of regulations. Algos are trades generated using pre-defined automated execution logic that is based on historical data. SEBI is of the view that such uncontrolled algos pose a risk to the market, can be misused for market manipulation, and can lure retail investors by guaranteeing them higher returns, according to sources. The potential loss in case of a failed algo strategy can have a huge impact on retail investors. As third-party algo providers or vendors are unregulated, there is also no investor grievance redressal mechanism in place.&nbsp;

What is the plan for algo regulation?

Risk management system for retail algos

Brokers must do due diligence and risk profiling of retail clients, such as education, net worth income, etc. For safeguarding purposes, all the registered strategies must have predefined caps on quantity and value order-wise, day-wise and client-wise. Beyond these limits, the strategy will automatically not work. Also, algo strategies will not be used for illiquid contracts. There will also be restrictions on the number of times an order can be modified. Brokers will have to ensure that prices quoted by orders do not violate price bands announced by exchanges. Systems to detect algo strategy malfunction and requisite surveillance may also be incorporated into regulations. Brokers will also be expected to develop a monitoring system to identify similar kinds of orders coming from different clients which can be construed as a potential assured return scheme. Brokers will not be allowed to place algo orders on behalf of clients. A throttle rate not exceeding 30 orders per second should be mandatory for execution. Malfunction and complaints due to malfunction should be reported to the exchange.&nbsp; &nbsp;

Control on API

A SEBI-constituted&nbsp;working group has submitted its report on the matter and discussions are on to implement the measures suggested by it. The major recommendations include control of the application programming interface (API). The working group has suggested that all algo providers and vendors of fintech companies have to be empanelled with the exchange.&nbsp;Also, they should be registered with the broker so that brokers can supervise them as they do with authorised persons. The suggestion is brokers have to ensure that they deal with exchange empanelled vendors only or develop in-house capability. Currently, many algo providers are neither registered with a broker nor empanelled with the exchange. SEBI wants all algo IDs to be registered with the exchange and brokers should not allow open API access.&nbsp;

Strategies used by the API model should be known to the broker

It is being discussed that all the algo strategies should be registered with the broker and brokers need to ensure that all such strategies should be registered with the exchange. Brokers can allow such strategies only after algos are registered with the exchange. Any modification or change has to be approved by the exchange. Black box algos should be provided by SEBI-registered entities only and all algo orders should be tagged with an exchange-issued algo ID. Brokers must ensure that no unauthorised tweaking or alteration is possible in algos. Algo should be certified by CISA/DISA. Brokers will have to ensure that authorised vendors, fin-tech companies, and algo makers use their names as part of testimonials. The working group also suggested that the broker must have the capability to ensure risk control checks at the individual order level and client level order before each order generated by algo is released to the trading system. In the algo orders, the exchange prescribed daily price limit, maximum order size threshold, and position limit should not be breached.

Role of Exchanges

Exchanges will have to form rules to register the algo providers, algo vendors, or fin-techs, converting aspects such as defining criteria, roles, and responsibilities of brokers and algo providers. Exchanges will also have to do the post-trade monitoring of algo orders and trades. The exchanges will also be responsible for handling client complaints.&nbsp;&nbsp;

Confidentiality of client data and due diligence

It is suggested that brokers continue to be responsible for the confidentiality of client-sensitive data as well as the orders flowing through APIs. Brokers will also have to abide by any law, or rule related to digital personal data protection. Regular vendor due diligence will also be a part of regulation.

SEBI plans to review the algo trading regulations emanating from the rising trend of usage by retail clients and the marketing of such strategies as a guaranteed return. Brokers were promoting API access to their clients, which enables investors to build their own front-end features or use a third-party application that suits their feature needs, covering aspects such as analysing market data or back-testing a trading strategy. Another concern raised by brokers is that they can identify the orders emanating from an API but unable to differentiate between an algo and non-algo order emanating from such API.

Recently, SEBI issued show cause notices to more than 120 stockbrokers for their association with the algo trading platforms despite being warned to disassociate.&nbsp;&nbsp;

Zee Business's email to SEBI, seeking a response, remained unanswered at the time of publishing this report.&nbsp;

SEBI is of the view that such uncontrolled algos pose a risk to the market, can be misused for market manipulation, and can lure retail investors by guaranteeing them higher returns, according to sources.&nbsp;


EXCLUSIVE: SEBI reviewing regulations for algo trading?

Market Regulator Securities and Exchange Board of India’s (SEBI) expert panel on suggesting measures to deal with the equity derivatives frenzy is exploring a product suitability framework for F&amp;O trading.

As per multiple sources, an expert working group led by former Reserve Bank of India (RBI) executive director (ED), G Padmanabhan, called a short notice meeting last week and sought the views of all stakeholders on the suitability issue.

<blockquote class="twitter-tweet">
ZeeBizExclusive: 
F&amp;O के सौदे करने की किसे इजाजत होनी चाहिए और किसे नहीं? सेबी की एक्सपर्ट वर्किंग ग्रुप ने मामले पर चर्चा शुरू की। किन किन पैमानों पर हो रहा है विचार? पूरी खबर बता रहे हैं ब्रजेश कुमार। <a href="https://twitter.com/hashtag/FnO?src=hash&amp;ref_src=twsrc%5Etfw">#FnO</a> <a href="https://twitter.com/hashtag/Sebi?src=hash&amp;ref_src=twsrc%5Etfw">#Sebi</a> <a href="https://twitter.com/hashtag/Trading?src=hash&amp;ref_src=twsrc%5Etfw">#Trading</a> <a href="https://twitter.com/hashtag/put?src=hash&amp;ref_src=twsrc%5Etfw">#put</a> <a href="https://twitter.com/hashtag/Call?src=hash&amp;ref_src=twsrc%5Etfw">#Call</a> <a href="https://twitter.com/BrajeshKMZee?ref_src=twsrc%5Etfw">@BrajeshKMZee</a> <a href="https://twitter.com/NSEIndia?ref_src=twsrc%5Etfw">@NSEIndia</a> <a href="https://twitter.com/BSEIndia?ref_src=twsrc%5Etfw">@BSEIndia</a>… <a href="https://t.co/xxsPn91FpL">pic.twitter.com/xxsPn91FpL</a>
— Zee Business (@ZeeBusiness) <a href="https://twitter.com/ZeeBusiness/status/1862438277284077758?ref_src=twsrc%5Etfw">November 29, 2024</a></blockquote>
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Officials of exchanges, clearing corporations, select brokers, and subject matter experts participated in the meeting.

The expert working group will meet on December 10 to deliberate on the views received.&nbsp;

<h2>Income, net worth, education, and what more?&nbsp;&nbsp;</h2>

According to one source, who was part of earlier discussions on plans to slow down the F&amp;O frenzy, “The working group will discuss, whether income, net worth, education, and experience are the sufficient parameters to decide on the suitability. Once agreed, the expert working group will then debate the minimum threshold of the parameters”.

There has been growing demand from stakeholders that SEBI should have thought of a product suitability framework for F&amp;O traders before implementing any major policy change.

So, there are defined criteria for deciding who should be allowed to take risky F&amp;O bets.

An industry source said, “In the meeting, Sebi officials did not suggest anything from their side, but asked all the stakeholders to share their views, SEBI has no starting view on this concept”.&nbsp;&nbsp;

As per one person part of the discussion, one exchange, a big broking firm, and a few associations had suggested SEBI consider the product suitability framework, and hence the issue was communicated to the expert working group, and now views are being sought.

<h2>Risk profiling and verification is not an easy task!</h2>

But another source added, “The setting up of an entry criteria is easy, but who will verify the income, net worth, educational, and experience credentials?

Brokers should not be expected to take the role of an auditor; also, there are around 18 crore demats, and verifying such a huge number will be challenging”.&nbsp;&nbsp;

The discussion on the product suitability framework is not new; earlier also, when SEBI floated a discussion paper in 2017 and sought views on product suitability, two issues were prominently highlighted for discussion.

First, considering the profile of participants, what measures would be required to create balanced participation in the equity derivatives market, and second, taking into account the trading of individual investors in derivatives, especially options, is there a need to introduce a product suitability framework in our market?

<h2>Suitability was discussed earlier also but not materialised</h2>

Later, the product suitability framework proposal was approved by the Sebi board.

Then the board note said, “Individual investors may freely take exposure in the market (cash and derivatives) up to a computed exposure based on their disclosed income as per their Income Tax Return (ITR) over a period of time. For exposure beyond the computed exposure, the intermediary would be required to undertake rigorous due diligence and take appropriate documentation from the investor. Determination of the computed exposure and details of due diligence documents required shall be formulated in consultation with market participants."

But despite the board’s go-ahead, the plan could not be materialised.&nbsp;&nbsp;

<h2>Risk Disclosure Document already there</h2>

As per one regulatory official, “The suitability part is still there in regulation, but it's hardly in practice.”

Brokers at the time of onboarding can identify who should be allowed to trade derivatives and who should not.

At the time of the onboarding of a client, a broker must execute a Risk Disclosure Document (RDD), and the same is included in the documentation related to client registration.

The RDD has a separate detailed paragraph, which contains information about the risks involved in trading in the derivatives segment.

This specifically mentions that transactions in derivatives carry a high degree of risk, losses may exceed the original margin amount, risks of option holders, and risks of option writers are also well explained.

<h2>Can we adopt the South Korean model?</h2>

But there are also examples that can guide, like South Korea, which had a model, South Korea had the 'Qualified Retail Investor' scheme.

To prevent retail investors from making reckless investments and incurring huge losses in derivatives markets, South Korea allows only 'qualified' retail investors to enter the derivative market by establishing two stages of entry barriers.

Under the first stage, retail investors who have completed prior education programme and mock trading and are subject to depositing a certain amount of money as initial margin are allowed to trade but only in simply structured futures of indices or individual stock futures.

In the second stage, retail investors with more than one year of trading experience are allowed under the first stage, and after the deposit of the higher amount of margin, are allowed to trade in complicated structured futures and options.&nbsp;&nbsp;

<h2>The impact of F&amp;O measures taken is yet to be seen</h2>

SEBI’s circular on tightening regulation regarding F&amp;O has been in force since November 20, and the effect will be known only after a few months.

SEBI’s tweaks included an increase in lot size, cutting down weekly expiries, increasing ELM margin towards expiry, removing calendar spread margin, collecting of upfront premium on options, and monitoring of intraday positions.&nbsp;

<h2>93% of retail traders lose money in F&amp;O, low-income earners lose more</h2>

Since the last one and a half years, at various forums, concerns have been raised about the increasing number of individual traders getting into complex derivative trading.

SEBI also published two studies on the trend and the losses suffered by retail traders.

As per the latest study of SEBI, 93% of over 1 crore individual F&amp;O traders incurred average losses of around Rs 2 lakh per trader (inclusive of transaction costs) during the 3 years from FY22 to FY24.

The top 3.5 per cent of loss makers, approximately 4 lakh traders, faced an average loss of Rs 28 lakh per person.

In contrast to individual traders, proprietary traders and Foreign&nbsp; Portfolio Investors (FPIs) as a class booked gross trading profits of Rs 33,000 crore and Rs 28,000 crore, respectively, in FY24, before accounting for transaction costs.

Against this, individuals and others incurred a loss of over Rs 61,000 crore in FY24 (before accounting for transaction costs).

Most of the profits were generated by larger entities that used trading algorithms, with 97 per cent of FPI profits and 96 per cent of proprietary trader profits coming from algorithmic trading in the same period, inclusive of transaction costs.

The SEBI study further says that nearly 76 per cent of the individual F&amp;O traders had declared annual income of less than Rs 5 lakh and approximately 94 per cent of the individual F&amp;O traders had declared annual income of less than Rs 10 lakh in FY24.

The percentage of loss-makers in the “low income” (i.e., less than Rs 5 lakh) traders’ category was the highest (92.2 per cent in FY24) as compared to the average proportion of loss-makers (91.1 per cent in FY24) and also compared to other income groups.&nbsp;&nbsp;

Here, if the income criterion is applied, it can substantially impact the volume.

Also, if an age bar or experience criteria is applied, it may reduce the youngster's trading activity, as per the latest data, the maximum (43 per cent) retail traders are of less than 30 years of age.

Once the expert working group finalises its recommendations, the matter will go to SEBI's committee, and after its approval, a formal consultation paper may be issued to seek larger public views.

Zee Business wrote to SEBI seeking comments, but no reply was received.

According to one source, who was part of earlier discussions on plans to slow down the F&amp;O frenzy, “The working group will discuss, whether income, net worth, education, and experience are the sufficient parameters to decide on the suitability. Once agreed, the expert working group will then debate the minimum threshold of the parameters”.


SEBI’s expert panel explores suitability framework for F&O trading: Sources

Market regulator Securities and Exchange Board of India (SEBI) is coming up with a specific virtual payment mode that will be dedicated to the use of payment to only to entities regulated by it. The regulator is learned to have codenamed it as Payright.

According to sources aware of the development, “The new mode has been finalised after extensive discussions with banks and NPCI. The idea is to give investors a safer option for payment to SEBI-registered entities. This will be a UPI payment mode and will be exclusively for SEBI-registered entities like brokers, research analysts, investment advisors, mutual funds, etc."

With this new mode of payment, funds will only go to SEBI-registered entities.

For instance, if a client has to pay to broker ABC Securities, they may be given a Payright ID such as 'ABCSecurities@Payright'. This mode can be later used for SIPs and other fee payments, investments, etc.

There have been multiple instances in the past where unregistered advisors cheated investors in the name of schemes and fees, claiming to be registered with SEBI. With this mode, investors will know surely that the money will go to a SEBI-registered genuine entity because the Payright mode will not be available to any other entity or individual not registered with the regulator.

This will make it easier for UPI-savvy investors to transfer funds safely to intended and regulated entities.

<h2>When can you expect SEBI to roll out Payright?</h2>

The regulator is learned to be planning to introduce this mode by the end of December or January.

This mode may be launched on an optional basis initially and then be made compulsory for all payments to intermediaries.

Recently SEBI introduced a centralised mechanism to enable investment advisors and research analysts to collect payments through an exchange platform.&nbsp;

Stock exchange BSE has already created an arm, BSE Administration and Supervisory Limited (BASL), for this purpose.

According to sources, a large number of banks have been consulted for PayRight and when implemented it will be widely available for investors and intermediaries.&nbsp;

Zee Business wrote to SEBI seeking comments but no response was received.

With this mode, investors will know surely that the money will go to a SEBI-registered genuine entity because the Payright mode will not be available to any other entity or individual not registered with SEBI.


SEBI's new virtual payment mode for investors? Payright and sit tight!

Capital market regulator Securities and Exchange Board of India (SEBI) may propose major changes in the IPO process for small and medium enterprises (SMEs). The regulator will issue a consultation paper soon. Recently, at the Morningstar Investment Conference in Mumbai, SEBI Whole-time Member Ashwani Bhatia emphasised the importance of the SME sector in the economy but also raised concerns about the SME IPO frenzy.

“What we have seen is pretty disturbing. The way retail participation is happening, the number of times IPO issues are oversubscribed, the way market making happens, the way underwriting happens... And obviously, we do not feel very comfortable about what is going on," said Bhatia.&nbsp;&nbsp;

SEBI’s recent orders also indicate how the SME companies are being used as a conduit for stock manipulation and siphoning of funds. This is why SEBI is considering overhauling the SME IPO regulations.

According to a merchant banking source aware of the development, “The consultation paper is likely to focus on tighter entry criteria, application size, monitoring of funds and disclosures made by companies."

The regulator is reviewing the whole SME IPO process&nbsp;due to the high exuberance created for such offers and the possible misuse of the route.&nbsp;

Who can come for IPO?

“SEBI’s proposal on entry criteria may focus on who can come up with SME IPO, it may set tighter norms like companies who are genuinely running a business having a verifiable track record, partnership firms/LLPs and others who convert into companies just before IPO plan, may find it difficult to get approval," according to one source.&nbsp;

Because partnership firms don’t have a track record like companies, there could be a cooling off period for filing of IPOs. Merchant bankers may have to do more on-ground and background checks. Net worth-based fundraising can also be a consideration, as in the past, companies with negative net worths have raised money and listed on huge premiums on the SME platform. Underwriting practices may also get overhauled. Also, there is a thinking that SME issues of Rs 100 crore and above should be mandatorily listed on the main board, instead of SME platforms.

Unified regulation across exchanges

The regulator may propose unified regulations across exchanges. Currently, all exchanges have their own criteria to allow companies to list on their platforms. The only common eligibility criteria is post paid-up capital should not be above Rs 25 crore. The rest of the criteria is decided by BSE and NSE platforms on their own. Many times, SME companies find regulatory arbitrage opportunities. However, unified regulation may lead to a lack of differentiation in offerings on exchange platforms. Unlike main board companies, SME IPOs are cleared by exchanges and not by SEBI.

Higher application size

To deter the retail frenzy, it is likely that SEBI may hike the minimum application size of Rs 1,00,000 so retail investors can be discouraged. The application size of Rs 1,00,000 was fixed in 2012 and has not been reviewed since then. The capital market scenario has changed so much since then and more so in the last five years. Seeing the huge oversubscription, SEBI may consider reviewing it. There were SME issues where the retail quota was subscribed more than 1,000 times. This year, the issue of HOAC Foods India Ltd was oversubscribed by 2013 times. Similarly, Kay Cee Energy &amp; infra's issue was subscribed 1,052 times. Oversubscription numbers just show the level of interest of investors, it does not mean that the company has actually received the money from investors.

Tighter monitoring of issue proceeds

Tighter monitoring of issue proceeds is one more area, that SEBI can look into for all SME issues. Currently, only issues above Rs 100 Cr are required to have a monitoring agency for the main board but not for SMEs. So, monitoring agency and fund utilization certificates may also find a place in consideration. Misuse of issue proceed is a big concern for the regulator. So, there are suggestions that SEBI should look into it. Recent SEBI orders also suggest how funds are misused and many times siphoned from listed SME companies.&nbsp; 
&nbsp; 
Checks on corporate action

The regulator may also come up with some kind of check on corporate actions like stock spilt, issuance of bonus shares, and rights shares. The regulator may propose certain financial performance parameters for the companies. To ensure that, corporate actions are not only to pump the share prices but genuinely reward the shareholders. SEBI’s orders on SME companies have shown a trend where promoters used corporate action to fuel the price and dump their holdings. There is a new trend in SME companies, promoters come up with offers for sale (OFS), which was unusual for SME companies earlier. Exchanges are keeping a close watch on such issues.

Tighter disclosure norms

SEBI may also propose main board-like disclosure norms for SME IPOs. Currently, SME companies are required to file half-yearly financial numbers while mainboard companies have to file quarterly results. However, SME companies may oppose it, citing an increase in compliance costs. SEBI is also concerned with SME companies auditors, as many times they don’t do their job properly and don’t flag the issues.

Review of the market-making mechanism

The market maker mechanism may also get overhauled, according to one merchant banking source, “Market makers are actually becoming trouble makers as they create demand-supply imbalance, by keeping a tight hold on the supply of shares, to create a mismatch." However, any review of this proposal will require data. But, the job of merchant bankers is likely to become tough, as scrutiny will go up.&nbsp;

Demand for an overhaul of allotment&nbsp;

There is also a growing demand that the quota for qualified institutional investors and anchor investors in SME IPOs should be removed. The regulator may look into this issue as well. To ensure that allotment is fair, exchange or SEBI-approved auditors certification may also be a condition.

A delicate balancing

The issue of SME funding is sensitive as it may create a narrative that the regulator is against the sector, so a delicate balancing may be required. SME associations have been complaining that institutional funding for them is a big issue and if exchanges also tighten the norms then the sector may be impacted. Besides reviewing the regulations SEBI will also focus on increasing investor awareness. So, that investors make an informed decision before investing.

Recently, at the Morningstar Investment Conference in Mumbai, SEBI Whole-time Member Ashwani Bhatia emphasised the importance of the SME sector in the economy but also raised concerns about the SME IPO frenzy.&nbsp;


To tackle SME IPO issues, SEBI to set the bar high

Market regulator Securities and Exchange Board of India (SEBI) is considering whether clearing corporations should be fully demerged from parent exchanges and divested to have diversified holding structures. According to sources, the regulator met stock exchange and clearing corporation heads a few weeks ago to discuss a proposal in this regard. The idea is to make clearing corporations independent from the parent exchanges. Currently, clearing corporations are registered as separate companies but are, in reality, totally dependent on parent exchanges for funds, technology, and human resources. As per a note circulated to exchanges and other stakeholders: “Given that clearing corporations are risk-bearing MIIs (market infrastructure institutions), it is highly desirable that they should be widely held.”

Clearing corporations are entities that help in the confirmation, settlement, and delivery of transactions. NSE has NSE Clearing Corporation Ltd (NCL), BSE has Indian Clearing Corporation Ltd (ICCL), and MCX has MCX Clearing Corporation Ltd (MCXCCL).&nbsp;&nbsp;

<blockquote class="twitter-tweet">
<a href="https://twitter.com/hashtag/ZbizExclusive?src=hash&amp;ref_src=twsrc%5Etfw">#ZbizExclusive</a> | क्लीयरिंग कॉरपोरेशंस की होगी लिस्टिंग? रेगुलेटर ने स्टेकहोल्डर्स से ली राय। क्या NSE, BSE और MCX से होगी वैल्यू अनलॉकिंग? कंसल्टेशन पेपर जल्द। 
 
- जानिए ब्रजेश कुमार से।<a href="https://twitter.com/MCXIndialtd?ref_src=twsrc%5Etfw">@MCXIndialtd</a> <a href="https://twitter.com/BrajeshKMZee?ref_src=twsrc%5Etfw">@BrajeshKMZee</a> <a href="https://twitter.com/NSEIndia?ref_src=twsrc%5Etfw">@NSEIndia</a> <a href="https://twitter.com/BSEIndia?ref_src=twsrc%5Etfw">@BSEIndia</a> <a href="https://t.co/wPr4nAhOUG">pic.twitter.com/wPr4nAhOUG</a>
— Zee Business (@ZeeBusiness) <a href="https://twitter.com/ZeeBusiness/status/1849020008539815997?ref_src=twsrc%5Etfw">October 23, 2024</a></blockquote>
<script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>

Three sources confirmed the ongoing discussions. According to the first person aware of discussions, “The thought process is that clearing corporations should be independent and strong in core settlement guarantee fund (SGF), risk management and technology related matters."

The regulator has posed certain questions, including what should be the approach: demerger or divestment? Globally, both types of models are there for clearing corporations. Major clearing corporations such as the USA's Depository Trust &amp; Clearing Corporation (DTCC), and Euroclear, a European post-trade facilitation services company, have diversified shareholding. Other clearing corporations such as London-based LSEG company LCH, and Singapore-based SGX-DC are subsidiaries of the parent exchanges. Clearing Corporation of India Ltd a clearing entity for government securities is also a domestic example of diversified shareholding, where banks, primary dealers, and other financial institutions have ownership.

As per the Stock Exchanges and Clearing Corporations regulations (SECC Regulation) 2018, which govern the ownership and governance framework of clearing corporations, at least 51 per cent of the paid-up equity share capital of a recognised clearing corporation is required to be held by one or more stock exchanges, and no person resident in India or outside India can hold more than 5 per cent. Other categories like depositories, banking companies, insurance companies, and their foreign counterparts including foreign stock exchange can hold up to 15 per cent of the paid-up equity share capital. However, in reality, most of the clearing corporations are 100 per cent owned by the parent exchanges. So, despite the regulations allowing it, the ownership is concentrated with exchanges.

Former RBI Deputy Governor R Gandhi told Zee Business: “All market infrastructure institutions should have diversified holding." Gandhi was also chairman of one of SEBI's committees that reviewed the regulations for market infrastructure institutions. The Gandhi panel believed that since clearing corporations are risk-bearing MIIs, it is highly desirable that they should be widely held. The question is also posed that if a diversified holding route is adopted, in case of huge losses, shareholders should contribute to the core settlement guarantee fund.

Another significant question raised by regulators to the stakeholders was whether clearing corporations should be allowed to list on stock exchanges. If so, the profit motive should also be there because investors will expect dividends, which is justified but in that case, clearing corporations will pursue a profit motive which may lead to higher transaction charges. Experts say that this thought of listing in itself is a big shift from a regulatory perspective, because current regulations forbid clearing corporations from listing. Although SEBI has not specifically said it, it is in favour of or against listing but only sought views. Globally, only Euroclear is listed with around 86 per cent holding with financial institutions and exchanges.

In the past also, various committees to review the structure and regulation of market infrastructure institutions were not in favour of listing. From the Jalan committee to the R Gandhi committee to the latest G Mahalingam committee, all advised against listing. However, keeping with the changing times, regulator SEBI&nbsp;wants to have a fresh perspective and view of stakeholders.&nbsp;&nbsp;

The R Gandhi committee noted that clearing corporations are sensitive and high risk-bearing and risk-managing entities, so listing clearing corporations should not be permitted. The Mahalingam committee was of the view that “clearing corporations can be considered as public utilities making reasonable profits to sustain their operations, the primary objective of all stakeholders should be that of ensuring market stability and development. Disbursing shareholder profits and capital appreciation should not be a consideration in the functioning of a clearing corporation."

Another person, who participated in the discussions, said, “It’s very unlikely that the idea of listing will garner support from stakeholders but a diversified structure may be supported by all stakeholders." The source also said: “Globally, it’s the clearing members (clearing brokers) who contribute to the capital and core SGF of clearing corporations, so clearing members should own the equity." The above person reasoned that it’s the clearing members who bring the risk to the clearing corporations so they should contribute to the risk capital. But many people Zee Business spoke to said that clearing members may not agree on this as it will be against their interest.&nbsp;

The other ideas being floated include that if there should be a unified clearing corporation. But the initial view does not favour it, because it will create a monopolistic situation. However, in reality, the dominant exchange’s clearing corporation has more than 90 per cent market share. Exchanges may also not agree. In the past, an attempt to merge the international exchanges in GIFT IFSC failed due to differences of view among parent exchanges.

The regulator is also seeking views on the existing multi-asset clearing corporation model. It has also sought views on whether only people who have risk management experience should be appointed as public interest directors in clearing corporations. Public interest directors are like independent directors and their appointment is cleared by SEBI.

A third person, part of the discussions, said, “SEBI is just posing questions to stakeholders, it does not mean it has formed any concrete view but discussion paper will give a better picture." The regulator may come up with a consultation paper very soon on the same to seek wider views on the proposal, as a policy-making process, SEBI seeks views from all stakeholders and comes up with a consultation paper.&nbsp;&nbsp;

A note floated by SEBI said, “Infusion of capital in a clearing corporation by a parent exchange might be at odds with the economic interest of an exchange and its shareholders. The said situation is significantly compounded in a scenario where the parent exchange is a listed entity. There is a need to ensure that there is no scope nor any appearance of a perverse incentive that comes in the way of clearing corporations discharging their role as independent risk managers, crucial to the securities market ecosystem."

The SEBI note also highlights the risk for clearing corporations with an increase in derivatives volume. “With an exponential growth in derivatives and derivatives being leveraged products, invariably increase the tail risk in markets," it reads. Hence, the need for resilience of a clearing corporation, especially in times of market stress, cannot be overstated.

At the time of publishing this report, queries emailed to SEBI remained unanswered.

According to sources, SEBI met the stock exchange and clearing corporation heads a few weeks ago to discuss a proposal in this regard. The idea is to make clearing corporations independent from the parent exchanges. Currently, clearing corporations are registered as separate companies but are, in reality, totally dependent on parent exchanges for funds, technology, and human resources.&nbsp;


Exclusive: To list or not to list? Merge or demerge? What’s SEBI's plan for independence of clearing corporations? Consultation paper expected soon

Investors often track grey market premiums to guess an IPO's listing price, but here's the catch: the Securities and Exchange Board of India (SEBI) doesn't recognise or approve the grey market. This lack of regulation makes grey market activities highly discouraged due to insufficient disclosures and unclear promoter track records. Interestingly, SEBI-registered brokers and fintech platforms sometimes promote trading in unlisted stocks, often creating buzz around limited supply and no guarantee of IPO allotment. Many a time, they even label certain stocks as "most trending" or "most bought and transacted" to lure investors with promises of high returns.

Market experts believe there is no problem if two parties decide to trade with each other upon agreed consideration, but inducing investors is a big concern. “This is a disturbing trend because platforms are just promoting to buy any share, they are operating like an exchange but no transparency on how and who is deciding the price and premium," said a market analyst on the condition of anonymity.&nbsp;

However, many brokers differ in this regard.&nbsp;“Trading of unlisted shares is outside the purview of SEBI. It comes under the Ministry of Corporate Affairs, so SEBI can’t restrain," said&nbsp;a broker on the condition of anonymity.

According to Arun Kejriwal, Founder, Kejriwal Research and Investment Services (KRIS): “It’s a grey area and SEBI has not specifically barred brokers from facilitating trade in such stocks."

He also described it as a "typical bull run boom moment phenomenon".

<blockquote class="twitter-tweet">
Who is fuelling the Grey Market premium? Is regulatory gap also responsible? Beware with fake apps promoting/inducing investors to put money in unlisted stocks. <a href="https://twitter.com/SEBI_India?ref_src=twsrc%5Etfw">@SEBI_India</a> <a href="https://t.co/to8iPcf2kH">https://t.co/to8iPcf2kH</a>
— Brajesh Kumar Mishra (@BrajeshKMZee) <a href="https://twitter.com/BrajeshKMZee/status/1848305213192425541?ref_src=twsrc%5Etfw">October 21, 2024</a></blockquote>
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"Unlisted stocks do not come into the regulatory domain of SEBI unless a public market is created out of it. SEBI cannot control private transactions although it can certainly come up with an advisory to brokers if they are creating a buzz about unlisted stocks and actively marketing them," said&nbsp;Anil Choudhary, Partner, Finsec Law Advisors.&nbsp;

According to a former regulatory officer, companies and promoters need to be cautious and not use grey market premium tactics to pump the stock price. "If the number of shareholders exceeds 200, it may create a problem for IPO approval as it may be considered a deemed public issue and SEBI approval may get difficult," according to the person.

Zee Business learned from sources that the recent issues of Waaree Energies and Mobikwik were also delayed because of this deemed public issue technicality. In such instances, the regulator and merchant bankers exercise utmost diligence to ensure that no promoter-driven agenda is at play.&nbsp;If the issue gets stuck because of such technical reasons, investors may face uncertainty with their money getting blocked.&nbsp;

Experts raise concern, and more so with new-age tech companies, as many times they are in losses when they file for IPOs and burn cash to retain their market share. For many of them, scaling and becoming profitable becomes difficult. Additionally, their business models are easy to replicate, so viability becomes an issue.&nbsp; &nbsp; &nbsp;&nbsp;

Cyber Fraud

“Seeing huge interest from investors, fraudsters create fake apps for buying and selling of such unlisted/pre-IPO stocks, where investors certainly lose money," said market expert Rakesh Bansal.&nbsp;

“There is no grievance redressal mechanism for such transactions as these are in unregulated space," Bansal added.&nbsp;

In one case, a Delhi-based investor lost Rs 24 crore in a fake app which was promoting such pre-IPO issues, said another market expert.&nbsp;&nbsp;

Market experts believe there is no problem if two parties decide to trade with each other upon agreed consideration, but inducing investors is a big concern.&nbsp;


Exclusive: Who’s fuelling pre-IPO grey market activity? Is ‘grey area’ in regulations responsible? 

Market regulator Securities and Exchange Board of India (SEBI) is considering tweaking the reporting structure of key people in stock exchanges, clearing corporations, and depositories. The idea is to further enhance the role of oversight committees, in ensuring good governance at the market infrastructure institutions (MIIs). As per people aware of the development, “SEBI is proposing that key people like Chief Regulatory Officer, Chief Technology Officer, Chief Risk Officer should have dual reporting structure, i.e. besides the MD and CEO of the MII, they should also report to the respective oversight committee as well."

The Chief Regulatory Officer will report to the Regulatory Oversight Committee, the Chief Technology Officer and Chief Information Security Officer will report to the Standing Committee on Technology (SCOT), and the Chief Risk Officer will report to the Risk Management Committee of the market infrastructure institution (MII).

The existing regulations mandate such managerial personnel to meet with these committees once a quarter in the absence of the MD and CEO. Now the idea is that these KMPs should regularly report to these committees so that they are free to share and update these oversight committees if they find or notice any concern. SEBI has discussed the proposal in a committee and sought the feedback of stock exchanges, depositories, clearing corporations, and other stakeholders; broadly there is an agreement on the proposal.

In June, SEBI came up with a circular based on the recommendations of the Committee on Strengthening Governance of Market Infrastructure Institutions. The functions, composition, and Terms of Reference of the statutory committees of MIIs were further deliberated in the Industry Standards Forum (ISF). As per that circular, all the oversight committees should be chaired by Public Interest Directors. Public Interest Directors in market infrastructure institutions are like independent directors in the companies, to protect the interest of investors. The appointment of public interest directors is approved by SEBI.

SEBI&nbsp;had constituted a&nbsp;committee,&nbsp;in&nbsp;April&nbsp;2022,&nbsp;under the chairmanship of its former Whole-Time Member G Mahalingam,&nbsp;to review the existing governance framework and make recommendations for further strengthening of governance norms at MIIs. The committee submitted its report in November 2022.

The committee suggested various measures to strengthen corporate governance at stock exchanges and clearing corporations.

Mahalingam committee had recommended that “the Board of the MII or the Chairperson of the Board (without the presence of the MD&nbsp; and any other executive director), on a periodic basis as specified by&nbsp;SEBI, should meet the Chief Regulatory Officer (CRO)/Compliance Officer, the Chief Risk Officer (CRiO), the Chief Information Security Officer (CISO), the Statutory Auditor of the&nbsp; MII&nbsp; and any other person as determined by the&nbsp; Public Interest Directors (PIDs)&nbsp; and Non-independent Directors ( NIDs) to discuss important issues concerning the MII”.

It also suggested that the PIDs should continue to meet twice a year and submit to SEBI a periodic report highlighting issues of importance/concern to MIIs.

After this, SEBI issued a detailed circular and detailed the role of each committee. Like the Standing Committee on Technology (SCOT) to ensure the availability of required IT infrastructure for core and critical functions under verticals for "critical operations" and "regulatory, compliance, risk management, and investor grievances”, and ensure the existence of adequate Business Continuity Plans (BCP) and Disaster Recovery (DR) plans, while ensuring sound and prudent policies, standards, and procedures for managing technology risks and safeguarding information assets in the stock exchange among others.

Similarly, the Regulatory Oversight Committee ensures all the matters related to the surveillance and investigation, Listing of Securities,&nbsp; compliance, laying down code of conduct, grievance redressal, and investor protection services among other issues.

The Risk Management Committee (RMC) has to formulate a risk management framework, including the framework for identification of internal and external risks, Measures for risk mitigation including systems and processes for internal control, review of risk mitigation measures, and a Business continuity plan.

As per the recommendations of the Bimal Jalan committee, SEBI has to review the regulations related to market infrastructure institutions. SEBI was last reviewed in 2017 and then in 2022, the Mahalingam committee was formed.

The proposal will require amendments in SECC regulations and Depository and Participants Regulation 2018.&nbsp;&nbsp;

At the time of publishing this report, Zee Business awaited SEBI's response to queries emailed to&nbsp;it seeking comments on the issue.&nbsp;

The Chief Regulatory Officer will report to the Regulatory Oversight Committee, the Chief Technology Officer and Chief Information Security Officer to the Standing Committee on Technology (SCOT), and the Chief Risk Officer will report to the Risk Management Committee of the market infrastructure institution (MII).


Exclusive: SEBI is mulling tweaks in oversight mechanism of stock exchanges & other MIIs

The first meeting of capital market regulator Securities and Exchange Board of India (SEBI) following the release of a report by US-based short-seller Hindenburg Research is scheduled for Monday, September 30. The board is expected to discuss and approve various policy measures and issues at the meeting, and may also address serious allegations leveled by Hindenburg against the SEBI chairperson, as well as the protests by the regulator's employees against top management.

On the policy front, the issue of fast-track rights issues can be taken by the board, as it will make fundraising easier for companies. It will also cut down the role of merchant bankers and reduce the whole post-board meeting timeline to around 20 days. This will be a kind of combination of rights issues and preferential issues. The idea is to make rights issues as the preferred route for fundraising by companies. Data shows that companies prefer the QIP and preferential issue routes to the rights issue because of the long timeline and other complexities.

“It is observed that many times, promoters choose the preferential issue route to benefit the selected people instead of existing shareholders, so the whole issue is being simplified,"&nbsp;a regulatory source said.&nbsp;

Another big policy measure for board discussion will be the ease of doing business and the harmonisation of ICDR and LODR norms. While ICDR rules apply to the issuance of capital and disclosure requirements, LODR norms comprise listing obligations and disclosure requirements regulations. This includes a review of regulations linked to related party transactions, promoter classification, and a single filing system for IPOs across stock exchanges, giving a three-month timeline for filling up board vacancies and strengthening corporate governance-related issues on the ICDR part. They combine the pre-issue advertisements and price band advertisements, enabling issuers with outstanding&nbsp;stock appreciation rights (SARs) to file draft offer documents and permitting issuers to obtain the certificate for the utilisation of loans from peer-reviewed chartered accountants, the disclosure of pre-IPO transactions after filing of DRHP, the clarification on promoter lock-in periods where issue proceeds are used for repayment of loans and utilised for capex.

<blockquote class="twitter-tweet">
<a href="https://twitter.com/hashtag/ZbizExclusive?src=hash&amp;ref_src=twsrc%5Etfw">#ZbizExclusive</a> | सेबी बोर्ड की सोमवार को होगी बैठक। किन किन मुद्दों पर बोर्ड में हो सकती है चर्चा? एनालिस्ट, ब्रोकर्स और मर्चेंट बैंकर्स और MF निवेशकों के लिए क्या है खास? हिंडनबर्ग का भी मुद्दा हो सकता है फोकस में। पूरी खबर बता रहे हैं ब्रजेश कुमार। <a href="https://twitter.com/hashtag/Sebichief?src=hash&amp;ref_src=twsrc%5Etfw">#Sebichief</a> <a href="https://twitter.com/hashtag/SEBI?src=hash&amp;ref_src=twsrc%5Etfw">#SEBI</a>… <a href="https://t.co/NCuui4Ra7L">pic.twitter.com/NCuui4Ra7L</a>
— Zee Business (@ZeeBusiness) <a href="https://twitter.com/ZeeBusiness/status/1838511392996909386?ref_src=twsrc%5Etfw">September 24, 2024</a></blockquote>
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The SEBI board is also likely to review the merchant bankers' regulations that define which activities they can take and which they cannot. Additionally, the net worth criterion for merchant bankers is likely to be raised from Rs 5 crore to Rs 50 crore. It was last revised in 1995. The regulator wants only serious players in the market. SEBI has observed that at times, merchant bankers are engaged in private placement activities of unlisted companies, advisory services for projects, and syndication of rupee term loans, which are outside the domain of SEBI. The regulator believes such activities may pose significant regulatory and systemic risks as such activities are outside its jurisdiction.

The long pending proposal of the performance validation agency may also go to the board for consideration. SEBI had floated a consultation paper on the same. An entity under NSE will be the first such agency. SEBI may initially allow it for investment advisors, research analysts, and algo makers. This will be voluntary for the market participants in order to get their claims authenticated.

Expanding the summary proceedings for intermediaries is another issue that the board may discuss and approve. There are certain cases of violations wherein it has been observed that the violations are obvious in nature or are either accepted by the intermediary or need minimal documents or evidence to corroborate the facts. So if such violations are covered under summary proceedings, it will enhance the board's ability to act swiftly in protecting the&nbsp;interest&nbsp;of&nbsp;investors&nbsp;and in maintaining the integrity,&nbsp;transparency, and efficiency of the securities market. It may address&nbsp;issues related to the expulsion of members from the exchange, non-payment of registration fees, and wrong claims of return and performance.

Another long-pending and much-discussed issue regarding light-touch regulations for passive funds is also likely to be brought before the board for discussion.

Considering the lesser risk inherent in managing passively managed MF schemes,&nbsp;the proposed&nbsp;MF&nbsp;Lite&nbsp;Regulations&nbsp;intend&nbsp;to&nbsp;reduce&nbsp;the compliance requirement, foster innovation, encourage competition, and promote the ease of entry for the MFs interested in launching only passive schemes. It is expected to promote ease of entry, encourage new players, reduce compliance requirements, increase penetration, facilitate investment diversification, increase market liquidity, and foster innovation. The proposal is to allow existing as well as new fund houses to enter the segment.

Another proposal about the New Asset Class is also likely to be taken up by the board. The new class will fill the gap between mutual funds (MFs) and portfolio management services (PMS). A minimum investment of Rs 10 lakh has been proposed for this New Asset Class, which will be riskier than mutual funds and will not be permitted to be advertised as a mutual fund product, but will be suitable for higher-risk taking investors earlier invested in the unregulated sphere. Such investors may now get a well-regulated entity. There was a demand for such kind of asset class as MFs allow investment from Rs 100 onwards, but PMSes and AIFs require minimum investments to the tune of Rs 50 lakh and Rs 1 cr respectively.

To deal with the persistent issue of insider trading, the SEBI board may consider expanding the scope of ‘connected person’. SEBI has&nbsp;observed that certain categories of persons, who are not covered in the scope of the&nbsp;definition&nbsp;of ‘connected&nbsp; persons‘ under existing&nbsp;regulations, may&nbsp;also&nbsp;be&nbsp;in&nbsp;a position to have access to UPSI from ‘ connected persons’ to a company, by the virtue of their close relationship with such ‘connected persons’. Such deemed connected persons, owing to their proximity and close relationship with the connected persons, are considered to be in a position where they can potentially indulge in insider trading. With the proposed regulation, it is intended that the relatives of a 'connected person' are also recognised as connected persons.&nbsp; The meaning of 'immediate relatives' is also being widened. The credit for this proposal goes to the insider trading case of a Delhi-based corporate group.

The board is also expected to discuss and approve regulations related to investment advisors (IA) and research analysts (RA), a move set to remove the condition of passing the base certification every three years and to relax the existing minimum qualification requirements for registration as IA or RA from a post-graduation to a graduate degree. The board may also dispense with the experience requirements for registration as IA and RA under the condition that they must possess relevant knowledge and skills desired to provide their services. The net worth criteria may also be relaxed for individuals. There may not be the requirement&nbsp;of any net worth for IAs and RA but for non-individuals, a condition of fixed deposit based on the number of clients may be imposed. Also, registration as both an investment adviser and a research analyst may be allowed and the fee structure may also be reviewed.

“There are more than two dozen items in the agenda for consideration of of board but it depends on how much time will be left for policy issues because the Hindenburg issue is likely to be discussed widely," said another source.

"The board will discuss the allegations and if sufficient disclosures have been made by the SEBI Chairperson, it may also discuss the issue of the employees' unrest. It was an unprecedented incident where almost half of the staff were out in protest against the top management," the source added.&nbsp;

A few other issues, related to FPIs and debt matters, may also come up to the board for discussion.&nbsp;&nbsp;

The Madhabi Puri Buch-led SEBI board is likely to discuss and approve various policy measures and issues, including serious allegations leveled by US-based research firm Hindenburg Research against her and a protest by the regulator's employees against its top management.


Brajesh Kumar