Executive Summary:
This SEBI circular mandates Stock Exchanges, Clearing Corporations, and Depositories (MIIs) to establish a Code of Conduct and Institutional Mechanism to prevent fraud and market abuse, aligning with PIT Regulations. MIIs must formulate a code of conduct, implement internal controls, and establish inquiry procedures. Implementation status is to be communicated to SEBI through the Monthly Development Report. The circular takes immediate effect.
Key Points / Main Content:
Code of Conduct:
* MIIs must formulate a Code of Conduct to regulate and monitor trading by designated persons and their immediate relatives, adhering to PIT Regulations Schedule C minimum standards.
* The MD/CEO is responsible for framing the code, with the Board ensuring compliance.
* Listed MIIs must adopt Schedule B standards for trading in their own securities and Schedule C for other securities.
* MIIs must designate a compliance officer to administer the Code of Conduct.
* The Board, with the compliance officer, will specify designated persons covered by the code, based on their role, access to unpublished price-sensitive information, seniority, and professional designation, per Regulation 9(4) of the PIT Regulations.
Institutional Mechanism:
* The MD/CEO must establish effective internal controls to ensure compliance with regulations and circulars, preventing fraud and market abuse.
* The Board must ensure the MD/CEO's compliance with the above and the compliance officer must administer the internal controls.
* The Regulatory Oversight Committee must review compliance annually and verify the effectiveness of internal controls.
* MIIs must formulate written policies and procedures, approved by the Board, for inquiry into suspected fraud or market abuse by designated persons and their immediate relatives, supervised by the Regulatory Oversight Committee.
* MIIs must initiate inquiries upon becoming aware of suspected illegal or unethical practices and promptly inform the Board.
* MIIs must have a whistleblower policy protecting employees reporting fraud or market abuse.
Implementation and Definitions:
* Undefined terms in the circular will have the meanings defined in specified Acts and Regulations.
* MIIs must implement the circular, amend relevant bylaws, rules, and regulations, and disseminate on their website.
* MIIs must communicate the status of implementation to SEBI through their Monthly Development Report.
Impact Analysis:
Stock Exchanges, Clearing Corporations, and Depositories (MIIs):
* Impact: Required to establish and implement a Code of Conduct and Institutional Mechanism for preventing fraud and market abuse.
* Action Required: Formulate and implement a Code of Conduct, appoint a compliance officer, establish an Institutional Mechanism, formulate written inquiry procedures, implement a whistleblower policy, amend relevant bylaws, rules and regulations, disseminate information on their website, and report implementation status to SEBI through the Monthly Development Report.
MD/CEO of MIIs:
* Impact: Responsible for framing the Code of Conduct and establishing internal controls.
* Action Required: Frame the Code of Conduct and establish adequate and effective internal controls.
Board of Directors of MIIs:
* Impact: Responsible for ensuring compliance by the MD/CEO and overseeing the effectiveness of internal controls and inquiry procedures.
* Action Required: Ensure the MD/CEO frames the Code of Conduct, establish internal controls, and approve written policies and procedures for inquiry.
Compliance Officer of MIIs:
* Impact: Responsible for administering the Code of Conduct and internal controls.
* Action Required: Administer the Code of Conduct and internal controls, and assist the Board in specifying designated persons.
Regulatory Oversight Committee of MIIs:
* Impact: Responsible for reviewing compliance and verifying the effectiveness of internal controls.
* Action Required: Review compliance with the circular annually and verify the effectiveness of internal controls.
Designated Persons and Immediate Relatives of Designated Persons of MIIs:
* Impact: Subject to the Code of Conduct and inquiry procedures.
* Action Required: Comply with the Code of Conduct.
SEBI:
* Impact: Oversees implementation of the circular and receives implementation reports.
* Action Required: Review Monthly Development Reports from MIIs.
Key Entities Referenced
Securities and Exchange Board of India: The regulatory body issuing the circular.
Stock Exchanges: Entities to whom the circular is addressed; regulated exchanges.
Clearing Corporations: Entities to whom the circular is addressed; responsible for clearing and settlement.
Depositories: Entities to whom the circular is addressed; responsible for holding securities.
Committee on Fair Market Conduct: A committee whose report led to changes in SEBI regulations.
SEBI Prohibition of Insider Trading Regulations, 2015: Regulations referred to as PIT Regulations concerning insider trading.
Securities Contracts Regulation Act, 1956: Act referred to for definitions of terms used in the circular.
Securities and Exchange Board of India Act, 1992: Act referred to for definitions of terms used in the circular.
भारतीय प्रततभूतत और तितिमय बोर् ड
Securities and Exchange Board of India
CIRCULAR
SEBI/HO/MRD/DCAP/CIR/P/2021/23 March 03, 2021
To,
All recognized Stock Exchanges, Clearing Corporations and Depositories
Sir / Madam,
Subject: Code of Conduct & Institutional mechanism for prevention of Fraud
or Market Abuse
1. Pursuant to the report of the Committee on Fair Market Conduct (‘Committee’),
set up inter-alia to recommend appropriate Institutional Mechanism to ensure
accountability of the management / designated persons in case of negligence /
failure, necessary changes have been carried out in SEBI (Prohibition of
Insider Trading) Regulations, 2015 (herein after referred as ‘PIT Regulations’).
2. Based on the above, it has been decided that the Code of Conduct and
Institutional Mechanism for prevention of fraud or market abuse shall be
applicable to Stock Exchanges, Clearing Corporations and Depositories (herein
after collectively referred as ‘MIIs’) also, on the lines of Regulation 9(1) to 9(4)
of PIT Regulations.
3. Accordingly, MIIs shall do the following:
3.1. Formulate a Code of Conduct to regulate, monitor and report trading by
their designated persons and immediate relative of designated persons
towards achieving compliance with the PIT Regulations, by adopting the
minimum standards set out in Schedule C to the PIT Regulations.
3.2. Managing Director (MD) / Chief Executive Officer (CEO) of the MII shall
be obligated to frame the referred code of conduct. The Board of Directors
may ensure the compliance by MD / CEO in this regard.
Explanation – For the avoidance of doubt it is clarified that a MII, which is
listed, is already required to adopt minimum standards set out in Schedule
B of PIT regulations. Further, such MII shall adopt minimum standards as
set out in Schedule B of PIT regulations with respect to trading in its own
securities and in Schedule C with respect to trading in other securities.
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3.3. MII shall identify and designate a compliance officer to administer the
aforesaid code of conduct.
3.4. The Board of Directors of MII, in consultation with the aforesaid
compliance officer, shall specify the designated persons to be covered by
the code of conduct on the basis of their role and function in the
organisation and the access that such role and function would provide to
unpublished price sensitive information in addition to seniority and
professional designation and shall include the position / designation as
specified in the Regulation 9(4) of the PIT Regulations.
4. MIIs shall put in place an Institutional Mechanism for prevention of fraud or
market abuse covering the following:
4.1. MD / CEO of the MII shall put in place adequate and effective system of
internal controls to ensure compliance with the regulations and circulars
issued by the Board from time to time, to prevent fraud or market abuse
by MII or its designated persons and immediate relatives of designated
persons.
4.2. The Board of Directors of the MII shall ensure that the MD / CEO ensures
compliance with Para 3 and Para 4.1 above. The compliance officer of the
respective MII shall administer the internal controls to prevent fraud or
market abuse by designated persons and immediate relatives of
designated persons of the MII.
4.3. The Regulatory Oversight Committee of the MII shall review compliance
with the provisions of this Circular at least once in a financial year and
shall also verify that the systems for internal control are adequate and are
operating effectively.
4.4. MII shall formulate written policies and procedures for inquiry in case of
suspected fraud or market abuse by its designated persons and
immediate relatives of designated persons, which shall be approved by its
Board of Directors. Any enquiry / investigation against the designated
persons and immediate relatives of designated persons of the MII may be
undertaken under the supervision of Regulatory Oversight Committee
comprising of PIDs and independent external expert with consideration of
avoidance of conflict of interest, if any, so as to ensure maximum fairness
and transparency.
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Securities and Exchange Board of India
4.5. MII shall initiate appropriate inquiry upon becoming aware of any illegal or
unethical practices or transactions of suspected fraud or market abuse by
its designated persons and immediate relatives of designated persons
and promptly inform its Board of Directors of such suspected fraud or
market abuse and results of the inquiry.
4.6. MII shall have an effective whistler-blower policy to enable stakeholders,
including employees to freely communicate their concerns about illegal or
unethical practices and report instances of fraud or market abuse or any
suspicion of fraud or market abuse.
4.7. MII shall ensure that the policy framed under Para 4.6 provides for
suitable protection against any discharge, termination, demotion,
suspension, threats, harassment, directly or indirectly or discrimination
against any employee who reports instances of fraud or market abuse or
any suspicion of fraud or market abuse.
5. Words and expressions used but not defined in this Circular shall have the
same meanings as may be defined in Securities Contracts (Regulation) Act,
1956 or the Securities and Exchange Board of India Act, 1992 or the
Depositories Act, 1996 or Regulations made thereunder i.e. Securities
Contracts (Regulation) (Stock Exchanges and Clearing Corporations)
Regulations, 2018, SEBI (Depositories and Participants) Regulations, 2018,
PIT Regulations, SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003, unless the context requires
otherwise.
6. MIIs are directed to:
6.1. take necessary steps to put in place systems for implementation of the
circular, including necessary amendments to the relevant bye-laws, rules
and regulations for the implementation of the above and disseminate the
same on their website;
6.2. communicate to SEBI the status of implementation of the provisions of
this circular through their Monthly Development Report.
7. This circular is issued in exercise of the powers conferred under Section 11(1)
of the Securities and Exchange Board of India Act 1992, read with Section 10
of the Securities Contracts (Regulation) Act, 1956 and Section 19 of the
Depositories Act, 1996, to protect the interests of investors in securities market
and to promote the development of, and to regulate the securities market.
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Securities and Exchange Board of India
8. The circular is available on SEBI website at www.sebi.gov.in at “Legal →
Circulars” and shall come into force with immediate effect.
Yours faithfully,
Sudeep Mishra
General Manager
Market Regulation Department
+91-22-26449365
sudeepm@sebi.gov.in
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