Executive Summary:
This circular, issued by SEBI on May 27, 2022, modifies the Standard Operating Procedure for Trading Member/Clearing Member defaults. It amends clause 4.25 of the July 1, 2020 circular to ensure equitable distribution of funds to investors. The circular is effective immediately, and requires exchanges, clearing corporations, and depositories to take specific actions.
Key Points / Main Content:
* **Modification of SOP for TM/CM Default:**
* Amends clause 4.25 of SEBI circular dated July 1, 2020 regarding the handling of Trading Member/Clearing Member defaults.
* Focuses on equitable distribution of funds among investors.
* **Settlement of Investor Claims:**
* SEs/CCs to settle claims of maximum number of clients via interim measures within 30 trading days of SCN.
* TMs must pay small investors from available funds and own resources under SEs supervision.
* Unencumbered deposits with SEs/CCs, after adjustments, will be used to settle investor credit balances, starting with the smallest amounts.
* Investors with credit balances up to Rs. 25,00,000 will be paid in full, subject to fund availability.
* Investors with credit balances over Rs. 25,00,000 will be paid pro-rata from remaining funds.
* Surplus funds with any SE/CC can be used to settle client balances with respect to other SEs.
* BGs of the TM shall be invoked and also the FDRs shall be encashed for utilisation.
* Client balances will be netted across exchanges to determine the final credit balance.
* TMs must provide proof of payment to clients and an undertaking excluding related parties from settlement.
* TMs must provide indemnity to the SEs to cover any shortfall in meeting investor claims, excluding those who have withdrawn their claims.
* **General Provisions:**
* All other provisions of the July 1, 2020 circular remain applicable.
* The circular is effective immediately.
* **Directives to Stock Exchanges, Clearing Corporations, and Depositories:**
* Bring the circular's provisions to the attention of their members/participants and disseminate on their websites.
* Amend relevant Byelaws, Rules, and Regulations as necessary.
* Communicate the status of implementation in their monthly development report to SEBI.
Impact Analysis:
* **Recognized Stock Exchanges, Clearing Corporations, and Depositories:**
* *Impact:* Must comply with the modified SOP for handling TM/CM defaults, focusing on equitable investor compensation. Requires changes to internal rules and communication with members.
* *Action Required:* Update Byelaws, Rules, and Regulations. Notify members/participants of the changes. Disseminate information on websites. Report implementation status to SEBI.
* **Trading Members and Clearing Members:**
* *Impact:* Subject to new procedures for handling defaults, including requirements to pay small investors and provide undertakings.
* *Action Required:* Understand and comply with the revised SOP, including payment obligations, providing undertakings, and furnishing proof of payments to clients.
* **Investors:**
* *Impact:* Benefits from a more equitable distribution of funds in case of TM/CM default, with priority given to smaller claims.
* *Action Required:* Be aware of the new procedures for claim settlement and provide necessary documentation, including withdrawal letters if applicable.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): A regulatory body for securities markets in India. The circular is issued by SEBI.
Recognised Stock Exchanges: Entities to whom the circular is addressed and who are directed to implement the provisions.
Recognised Clearing Corporations: Entities to whom the circular is addressed and who are directed to implement the provisions.
Depositories: Entities to whom the circular is addressed and who are directed to implement the provisions.
SEBI circular no. SEBIHOMIRSDDPIEACIRP2020115 dated July 1, 2020: A previous SEBI circular that specified the Standard Operating Procedure regarding Trading Member/Clearing Member defaults, which is being modified by this circular.
Trading Member/Clearing Member: Refers to members of stock exchanges or clearing corporations who are likely to default in repayment of funds or securities to its clients.
Securities and Exchange Board of India Act, 1992: The act under which SEBI derives its powers to issue the circular.
Securities Contract Regulation Act, 1956: The act under which SEBI derives its powers to issue the circular.
CIRCULAR
SEBI/HO/MIRSD/DPIEA/P/CIR/2022/72 May 27, 2022
To,
All Recognised Stock Exchanges
All Recognised Clearing Corporations
All Depositories
Dear Sir/Madam,
Subject: Modification to Standard Operating Procedure in the cases of Trading
Member / Clearing Member leading to default
1. SEBI vide circular no. SEBI/HO/MIRSD/DPIEA/CIR/P/2020/115 dated July 1, 2020
had specified the Standard Operating Procedure enumerating the steps to be taken
by the Stock Exchanges (“SEs”), Clearing Corporations (“CCs”) and Depositories
in cases where SE / CC is of the view that Trading Member / Clearing Member is
likely to default in repayment of funds or securities to its clients.
2. SEBI, in consultation with the Market Infrastructure Institutions, has decided to
modify clause 4.25 of SEBI circular no. SEBI/HO/MIRSD/DPIEA/CIR/P/2020/115
dated July 1, 2020 in order to provide equitable distribution of funds amongst
investors. Accordingly, clause 4.25 of the said circular stands modified as under:
Page 1 of 3Sr. No. Action Timeline
4.25 ISE / SEs / CCs shall endeavour to settle the claims of Within 30
maximum number of clients by way of interim trading days
from
measures, under their supervision prior to issuing
crystallization
show cause notice (SCN) for declaring the TM a
of balances
defaulter. The TM shall be instructed to pay small
investors out of available funds and own resources
(movable and immovable) under the supervision of the
ISE/ SEs.
Further, the unencumbered deposits available with the
SEs/ CCs, after adjusting for any dues of the SE / CC
and maintaining the minimum BMC, shall also be
utilised for settling the credit balance of investors
starting from the smallest amount. Such amount shall
be paid in full to all such investors having credit
balance up to the amount of Rs. 25,00,000/- (Rupees
twenty five lakh), subject to availability of funds.
Further, investors having credit balance of more than
Rs. 25,00,000/- (Rupees twenty five lakh) shall be paid
on pro-rata basis from the remaining funds.
Also, any surplus available with any SEs / CCs shall
be utilised for settling the credit balances of clients with
respect to other SEs. BGs of the TM shall be invoked
and also the FDRs shall be encashed for utilisation.
SEs / CC may settle such clients in tranches.For this
purpose, the balances of client will be netted across
exchanges to arrive at the final credit balance due to
such client.
The TM shall furnish the proof of payment to the
clients, to the SEs.
In this regard, the related parties of the TM shall not be
considered for settlement, for which the TM shall
provide an undertaking to the SEs/ CC. TM shall
provide indemnity to the SEs to make available the
funds to meet any shortfall in meeting investor’s claim
(other than those who have withdrawn their claim).
Clients withdrawing their claim will have to submit
unconditional withdrawal letter to the SEs.
Page 2 of 33. All other provisions specified in SEBI circular dated July 1, 2020 shall continue to
remain applicable.
4. Stock Exchanges, Clearing Corporations and Depositories are directed to:
4.1. bring the provisions of this Circular to the notice of their members /
participants and also disseminate the same on their websites.
4.2. make amendments to the relevant Bye-laws, Rules and Regulations, as may
be necessary; and
4.3. communicate the status of the implementation of the provisions of this
Circular in their monthly development report to SEBI.
5. This Circular shall be applicable with immediate effect.
6. 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 Contract (Regulation) Act, 1956 and Section 19 of the Depositories Act,
1996, to protect the interests of investors in securities and to promote the
development of and to regulate the securities markets.
7. This Circular is issued with the approval of competent authority.
8. This Circular is available at www.sebi.gov.in under the link “LegalCirculars”
Yours faithfully
Rachna Anand
General Manager
Tel. No: 022 26449582
rachnaa@sebi.gov.in
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