Big relief for brokers in works; SEBI working on 'one event, one penalty' mechanism

Big relief for brokers in works; SEBI working on 'one event, one penalty' mechanism

As part of its attempts to make the regulatory framework more industry-friendly, the Securities and Exchange Board of India (SEBI) is working on a ‘one event, one penalty’ mechanism that would significantly reduce the penalty burden of broking firms by capping the number of times a non-compliant entity can be penalised for the same violation.

According to sources familiar with the development, SEBI is deliberating on the matter with exchanges to design a framework that does not allow different bourses to levy separate penalties for a single event of non-compliance.

“SEBI is considering the concept of ‘one event, one penalty’ as part of ease of doing business for brokers,” said a source on conditions of anonymity.

This assumes significance as currently if a broking firm fails to comply with regulatory or statutory requirements within the prescribed time limit, then all exchanges impose separate penalties on the defaulting entity.

“To ensure ease of doing business for stock brokers, penalties levied on stock brokers are being reviewed with a view to standardize the penalty structure across exchanges,” said SEBI while responding to a query by Moneycontrol.

Simply put, there could be a single violation but the penalties imposed could be more than one as most broking firms are members of all the exchanges in the equity and commodity space.

For instance, a broking firm might have failed to file its annual report or some other compliance report within the prescribed time limit and all exchanges would impose separate penalties thereby significantly pushing up the cumulative amount of penalties.

SEBI, however, plans to put in place a system wherein only one exchange will be able to penalise the broking firm. For this, the regulator is deliberating on the concept of a ‘designated exchange’ wherein broking firms can be allocated exchange A or B that will have the right to impose the penalty.

Incidentally, the concept of designated exchange for brokers exists currently but is mostly for administration and supervision purposes only. SEBI could tweak the framework to allow the designated exchange to levy a penalty as well.

According to another source, two departments within SEBI -- one that looks at regulation of exchanges, clearing corporations, depositories and the other that regulates brokers -- are working on the plan, which is expected to be finalised by June.

“The intent of the regulator is not to impose a penalty and earn out of it but to improve the behaviour of the brokers. After developing a good off site mechanism, violations are easy to track and are flagged to the concerned broker. This has improved compliance and also the number of enforcement actions have gone down,” said the source.

Brokers, exchanges and SEBI have together identified around 300 types of violations where regular penalties are imposed or other actions are taken. The deliberations would try to bring down the number of violations while standardising the quantum of penalties.

“There are incidents where brokers have no control but face penalty, like if a client has given margin which we try to upload but at times due to slow system or technical issue, we are not able to upload. In that case too, clearing corporations impose penalty,” said a market participant.

Another industry source said that quite often penalties are imposed only on account of a difference of opinion or judgment.

“Take the case of a technical glitch. A broker might not have considered the event as a technical glitch and hence would not file any report. But six months later, during the course of a routine inspection, the inspection team might view it as a technical glitch. In such cases, the cumulative penalty could go up to Rs 40 lakh,” he said.

“Instead of a penalty system, if there can be a point system, it will be good for industry. In that case, violations can be counted, and after certain points, penalties can be imposed,” he added.

Meanwhile, there is also a plan to create a dedicated platform where all brokers can do the compliance related filings and exchanges can take note of that. This is also part of Ease of Doing Business framework for brokers. Exchanges are working on it and a dozen compliances are being tested initially.

“The development of common portal is under process to ensure single filing by brokers across exchanges. SEBI is also taking steps to increase voluntary compliance by stock brokers,” said the SEBI statement.

SEBI, however, declined to provide any timeline for the same.