Sebi moves policy for joint inspection of brokers by MIIs to cut down disruption, improve supervision

Sebi also said that the MIIs shall set up an information sharing mechanism to exchange inspection observations of entities who hold multiple registrations with MIIs.

In a significant step towards ease of business for stock brokers and depository participants, regulator Sebi has issued a circular on August 7 mandating joint annual inspection instead of separate ones by Market Infrastructure Institutions (MIIs), to reduce disruption for brokers and ensure efficient supervision.

"Entities selected for annual inspections shall be inspected for all segments jointly by all exchanges along with their depository participant (DP) operations and clearing activity", Sebi's circular said.

Moneycontrol was the first to report that the capital market regulator is mulling a less cumbersome mechanism of inspections for brokers.

Sebi also said that the MIIs shall set up an information sharing mechanism to exchange inspection observations of entities who hold multiple registrations with MIIs. Stock exchanges, depositories, and clearing corporations are considered as Market Infrastructure Institutions (MIIs).

The circular said inspection criteria will focus on high-risk entities based on penalties and risk scores, and top 25 ones paying high and recurring penalties over poor reporting of compliance issue shall be inspected irrespective of when they were last inspected.

Top 25 entities based on investor complaints and arbitration cases by investors - as percentage of active clients - shall be inspected irrespective last inspection. Similarly, inspection criteria are streamlined to focus on high-risk entities based on penalties, investor complaints, and risk scores.

Entities that do not fall under any of the above categories shall be inspected by the MIIs at least once in three years, Sebi said.

These entities have also been advised to frame a joint Standard Operating Procedure (SOP) by November 01, 2025 for detailed specifications of inspection criteria, information sharing mechanism. Sebi also said it will be designating one MII as a ‘Lead MII’ to initiate enforcement action after inspections. The circular shall come into force with effect from December 01, 2025, said Sebi.

Further, the capital market regulator has also ensured that MIIs have the prerogative to carry out special inspections based on certain triggers.

"MIIs shall have the prerogative to carry out special purpose/limited inspections based on any triggers like patterns found during investor complaint resolution/Arbitration, complaints on specific malpractices of a broker or references from various authorities. The inspection shall be irrespective of the fact of when the last inspection was carried out," stated the Sebi circular.