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SEBI proposes client code modification by market makers of ETFs without penalty

SEBI has proposed client code modification by the Market Makers to the Asset Management Company like associated ETF scheme, without levy of any penalty in order to enable market makers to transact in the basket for securities underlying the ETF against equivalent transaction in units of ETF and to transfer the net obligation of such transactions to the ETF for unit creation or redemption.

June 20, 2025 / 22:15 IST
Market Makers are permitted to transact in the basket for securities underlying the ETF against equivalent transaction in units of ETF and transfer the net obligation of such transaction in ETFs for unit creation or redemption.

Market Makers are permitted to transact in the basket for securities underlying the ETF against equivalent transaction in units of ETF and transfer the net obligation of such transaction in ETFs for unit creation or redemption.

As an Ease of Doing Business measure, market regulator Securities and Exchange Board of India (SEBI) has proposed that client code modifications may be permitted from the market makers to the mutual fund associated exchange traded fund (ETF) scheme without levy of any penalty to enable the net settlement by the market makers.

Stock exchanges had made a representation to the SEBI regarding this. SEBI has also proposed that, penalties on client code modification by certain category of clients may also not be made applicable if the client code modification is carried out from one unique client code (UCC) to another provided that the UCCs are under the same PAN.

SEBI has also proposed that client code modification by other category of investors may be permitted without imposing any penalty. SEBI has proposed that client code modification by Institutional clients like banks, domestic financial institutions, insurance companies, pension funds, statutory bodies may be permitted without any penalty.

In the non-institutional clients, clearing their trades through custodians like portfolio management services (PMSs), Non-Resident Indians (NRIs), individuals or proprietorship firms, Hindu Undivided Families (HUFs), body corporates, etc., who have more than one UCC under the same Permanent Account Number (PAN), should also be allowed modification of client code without attracting any penalty.

Stock Exchanges have submitted to SEBI that if the PAN of the original client code and the PAN of modified client code is same then there is no change with respect to trade obligation or ownership pre and post client code modification. The same is currently applied in permitting client code modification for FPIs and for the different schemes under the same Mutual Funds, without levy of any penalty. Based on the feedback SEBI has proposed these relief measures.

Market Makers are permitted to transact in the basket for securities underlying the ETF against equivalent transaction in units of ETF and transfer the net obligation of such transaction in ETFs for unit creation or redemption. SEBI consultation paper stated, in order to enable the net settlement by the market makers, change in client code without levy of any penalty needs to be permitted. SEBI has sought comments from stakeholders by July 11, 2025.

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Brajesh Kumar
first published: Jun 20, 2025 10:15 pm

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