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SEBI’s proactive steps provide booster dose to capital market in pandemic times

From developmental work to strengthening the regulatory or compliance framework, the SEBI, MIIs and Intermediaries seem to have worked well together, despite the constraints, to ensure minimum hindrances in the stock market and related activities.

May 13, 2021 / 10:20 PM IST
Taking note of the continuing abnormally high market volatility, SEBI announced a few measures with the objective to ensure orderly trading and settlement, effective risk management and maintenance of market integrity.

Taking note of the continuing abnormally high market volatility, SEBI announced a few measures with the objective to ensure orderly trading and settlement, effective risk management and maintenance of market integrity.

If the pandemic has not been able to bare its disruptive fangs at one aspect of the economy, it is the capital and commodity market.

The Securities and Exchange Board of India (SEBI), the Market Infrastructure Institutions (MIIs) and the Intermediaries have taken steps, as well as adhered to several measures, which have not just ensured continuity, but has also witnessed increased client participation in the markets.

From developmental work to strengthening the regulatory or compliance framework, the SEBI, MIIs and Intermediaries seem to have worked well together despite the constraints, to ensure that there were least impediments in the functioning of the stock market and related activities.

Review of margin framework for cash and derivative segment

In consultation with the Risk Management Review Committee (RMRC) of SEBI, a comprehensive evaluation of the margin framework was done by the market regulator, announced on February 25, 2020, for implementation with effect from May 1, 2020.

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Measured in anticipation of significant volatility

Taking note of the continuing abnormally high market volatility, SEBI announced a few measures with the objective to ensure orderly trading and settlement, effective risk management and maintenance of market integrity.

These measures were effective for a period of one month, from March 23, 2020, but based on its periodic review, they were continued till November 26, 2020.

For stocks in the futures and options (F&O) segment, the market wide position limit (MWPL) was revised to 50 percent of existing levels and the margin rate in the cash market for such stocks was increased to minimum 40 percent in a phased manner between March 23 to March 30, 2020.

The non-F&O stocks also witnessed a similar increase in margin rates.

Flexing of dynamic price bands and revision in position limits of index derivatives, were also part of the measures.

Srinath Sridharan, independent market expert and columnist, told Moneycontrol: "SEBI has clearly stuck to its ‘consumer protection’ stance by removing any ambiguity around clients’ securities pledges. Whereas on the short selling topic, more policy attention needs to be shown to avoid undue speculative trades, the regulatory stance on F&O needs to be consistent on a theme based on the risks F&O clients carry”.

Acceptance of collateral in the form of securities only by way of pledge

Considering several defaults by brokers, including the large and high profile KARVY Stock Broking Ltd., a framework was devised by SEBI to mitigate the risk of misappropriation and misuse of clients’ securities by the trading member (TM) or the clearing member (CM).

Originally scheduled to be implemented from June 1, 2020, but eventually implemented from September 1, 2020, the new framework mandated the TM/CM to accept collateral in the form of securities only by way of ‘margin pledge’ created in the depository system.

The transfer of securities to the demat account of the TM/CM for margin purposes was prohibited.

The depositories provided a separate pledge type, namely a margin pledge for this purpose, and the TM/CM have had to open a separate demat account for accepting such a margin pledge.

Easing the process by enabling online KYC

To simplify the process of Know Your Client (KYC) for investors and intermediaries, SEBI on April 24, 2020, allowed the use of technological innovations to facilitate online KYC. It permitted the use of ‘eSign’ mechanism for affixing the cropped signature on the KYC form and on the copy of the originally verified document (OVD) of the investor.

It enabled the intermediaries to implement their app that could be used for online KYC and video in-person verification.

In fact, the SEBI Chairman also attributed the substantial addition of investors to the stock market - nearly 1 crore in less than 12 months - to this ease of doing business, namely online KYC.

Anil Choudhary, Partner with Finsec Law lawyer, who interacts with SEBI officials on a regular basis, told Moneycontrol: "SEBI has been a very pro-active regulator during this time of crisis. It has not only ensured that markets run smoothly, but also guaranteed that the regulations are modified keeping in mind the ever-changing ground realities due to COVID-19. While its own officers have suffered the brunt of the virus, the institution of SEBI did not lag. They have supported not only the listed companies and market intermediaries, but also the investors by making timely and necessary interventions.”

Collection of upfront margins

SEBI on July 20, 2020, prescribed a framework for the purpose of verification of upfront collection of margins from clients and levy of penalty.

Under the framework, applicable from December 1, 2020, the clearing corporations send a minimum of four snapshots of client wise margin requirements to the TMs/CMs for them to know the intraday margin requirements.

The member must report the margin collected from each client at the end of day and the peak margin collected during the day.

This peak margin obligation of clients across snapshots has been adopted in a phased manner, i.e. four phases with each phase, consisting of three months starting with 25 percent of peak margin obligation going up to 100 percent from September 2021.

Allowing trade from alternative place

SEBI has also allowed brokers to trade from alternative places, instead of a registered place. This step offers smooth trading opportunities to clients and brokers.

Limits on creeping acquisition increased

With a view to further facilitate fund raising by the companies, SEBI vide its notification dated June 16, 2020, relaxed the obligation for making open offer for creeping acquisition under Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code).

The relaxation allows creeping acquisition up to 10 percent instead of the existing 5 percent, for acquisition by promoters of a listed company for financial year (FY) 2020-21.

The relaxation is specific and limited to acquisition by way of a preferential issue of equity shares and therefore excludes acquisitions through transfers, block, and bulk deals.

Reduce timeline for buyback

To enable relatively quicker access to capital, SEBI on April 23, 2020, temporarily relaxed the period of restriction from one year to six months for buyback.

It is a way of rewarding shareholders by buying back the shares as dividend payment results in double taxation and buy back thus becomes tax efficient, especially for the higher tax bracket.

It allowed a lesser gap so that companies could reward their shareholders during these stressful times by ensuring that money is there in the shareholder's hands.

Internationally, there is no prescribed time gap for buyback and companies can buy back anytime.

Enhanced monitoring

The stock exchanges have now introduced weekly submission of daily ‘Client Level Cash or Cash Equivalent Balances’ and daily reporting of bank balances as part of its efforts to safeguard client funds.

Previously, brokers needed to report client fund and securities balances monthly. Now, stock exchanges have also taken an undertaking from the TM to access information of all bank accounts maintained by them, as part of its monitoring process.

Order-based surveillance measure

Stock exchanges have also put in place a new order-based surveillance mechanism to deter pseudo traders, especially algo traders from the market.

The penal charges for high order to trade ratio have been increased at the higher end to discourage excessive orders.

Further actions, such as disablement have been introduced for both trading members and client level, based on order trade ratio, and count of order modifications.
Tarun Sharma
first published: May 13, 2021 10:20 pm

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