SEBI issues Framework for Surveillance Lapse Penalty

Recently, SEBI introduced a framework on “financial disincentives” that targets market infrastructure institutions. 

New Provision: Under this framework, there is a provision for imposing penalties ranging from ₹1 lakh to ₹1 crore for each surveillance lapse during the financial year.

• The new framework will be applicable from July 1. 

What Is Market Surveillance? 

• Market surveillance involves preventing and investigating abusive, manipulative, or illegal trading practices in securities markets.
• Purpose: It ensures orderly markets by fostering confidence among buyers and sellers in the fairness and accuracy of transactions.
• Significance: Effective market surveillance is crucial for maintaining market order, encouraging investment, and supporting economic growth.
• Providers: Both the private sector and the public sector can perform market surveillance activities.

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Market Surveillance by MIIs

Surveillance by Market Infrastructure Institutions (MIIs) is to continuously monitor the security market. It provides crucial information that aids the regulator in enforcing market rules and regulations.

Their responsibilities include:

• Day-to-day monitoring of market activities.
• Reporting abnormal or suspicious activities.
• Monitoring the conduct of market intermediaries.
• Generating and processing alerts.
• Seeking trading rationale.
• Carrying out snap analysis

About Surveillance lapse 

• A surveillance lapse includes any failure observed in carrying out surveillance activities.
• The activities include inadequate or non-reporting of these activities according to agreed timelines.
  • It also includes the partial or delayed execution of any surveillance-related SEBI decision or communication.

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Penalty Structure for Surveillance Lapses Under new framework

• First Instance:
  • MIIs with annual revenue < ₹300 crore: Penalty of ₹1 lakh.
  • MIIs with annual revenue > ₹1,000 crore: Penalty of ₹25 lakh.
• Second Instance:
  • Penalty ranges from ₹2 lakh to ₹50 lakh, based on the annual revenue.
• Third Instance and Beyond:
  • Penalty ranges from ₹4 lakh to ₹1 crore, based on the annual revenue.

Impact of Market Surveillance Lapse

• Trust and Confidence: Lapses in market surveillance of the Securities Market can erode investor trust and confidence in the securities market. 
• Manipulative practices:  Market surveillance lapses can cause rise in manipulative practices, leaving the market vulnerable.
• Unfair playing: lapses of market surveillance can create an unfair playing field for investors.

Exceptions of new Framework

• New framework of SEBI is not Applicable When:
  • The lapse has a broad market impact.
  • The lapse results in significant investor losses.
  • The lapse compromises market integrity on a large scale

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