The Securities and Exchange Board of India (Sebi) is likely to make it mandatory for exchanges to transfer 25 per cent of annual profits to their clearing corporations to guarantee settlement of trades.
The decision is expected to be announced on Thursday when the board of the capital market regulator is scheduled to meet in Mumbai.
The issue first came up in June 2012, when exchanges were directed to transfer 25 per cent of their profits every year to a fund of their clearing corporation, which clears and settles trades on that exchange to guarantee settlement of trades.
The regulator was of the view that such a ‘core’ fund should be funded by the profits of the exchange and not by margins deposited by the members of the exchange, which a member can withdraw in specified situations.
The idea of such a core fund for the equity market was triggered by the Rs. 5,600-crore settlement scam at the National Spot Exchange Ltd (NSEL), which saw the Settlement Guarantee Fund of the bourse vanish within days.
Stock exchanges, however, were not comfortable with the Sebi decision and a committee was formed to look into the matter. The committee report was placed before the Sebi board in August 2015 and a decision was kept in abeyance for seeking public comments.
“The issue has been under discussion for a couple of years, and now, based on all the feedback it has received, Sebi is of the view that exchanges should contribute 25 per cent of their profits every year to such a fund of their clearing corporation,” said a Sebi official. He declined to be identified as the decision has not yet been announced officially.
Meanwhile, exchanges have already started provisioning for such a transfer in their books of accounts. The National Stock Exchange and BSE even reported a fall in profit for the year 2015-16 due to such provisioning.
On a different note, Sebi is also expected to amend the norms for settlement of cases through consent in matters wherein the regulator has initiated prosecution proceedings.
“The idea is that this will reduce the time spent in litigation procedures in cases wherein the regulator and the alleged wrongdoer are able to agree on the settlement terms,” said the Sebi official quoted earlier.
Consent mechanism refers to an out-of-court settlement procedure wherein entities are directed to pay a settlement amount without admission or denial of any wrongdoing.
Among other matters, the board is also likely to make disclosures related to participatory notes (P-notes) more stringent and amending the accounting policies of Sebi for investment of its own surplus funds.
The regulator is also expected to ask the government for an amendment to the Sebi Act to give discretionary powers to the adjudicating officer to decide on the penalty amount. The issue is pending before a Supreme Court Bench.
