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Amended guidelines for Liquidity Enhancement Scheme in the Equity Cash and Equity Derivatives Segments

Amended guidelines for Liquidity Enhancement Scheme in the Equity Cash and Equity Derivatives Segments

Market intermediaries and brokers are rewarded for generating liquidity and investor interest in securities with restricted trading activity under the LES scheme (Liquidity Enhancement Scheme) for a set duration of time. On the major exchanges, there are around 2,000 illiquid stocks.

Securities qualified for the schemes must have “a mean impact cost more than or equivalent to 2% for an order size of Rs 1 lakh computed over the previous 60 trading days.

Furthermore, the schemes will be applicable to securities that are ‘permitted to trade.’

According to the authority, the schemes can be terminated at any moment with a 15-day notice. SEBI further said that stock exchanges may reinstate LES on stocks that fulfil the qualifying requirements.

Revised Guidelines for Liquidity Enhancement Scheme

On September 1, 2021, the SEBI (Securities and Exchange Board of India) issued a circular to amend a prior liquidity enhancement scheme (LES) circular CIR/MRD/DP/14/2014 dated April 23, 2014, which allowed stock exchanges to incorporate liquidity enhancement schemes in the equity cash and equity derivatives segments to improve liquidity in illiquid securities. Stock exchanges will now be required to obtain prior consent from their regulatory board before starting a programme following this new rule. In a circular, SEBI stated that these alterations were made based on experiences of the stock exchange.

Changes made by SEBI to the Liquidity Enhancement Scheme Framework: A brief Overview

Earlier, the market regulator has permitted stock exchanges to use liquidity enhancement programmes in equity derivatives and equity cash segments to help illiquid assets become more liquid.

Meantime, SEBI stated in this new regulation that stock exchanges might impose LES on any security. Furthermore, it stated that after the scheme expires, stock exchanges may revive it on the same security.

Previously, SEBI permitted stock exchanges to provide LES plans on any securities for a maximum of three years. To clarify, stock exchanges might reinstate this scheme on the same security after it was discontinued if it had been less than three years after it was first introduced on that security.

SEBI further said that, under clauses 3.1 and 4.1 of the Circular, the regulating body’s approval of stock exchanges will be valid for only a year. Thus, the government agency may continue to provide permission on an annual basis until the programme is no longer operational.

Clauses 3.1 and 4.1 of said Circular have been amended as follows:

“3.1 The Scheme must get prior permission from the Stock Exchange’s Governing Board, which would be valid for 1 year. The Stock Exchange’s Governing Board may provide annual permission until the scheme is fully operational. The Governing Board will also monitor its execution and outcome at periodic intervals.

4.1. Liquidity boosting strategies for any securities will be introduced by the Stock Exchange. The scheme can be reintroduced on the same security once it has been discontinued.”

Previous to this change, stock exchanges had to get board permission before implementing LES programmes. In addition, the board reviewed the scheme’s outcome and execution at quarterly intervals.

SEBI’s Stock Exchange Instructions

This revision, according to the market regulator, is similarly applied to all current schemes. Every other requirement stated in the SEBI circular of April 23, 2014 shall remain unchanged.

SEBI also issued directives to stock exchanges, instructing them to:-

  • Create new procedures and install essential systems to ensure the efficient and successful execution of this change.
  • Initiate newer modifications to the rules and regulations, as well as any necessary bye-laws, in order to appropriately execute this judgement.
  • Use the provisions of this circular to alert stock exchanges, their brokers, and trading participants. They also must make it available on the company’s website.

Furthermore, the above circular is released in the exercise of powers bestowed on the SEBI as per Section 11 (1) of the Securities and Exchange Board Exchange Board of India Act, 1992, r/w Section 10 of the Securities Contracts (Regulation) Act, 1956, in order to safeguard the interests of shareholders in securities, as well as to promote and regulate the securities market.

Circular attached

The circular could also be viewed on the SEBI website, www.sebi.gov.in.


Concluding remarks

The Liquidity Enhancement Scheme was established by SEBI to enhance liquidity in illiquid derivatives and stock cash. Since its inception, the scheme has made a significant contribution to lowering trade effect costs. BSE, for example, has utilised this strategy to increase volume in its derivatives section. Now, hopefully this improvement to the LES framework enables more effective liquidity management.

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Akansha Gupta

Akansha is a Delhi-based lawyer who is actively involved in publishing articles on a plethora of aspects of Indian and International laws. She holds Master in law (LL.M) focused on Business Laws from Amity University, Noida. Having expertise in the same, she has authored several publications on legal topics related to corporate, M&A and commercial laws.

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