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