SEBI

SEBI Issues Circular on Modified SOP on Defaulting Members

On 27th May 2022, vide circular number SEBI/HO/MIRSD/DPIEA/P/CIR/2022/72, the Securities and Exchange Board of India (SEBI) has made modifications to the Standard Operating Procedure (SOP), laying down the procedure to be adopted by the Stock Exchanges, Clearing Members and Depositories while dealing with the possible defaults from the end of the trading and clearing members.    

Who Are The Entities To Whom The Circular On Modified SOP On Defaulting Members Is Applicable?

The circular titled “Modification to Standard Operating Procedure in the cases of Trading Member / Clearing Member leading to default” is applicable to the following entities:

1. All Clearing Corporations
2. All Recognised Stock Exchanges
3. All Depositories

Highlights of the Circular on Modified SOP on Defaulting Members  

Background

Earlier on 1^st July 2020, SEBI vide circular number SEBI/HO/MIRSD/DPIEA/CIR/P/2020/115 had laid down the Standard Operating Procedure (SOP) specifying the steps to be taken by the Stock Exchanges, Clearing Corporations and Depositories in cases where they are of the view that Trading Member or Clearing Member is likely to default in the repayment of funds or securities to its clients.

Modified SOP on defaulting members

SEBI^[1], after consultation with the Market Infrastructure Institutions, has decided to come out with a modified SOP on defaulting members wherein clause 4.25 will be modified of the SEBI circular number SEBI/HO/MIRSD/DPIEA/CIR/P/2020/115 dated 1st July 2020 with a view to providing an equitable distribution of funds among the investors.

The following changes were introduced under the modified SOP on defaulting members:

Within a duration of 30 days from the crystallization of balances, the Initiating Stock Exchange or the Stock Exchange or the Clearing Member shall make efforts to settle the claims of maximum number of clients by employing interim measures under their supervision before they issue show cause notice declaring the trading member a defaulter.

The trading member will then be instructed to pay small investors from the available funds and own resources, both movable and immovable, under the supervision of initiating stock exchanges or the stock exchanges.

The unencumbered deposits available with the stock exchanges or clearing corporations shall be utilised for settling the credit balance of the investors, starting from the smallest amount. Such settlement will be carried out after the adjustment of dues of the stock exchange or clearing corporation and maintaining the base minimum capital (BMC).

Such amount will be paid in full to all those investors who have a credit balance up to an amount of Rupees 25,00,000 (rupees twenty-five lakh), subject to the availability of funds. On the other hand, the investors having a credit balance of more than Rupees 25, 00,000 (rupees twenty-five lakh) shall be paid on a pro-rata basis from the remaining funds.

If there is any surplus amount available with any of the stock exchanges or the clearing corporations, then it shall be used for settling the balances of the client with respect to other Stock exchanges. Further, Bank Guarantees of the trading member shall be invoked and also the Fixed Deposit Receipts shall be used for utilisation. The stock exchanges or clearing corporation can settle such clients in tranches. For this purpose, the balances of the clients will be netted across the stock exchanges in order to arrive at the final credit balance that is due to such clients.

The proof of payments to the clients and to the stock exchanges shall be furnished by the trading member.

For these purposes, the related parties of the trading member shall not be considered for settlement for which the trading member has to provide an undertaking to the Stock exchanges or clearing corporation. Indemnity shall be provided by the trading member to the stock exchanges to make available the funds in meeting any shortfall in meeting the investor’s claim (apart from those who have withdrawn their claim). The clients’ who are withdrawing their claims have to submit an unconditional withdrawal letter to the Stock exchanges.   

The modified SOP on defaulting members is aimed at protecting the interests of the non-defaulting clients of the trading members or clearing members in the likely case of a default.

Directions to the Stock Exchanges, Clearing Corporations and the Depositories

• All the registered stock exchanges, clearing corporations and depositories have been directed to bring the provisions of this Circular to the notice of their participant members and also disseminate this information through their websites.
• They have also been directed to amend their existing bye-laws, rules and regulations in order to bring the particulars of this circular into effect.
• These entities have also been directed to communicate the implementation of the provisions of this circular within their monthly development report to SEBI.

Date of Coming into Effect

The particulars of this circular shall come into immediate effect. However, it must be noted that all the provisions mentioned in the circular dated 1^st July 2020 shall continue to be applicable.

Conclusion

This Circular on modified SOP on defaulting members has been issued in exercise of the powers conferred on the SEBI under section 11(1) of the Securities and Exchange Board of India Act, 1992, read with s. 19 of the Depositories Act, 1996 and also with section 10 of the Securities Contract (Regulation) Act, 1956 a view to protect the interests of the investors in the securities market and also to promote the development and regulation of the securities market.

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