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SEBI Reduces Minimum Net Worth Requirements for Clearing Corporation in IFSC

Narendra Kumar

| Updated: May 02, 2019 | Category: SEBI Registration

Clearing Corporation

SEBI being an autonomous body by the government of India has given statutory powers to approve by-laws of a securities exchange. SEBI committee review’s the structure of market infrastructure institutions. The body has enjoyed success as a regulatory by pushing the best reforms successively. In this article, we will discuss SEBI Reduces Minimum Net Worth Requirements for Clearing Corp in IFSC.

What is Clearing House?

An Institution formed to facilitate the clearance of payments, securities, and acts as a third-party agency between the two parties i.e. buyers and sellers engaged in the financial transactions.

What is Minimum Net Worth?

Net worth reflects the financial strength of the companies/corporation. It provides a layout of the entity’s present financial position.Net worth can be calculated by deducting assets minus liabilities.

In the case of Cleaning Corporation in IFSC, the net worth in terms of liquid assets should be maintained as prescribed by the SEBI guidelines. The asset should be as such that can be easily converted into cash. Increasing net worth always indicates good financial health and the best to maintain the net worth is to reduce the liabilities or increase the assets while the liabilities stay constant or fall.

The relation between SEBI and Clearing corporations

  • DISPUTE RESOLUTION PROCESS
  • CLIENT DATA SHARING
  • PRODUCT INFROMATION SHARING
  • TO MANAGE INTER-CORPORATE CLEARING CORPORATION LINKS.

To establish a peer-to-peer link for ensuring interoperability. SEBI and Clearing corporations entered into an agreement to manage the risk management framework, system capability and to monitor the client margin. To establish participant link for inter-operability, SEBI requires clearing corporation participation. It also includes-

SEBI has cut the net worth of all clearing corporations in the international financial services Centre. SEBI prescribes the net worth requirement of all clearing corporations in the international financial services[1] Centre in clause 5 of SEBI (IFSC) GUIDELINES, 2015.

The circular states that every recognized clearing corporation shall maintain-WHICHEVER IS HIGHER

A minimum net worth of 100 crore rupees
or
As captial determined under regulation 14(3)(a)&14(3)(b) by the SEBI.

Earlier the net worth requirement in the form of liquid assets was Rs300 crore which has been brought down to Rs 100 crore whereas the minimum net worth of clearing corporation at the time of commencement of operations will remain the same as Rs 50 crore.

SEBI has provided a blueprint to determine the minimum net worth requirement that includes capital requirements based on credit and business risk (legal and operational) and recovery of operations.

In case of Clearing Corporation in the international financial service Centre falls below the prescribed limit to be maintained at all times, it should inform the regulatory, the reason behind not maintaining the threshold limit for the stipulated time and the measures to re-attain the prescribed limit.

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The clearing corporation dealing in international financial Centres has to review regularly their net worth requirement by ensuring that it will not fall below the threshold limit.

Criteria to be Fulfilled by the Clearing Corporation Seeking Recognition as a Clearing Corporation in International Financial Service Centre

  • A minimum net worth equivalent to 50 Crore rupees in the form of liquid assets.   
  • It shall have all times, in the form of liquid assets, to maintain a minimum net worth equivalent of fifty crore rupees or capital as determined in accordance with the SEBI Guidelines.
  • Further, over a period of three years from its commencement/operations, the corporation shall enhance the net worth equivalent to 100 crore or as per the capital determined by the SEBI as amended from time to time.

Functions to be Performed by the Clearing Corporation to Maintain The Minimum Net Worth Requirement

  • Regular review of the net worth requirement and ensuring the same that the net worth does not fall below the threshold limit.
  • A certificate signed by the managing director shall be submitted to SEBI within 15 days from the end of every quarter applicable from April-June 2019 quarter (1st submission).
  • Proper explanation in case the clearing corporation fails to maintain the threshold limits and the appropriate measures to be adopted in order to re-attain the minimum net worth.
  • To take all the steps to protect the interest of investors in securities and to promote the development of the securities market.
The clearing corporation must meet the criteria specified by the regulatory body i.e. SEBI to meet out the requirement of the investors and to mitigate the risk factor involved in it.

The Minimum Net Worth Requirement Includes Capital Requirement based on

  • Business and credit risk.
  • Recovery of operation and in case of failure orderly winding up.
  • Assessment of legal and operational risks.
  • Lastly to protect the interest of the investors.

Conclusion

SEBI has reduced the minimum net worth requirement in the form of a liquid asset from rupees 300 crores to 100 crores. The clearing corporation on the commencement of the operation shall maintain the liquid assets( minimum net worth) same as Rs 50 crore or the capital determined by the SEBI from time to time and will enhance the net worth to Rs 100 Crore over a period of 3 years from the date of commencement of operations.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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