Prohibited activities in the securities market: what to know

The Securities and Exchange Board of India (SEBI) has issued a crucial circular on January 29, 2025, addressing the responsibilities of market intermediaries, market infrastructure institutions (MIIs), and their agents regarding their associations with individuals or entities engaged in prohibited activities. This move, stemming from recent amendments in SEBI’s regulatory framework, aims to enhance transparency and safeguard investor interests in the securities market.

Prohibited Associations: What Does SEBI’s Circular State?

According to the circular, market participants must ensure they do not associate, either directly or indirectly, with individuals or entities that:

  1. Provide investment advice or recommendations without proper registration or authorization from SEBI.
  2. Make claims regarding investment returns or performance without SEBI’s explicit permission.

The responsibility lies with stock exchanges, clearing corporations, depositories, and other SEBI-regulated entities to ensure compliance. If any agent or associated entity is found engaging in these prohibited activities, it could lead to regulatory action against the primary intermediary.

Exemptions and Clarifications

SEBI has clarified that entities engaged solely in investor education are exempt from this restriction, provided they do not directly or indirectly indulge in unauthorized investment advisory activities or misleading claims.

To further aid compliance, SEBI has issued an FAQ document (Annexure A) along with the circular. This document provides detailed clarifications and guidance for market participants to align their practices with SEBI’s regulatory expectations.

Compliance Measures for Market Participants

Given SEBI’s emphasis on strict compliance, registered entities must undertake the following steps:

  1. Review Existing Associations: Conduct internal audits to identify any direct or indirect associations with entities engaged in prohibited activities.
  2. Strengthen Due Diligence: Implement robust screening mechanisms before onboarding agents, affiliates, or business partners.
  3. Educate Stakeholders: Train employees and agents about SEBI’s regulations to prevent inadvertent non-compliance.
  4. Monitor Market Practices: Regularly update compliance frameworks to align with SEBI’s evolving regulatory landscape.

Conclusion

SEBI’s January 2025 circular reinforces its commitment to investor protection and market discipline. Market intermediaries and infrastructure institutions must proactively ensure compliance, as failure to do so could invite regulatory scrutiny and penalties. By fostering transparency and accountability, SEBI aims to create a safer and more reliable securities market for investors.

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