In a significant move aimed at improving the ease of doing business in India’s financial markets, the Securities and Exchange Board of India (SEBI) has introduced a new policy for joint annual inspections by Market Infrastructure Institutions (MIIs). This initiative, outlined in the recent circular, seeks to streamline the inspection process for stock brokers and depository participants (DPs), thereby reducing the operational burden on these entities.
Background of the Policy
Historically, annual inspections of stock brokers and DPs were conducted separately by each MII, including stock exchanges, depositories, and clearing corporations. This fragmented approach often led to multiple inspections within a short period, causing unnecessary strain on resources and disrupting the routine operations of these entities. Recognizing the need for a more efficient system, SEBI has now mandated a joint inspection process, allowing for a comprehensive evaluation of an entity’s operations across all MIIs in a single visit.
Key Features of the New Policy
Joint Annual Inspections: Under the new policy, selected entities will undergo a joint inspection by all relevant MIIs. This means that if a broker is also registered as a DP or is involved in clearing activities, all aspects of their operations will be inspected simultaneously. This holistic approach not only minimizes the frequency of inspections but also ensures that all operational facets are evaluated cohesively.
Information Sharing Mechanism: To enhance the effectiveness of supervision, MIIs are required to establish an information-sharing mechanism. This will facilitate the sharing of inspection observations for entities that hold multiple registrations, ensuring that all MIIs are informed of any compliance issues or operational challenges faced by these entities.
Rationalized Selection Criteria: The policy introduces a revised set of criteria for selecting entities for inspection. This includes:
- Inspecting the top 25 entities with high penalties for compliance issues, regardless of their last inspection date.
- Focusing on the top 25 entities with the highest number of investor complaints and arbitration cases.
- Targeting entities with a high-risk score under the Risk-Based Supervision framework.
Entities not falling under these categories will be inspected at least once every three years, while those inspected in the previous two years or those with no trading activity in the last two financial years may be exempt from inspection.
Special Purpose Inspections: MIIs retain the authority to conduct special inspections based on specific triggers, such as patterns observed during investor complaint resolutions or reports of malpractices. This flexibility ensures that any emerging issues can be addressed promptly, regardless of the regular inspection schedule.
Standard Operating Procedures (SOPs): MIIs are tasked with developing a joint SOP by November 1, 2025, detailing the inspection criteria and information-sharing mechanisms. A designated ‘Lead MII’ will be responsible for initiating enforcement actions during these inspections.
Implementation and Future Outlook
The new policy is set to come into effect on December 1, 2025, and MIIs are directed to amend their relevant bye-laws and regulations accordingly. This initiative not only aims to protect investor interests but also promotes the development and regulation of the securities markets in India.
By reducing the frequency of inspections and enhancing collaboration among MIIs, the policy is expected to significantly improve the operational efficiency of stock brokers and DPs. This, in turn, will foster a more conducive environment for business, ultimately benefiting investors and the broader financial ecosystem.
In conclusion, SEBI’s new policy for joint annual inspections represents a progressive step towards enhancing the ease of doing business in India’s financial markets. By streamlining the inspection process and promoting cooperation among MIIs, this initiative is poised to create a more efficient and investor-friendly environment, reinforcing the commitment to regulatory excellence and operational integrity in the securities market.