SEBI Modifies Standard Operating Procedure in the cases of Trading Member / Clearing Member leading to default – 27th May, 2022

SEBI, vide its Circular dated 1^st July, 2020 has specified the Standard Operating Procedure enumerating the steps to be taken by the Stock Exchanges (“SEs”), Clearing Corporations (“CCs”) and Depositories in cases where SE / CC is of the view that Trading Member/ Clearing Member is likely to default in repayment of funds or securities to its clients.

Further, SEBI, in consultation with the Market Infrastructure  Institutions,  has  decided  to modify clause 4.25 of SEBI circular dated 1^st July,  2020  in  order  to  provide  equitable  distribution of funds amongst investors. Accordingly, clause 4.25 of the said circular stands modified as under:

Sr. No.	Action	Timeline
4.25	ISE / SEs / CCs shall endeavour to settle the claims of maximum   number   of clients   byway   of   interim measures, under their supervision prior  to  issuing show  cause  notice  (SCN)  for declaring  the  TM  a defaulter.  The TM  shall be instructed to  pay small investors  out  of  available  funds  and  own  resources (movable and immovable) under the supervision of the ISE/ SEs.   Further, the unencumbered deposits available with the SEs/ CCs, after adjusting for any dues of the SE / CC and maintaining  the  minimum  BMC,  shall  also be utilised  for  settling  the  credit  balance  of  investors starting from the smallest amount. Such amount shall be  paid  in  full  to  all  such  investors having credit balance up to the amount of Rs.25,00,000/-(Rupees twenty  five  lakh),  subject  to  availability  of  funds. Further, investors having credit balance of more than Rs.25,00,000/-(Rupees twenty five lakh) shall be paid on pro-rata basis from the remaining funds.   Also, any  surplus  available  with any  SEs  / CCs shall be utilised for settling the credit balances of clients with respect to other SEs. BGs of the TM shall be invoked and also  the  FDRs  shall  be  encashed  for  utilisation. SEs / CC may settle such clients in tranches. For this purpose,  the  balances  of  client  will  be  netted  across exchanges to arrive at the final credit balance due to such client.   The  TM  shall  furnish  the  proof  of  payment  to  the clients, to the SEs.   In this regard, the related parties of the TM shall not be considered  for  settlement,  for  which  the  TM shall provide  an  undertaking  to  the  SEs/  CC.  TM shall provide  indemnity  to the  SEs to  make  available  the funds to meet any shortfall in meeting investor’s claim (other  than  those  who  have  withdrawn  their  claim). Clients  withdrawing  their claim will  have  to submit unconditional withdrawal letter to the SEs.	Within 30 trading   days from crystallization  of balances

• The Circular further added that, all other provisions specified in SEBI circular dated 1^st July, 2020 shall continue to remain applicable.

• Other than that, Stock Exchanges, Clearing Corporations and Depositories are directed to:

1. Bring the provisions of this Circular to  the  notice  of  their members  / participants and also disseminate the same on their websites.
2. Make amendments to the relevant Bye-laws, Rules and Regulations, as may be necessary; and
3. Communicate the status of the  implementation  of  the provisions  of  this Circular in their monthly development report to SEBI.

• This Circular shall be applicable with immediate  effect.

Link to the Circular:

https://www.sebi.gov.in/legal/circulars/may-2022/modification-to-standard-operating-procedure-in-the-cases-of-trading-member-clearing-member-leading-to-default_59257.html