SEBI to Impose Penalties on Exchange for Glitches

The Indian securities market regulator, the Securities and Exchange Board of India (SEBI), announced penalties on stock exchanges for technical glitches that lead to financial losses for investors. With greater tech dependency, a major glitch in the system would result in business disruptions and the unavailability of services. 

SEBI said it has decided to penalise bourses after considering the essence of ensuring the continuous operations of the systems from the market participants’ point of view. It is desirable to specify a predefined threshold for the downtime of MIIs (market infrastructure institutions).

SEBI said that for a downtime longer than the predefined threshold, MIIs, the chief technology officer and managing director of MIIs, will pay a financial disincentive. The tightening of norms is expected to result in MIIs continually monitoring the efficiency and performance of their systems, which will avoid encountering technical glitches. 

SEBI initiated an investigation on the National Stock Exchange (NSE), which halted trading due to a technical glitch in February 2021. The Technical Advisory Committee (TAC) had directed NSE to explain the causes behind the trading halt by conducting a root-cause analysis. SEBI has also questioned NSE as to why trading was not migrated to the disaster recovery site. 

As per SEBI norms, if an event leads to business disruption, the bourse must explain to SEBI the reasons behind it within two hours. The exchange should submit the preliminary report of the incident within 24 hours, while a detailed root-cause analysis and corrective actions must be submitted within 21 days. 

If the exchange is not submitting the root-cause analysis, a financial disincentive of Rs 1 lakh per business day is imposed. Moreover, if the exchange is unable to resolve the glitch encountered, it attracts penalties. SEBI had recently mandated that if there is a disruption in the critical systems, the concerned bourse should declare such an incident as a disaster within 30 minutes, failing which penalties would be levied. 

If the exchange fails to resume its operations within 45 minutes of the declaration of a disaster, a penalty of 10% of the average standalone net profit of the exchange for the last two financial years, or Rs 2 crore, which is higher, will be applied. Apart from that, the chief technology officer and managing director of the exchange will be fined 10% of their annual pay. 

If an exchange cannot resume operations of its critical systems within three hours, SEBI would impose additional financial disincentives. Furthermore, if an exchange fails to get its operations back to normal within 75 minutes of the incident, it shall attract further penalties. 

For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in