Description

BSE announces rationalized and standardized penalty framework for violations and non-compliances observed during Trading Member inspections, including financial implications and compliance requirements.

Summary

BSE has issued a comprehensive framework rationalizing and standardizing penalties for violations and non-compliances observed during Trading Member inspections. The circular categorizes violations based on financial implications and prescribes specific actions for first-time and repeat instances. Key violations covered include misuse of client funds/securities, net worth shortfalls, offering assured returns, and non-cooperation during inspections.

Key Points

  • Standardized penalty structure for violations with financial implications
  • Penalties differentiate between first-time and repeat violations
  • Client fund misuse penalties range from 0.07% to 0.10% per day depending on duration
  • Proprietary deposits may be blocked up to Rs. 10 crores for fund shortfalls
  • Securities misuse attracts 2-3% penalty with caps of Rs. 1-2 lakhs
  • Net worth shortfall penalties at 5% of shortfall amount with progressive deposit blocking
  • Daily penalties for non-submission of inspection documents
  • Different penalty rates for QSB (Qualified Stock Broker) and non-QSB members

Regulatory Changes

Client Fund Violations

  • Recouped within timeframe: 0.07% per day (up to 2 days/month) or 0.10% per day (more than 2 days/month)
  • Not recouped after 30 days: Referral to disciplinary authority, potential trading terminal disablement, blocking of proprietary deposits up to Rs. 10 crores

Securities Misuse

  • First instance: 2% of misuse amount (max Rs. 1 lakh penalty)
  • Repeat instances: 3% of misuse amount (max Rs. 2 lakhs penalty)

Net Worth Shortfall

  • Monetary penalty: 5% of shortfall amount
  • Deposit blocking: Progressive based on shortfall percentage (10% blocking for up to 10% shortfall, up to 100% blocking for over 50% shortfall)
  • Repeat violations: 50% escalation plus administrative action

Inspection Non-Cooperation

  • Non-QSB Members: Rs. 1,000/day (up to 7 days), Rs. 5,000/day thereafter (max Rs. 1 lakh)
  • QSB Members: Rs. 2,000/day (up to 7 days), Rs. 10,000/day thereafter

Compliance Requirements

  • Trading Members must maintain adequate client funds and avoid misuse
  • Members must maintain minimum prescribed net worth at all times
  • Accurate and timely reporting of net worth to the Exchange is mandatory
  • Members prohibited from offering fixed/assured/periodic returns to clients
  • Complete cooperation required during inspections including timely submission of all data, records, and documents
  • All information submitted must be accurate and complete
  • Members must recoup any client fund shortfalls within prescribed timelines

Important Dates

  • Effective Date: 2025-10-10
  • Proprietary Deposit Blocking: After 2 trading days from communication
  • Blocking Duration: 10 days for client fund violations
  • Shortfall Escalation: After 30 days of continuous shortfall, matter referred to disciplinary authority

Impact Assessment

Market Impact: High - This standardized penalty framework affects all BSE Trading Members and establishes clear consequences for violations, promoting market integrity and investor protection.

Operational Impact: High - Trading Members must enhance their compliance monitoring systems to avoid penalties. Non-compliance can result in blocked deposits, trading terminal suspension, and restriction on onboarding new clients.

Financial Impact: Significant financial implications for violating members, with penalties ranging from daily charges on fund misuse to percentage-based penalties on securities misuse and net worth shortfalls. Proprietary deposits may be blocked up to Rs. 10 crores.

Compliance Burden: Enhanced due diligence required for client fund management, securities handling, net worth maintenance, and inspection cooperation. Members need robust internal controls to prevent violations classified as ‘Material’ impact.

Impact Justification

Critical circular establishing standardized penalty framework for trading member violations including client fund misuse, net worth shortfalls, and compliance failures, with significant financial and operational consequences.