Description

BSE introduces standardized penalty framework for trading member violations across inspection-related non-compliances, covering financial violations, client fund misuse, net worth shortfalls, and data submission requirements.

Summary

BSE has issued a circular standardizing penalties for trading member violations discovered during inspections. The framework classifies violations into categories with financial implications, establishing clear penalties for first-time and repeat offenses. Key violations covered include client fund misuse, securities misuse, net worth shortfalls, offering assured returns, and non-cooperation during inspections.

Key Points

  • Client Fund Violations: Penalties of 0.07% per day (up to 2 days/month) or 0.10% per day (beyond 2 days) for non-availability or misuse of client funds
  • Securities Misuse: 2% of misuse amount (max Rs. 1 lakh) for first instance; 3% (max Rs. 2 lakhs) for repeat violations
  • Net Worth Shortfall: 5% penalty on shortfall amount plus proportional deposit blocking (10%-100% based on severity)
  • Assured Returns: Disciplinary action including suspension, disablement of terminals, or expulsion
  • Inspection Non-Cooperation: Daily penalties ranging from Rs. 1,000-5,000 for non-QSB members and Rs. 2,000-10,000 for QSB members

Regulatory Changes

Violations with Financial Implications

1. Client Fund Shortfalls

  • Recouped within timeframe: 0.07%-0.10% daily penalty on shortfall amount
  • Not recouped after 30 days: Referral for disciplinary action, terminal disablement, new client restrictions
  • Proprietary deposits blocked up to shortfall amount or Rs. 10 crores (whichever lower) for 10 days

2. Client Securities/Commodities Misuse

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

3. Net Worth Shortfall

  • Monetary penalty: 5% of shortfall from required net worth
  • Deposit blocking based on severity:
    • Up to 10% shortfall: 10% blocking
    • 10%-20% shortfall: 25% blocking
    • 20%-50% shortfall: 50% blocking
    • Over 50% shortfall: 100% blocking
  • Repeat violations: 50% escalation plus administrative recoupment action

4. Fixed/Assured Returns

  • Disciplinary action including no new clients, suspension/disablement, or expulsion

5. Inspection Data Submission

  • Non-cooperation penalties escalate from Rs. 1,000-5,000/day (non-QSB) or Rs. 2,000-10,000/day (QSB)
  • Maximum penalties: Rs. 1 lakh (non-QSB) or Rs. 2 lakhs (QSB) before member committee referral

Compliance Requirements

  • Trading members must maintain adequate client funds and avoid misuse for proprietary trading
  • Maintain minimum prescribed net worth at all times and report accurately
  • Prohibit offering fixed/assured/periodic returns or mobilizing deposits from investors
  • Full cooperation required during inspections with timely submission of all requested documents/data
  • Accurate data submission mandatory; material misrepresentation subject to penalties
  • Recoup any shortfalls promptly to avoid escalated penalties and disciplinary action

Important Dates

  • Effective Date: October 10, 2025 (circular issuance date)
  • Client Fund Shortfall Timeline: 30 days continuous shortfall triggers disciplinary referral
  • Deposit Blocking Timeline: 2 trading days notice before blocking proprietary deposits
  • Blocking Duration: 10 days for blocked proprietary deposits/collaterals
  • Inspection Data Submission: 7-day threshold for penalty escalation

Impact Assessment

Operational Impact: Trading members face standardized, transparent penalty framework reducing regulatory uncertainty. Clear escalation paths for repeat violations incentivize compliance. Non-cooperation during inspections carries substantial daily penalties that can reach Rs. 1-2 lakhs before committee referral.

Financial Impact: Material violations carry significant financial consequences including percentage-based penalties on misuse amounts, deposit blocking proportional to net worth shortfalls, and potential terminal disablement affecting revenue generation. QSB members face double penalties compared to non-QSB members for inspection-related violations.

Compliance Impact: Standardization brings clarity but requires robust internal controls to prevent client fund/securities misuse, accurate net worth reporting, and inspection readiness. Members must ensure data systems can produce required records promptly to avoid daily penalties.

Impact Justification

Establishes comprehensive penalty framework affecting all trading members with material financial implications for non-compliance including client fund misuse, net worth shortfalls, and inspection violations