Description

NSE introduces standardized penalty framework for trading member violations including client fund misuse, net worth shortfalls, securities misuse, and inspection non-compliance with differentiated actions for first-time and repeat offenders.

Summary

NSE has issued a circular rationalizing and standardizing penalties levied on trading members for various non-compliances observed during member inspections. The framework categorizes violations with financial implications and prescribes specific monetary penalties and administrative actions for first-time and repeat offenses. Key violations covered include client fund misuse, securities misuse, net worth shortfalls, offering assured returns, and inspection non-cooperation.

Key Points

  • Standardized penalty structure for client fund violations: 0.07% per day (up to 2 days) or 0.10% per day (more than 2 days) of shortfall amount
  • Securities/commodities misuse: 2% of misuse amount (max Rs. 1 lakh first instance), 3% (max Rs. 2 lakhs repeat instance)
  • Net worth shortfall: 5% monetary penalty of shortfall amount plus 50% escalation for repeat offenses
  • Administrative actions including no new clients and terminal disablement when violations exceed Rs. 25 lakhs or after 30 days continuous shortfall
  • Offering fixed/assured returns results in disciplinary action including possible suspension or expulsion
  • Daily penalties for inspection non-cooperation: Rs. 1,000-5,000 per day for non-QSB members, Rs. 2,000-10,000 per day for QSB members
  • Material incorrect submission of inspection data attracts Rs. 1 lakh penalty

Regulatory Changes

Client Fund Violations

  • When recouped subsequently: 0.07% per day (up to 2 days in calendar month) or 0.10% per day (more than 2 days)
  • If not recouped after 30 days: referral to disciplinary authority with no new client restrictions and terminal disablement
  • Additional administrative actions apply when highest violation value exceeds Rs. 25 lakhs per calendar month (per Circular NSE/INSP/57097 dated June 13, 2023)

Securities/Commodities Misuse

  • First instance: 2% of misuse amount (max Rs. 1 lakh)
  • Repeat instance: 3% of misuse amount (max Rs. 2 lakhs)
  • Classified as material violation

Net Worth Compliance

  • First instance: 5% penalty on shortfall amount plus administrative action per Circular NSE/INSP/63598 dated August 27, 2024
  • Repeat instance: 50% escalation on penalty plus administrative action
  • Applies to incorrect reporting resulting in below minimum prescribed net worth

Inspection Compliance

Non-cooperation in providing data/records/documents:

  • 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 (max Rs. 2 lakhs)
  • Post maximum penalty: referral to member committee

Delay in submission:

  • Rs. 1,000 per day from final due date (max Rs. 1 lakh)

Incorrect submission:

  • Procedurally incorrect: warning
  • Materially incorrect: Rs. 1 lakh

Compliance Requirements

Trading Members Must:

  1. Maintain adequate client funds and avoid proprietary use of client funds
  2. Ensure no debit balance in client obligations beyond specified tolerance periods
  3. Maintain minimum prescribed net worth and report accurately to Exchange
  4. Avoid misuse of client securities or commodities
  5. Not offer fixed, assured, or periodic returns to clients or mobilize deposits from investors
  6. Cooperate fully with inspection officials and provide complete data/records/documents promptly
  7. Submit materially correct information during inspections
  8. Recoup any shortfalls within 30 days to avoid disciplinary referral

Escalation Actions:

  • Violations classified as “Material” are subject to stricter scrutiny
  • Repeat offenses attract higher penalties (50% escalation or specified increased rates)
  • Persistent non-compliance may result in no new client restrictions, terminal suspension, or expulsion

Important Dates

  • Circular Date: October 10, 2025
  • Reference Circular: NSE/INSP/57097 dated June 13, 2023 (administrative actions for violations exceeding Rs. 25 lakhs)
  • Reference Circular: NSE/INSP/63598 dated August 27, 2024 (net worth recoupment procedures)
  • 30-day threshold: Continuous shortfalls not recouped after 30 days trigger disciplinary referral

Impact Assessment

Market Impact:

  • High - Affects all trading members across NSE segments
  • Creates transparent, predictable penalty framework reducing regulatory uncertainty
  • Encourages voluntary compliance through clear escalation paths

Operational Impact:

  • Trading members must strengthen internal controls for client fund segregation and net worth monitoring
  • Enhanced documentation and record-keeping systems required for inspection readiness
  • Repeat violations carry significantly higher financial and administrative costs
  • Risk of terminal disablement creates strong deterrent against persistent non-compliance

Financial Impact:

  • Direct monetary penalties ranging from Rs. 1,000 to Rs. 2 lakhs depending on violation type
  • Percentage-based penalties for client fund and net worth violations can be substantial
  • Administrative restrictions (no new clients, terminal suspension) impact revenue generation capacity
  • Possible expulsion for serious violations like offering assured returns

Compliance Impact:

  • Ease of Doing Business initiative provides clarity on penalty structure
  • Standardization enables members to assess compliance risk and cost
  • Differentiated treatment for QSB vs non-QSB members reflects varying operational scales
  • Focus on recoupment and corrective action rather than purely punitive measures

Impact Justification

Establishes comprehensive penalty framework affecting all trading members with material financial implications and potential terminal suspension for violations