Description

NSE prescribes categorized violations (A, B, C) and indicative disciplinary actions that Trading Members must apply against Authorised Persons based on non-compliance identified during inspections.

Summary

NSE has issued a circular specifying the list of violations and indicative disciplinary actions that Trading Members must take against Authorised Persons (APs) when non-compliance is identified during inspections. The violations are categorized into three levels (A, B, C) with escalating disciplinary measures. This framework supplements the earlier circular NSE/COMP/63628 dated August 28, 2024, which provided the supervision framework for APs and branches.

Key Points

  • Trading Members are accountable for all acts of omission and commission of Authorised Persons
  • Violations are categorized into three levels: A (most severe), B (moderate), and C (least severe)
  • Category A violations require termination on disciplinary grounds, withholding money due to AP, and public notification
  • For specific Category A violations (points 2, 4, 5, 6, 8, and 9 of Annexure A), filing a police complaint is mandatory
  • Category B violations warrant warning letters with termination for repeat offenses
  • Category C violations require advisory letters, escalating to warnings for repeat violations
  • Trading Members must consider nature and significance of non-compliance and may apply stricter actions than prescribed minimums
  • Detailed inspection areas include client registration verification, fund movement monitoring, fixed payment detection, cash dealing checks, and unauthorized trading activities

Regulatory Changes

This circular introduces a standardized disciplinary action framework jointly specified by Exchanges for Trading Members to apply against Authorised Persons. Key changes include:

  • Three-tier violation categorization system with clearly defined disciplinary responses
  • Mandatory police complaint filing for serious Category A violations including unauthorized fund movements, cash dealings, fund-based activities, deposits collection, and unauthorized trading
  • Public notification requirement for Category A terminations to enhance market transparency
  • Escalation mechanism for repeat violations in Categories B and C
  • Indicative inspection methodology provided in Annexure A covering areas such as client registration, fund and securities movement, fixed payments, cash dealings, and unauthorized activities

Compliance Requirements

Trading Members must:

  1. Implement the three-tier disciplinary action framework for AP violations
  2. Ensure all clients are registered directly with the Trading Member only
  3. Monitor and prevent fund/securities movement between clients and APs
  4. Detect and prevent fixed periodic payments to clients mapped to APs
  5. Prevent cash dealings between APs and clients
  6. Ensure APs are not involved in fund-based activities, collecting deposits, or unauthorized trading
  7. Examine books of account, demat statements, and bank statements during inspections
  8. Obtain written confirmation from APs regarding disclosure of all demat and bank accounts
  9. Examine client ledgers for fixed periodic payments
  10. Conduct mystery shopping, surprise visits, and web searches as part of supervision
  11. File police complaints for mandatory Category A violations (points 2, 4, 5, 6, 8, and 9)
  12. Issue public notifications for Category A terminations
  13. Withhold money due to APs terminated on disciplinary grounds
  14. Inform all clients of the AP when termination occurs

Support contacts:

Important Dates

  • Circular Date: October 10, 2025
  • Reference Circular: NSE/COMP/63628 dated August 28, 2024
  • Effective Date: Immediate compliance required

Impact Assessment

Market Impact:

  • Enhanced investor protection through stricter supervision and enforcement against errant Authorised Persons
  • Improved market integrity by standardizing disciplinary actions across Trading Members
  • Greater transparency through mandatory public notifications for serious violations

Operational Impact:

  • Trading Members must implement robust inspection frameworks covering all areas specified in Annexure A
  • Enhanced monitoring requirements for AP activities including bank accounts, demat accounts, and client dealings
  • Administrative burden of conducting regular inspections, mystery shopping, and surprise visits
  • Legal and procedural requirements for filing police complaints in serious violation cases

Compliance Impact:

  • Stricter accountability for Trading Members regarding AP conduct
  • Clear escalation paths for repeat violations (C → B → A)
  • Mandatory documentation requirements including written confirmations from APs
  • Potential reputational risk for firms with publicly notified AP terminations

Risk Mitigation:

  • Reduces risk of unauthorized trading, fund diversion, and investor fraud by APs
  • Creates deterrent effect through mandatory terminations and police complaints for serious violations
  • Protects investors from cash dealings and unauthorized fund-based schemes operated by APs

Impact Justification

Establishes mandatory enforcement framework for Trading Members to discipline Authorised Persons, including termination and police complaints for serious violations. Critical for investor protection and market integrity.