Sebi asks bourses, clearing cos to put in place mechanism to prevent fraud

Sebi on Wednesday asked stock exchanges, clearing corporations and depositories to put in place code of conduct and institutional mechanism to prevent fraud or market abuse by them and their designated persons.

Under this, managing director (MD) / chief executive officer (CEO) of MIIs will be obligated to frame code of conduct and put in place an institutional mechanism. Further, the board of directors needs to ensure compliance by MD /CEO in this regard.

In a circular, Sebi said that code of conduct and institutional mechanism for prevention of fraud or market abuse will be applicable to market infrastructure institutions (MIIs) -- exchanges, clearing corporations and depositories--on lines of insider trading norms.

Now, MIIs will have to formulate a code of conduct to regulate, monitor and report trading by their designated persons and immediate relative of designated persons towards achieving compliance with the PIT (Prohibition of Insider Trading) Regulations.

Besides, MIIs would have to identify and designate a compliance officer to administer the code of conduct.

The boards of directors of MIIs, in consultation with the compliance officer, will have to specify the designated persons to be covered by the code of conduct on the basis of their role and function in the organisation and the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation.

Under the institutional mechanism, Sebi said MDs or CEOs of MIIs would need to come out with adequate and effective system of internal controls to ensure compliance with the regulations issued by the regulator to prevent fraud or market abuse by MIIs or their designated persons and immediate relatives of designated persons.

The compliance officers of the respective MIIs would administer the internal controls to prevent market abuse by designated persons and immediate relatives of designated persons of the MII.

According to Sebi, the regulatory oversight committee of the MIIs would review compliance with the provisions of this circular at least once in a financial year and would also verify that the systems for internal control are adequate and are operating effectively.

MIIs would have to formulate written policies and procedures for inquiry in case of suspected fraud or market abuse by their designated persons and immediate relatives of designated persons, which need to be approved by their board of directors.

Any enquiry or investigation against the designated persons and immediate relatives of designated persons of the MIIs should be undertaken under the supervision of regulatory oversight committee comprising of public interest directors (PIDs) and independent external expert with consideration of avoidance of conflict of interest, if any, so as to ensure maximum fairness and transparency, Sebi said.

MIIs need to initiate appropriate inquiry upon becoming aware of any illegal or unethical practices or transactions of suspected fraud or market abuse by their designated persons and immediate relatives of designated persons and promptly inform their board of directors of the same and results of the inquiry, it added.

Also, MIIs need to have an effective whistler-blower policy to enable stakeholders, including employees to freely communicate their concerns about illegal or unethical practices and report instances of fraud or market abuse or any suspicion of fraud or market abuse.

Further, MIIs will have to ensure that the policy framed under the whistleblower provides for suitable protection against any discharge, termination, demotion, suspension, threats, harassment, directly or indirectly or discrimination against any employee who reports instances of fraud or market abuse.

Sebi said the circular would come into force with immediate effect.