With rising instances of non-compliance with rules, the country's top depository — National Securities Depository Ltd (NSDL) — has revised the penalty imposed on erring market participants, which came into effect from May 1. Now, the penalty will be decided on the history of violations by a market participant and not on the basis of points accumulated by them for violations.
In a circular issued to all its clients, or participants, registered with it, NSDL has listed out 51 violations that mainly include operational and system-related deviations, which now face the revised penalty.
Some of the common operational violations by stock brokers and securities firms include incomplete agreements with clients, opening of accounts for those ineligible to hold securities, debiting a client account without proper authorisation, failure to send transaction statements on time, improper submission of audit reports and for carrying out functions through franchise, among others.
Some of the major system-related deviations include software configurations that are not as per depository norms and not taking proper back-up of client data, among others.
Recently, the Securities and Exchange Board of India (Sebi) has also stepped up vigil against companies to check violations of the Sebi (Depositories and Participants) Regulations, 1996. In fact, during its inspection of brokerages and depository participants (DPs), the regulator had found that client accounts were misused and share transfer was done without obtaining proper instructions. Also, it was found that DPs had opened accounts under fictitious names and client agreements were incomplete.
Sebi officials said major violations of rules were committed by brokers who acted as both margin financier as well as a DP. The regulator has also found that accounts with incomplete agreements were being used as a temporary in-transit account for crediting or debiting benami obligations.
With respect to building the history of violations by market participants, a penalty structure was devised, under which every warning issued by NSDL would fall into different categories of penalty, depending on which the fine would be imposed. The revised structure is somewhat similar to that devised by the Bombay Stock Exchange (BSE) in April to crack down on stock price manipulators.
According to the new structure, the first time penalty for certain major violations like operating client accounts without proper agreements or identity proof would be Rs 2,500 and it would double if the same deviation is observed again, and the matter would be referred to the NSDL Disciplinary Action Committee (DAC) after the third instance. However, for major system-related deviations, the penalty amount has been fixed at Rs 5,000 on every instance of violation.
The matter would be referred to DAC if the penalty amount exceeds Rs 50,000 after a single inspection due to various deviations. In case the total monetary penalty on a particular participant in the last three years exceeds Rs 100,000, and if the compliance report or any other information provided is found to be false, then the matter would be referred to DAC.
Even minor deviations of business rules would attract penalties between Rs 100 to Rs 500 on every occasion. The entire fine amount will have to be paid within 15 days of imposition of the same.
As per the new penalty structure, warnings issued by NSDL would fall into different categories, depending on which the fine would be imposed.
Some of the common operational violations by stock brokers and securities firms include incomplete agreements with clients, opening of accounts for those ineligible to hold securities, debiting a client account without proper authorisation, failure to send transaction statements on time, improper submission of audit reports and for carrying out functions through franchise, among others.
Some of the major system-related deviations include software configurations that are not as per depository norms and not taking proper back-up of client data, among others.
