Exchanges, MDs to be Fined if Glitches Not Addressed in Times

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Capital market regulator SEBI has introduced a penalty structure for cases wherein exchanges are not able to timely address technical glitches.

In the event of a disaster, if an exchange fails to restore operations of ‘Critical Systems’, including from Disaster Recovery Site, within 45 minutes of the declaration of disaster, the bourse will have to pay 10 percent of the average standalone net profit for previous two financial years or Rs 2 crore, whichever is higher.

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On Monday, the Securities and Exchange Board of India (SEBI) released the standard operating procedures (SOPs) for the handling of technical glitches by Market Infrastructure Institutions (MII).

The penalties or the financial disincentives by stock exchanges, depositories, and their MDs would be credited to the Investor Protection Fund, and that from the clearing corporations would go to the Core Settlement Guarantee Fund (Core SGF).

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Further, the MD and CTO (Chief Technology Officer) of the MII or the exchange will be fined 10 percent each of their annual pay (fixed and variable components) for the financial year when the disaster occurred.

In order to ensure that MIIs address technical glitches within the timeline specified by the TAC/SEBI, the regulator has introduced a progressive slab-wise “financial disincentive” to be paid from the expiry of the timeline specified by the TAC/SEBI.

In the first 15 days of continuous failure in the system after the expiry of the specified timeline, the exchange concerned will have to pay Rs 2 lakh per working day. In the next 15 days, if the failure continues, it will have to pay Rs 3 lakh per working day in addition to the Rs 2 lakh.

Further, it will have to pay Rs 25 lakh over and above the previous penalties if the issue continues beyond 30 days.

The SEBI has mandated that in the event of disruption of any one or more of the ‘Critical Systems’, the MII shall, within 30 minutes of the incident, declare that incident as ‘Disaster’. In case of delay in declaration of disaster beyond the timeline specified by SEBI, “financial disincentives” will have to be paid by the exchange and their top officials — MD and CTO.

In the event of any business disruption, which is not required to be declared as “Disaster” as per SEBI norms, if an MII fails to restore normalcy of operations within 75 minutes of the incident, the exchange will have to pay Rs 50 lakh till a period of 3 hours of the incident.

If the issue exists beyond three hours, the financial disincentive would be Rs 1 crore.

The SOPs also said that in case of incidents resulting in business disruption, the exchange will have to submit the information of technical glitch within 2 hours from the time of occurrence of the glitch to the SEBI, provided that glitches are of the nature of a disaster, as defined by the SEBI.

Among other compliance norms, the SOPs said that exchanges will also have to submit a preliminary report within 24 hours of the occurrence of the glitch.

The MIIs will also have to submit the Comprehensive Root Cause Analysis (RCA) report and corrective action taken to address the technical glitch within 21 days of the incident.

Such report shall be submitted to the SEBI, after placing the same before the Standing Committee on Technology and the Governing Board of the MII and confirming compliance with their observations.

The circular will come into effect on August 16, 2021.

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