Liquidity Enhancement Schemes (LES) for Illiquid
Securities in Equity Cash Market
CIRCULAR, CIR/MRD/DP/05/2013,
dated February 08, 2013
To
All
Stock Exchanges
1.
SEBI vide its circular CIR/DNPD/5/2011 dated June 02, 2011, permitted liquidity
enhancement schemes (LES) in Equity Derivatives Segment and specified broad
guidelines for the same.
2.
Pursuant to the introduction of LES scheme in derivatives segment to enhance
liquidity in illiquid derivative products, there was demand that similar scheme
may also be introduced for the Equity Cash market. It has therefore been
decided to permit stock exchanges to introduce LES to enhance liquidity of
illiquid securities in their Equity Cash market.
3.
LES may be introduced in any of the following securities:
(a) Securities having a mean
impact cost greater than or equal to 2% for an order size of Rs.1 lakh, where
mean impact cost of the security on the stock exchange is calculated over the
past 60 trading days.
(b) Securities introduced for
trading in the “permitted to trade” category.
4.
LES may be continued till such time as the security achieves mean impact cost
of less than 2% for an order size of Rs.1 lakh on the stock exchange during the
last 60 trading days.
5.
Discontinuation of LES for any security shall be done after advance notice of
15 days.
6.
Stock exchanges may re-introduce LES on a security if the criterion as
mentioned in para 3(a) is satisfied.
7.
In case any stock exchange introduces LES on securities eligible under para
3(a) above, other stock exchanges may also introduce LES in the same securities
even if those are not eligible on their stock exchange under 3(a). Such LES of
other stock exchanges shall not be continued beyond the period of LES at the
initiating stock exchange.
8.
The stock exchange shall ensure that the LES, including any modification
therein or its discontinuation,
(a) has the prior approval of its
Board and its implementation and outcome is monitored by the Board at quarterly
intervals;
(b) prescribes and monitors the
obligations of liquidity enhancers (liquidity provider, market maker,
maker-taker or by whatever name called);
(c) disburses the incentives
linked to performance;
(d) is objective, transparent,
non-discretionary and non-discriminatory;
(e) does not compromise market
integrity or risk management;
(f) complies with all the
relevant laws; and
(g) is disclosed to the market
atleast 15 days in advance and its outcome (incentives granted and volume
achieved – liquidity enhancer wise and security wise) is disseminated monthly
within a week of the close of the month.
9.
The incentives under LES shall be transparent and measurable. These may take
either of the two forms:
(a) Discount in fees, adjustment
in fees in other segments or cash payment;
(b) Shares, including options and
warrants, of the stock exchange.
10.
If a stock exchange chooses the form specified in Para ‘9a’ above, the
incentives under all LES (both Equity Cash and Derivative Segment), during a
financial year, shall not exceed 25% of the net profits or 25% of the free
reserves of the Stock Exchange, whichever is higher, as per the audited
financial statements of the preceding financial year. If, however, a stock
exchange chooses the form specified in Para ‘9b’ above, the shares, including
the shares that may accrue on exercise of warrants or options, given as
incentives under all LES (both Equity Cash and Derivative Segment), during a
financial year, shall not exceed 25% of the issued and outstanding shares of
the Stock Exchange as on the last day of the preceding financial year. Further,
the Exchange shall ensure that it is compliant with the Securities Contracts
(Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 at
all times.
11.
From a market integrity perspective, the stock exchange shall ensure the
following, in respect of LES for both Equity Cash market and Derivative
Segment:
(a) The Exchange must have
systems and defined procedures in place to monitor collusion between trading
members indulging in trades solely for seeking incentives and prevent payment
of incentives in such cases.
(b) In addition to (a) above,
incentives in the form of cash payments, warrants, discount in fees, etc may
not be provided for the trades where the counterparty is self, i.e., same
Unique Client Code (UCC) is on both sides of the transaction.
(c) Any violations of clauses in
this para shall be viewed most seriously.
(d) In this regard, SEBI circular
CIR/DNPD/5/2011 dated June 02, 2011 stands modified to the extent as mentioned
in para 10 and 11.
12.
The Stock Exchange shall submit half-yearly reports on the working of its LES
for review of SEBI.
13.
This circular shall not be applicable to securities listed on SME Platform or
SME Exchange. Further, the conditions specified in SEBI circular
SMDRP/Policy/CIR-04/2000 dated January 20, 2000 shall not be applicable for the
LES introduced pursuant to this circular.
14.
Stock Exchanges are directed to:
a) take necessary steps to put in
place systems for implementation of the circular, including necessary
amendments to the relevant byelaws, rules and regulations;
b) bring the provisions of this
circular to the notice of the stock brokers and also disseminate the same on
its website;
c) communicate to SEBI the status
of implementation of the provisions of this circular.
15.
This circular is being issued in exercise of powers conferred under Section 11
(1) of the Securities and Exchange Board of India Act, 1992 to protect the
interests of investors in securities and to promote the development of, and to
regulate the securities market.
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