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The Securities and Exchange Board of India (Intermediaries) Regulations, 2008 have been enacted to provide rules and procedures for intermediaries.
Brief History of the Regulations
The Securities and Exchange Board of India (SEBI) has notified the SEBI (Intermediaries) Regulations, 2008 by powers granted under Section 30 of the SEBI Act, 1992 through Notification No. LAD-NRO/GN/2008/11/126538.
List of Amendments
- SEBI (Stock Brokers and Sub- Brokers) (Amendment) Regulations, 2008
- SEBI (Intermediaries) (Amendment) Regulations, 2009
- SEBI (Foreign Portfolio Investors) Regulations, 2014
- SEBI (Intermediaries) (Amendment) Regulations, 2016
- SEBI (Intermediaries) (Amendment) Regulations, 2017
1. Important Definitions
Associate means any person controlled, directly or indirectly, by the intermediary, or any person who controls, directly or indirectly, the intermediary, or any entity or person under common control with such intermediary, and where such intermediary is a natural person will include any relative of such intermediary and where such intermediary is a body corporate will include its group companies or companies under the same management.
Change of Status or Constitution in relation to an intermediary includes amalgamation, demerger, consolidation or any other kind of corporate restructuring falling within the scope of of the Companies Act, 2013 or the corresponding provision of any other law for the time being in force or any agreement or arrangement which would have the effect of such corporate restructuring, any change in control of the intermediary and any change in the legal status of the intermediary.
Control in relation to an intermediary includes the power to, directly or indirectly, control the management or policy decisions of such intermediary by person or persons acting individually or in concert.
Date of Receipt of Reply includes the date on which the noticee makes oral submissions, if any.
Designated Member means the Chairman or a Whole Time Member of the Board designated for the purpose.
Executive Director means an officer of the Board who is appointed as such by the Board.
Intermediary means a person mentioned under the Act and includes an asset management company in relation to the SEBI (Mutual Funds) Regulations, 1996, a clearing member of a clearing corporation or clearing house, foreign portfolio investors and a trading member of a derivative segment or currency derivatives segment of a stock exchange but does not include foreign venture capital investor, mutual fund, collective investment scheme and venture capital fund.
Noticee means the person to whom a notice has been issued under these regulations.
Principal Officer means any person who is responsible for the activities of an intermediary and includes proprietor, in the case of a proprietary concern, any partner, in the case of a partnership firm, whole time/executive director/managing director, in the case of a body corporate, trustee, in the case of a trust, any key employee and any person designated as a principal officer under the relevant regulations.
Self Regulatory Organisation means an organization of a class of intermediaries duly recognised by or registered with the Board and includes a stock exchange.
Wilful Defaulter means any person who is categorized as a wilful defaulter by any bank or financial institution or consortium thereof, in accordance with the guidelines on wilful defaulters issued by the Reserve Bank of India and includes any person whose director, promoter or principal officer is categorized as such.
2. Registration of Intermediaries
- On and from the commencement of these regulations, an application, for grant of a certificate to act as an intermediary, has to be made to the Board in Form A of Schedule I with such additional information as required to be provided under the relevant regulations, and the application fee, as specified in the relevant regulations. The applicant seeking registration to act as a stock broker or sub-broker or a trading member or a clearing member or a depository participant has to make the application along with such additional information through the stock exchange or through the clearing corporation of which the applicant is a member or trading member or through the depository in which the applicant proposes to act as a participant, as the case may be.
- The stock exchange, the clearing corporation, the depository or the specified self regulatory organization, as the case may be, has to examine the eligibility of the applicant in terms of these regulations, relevant regulations and the rules, regulations or bye-laws of the concerned stock exchange, clearing corporation, depository or the self regulatory organization and forward the application with the application fees to the Board along with its recommendation as early as possible but not later than 30 days of receipt of the complete application with the specified application fees.
- An intermediary, who was granted a certificate under the relevant regulations prior to the commencement of these regulations in relation to such intermediary, may continue to act as such, where the certificate was granted for a specified period, an application for grant of certificate has to be made by the intermediary at least 3 months prior to the expiry of such period or 3 months prior to expiry of 2 years from the commencement of these regulations in relation to such intermediary, whichever is earlier and if the intermediary fails to do so, it has to cease to act as an intermediary on and from the expiry of the aforementioned period, where a certificate has been granted to an intermediary on a permanent basis, the certificate may continue to be valid under these regulations subject to the condition that the intermediary has to, within 2 years of commencement of these regulations in relation to such intermediary, furnish the information in Form A to the Board and upload the information on the website specified by the Board.
- Subject to the provisions of the relevant regulations, an applicant or an intermediary as the case may be may carry on the activities of one or more intermediaries only if it obtains a separate certificate to carry on each such activity.
- The Board may require the applicant to furnish further information or clarifications, regarding matters relevant to the activity of such an intermediary or which may otherwise be considered necessary by the Board, to consider and dispose of the application.
- The applicant has to furnish such information and clarification to the satisfaction of the Board, within the time specified in this regard by the Board.
- While considering the application, the information furnished by the applicant and its eligibility, the Board may, if it so desires, verify the information by physical verification of documents, office space, and inspect the availability of office space, infrastructure, and technological support which the applicant is required to have.
- For considering the eligibility of the applicant and grant of certificate to such applicant, the Board has to take into account all matters which it deems relevant to the activities in the securities market, including but not limited to whether the applicant or any of its associates have in the past been refused certificate by the Board and if so, the ground for such refusal, whether the applicant, its directors or partners, or trustees, as the case may be or its principal officer is involved in any pending litigation connected with the securities market which has an adverse bearing on the business of the applicant or on development or functioning of the securities markets, whether the applicant satisfies the eligibility criteria and other requirements as specified in these regulations and the relevant regulations and whether the grant of a certificate to the applicant is in the interest of the investors and the development of the securities market.
- Any application for grant of certificate which is not complete in all respects and does not conform to the requirements in Form A and the requirements specified in the relevant regulation, which does not contain such additional information as required by the Board, which is incorrect, false or misleading in nature, where the applicant is not in compliance with the eligibility requirements as set out under these regulations or the relevant regulations, where the applicant is not a fit and proper person as stated in Schedule II and where the principal officer does not have the requisite qualification or experience as required under the relevant regulations can be rejected by the Board for reasons to be recorded by the Board in writing.
- Before rejecting an application, the applicant has to be given an opportunity in writing to make good the deficiencies within the time specified by the Board, for the purpose. Where an application is rejected for the reason that it contains false or misleading information, no such opportunity may be given and the applicant cannot make any application for grant of certificate under these regulations or any other regulations for a period of 1 year from the date of such rejection.
- The Board on being satisfied that the applicant is eligible, has to grant a certificate in the form specified in the relevant regulations and send an intimation to the applicant in this regard. Where a pending proceeding before the Board or any court or tribunal may result in the suspension or cancellation of the certificate, the Board may give a conditional registration.
- When an intermediary, who has been granted a certificate and who has filed Form A under these regulations, wishes to commence a new activity which requires a separate certificate under the relevant regulations, it has to, while seeking such certificate, not be required to file Form A, and has to furnish to the Board only such additional information as is required under the relevant regulations.
- Any certificate granted by the Board to an intermediary has to be subject to the conditions that where the intermediary proposes to change its status or constitution, it has to obtain prior approval of the Board for continuing to act as an intermediary after such change in status or constitution, it has to pay the applicable fees in accordance with the relevant regulations, it has to abide by the provisions of the securities laws and the directions, guidelines and circulars as may be issued thereunder, it has to continuously comply with the requirements of Regulation 4 and it has to meet the eligibility criteria and other requirements specified in these regulations and the relevant regulations. The Board may impose other conditions as it may deem fit in the interest of investors or orderly development of the securities market or for regulation of the working of the intermediary and the intermediary has to comply with such conditions.
- A request for prior approval which is complete in all respects has to be disposed off by the Board within a period of 60 days from the date of receipt of such request and where the decision of the Board has not been communicated to the intermediary within the said period of 60 days, the prior approval has to be deemed to have been granted.
- The request for prior approval has to contain the information in Form A in respect of the intermediary after the proposed change in status or constitution and the information under Part I of Form A has to be uploaded in the website specified by the Board.
- Where an intermediary has failed to make an application or where an existing intermediary has been refused grant of certificate under these regulations, the intermediary has to forthwith cease to act as such intermediary, transfer its activities to another intermediary which has been granted a certificate for carrying on such activity and allow its clients or investors to withdraw or transfer their securities or funds held in its custody without any additional cost to such client or investor, make provisions as regards liability incurred or assumed by the intermediary and take such other action, within the time period and in the manner, as may be required under the relevant regulations or as may be directed by the Board.
- While refusing grant of certificate under these regulations to an intermediary, the Board may impose such conditions upon the intermediary as it deems fit for protection of investors or clients of the intermediary or the securities market and such conditions have to be complied with.
- Subject to compliance with the provisions of the Act, these regulations and the relevant regulations, the certificate granted to an intermediary has to be permanent unless surrendered by the intermediary or suspended or cancelled in accordance with these regulations.
3. General Obligations of Intermediaries
- An intermediary has to provide the Board with a certificate of its compliance officer on the 1st April of each year certifying where the compliance by the intermediary with all the obligations, responsibilities and the fulfillment of the eligibility criteria on a continuous basis under these regulations and the relevant regulations and that all disclosures made in Form A and under the relevant regulations are true and complete.
- Each intermediary has to prominently display a photocopy of the certificate at all its offices including branch offices.
- The intermediary has to also prominently display the name and contact details of the compliance officer to whom complaint may be made in the event of any investor grievance.
- The intermediary has to maintain such books, accounts and records as specified in the relevant regulations.
- The intermediary has to make endeavours to redress investor grievances promptly but not later than 45 days of receipt thereof and when called upon by the Board to do so it has to redress the grievances of investors within the time specified by the Board.
- The intermediary has to maintain records regarding investor grievances received by it and redressal of such grievances.
- The intermediary has to, at the end of each quarter of a financial year ending on 31st March upload information about the number of investor grievances received, redressed and those remaining unresolved beyond three months of the receipt thereof by the intermediary on the website specified by the Board.
- An intermediary has to appoint a compliance officer for monitoring the compliance by it of the requirements of the Act, rules, regulations, notifications, guidelines, circulars and orders made or issued by the Board or the Central Government, or the rules, regulations and bye- laws of the concerned stock exchanges, or the self regulatory organization, where applicable. The intermediary may not appoint a compliance officer if it is not carrying on the activity of the intermediary.
- The compliance officer has to report to the intermediary or its Board of Directors, in writing, of any material non-compliance by the intermediary.
- An intermediary, its directors, officers, employees or key management personnel cannot render, directly or indirectly, any investment advice about any security in the publicly accessible media, whether real-time or non-real-time, unless a disclosure of its interest, direct or indirect, including its long or short position in the said security has been made, while rendering such advice.
- If an intermediary’s directors, officers, employees or key management personnel are rendering such advice, the intermediary has to ensure that while rendering such advice he discloses his interest, the interest of his dependent family members and that of the employer including employer’s long or short position in the said security.
- An intermediary cannot make a recommendation to any client or investor who may be expected to rely thereon to acquire, dispose of or retain any securities unless he has reasonable grounds to believe that the recommendation is suitable.
- An intermediary and its directors, officers, employees and key management personnel has to continuously abide by the code of conduct specified in Schedule III.
4. Powers of the Board
- Power of inspection to ensure that the books of account, records including telephone records and electronic records and documents are being maintained in the manner required under the relevant regulations.
- Power of inspection to ascertain whether adequate internal control systems, procedures and safeguards have been established and are being followed by the intermediary to fulfill its obligations under the relevant regulations.
- Power of inspection to ascertain whether any circumstances exist which would render the intermediary unfit or ineligible.
- Power of inspection to ascertain whether the provisions of the securities laws and the directions or circulars issued thereunder are being complied with.
- Power of inspection to inquire into the complaints received from investors, clients, other market participants or any other person on any matter having a bearing on the activities of the intermediary.
- Power of inspection to inquire into such matters as may be deemed fit by the Board itself in the interest of investors or the securities market.
- Power to issue notice before inspection.
- Power to appoint auditor or valuer.
- Power to require submission of inspection report.
- Power to issue clarifications.
- Power to issue directions.
- Power to issue or refuse certificate of registration.
5. Action in case of Default by Intermediary, Procedure for Suspension or Cancellation of Certificate and Appeals
- Where any person who has been granted a certificate of registration under the Act or regulations made thereunder, fails to comply with any conditions subject to which a certificate of registration has been granted to him or contravenes any of the provisions of the securities laws or directions, instructions or circulars issued thereunder, the Board may, without prejudice to any action under the securities laws or directions, instructions or circulars issued thereunder, by order take such action in the manner provided under these regulations.
- Where it appears to the designated member, that any person who has been granted a certificate of registration under the Act and regulations made thereunder has committed any default, the designated member may approve the initiation of proceedings against such person.
- The Executive Director has to, after that, appoint an officer not below the rank of a Division Chief, as a designated authority. The Executive Director may, at his discretion, also appoint a bench of three officers, each of whom cannot be below the rank of a Division Chief. Such a bench has to be presided by the senior most amongst them and all the decisions or recommendations of such a bench shall be by way of majority.
- No officer who has conducted investigation or inspection in respect of the alleged violation can be appointed as a designated authority.
- The designated authority has to, if it finds reasonable grounds to do so, issue a notice to the concerned person requiring him to show cause as to why the certificate of registration granted to it, should not be suspended or cancelled or why any other action provided herein should not be taken.
- Every notice has to specify the contravention alleged to have been committed by the noticee indicating the provisions of the Act, rules, regulations, circulars or guidelines in respect of which the contravention is alleged to have taken place.
- There has to be annexed to the notice issued, copies of documents relied on in making of the imputations and extracts of relevant portions of documents, reports containing the findings arrived at in an investigation or inspection, if any, carried out.
- The noticee has to be called upon to submit within a period to be specified in the notice, not exceeding 21 days from the date of service thereof, a written representation along with documentary evidence, if any, in support of the representation to the designated authority.
- The noticee has to submit to the designated authority its written representation within the period specified in the notice along with documentary evidence, if any, in support thereof. The designated authority may extend the time specified in the notice for sufficient grounds shown by the noticee and after recording reasons in writing.
- If the noticee does not reply to the show cause notice, the designated authority may proceed with the matter ex-parte recording the reasons for doing so and make recommendation as the case may be on the basis of material facts available before it.
- After considering the representations, if any, of the noticee, the facts and circumstances of the case and applicable provisions of law or directions, instructions or circulars administered by the Board, the designated authority has to submit a report, where the facts so warrant, recommending, suspension of certificate of registration for a specified period, cancellation of certificate of registration, prohibiting the noticee to take up any new assignment or contract or launch a new scheme for the period specified in the order, debarring a principal officer of the noticee from being employed or associated with any registered intermediary or other registered person for the period specified in the order, debarring a branch or an office of the noticee from carrying out activities for the specified period or warning the noticee.
- On receipt of the report recommending the measures from the designated authority, the designated member has to consider the same and issue a show cause notice to the noticee enclosing a copy of the report submitted by the designated authority calling upon the noticee to submit its written representation as to why the action, including passing of appropriate direction, as the designated member considers appropriate, should not be taken.
- The noticee may, within 21 days of receipt of the notice send a reply to the designated member who may pass appropriate order after considering the reply, if any received from the noticee and providing the person with an opportunity of being heard, as expeditiously as possible and endeavour shall be made to pass the order within 120 days from the date of receipt of reply of the notice or hearing.
- The designated member may pass a common order in respect of the number of noticees, where the subject matter in question is substantially the same or similar in nature.
- Every report made by a designated authority and every order passed by the designated member has to be dated and signed.
- A copy of the order passed has to be sent to the noticee and also uploaded on the website of the Board.
- If the noticee is a member of a stock exchange, clearing corporation, a depository or a self- regulatory organization, a copy of the order has to also be sent to the concerned stock exchange, clearing corporation, depository or self regulatory organization.
- Any person, who has been granted a certificate of registration under the Act or the regulations made thereunder, desirous of giving up its activity and surrender the certificate, may make a request for such surrender to the Board and while disposing such request, the Board cannot be bound by the procedure specified in the foregoing provisions of these regulations. While disposing a request under this regulation, the Board may require the concerned person to satisfy the Board the factors as it deems fit, including but not limited to the arrangements made by the person for maintenance and preservation of records and other documents required to be maintained under the relevant regulations, redressal of investor grievances, transfer of records, funds or securities of its clients, the arrangements made by it for ensuring continuity of service to the clients and defaults or pending action, if any.
- While accepting surrender, the Board may impose such conditions upon the person as it deems fit for protection of the investors or its clients or the securities market and such person has to comply with such conditions.
- On and from the date of debarment, suspension, surrender or cancellation of the certificate, the concerned person cannot undertake any new assignment or contract or launch any new scheme and during the period of such debarment or suspension it shall cease to carry on any activity in respect of which certificate had been granted, allow its clients or investors to withdraw or transfer their securities or funds held in its custody or withdraw any assignment given to it, without any additional cost to such client or investor, make provisions as regards liability incurred or assumed by it and take such other action including the action relating to any records or documents and securities or money of the investors that may be in custody or control of such person, within the time period and in the manner, as may be required under the relevant regulations or as may be directed by the Board while passing order.
- The person aggrieved by an order under these regulations may prefer an appeal to the Securities Appellate Tribunal against such order.
6. Code of Conduct
6.1 Investor Protection and Disbursal of Amounts
- Every intermediary has to make all efforts to protect the interests of investors and has to render the best possible advice to its clients having regard to the client’s needs and the environments and his own professional skills.
- An intermediary has to ensure that it and its key management personnel, employees, contractors and agents, in the conduct of their business, observe high standards of integrity, dignity, fairness, ethics and professionalism and all professional dealings shall be affected in a prompt, effective and efficient manner.
- An intermediary is responsible for the acts or omissions of its employees and agents in respect to the conduct of its business.
- An intermediary has to, at all times render high standards of service, exercise due skill and diligence over persons employed or appointed by it, ensure proper care and exercise independent professional judgment and cannot at any time act in collusion with other intermediaries in a manner that is detrimental to the investors.
- An intermediary cannot increase charges/ fees for the services rendered without proper advance notice to its clients/investors.
- An intermediary has to be prompt in disbursing dividends, interests or any such accrual income received or collected by it on behalf of its clients/investors.
6.2 Disbursal of Information and Conflict of Interest
- An intermediary has to ensure that adequate disclosures are made to the clients/investors in a comprehensible and timely manner so as to enable them to make a balanced and informed decision.
- An intermediary cannot make any misrepresentation and ensure that the information provided to the clients/investors is not misleading.
- An intermediary cannot make any exaggerated statement whether oral or written to the client/investor, either about its qualification or capability to render certain services or its achievements in regard to services rendered to other clients/investors.
- An intermediary cannot divulge to anybody, either orally or in writing, directly or indirectly, any confidential information about its clients/investors, which has come to its knowledge, without taking prior permission of its clients/investors except where such disclosures are required to be made in compliance with any law for the time being in force.
- An intermediary has to avoid conflict of interest and make adequate disclosure of his
interest and has to put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises, has to take reasonable steps to resolve the same in an equitable manner.
- An intermediary has to make appropriate disclosure to the client/investor of its possible source or potential areas of conflict of duties and interest while acting as an intermediary which would impair its ability to render fair, objective and unbiased services.
- An intermediary or any of its directors, or employees having the management of the whole or substantially the whole of affairs of the business, or an associate of the intermediary cannot, either through its account or their respective accounts or through their family members, relatives or friends indulge in any insider trading.
6.3 Compliance and Corporate Governance
- An intermediary has to ensure that good corporate policies and corporate governance is in place. It cannot engage in fraudulent and manipulative transactions in the securities listed on any stock exchange in India and cannot indulge in any unfair competition (including resorting to unfair means for inducing another intermediaries’ clients) which is likely to harm the interests of other intermediaries or investors or is likely to place such other intermediaries in a disadvantageous position while competing for or executing any assignment.
- An intermediary has to take adequate and necessary steps to ensure that continuity in data and record keeping is maintained and that the data or records are not lost or destroyed. It has to also ensure that for electronic records and data, up-to-date back up is always available with it.
- An intermediary cannot be a party to or instrumental in or indulge in creation of false market for securities listed or proposed to be listed on any stock exchange in India, price rigging or manipulation of prices of securities listed or proposed to be listed on any stock exchange in India, passing of unpublished price sensitive information in respect of securities which are listed or proposed to be listed on any stock exchange to any person or intermediary, or any activity for distorting market equilibrium or which may affect the smooth functioning of the market or for personal gain.
- An intermediary has to cooperate with the Board, or any authority designated by the Board, as and when required and shall not make any untrue statement or suppress any material fact in any documents, reports, papers or information furnished to the Board or neglect or fail or refuse to submit to the Board or other agencies with which it is registered, such books, documents, correspondence and papers or any part thereof as may be demanded/requested from time to time.
- An intermediary has to ensure that any change in registration status /any penal action taken by Board or any material change in financials which may adversely affect the interests of clients/investors is promptly informed to the clients/investors and any business remaining outstanding is transferred to another registered person in accordance with any instructions of the affected clients/investors or as per the instructions of the Board and the provisions of the relevant regulations.
- An intermediary has to maintain an appropriate level of knowledge and competency and abide by the provisions of any act, regulations, circulars and guidelines of the Central Government, the Reserve Bank of India, the Board, the stock exchange or any other applicable statutory or self regulatory or other body, as the case may be, and as may be applicable to the intermediary in respect of the business carried on by such intermediary. An intermediary has to also comply with the award of the Ombudsman passed under the SEBI (Ombudsman) Regulations, 2003.
- An intermediary has to ensure that the Board is promptly informed about any action, legal proceedings, etc., initiated against it in respect of any material breach or non- compliance by it, of any law, rules, regulations, and directions of the Board or of any other regulatory body.
6.4 Intermediary Infrastructure Requirements
- An intermediary has to have internal control procedures and financial and operational
capabilities which can be reasonably expected to protect its operations, its clients, investors and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions.
- An intermediary also registered with the Board in any other capacity/ category has to endeavour to ensure that arm’s length relationship is maintained in terms of both manpower and infrastructure between the activities carried out as an intermediary and other permitted activities.
- An intermediary has to establish and maintain adequate infrastructural facility to be able to discharge its services as such intermediary to the satisfaction of clients/investors, and the operating procedures and systems of the intermediaries have to be well documented and backed by operations manuals.
- An intermediary has to create and maintain the records of all documents and data in their custody in such manner that the tracing of such document or data is facilitated in the event of loss of original records or documents for any reason.
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