𝐓𝐫𝐮𝐞 𝐭𝐨 𝐋𝐚𝐛𝐞𝐥: 𝐒𝐄𝐁𝐈’𝐬 𝐍𝐞𝐰 𝐂𝐢𝐫𝐜𝐮𝐥𝐚𝐫 𝐨𝐧 𝐂𝐡𝐚𝐫𝐠𝐞𝐬 𝐨𝐟 𝐌𝐈𝐈𝐬

Securities and Exchange Board of India (SEBI) has issued a new circular dated July 01, 2024, effective from October 01, 2024, focusing on the charges levied by Market Infrastructure Institutions (MIIs) on their members and ultimately on the end clients.

𝐁𝐚𝐜𝐤𝐠𝐫𝐨𝐮𝐧𝐝
MIIs, including stock exchanges and depositories, play a pivotal role in maintaining the integrity of the securities market. As first-level regulators, MIIs are responsible for providing equal and transparent access to all market participants. One of the key principles guiding this responsibility is ‘True to Label,’ which ensures that any charges levied are accurately represented and transparent to the end clients. This means that the charges collected from end clients should precisely match the charges paid by members to MIIs.

𝐇𝐢𝐠𝐡𝐥𝐢𝐠𝐡𝐭𝐬 𝐨𝐟 𝐭𝐡𝐞 𝐂𝐢𝐫𝐜𝐮𝐥𝐚𝐫
SEBI’s circular addresses several key issues observed in the current process of charges levied by MIIs:
a)     𝐕𝐨𝐥𝐮𝐦𝐞-𝐛𝐚𝐬𝐞𝐝 𝐂𝐡𝐚𝐫𝐠𝐞𝐬: Some MIIs follow a volume-based slab-wise charge structure, leading to potential discrepancies between the charges collected from end clients and those paid to MIIs.
b)    𝐃𝐚𝐢𝐥𝐲 𝐯. 𝐌𝐨𝐧𝐭𝐡𝐥𝐲 𝐂𝐡𝐚𝐫𝐠𝐞𝐬: Members often recover charges from end clients on a daily basis, while MIIs receive aggregate charges monthly, leading to possible overcharging.

To address these concerns, SEBI has mandated the following principles for MIIs:
a)     𝐓𝐫𝐮𝐞 𝐭𝐨 𝐋𝐚𝐛𝐞𝐥 𝐂𝐡𝐚𝐫𝐠𝐞𝐬: MIIs must ensure that the charges recovered from end clients are the same as those received by MIIs.
b)    𝐔𝐧𝐢𝐟𝐨𝐫𝐦 𝐂𝐡𝐚𝐫𝐠𝐞 𝐒𝐭𝐫𝐮𝐜𝐭𝐮𝐫𝐞: MIIs should implement a uniform charge structure for all members, eliminating volume-based slabs.

In order to implement the above principles, MIIs are directed to:
a)     Redesign charge structures and associated processes.
b)    Amend relevant byelaws, rules, and regulations.

𝐂𝐨𝐧𝐜𝐥𝐮𝐬𝐢𝐨𝐧
By introducing ‘True to Label’, the idea is to foster greater trust and clarity. However, from a policy perspective, the data is scarce to show the efficacy of this policy and one school of thought questions the basis of adopting such a policy approach as hindering free market and role of competition.

Recently in 2020, ASIC had warned consumers about investment advertising that compares fixed-term investment products to bank term deposits and directed that fund managers must do more to ensure their products are ‘true to label’ – that the product name aligns with the underlying assets, something akin to SEBI and RBI attempted to do, post facto, in enforcement matters relating to AT-1 Bonds.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com.

A copy of SEBI’s circular is attached herewith.