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๐“๐ซ๐ฎ๐ž ๐ญ๐จ ๐‹๐š๐›๐ž๐ฅ: ๐’๐„๐๐ˆโ€™๐ฌ ๐๐ž๐ฐ ๐‚๐ข๐ซ๐œ๐ฎ๐ฅ๐š๐ซ ๐จ๐ง ๐‚๐ก๐š๐ซ๐ ๐ž๐ฌ ๐จ๐Ÿ ๐Œ๐ˆ๐ˆ๐ฌ

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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.

๐๐š๐œ๐ค๐ ๐ซ๐จ๐ฎ๐ง๐
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 โ€˜True to Label,โ€™ 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.

๐‡๐ข๐ ๐ก๐ฅ๐ข๐ ๐ก๐ญ๐ฌ ๐จ๐Ÿ ๐ญ๐ก๐ž ๐‚๐ข๐ซ๐œ๐ฎ๐ฅ๐š๐ซ
SEBIโ€™s circular addresses several key issues observed in the current process of charges levied by MIIs:
a)ย ย ย ย ย ๐•๐จ๐ฅ๐ฎ๐ฆ๐ž-๐›๐š๐ฌ๐ž๐ ๐‚๐ก๐š๐ซ๐ ๐ž๐ฌ: 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)ย ย ย ย ๐ƒ๐š๐ข๐ฅ๐ฒ ๐ฏ. ๐Œ๐จ๐ง๐ญ๐ก๐ฅ๐ฒ ๐‚๐ก๐š๐ซ๐ ๐ž๐ฌ: 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)ย ย ย ย ย ๐“๐ซ๐ฎ๐ž ๐ญ๐จ ๐‹๐š๐›๐ž๐ฅ ๐‚๐ก๐š๐ซ๐ ๐ž๐ฌ: MIIs must ensure that the charges recovered from end clients are the same as those received by MIIs.
b)ย ย ย ย ๐”๐ง๐ข๐Ÿ๐จ๐ซ๐ฆ ๐‚๐ก๐š๐ซ๐ ๐ž ๐’๐ญ๐ซ๐ฎ๐œ๐ญ๐ฎ๐ซ๐ž: 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)ย ย ย ย ย Redesign charge structures and associated processes.
b)ย ย ย ย Amend relevant byelaws, rules, and regulations.

๐‚๐จ๐ง๐œ๐ฅ๐ฎ๐ฌ๐ข๐จ๐ง
By introducing โ€˜True to Labelโ€™, 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 advertisingย that compares fixed-term investment products to bank term deposits and directed that fund managers must do more to ensure their products are โ€˜true to labelโ€™ โ€“ย 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 SEBIโ€™s circular is attached herewith.

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