SEBI Intermediaries Regulations | Compliance & Default Actions

The SEBI (Intermediaries) Regulations, 2008, notified on 26th May 2008, contain 6 chapters and 4 schedules. These regulations define “intermediaries” to include entities such as asset management companies, clearing members, foreign portfolio investors, and trading members, while excluding foreign venture capital investors, mutual funds, collective investment schemes, and venture capital funds.

Table of Content

1. 1. 1. 1. Obligations of Intermediaries
         2. Responsibility for the use of Artificial Intelligence
         3. Inspection and Disciplinary Proceedings
         4. Action in Case of Default and Manner of Suspension and Cancellation of Certificate

1. General Obligations of Intermediaries

The SEBI (Intermediaries) Regulations, 2008 prescribes that

(1) An intermediary shall provide the Board with a certificate of its compliance officer on the 1st April of each year certifying:

a) the compliance by the intermediary with all the obligations, responsibilities and the fulfilment of the eligibility criteria on a continuous basis under these regulations and the relevant regulations;
b) that all disclosures made as prescribed by SEBI.

(2) Each intermediary shall prominently display a photocopy of the certificate at all its offices including branch offices.
(3) The intermediary shall also prominently display the name and contact details of the compliance officer to whom a complaint may be made in the event of any investor grievance.
(4) The intermediary shall maintain such books, accounts and records as specified in the relevant regulations.
(5) The intermediary shall make endeavours to redress investor grievances promptly but not later than forty-five days of receipt thereof and when called upon by the Board to do so it shall redress the grievances of investors within the time specified by the SEBI.
(6) The intermediary shall maintain records regarding investor grievances received by it and redressal of such grievances.
(7) The intermediary shall 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 SEBI.

2. Responsibility for the use of Artificial Intelligence:

Any person regulated by the Board who uses artificial intelligence and machine learning tools and techniques, either designed by it or procured from third-party technology service providers, irrespective of the scale and scenario of adoption of such tools for conducting its business and servicing its investors, shall be solely responsible –

(a) for the privacy, security and integrity of investors’ and stakeholders’ data including data maintained by it in a fiduciary capacity throughout the processes involved;
(b) for the output arising from the usage of such tools and techniques it relies upon or deals with; and
(c) or the compliance with applicable laws in force.

(2) The Board may, in case of violation of the provisions of sub-regulation (1), take such action as it may deem fit including action under Chapter V of these regulations.
Explanation: For the purpose of this regulation,-

(a) the expression “artificial intelligence and machine learning tools and techniques” may include any application or software program or executable system or a combination thereof, offered by the person regulated by the Board to investors/stakeholders or used internally by it to facilitate investing and trading or to disseminate investment strategies and advice or to carry out its activities including compliance requirements and the same are portrayed as part of the products offered to the public or under usage for compliance or management or other business purposes;
(b) the expression “person regulated by the Board” shall have the same meaning as provided under Explanation 1 to regulation 16A.16

2.1 Appointment of Compliance Officer

As already stated in chapter 3, an intermediary is required 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 SEBI, or the Central Government, or the rules and regulations and bye-laws of the concerned stock exchanges or the SRO, where applicable. Provided, the intermediary may not appoint compliance officer if it is not carrying on the activity of the intermediary. The compliance officer shall report to the intermediary or its board of directors in writing, of any material non-compliance by the intermediary.

2.2 Code of Conduct

An intermediary and its directors, officers, employees and key management personnel shall continuously abide by the code of conduct specified in the Schedule III of SEBI (Intermediaries) Regulations.

3. Inspection and Disciplinary Proceedings

3.1 Obligation of the intermediary on Inspection

Under regulation 19 of the SEBI (Intermediaries) Regulations, 2008

1. It shall be the duty of every director, proprietor, partner, trustee, officer, employee and any agent of an intermediary which is being inspected, to produce to the inspecting authority such books, accounts, records including telephone records and electronic records and documents in his custody or control and furnish to the inspecting authority with such statements and information relating to its activities within such time as the inspecting authority may require.

2. The intermediary shall allow the inspecting authority to have reasonable access to the premises occupied by such intermediary or by any other person on its behalf and also extend reasonable facility for examining any books, records including telephone records and electronic records and documents in the possession of the intermediary or any such other person and also provide copies of documents or other material which in the opinion of the inspecting authority are relevant for the purposes of the inspection.

3. Without prejudice to the provisions the Act, the inspecting authority shall, in the course of inspection, be entitled to examine or record statements of any principal officer, director, trustee, partner, proprietor or employee of such intermediary.

4. It is the duty of every director, proprietor, trustee, partner, officer and employee of such intermediary to give to the inspecting authority all assistance which the inspecting authority may reasonably require in connection with the inspection.

4. Action in Case of Default and Manner of Suspension and Cancellation of Certificate

1. Where any intermediary fails to comply with any of the conditions of registration or contravenes any of the provisions of the securities laws (i.e. SEBI Act or SCRA or Depository Act or rules and regulations made thereunder) or directions, instructions or circulars issued thereunder, in terms of Regulation 24(2), the Executive Director shall appoint an officer not below the rank of a Division Chief, as a designated authority. The Executive Director may, at his discretion, appoint a bench of 3 officers each of whom will not be below the rank of Division Chief to enquire into and to make recommendations as to the action to be taken. No officer who has conducted an investigation or inspection in respect of the alleged violation can be appointed as a designated authority.

2. The designated authority shall issue a notice to a person against whom an enquiry has been initiated, to show cause as to why the action, as contemplated against such person, should not be recommended.

3. The notice shall specify the period (not exceeding 21 days) within which a written reply should be submitted along with documentary evidence, if any, in support of such written reply.

4. Every notice shall specify the contravention alleged to have been committed by notice by indicating the provisions of the securities laws or the direction or the order of the SEBI which are alleged to have been contravened.

5. Moreover, there shall be annexed to the notice copies of documents relied upon by SEBI along with the extracts of relevant portions of the reports containing the findings arrived at in an inquiry, investigation or inspection, if any.

6. The designated authority may grant a request for inspection of documents.

7. The designated authority shall grant an opportunity of personal hearing and issue or cause to issue a notice scheduling a date for hearing.

8. If the noticee does not reply to the notice or fails to appear on the scheduled date of hearing and the designated authority is satisfied that sufficient opportunity has been given to the noticee, the designated authority may conclude the proceedings after recording the reasons for doing so, on the basis of the material available on record.

4.1 Recommendation of Action

After considering material available on record and the reply, the designated authority may by way of a report, recommend the following measures:

(i) Disposing of the proceedings without adverse action
(ii) Cancellation of certificate of registration;
(iii) Suspension of certificate of registration for a specified period;
(iv) Prohibition of the noticee from taking up any new assignment or contract or launch new scheme for such period as may be specified;
(v) Debarment of an officer of the noticee from being employed or associated with any registered intermediary or other person associated with the securities market for such period as may be specified;
(vi) Debarment a branch or an office of the noticee from carrying out activities for such period as may be specified;
(vii) Issuance of a regulatory censure to the noticee.
The designated authority shall endeavour to submit the report within 120 days from the date of receipt of reply to the notice or date of personal hearing whichever is later.

4.2 Order

Regulation 27 specifies on receipt of the report containing measures by the designated authority, the competent authority shall cause to forward a copy of the report submitted by the designated authority and call upon the noticee to make a submission, in writing, as to why measures recommended by the designated authority should not be taken. The noticee shall submit not exceeding twenty-one days from date of service, written submission along with documentary evidence if any, in support of the written submission.
After considering the submission of the noticee, the competent authority may if deemed fit, for records to be recorded it in writing, remit the matter to the designated authority to enquire afresh or to further enquire afresh or to further enquire and resubmit the report.
The competent authority may grant an opportunity of personal hearing where the designated authority has recommended cancellation of certificate of registration or the competent authority is of the prima facie view that it is a fit case for cancellation of certificate of registration.
After considering the facts and circumstances of the case, material on record and the written submission, if any, the competent authority shall endeavour to pass an appropriate order within 120 days from the date of submission or personal hearing, whichever is later.

4.3 Common Order

The competent authority may pass a common order in respect of a number of noticees where the subject matter in question is substantially the same or similar in nature.

4.4 Special Procedure for action on expulsion from membership of the stock exchange (s) or clearing corporation(s) or termina-tion of all the depository participant agreements with depository (ies)

(1) Notwithstanding anything contained in these regulations, the procedure as provided under this regulation shall be applied to –

(a) the stock broker or a clearing member, in respect of which intimation has been received by SEBI from all the stock exchange(s) or the clearing corporation(s), as the case may be, of which it was a member, that such stock broker or clearing member has been expelled as its member;
(b) a depository participant, in respect of which intimation has been received by SEBI from all the depository(ies) where the participant was admitted, that the depository participant agreement has been terminated by the depository(ies);
(c) a person found to have made claim(s) of return or performance in respect of or related to a security or securities, unless otherwise permitted by SEBI to make such claim(s);
(d) a person which fails to pay the fees, to SEBI or to such body as may be specified, in terms of provisions of the relevant regulations governing such a person;
(e) a person not traceable at its physical address and email address available in the records of SEBI;
(f) a person which has failed to submit periodic reports to the Board for three consecutive periods or such other period(s) as may be specified in the relevant regulations or circulars issued thereunder which govern such a person;
(g) a person which has admitted to have violated any of the provisions of the securities laws or directions, instructions or circulars issued by the Board.

(2) The competent authority shall issue a notice to the person referred to in sub-regulation (1) communicating the grounds for initiation of the proceedings under this regulation and the violation(s) alleged to have been committed by such person.
(3) The notice issued under sub-regulation (2) shall require the noticee to make submission(s), if any, within twenty-one calendar days from the date of receipt of the notice, only through a written response, along with documentary evidence, if any, as to why the certificate of registration granted under the Act and the regulations made thereunder shall not be cancelled or suspended:
Provided that the competent authority may, for the reasons to be recorded, permit the noticee to submit a written response within a further period not exceeding fifteen calendar days.
(4) No further opportunity beyond the timelines specified in sub-regulation (3) shall be allowed.
(5) After considering the facts and circumstances of the case, material on record and the written submissions, if any, the competent authority shall endeavor to pass an order within twenty-one calendar days from—

(i) the date of receipt of the written submissions of the noticee; or
(ii) the date of expiry of the time period granted by the competent authority to file the written submissions under sub-regulation (3), in case no written submissions are filed within the specified period.

(6) No opportunity of personal hearing shall be granted while disposing of the proceedings initiated under this regulation.
(7) The competent authority shall pass an appropriate order of cancellation or suspension of the certificate of registration of the noticee or any other order, as deemed fit.
(8) The competent authority may, while passing the order, impose such conditions upon the noticee as it deems fit to protect the interest of the investors or the clients of the noticee or the securities market.
(9) While passing the order, the competent authority shall, wherever considered necessary, require the noticee to satisfy the Board on the following—

(a) arrangements made for maintenance and preservation of records and other documents as required under the relevant regulations;
(b) redressal of investor grievances;
(c) transfer of records, funds or securities of its clients;
(d) arrangements made for ensuring continuity of service to the clients;
(e) defaults or pending action, if any;
(f) such other conditions in the interest of investors or the client(s) of the noticee or the securities market.

(10) On and from the date of cancellation of the certificate of registration, the noticee shall forthwith –

(a) return to the Board the certificate of registration so cancelled, if the same has been issued in the physical form and shall not represent itself to be a holder of the certificate for any purpose;
(b) cease to carry on any activity in relation to which the certificate had been granted;
(c) transfer its activities to another person holding a valid certificate of registration to carry on such activity or allow its clients or investors to withdraw or transfer their securities or funds held in its custody or to withdraw any assignment given to it, without any additional cost to such client or investor;
(d) make provisions as regards any liability incurred or assumed by it;
(e) take such other action including action relating to any record(s) or document(s) and securities or money of the investors that may be in the custody or control of such person, within the time and in the manner, as may be required under the relevant regulations or as may be directed by the competent authority while passing the order under this regulation.

(11) A copy of the order passed under this regulation shall be–

(a) sent to the noticee;
(b) sent to the stock exchange(s) or the clearing corporation(s) or the depository(ies) or the body or body corporate recognized by SEBI for administration and supervision of the intermediary, as the case may be, and shall be uploaded on their respective websites; and
(c) uploaded on the website of SEBI.

4.5 Surrender of certificate of registration

An intermediary may surrender the certificate of registration by making a request to the SEBI. SEBI, while disposing such request, may require the intermediary to satisfy SEBI as to the factors it deems fit, including but not limited to the following:

i. the arrangements made by the person for maintenance and preservation of records and other documents required to be maintained under the relevant regulations;
ii. redressal of investor grievances;
iii. transfer of records, funds or securities of its clients;
iv. the arrangements made by it for ensuring continuity of service to the clients;
v. defaults or pending action, if any.
While accepting the surrender, SEBI may also impose such conditions upon the intermediary as it deems fit for protection of the investors or its clients or the securities market and such intermediary shall comply with such conditions.

4.6 Effect of debarment, suspension, cancellation or surrender

On and from the date of debarment or suspension of the certificate, the concerned person shall

(a) not 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;
(b) 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;
(c) make provisions as regards liability incurred or assumed by it;
(d) 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 SEBI while passing the order.

On and from the date of surrender or cancellation of the certificate, the concerned person shall

i. return the certificate of registration so cancelled to SEBI and shall not represent itself to be a holder of the certificate for carrying out the activity for which such certificate had been granted;
ii. cease to carry on any activity in respect of which the certificate had been granted;
iii. transfer its activities to another person holding a valid certificate of registration to carry on such activity and allow its clients or investors to withdraw or transfer their securities or funds held in its custody or to withdraw any assignment given to it, without any additional cost to such client or investor;
iv. make provisions as regards liability incurred or assumed by it;
v. 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 SEBI while passing orders.