Under the scheme, brokers and other market intermediaries are given incentives for a specified period of time to bring in liquidity and generate investor interest in securities which have limited trading activity.
In a circular issued today, Sebi said that the liquidity enhancement schemes enhance would have to be "objective, transparent, non-discretionary and non-discriminatory. The scheme would not compromise on market integrity or risk management. Sebi said liquidity enhancement scheme would have the prior approval of the stock exchange's board. Besides, the implementation and outcome of the scheme would be monitored by the board at quarterly intervals.
Also, the scheme is required to specify the incentives available to market makers /liquidity providers and such incentives include discount as well as adjustment in fees in other segments, cash payment or issue of shares, including options and warrants.
The effectiveness of the scheme would be reviewed by the exchanges every six months and they would submit half-yearly reports to Sebi. The regulator said the schemes can be discontinued at any time with an advance notice of 15 days. It said that outcome of the scheme like incentives granted and volume achieved on the market maker and security wise would be disseminated on a monthly-basis.
Regarding illiquid securities, Sebi said that the stock exchange would formulate it's own benchmarks for selecting such securities for liquidity enhancement.
The exchanges would introduce liquidity enhancement schemes on any security for a maximum period of three years. Sebi said that once the scheme is discontinued, it can be re-introduced on the same security provided it is less than the three year period since the introduction of scheme on that security.
"Further, a exchange may introduce liquidity enhancement schemes in securities where liquidity enhancement scheme has been introduced in another exchange. Such schemes cannot be continued beyond the period of liquidity enhancement schemes of the initiating exchange," Sebi noted.
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