Sebi Issues Draft Circular to Regulate Associations with Prohibited Entities for Market Integrity

Sebi has released a draft circular aiming to clarify and regulate the relationships between market intermediaries, market infrastructure institutions (MIIs), their agents, and entities involved in prohibited activities. This move follows amendments to Sebi's rules on Intermediaries, Securities Contracts Regulation, and Depositories and Participants earlier this year, which took effect in August. The goal is to curb unregistered entities offering investment advice and making unauthorised claims of returns.

Representative image

In the consultation paper, Sebi outlined provisions that prohibit intermediaries and MIIs, such as stock exchanges, clearing corporations, and depositories, from associating with entities providing unregistered securities advice or performance claims. The draft circular aims to ensure strict compliance by defining the scope of association, responsibilities, and consequences of violations.

Regulations on Associations

The paper describes association as any engagement involving monetary transactions, client referrals, or technological interactions. Sebi mandates that regulated entities and their agents ensure their associates are not involved in prohibited activities. Associations with entities focused solely on investor education are allowed if they avoid unauthorised advice or claims.

The circular distinguishes between educational activities and advisory services. It emphasises that educational content using market data must have a minimum three-month delay. Regulated entities must end existing contracts with prohibited entities by January 21, 2025.

Penalties for Non-Compliance

Sebi warns of severe penalties for violators, including registration suspension, debarment, or monetary fines. It also cautions against indirect associations through advertising or branding that might link regulated entities to prohibited entities. Stakeholders have until December 27 to provide feedback on the draft circular.

The initiative seeks to strengthen the regulatory framework by ensuring that all market participants adhere to established guidelines. By doing so, Sebi aims to protect investors from misleading practices and enhance the integrity of the financial markets.