SEBI Declares: Institutions Responsible for Financial Penalties, Not Executives

Have you ever thought about who is accountable if a group of investors can’t buy or redeem securities due to a technical issue in the stock market or depository’s software or IT system? 

According to current rules set by the Securities and Exchange Board of India (SEBI), the institutions themselves are held responsible and must pay what’s called a ‘financial disincentive.’

However, in a circular released on September 20, 2024, SEBI clarified that only these institutions will be liable for paying the financial disincentives — not the individuals who run them.

For those who may not know, SEBI issued a master circular on October 16 last year for stock exchanges and clearing corporations and another similar circular on October 6 for depositories. These circulars included a rule requiring the payment of ‘financial disincentives’ if technical issues in these institutions caused problems or losses for investors. Both the institutions and certain individuals, like the managing director and chief technology officer (CTO), were expected to pay these disincentives.

However, many suggested that SEBI should reconsider this rule for individuals. As a result, SEBI reviewed its decision and has now decided that only the institutions will be liable for these financial disincentives, not the individuals. 

SEBI explained that since the operations of these market infrastructure institutions (MIIs) are becoming more reliant on IT systems, which depend on various vendors and service providers, it’s not fair to hold individuals responsible.

“Further, the test for ascertaining any individual responsibility for a technical glitch would entail ascertaining if there has been any act of omission/commission, including if an MD/CTO did or did not ensure adequate oversight/resources/checks and balances to prevent such glitch reasonably and by definition such a test would require the application of mind and assessment,” reads the SEBI circular dated Sept 20, 2024.

The circular states that if there is any downtime or disruption in services, the MIIs must pay a ‘financial disincentive’. This is meant to motivate them to continuously monitor, improve, and upgrade their systems to prevent technical issues, disruptions, or disasters.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.