The Securities and Exchange Board of India (Sebi), in consultation with the country’s stock exchanges, has rolled out a rationalized penalty framework for stock brokers. The move, announced on Friday, aims to standardize penalties, reduce duplication, and shift from a punitive to a more corrective stance. The new regime also promises to bring uniformity and fairness to the compliance landscape.
While the intent is sound, legal experts believe the move’s success will hinge on careful implementation and vigil to ensure discipline isn’t inadvertently diluted.
The previous framework was beset with inconsistencies that sowed confusion and frustration. As Sonam Chandwani, managing partner at KS Legal, noted, “The move to rationalize and standardize the penalty framework was primarily driven by the long-standing inconsistency in how exchanges penalized brokers for similar types of violations.”
In its press release, Sebi clarified that under the old framework, brokers with memberships on multiple exchanges faced differing penalties for the same infraction and, in some instances, were penalized multiple times for a single error. “This created duplication, uncertainty, and a sense of unfairness in enforcement. The term ‘penalty’ itself was seen as carrying a stigma, creating unintended reputational risk for procedural or technical mistakes,” it said.
To fix these problems, Sebi and the bourses worked together to create a standardized framework. “It signals a policy shift from punitive to corrective regulation,” Chandwani said.
Uniformity across exchanges
The new system ensures the consequence for a specific violation is the same across all exchanges. To prevent multiple penalties for the same offense, a designated ‘lead exchange’ will be responsible for levying penalties for violations common across exchanges. Of the 235 existing penalty items reviewed, penalties on 40 violations have been eliminated entirely. For 105 minor lapses, the penalty has been reclassified as a ‘financial disincentive’. “This reduces the reputational stigma and treats the issue as a lapse to be corrected rather than a serious offense”, Chandwani said.
For seven types of violations, a first-time offense will now result in a warning or advisory instead of a monetary fine. A cap on the maximum penalty amount has been introduced for six types of violations, ensuring proportionality.
Crucially, the revised framework will also apply to ongoing enforcement proceedings, providing major relief to the stockbroking community.
Despite its merits, the new framework is not without potential pitfalls. The discretion granted to exchanges to classify lapses as ‘minor’ or ‘major’ is a significant grey area. “This could still lead to inconsistent interpretation, especially if detailed guidance is not issued by Sebi,” Chandwani said.
The absence of a formal Sebi circular may also invite procedural challenges.
More fundamentally, lawyers believe there is a risk that a softer regime could weaken deterrence, potentially fostering a more relaxed compliance culture if not monitored closely.
Another practical challenge lies in its application to legacy cases. “Brokers facing ongoing proceedings might seek to invoke the new framework to dilute existing charges, which could create administrative burden and ambiguity,” Chandwani said.
According to Nirali Mehta, partner at Mindspright Legal, while the retrospective application of substantive law is generally impermissible in ongoing proceedings unless expressly provided, Sebi has clarified that the new framework would apply, ruling out the benefit for proceedings already adjudicated.
A critical loose end, experts said, was the lack of clarity on how the revised framework will apply to matters that are currently pending for orders. “While the revised framework does not have a binding effect on the appellate tribunal authorities, it may nonetheless serve as a persuasive consideration for them to adopt a more lenient approach,” Mehta said.
She added that if appellate authorities take cognizance of the new regime, it could facilitate early resolution of matters, reduce the burden on the tribunal, and ensure consistency with Sebi’s current regulatory approach.
Legal experts said though Sebi’s move is a regulatory modernization, its effectiveness would depend on the supervisory oversight to ensure there is no inadvertent compromise on compliance.
