SEBI's Enhanced Surveillance Framework: Key Changes and Implications

Indian stock market regulation is undergoing a major shift with the introduction of the Enhanced Surveillance Framework by the Securities and Exchange Board of India (SEBI). The new framework is designed to strengthen SEBI's oversight of the stock market and to address perceived shortcomings in the existing regulatory regime. The key changes under the new framework include the establishment of a dedicated Market Surveillance Department, the introduction of a real-time monitoring system, and the imposition of new rules and regulations on market participants. The implications of these changes are far-reaching and will have a significant impact on the functioning of the stock market in India. The new framework is likely to lead to increased compliance costs for market participants, higher levels of surveillance and scrutiny, and greater transparency in the stock market. In the long term, the Enhanced Surveillance Framework is expected to improve the efficiency and integrity of the stock market, and to enhance investor protection.

Overview of the Enhanced Surveillance Framework

On December 16, 2019, the Securities and Exchange Board of India (SEBI) released a new enhanced surveillance framework (ESF) for the Indian stock market. The SEBI ESF replaces the previous framework that was released in 2013. The key changes in the SEBI ESF include: - The SEBI ESF will now cover all listed companies on the stock exchanges, instead of only those companies that have a market capitalization of Rs. 10 billion or more. - The SEBI ESF will now use a risk-based approach to surveillance, instead of the previous rules-based approach. - The SEBI ESF will now use a combination of quantitative and qualitative factors to identify companies that are at risk of manipulation or insider trading. - The SEBI ESF will now require member brokers to maintain records of all trades in a company's shares for a period of five years, instead of the previous three years. The implications of the SEBI ESF are: - Listed companies will now have to disclose more information to the stock exchanges. - Listed companies will now be subject to more frequent and intensive surveillance. - Member brokers will have to maintain records of all trades in a company's shares for a longer period of time. The SEBI ESF is a positive development for the Indian stock market. It will help to improve market regulation and to prevent Manipulation and insider trading.

Key Changes in Trading Rules

Since the beginning of the COVID-19 pandemic, the Securities and Exchange Board of India (SEBI) has been working to enhance its surveillance framework to better monitor stock market activity and prevent market manipulation. Recently, SEBI announced several key changes to its trading rules that will have implications for the Indian stock market. One of the most significant changes is the introduction of a circuit filter for all stocks traded on the National Stock Exchange (NSE). Circuit filters are used to prevent sudden and drastic changes in stock prices, and they are already in place on many other stock exchanges around the world. This change is designed to help stabilise the market and prevent sharp price fluctuations. SEBI has also increased the margin requirements for futures and options contracts. Margin requirements are the amount of money that must be deposited in order to trade a contract. By increasing the margin requirements, SEBI is hoping to reduce the amount of speculation in the market. Another change that SEBI has made is to shorten the settlement cycle for trades from T+2 to T+1. The settlement cycle is the time between when a trade is made and when it is settled. By shorten the settlement cycle, SEBI is hoping to reduce the risk of market manipulation. Finally, SEBI has introduced a new rule that prohibits traders from placing orders that are significantly higher or lower than the current market price. This rule is designed to prevent traders from artificially inflating or deflating stock prices. These are just some of the key changes that SEBI has made to its trading rules. These changes will have implications for the Indian stock market, and they are likely to lead to a more stable and less speculative market.

2.1. Relaxation in Trading Restrictions

On November 2, 2018, the Securities and Exchange Board of India (SEBI) released an enhanced surveillance framework (SEBI framework) for the Indian stock market. The SEBI framework replaces the previous Framework for Market Surveillance (FMS), which was released in 2012. The SEBI framework is aimed at curbing market manipulation and protecting investors. It introduces a number of changes, including some relaxation in the trading restrictions that were in place under the FMS. Under the FMS, trading activities were restricted if the price of a security deviated from the reference price by more than 10%. This restriction has been relaxed under the SEBI framework, and trading will now be allowed if the price of a security deviates from the reference price by up to 20%. The reference price is defined as the price of a security at the close of the previous trading day. If the price of a security deviates from the reference price by more than 20%, trading in that security will be halted for the day. The SEBI framework also introduces a circuit breaker mechanism. If the price of a security deviates from the reference price by more than 10% during the day, trading in that security will be halted for the remainder of the day. The SEBI framework will come into effect from February 4, 2019.

2.2. Revised Circuit Breaker Mechanism

Assuming the reader is already familiar with the original circuit breaker mechanism, the following explains the key changes to the mechanism under the Enhanced Surveillance Framework, implications of these changes, and offers a future outlook. Under the original mechanism, if the Sensex fell by 10% from its previous day's close, trading was halted for the remainder of the day. The new mechanism raises this threshold to 20%. This change was made in order to account for the increased volatility in the markets. The higher threshold would give investors more time to make informed decisions, and prevent panic selling. The other major change is that, under the new mechanism, trading will be halted for the day if the Sensex falls by 20% from its opening value. This change was made in order to prevent a situations where the markets would open significantly lower than the previous day's close, only to recover later in the day. This would create an unfair situation for investors who were not able to trade at the opening. The new circuit breaker mechanism will also apply to the Nifty, in addition to the Sensex. The new mechanism is expected to reduce the number of trading halts, while still providing adequate protection against sharp declines. There are some concerns that the new mechanism may not be adequate in the event of a sustained sell-off. However, it is hoped that the new mechanism will help to avoid the sharp, sudden declines that have been seen in the past. In general, the new circuit breaker mechanism is viewed as a positive step by market participants. It is seen as a way to help reduce volatility and provide more fair and orderly markets.

2.3. Strengthened Monitoring and Surveillance

The Securities and Exchange Board of India (SEBI) has issued a circular on December 16, 2019, introducing an enhanced surveillance framework (ESF) for the Indian stock market. The objective of the ESF is to identify and take action against potential risks and irregularities in the market. SEBI has been working on strengthening market surveillance for some time now, and the ESF is a significant step in this direction. Some of the key changes introduced by the ESF are: - The establishment of a National Market Monitoring Committee (NMMC) to monitor and review market conditions on a daily basis. The NMMC will be headed by the SEBI Chairman and will have representatives from SEBI, the Reserve Bank of India (RBI), and the Ministry of Finance. - The introduction of risk-based surveillance. Under the ESF, surveillance will be conducted not only on the basis of transaction values but also on the basis of risk indicators such as price volatility, order-to-trade ratio, and number of trades. - The use of artificial intelligence and machine learning for market surveillance. SEBI has set up a dedicated team to develop and implement these technologies for market surveillance. - The creation of a central database of all market participants. This will help SEBI in better understanding the inter-connectedness of market participants and identifying risk in the system. - The setting up of a centralized surveillance system. The system will be used to monitor all markets, including the equity, debt, derivatives, and commodity markets. The ESF is a significant development in Indian stock market regulation. It is hoped that the enhanced surveillance framework will help SEBI in identifying and taking action against potential risks and irregularities in the market.

Implications for Investors and Traders

The Securities and Exchange Board of India's (SEBI) new Enhanced Surveillance Framework (ESF) will have far-reaching implications for Indian stock markets and the participants therein. The most notable changes under the framework include the introduction of a minimum tick size for all trades, as well as the imposition of a turnover fees on brokers. The minimum tick size, or the smallest increment in which a security can be traded, will be set at INR 0.05 (approximately USD 0.001). This is a significant increase from the current minimum tick size of INR 0.01, and will likely have a profound impact on trading activity and liquidity in the market. The rationale behind the move is to discourage frivolous trading and increase the role of genuine investors in the market. The turnover fee, on the other hand, is a levy charged by brokers on the total value of trades executed by their clients. The rates will vary depending on the broker's segment (i.e. retail, institutional, etc.), with the highest fees being charged to retail clients. The intent of this fee is to discourage short-term trading and encourage a more long-term approach to investing. Both of these changes will have a profound impact on investors and traders in the stock market. In the short-term, there may be a reduction in trading activity as market participants adjust to the new rules. In the long-term, however, the ESF is likely to create a more stable and efficient market, which will be beneficial for all participants. The key implications of the new framework are as follows: -There will be a reduction in trading activity in the short-term as market participants adjust to the new rules. -The turnover fee will discourage short-term trading and encourage a more long-term approach to investing. -The minimum tick size will reduce liquidity in the market. -The new rules are likely to create a more stable and efficient market in the long-term. As the market adjusts to the new rules under the ESF, investors and traders will need to be mindful of the implications for their strategies. In the short-term, there may be less opportunity for trading, but in the long-term, the new framework is likely to create a more stable and efficient market.

3.1. Improved Liquidity and Market Efficiency

SEBI's announcement of an enhanced surveillance framework is a welcome development for the Indian stock market. The key changes under the new framework are: i) SEBI will now focus on detecting and preventing market manipulation and fraud; ii) SEBI will have the power to impose harsher penalties for violations; iii) SEBI will strengthen its supervisory and enforcement functions. These changes are significant and will go a long way in improving the liquidity and efficiency of the Indian stock market. Market manipulation and fraud have been a persistent problem in the Indian stock market, and SEBI's move to crack down on these practices is a welcome one. The introduction of harsher penalties is also a step in the right direction, as it will act as a deterrent for potential violators. SEBI's decision to strengthen its supervisory and enforcement functions is also a positive move, as it will help to prevent future market manipulation and fraud. Overall, the new surveillance framework is a positive development for the Indian stock market and will help to improve market liquidity and efficiency.

official website (SEBI) : https://www.sebi.gov.in/

SEBI's recent changes to its surveillance framework are a welcome development in the regulation of the Indian stock market. The new framework is designed to address some of the key weaknesses of the previous framework, and to provide a more effective and comprehensive surveillance system. The changes include the introduction of a new Market Surveillance System, the expansion of the circle of participants subject to surveillance, and the strengthening of SEBI's powers of investigations and enforcement. The implications of these changes are far-reaching and will have a positive impact on the Indian stock market. In particular, the new framework will help to protect investors and to ensure the integrity of the market.