The Securities and Exchange Board of India (SEBI) on Wednesday imposed a total penalty of ₹25 lakh on the Bombay Stock Exchange Limited (BSE) following an inspection that revealed systemic failures in information dissemination and client code modification oversight.
The regulator’s primary concern centered on BSE’s system architecture that enabled paid clients and the Listing Compliance Monitoring (LCM) team to receive unpublished price-sensitive information before general investors could access it on the BSE website.
“I find that the system architecture of BSE did not ensure equal, unrestricted, transparent and fair access to information/data with regard to corporate announcements of listed companies to all persons as required under regulation 39(3) of the SECC Regulations,” the SEBI adjudicating officer ruled.
The investigation conducted for the period between February 2021 and September 2022 revealed that BSE’s load balancing system distributed access through multiple databases, creating timing disparities in information availability. In 98 out of 100 instances examined, the LCM received data before it was replicated to other databases, while in 6 out of 100 cases, paid subscribers received information before general website users could access it.
SEBI found this arrangement violated Regulation 39(3) of the Securities Contracts (Regulation) Regulations, 2018, which mandates equal, unrestricted, transparent and fair access to all persons without any bias towards its associates and related entities.
“There is no plausible reason that LCM must get the data before general users of BSE website, especially when such information is prone to misuse by anyone who gets this information before general investors,” the order stated.
The second major violation involved BSE’s inadequate monitoring of client code modifications (CCMs). SEBI found multiple deficiencies including failure to formulate comprehensive policies for identifying frequent modifiers, inadequate review of broker error accounts conducted only once every three years, and allowing institutional-to-institutional client code modifications between unrelated entities without proper penalties.
“This shows weak supervision and monitoring by BSE when seen in the context of requirements of daily monitoring…This also shows laxity of BSE towards its supervisory functions…Clause 15.3.2.3 of the SEBI Master Circular dated July 05, 2021 has been clearly violated by BSE.”
Regarding institutional client code modifications, SEBI found,
“I find that such lack of due diligence on the part of BSE towards CCMs, which can be used with the mala fide purpose by brokers. Hence, in my view, BSE has violated provisions of SEBI circular dated October 26, 2004, January 03, 2011 and July 05, 2011 by not penalizing brokers.”
BSE’s legal team argued that the alleged defaults can be remedied by corrective measures and claimed that no loss was caused to the investors and no gain was made by BSE in relation to the allegations.
Counsel for BSE also stated that it had implemented corrective measures including creating time gaps in data dissemination to paid subscribers on September 13, 2023, modifying the load balancing system to prioritise general website access, and enhancing monitoring mechanisms for error account reviews.
However, SEBI’s adjudicating officer rejected BSE’s arguments, emphasising the exchange’s role as a first-level regulator.
“Being the first level regulator in the stock market and having been bestowed with primary duties…the role of stock exchanges as ‘the first layer of oversight’ is of much significance while handling material price sensitive information.”
The regulator firmly rejected BSE’s defense, delivering a scathing assessment:
“This case involves multiple acts of omissions, laxity and negligence with a certain amount of lethargic approach which cannot be allowed to be exonerated if the first level regulator having paramount duties of regulation and oversight shows such approach of lax regulation leaving visible scope for misuse of its systems.”
In a definitive ruling on BSE’s regulatory responsibilities, SEBI stated:
“Such duty, if allowed to be violated with impunity, will be a serious setback to the image and the prestige of the BSE and SEBI both.”
Source : https://www.barandbench.com/news/litigation/sebi-imposes-25-lakh-penalty-on-bse-find-out-why