SEBI Panel Discusses Dividend Caps For NSE And Other Clearing Corporations

India’s market regulator, the Securities & Exchange Board of India (SEBI), is weighing a fresh set of rules to strengthen the finances of clearing corporations, the institutions that act as the backbone of stock market settlements.

One of the key proposals under discussion is a cap on dividends paid by clearing corporations to stock exchanges, including the country’s largest bourse, National Stock Exchange (NSE).

The discussions are part of a broader review being carried out by a committee led by former RBI deputy governor R. Gandhi. The panel has been examining ways to make clearing corporations financially stronger without increasing transaction charges for investors and brokers.

Why Does SEBI Want Stronger Clearing Corporations?

Clearing corporations play a critical role in the market ecosystem. They step in as the legal counterparty for every trade and absorb risks if any broker defaults during settlement.

According to people familiar with the discussions, a senior SEBI official recently suggested putting a regulatory ceiling on dividends distributed by clearing corporations. The idea is to ensure that a larger share of profits stays within the system to build stronger financial buffers.

The committee is also discussing whether interest earned from investments of broker collateral in treasury bills and government securities should be directly transferred to settlement guarantee funds (SGFs). These funds are designed to handle defaults by large brokers during volatile market conditions.

At present, the income from these investments is retained by the clearing corporations.

Other Measures Under Review

Another proposal being examined is whether stock exchanges should share a larger portion of transaction charges with clearing corporations. Currently, exchanges retain most of these charges.

The panel is also looking at introducing a uniform formula for calculating SGFs across exchanges. While the NSE clearing corporation reportedly maintains funds capable of handling defaults from the top three brokers, some other exchanges maintain coverage for only two brokers.

Market participants say there is currently no standard mechanism on how SGFs should be replenished if the fund size falls after a major default event.

Also Read - India's Top E-Commerce And Quick-Commerce Firms Launch Digital Commerce Coalition

However, some exchange officials believe routing all investment income into SGFs may reduce flexibility. If the fund becomes larger than required, the excess money cannot easily be redeployed elsewhere.

People aware of the discussions said the industry broadly agrees that the framework needs strengthening, though there is no immediate pressure to finalise the rules before the proposed NSE IPO.

Source:

The Economic Times