The Securities and Exchange Board of India (Sebi) in February last year had allowed stock exchanges to introduce incentive schemes for brokers and intermediaries to enhance liquidity in illiquid securities in the equity cash and derivative segments.
Under the scheme, brokers and other market intermediaries are given incentives for a specified period of time to bring in liquidity and generate investor interest in securities with limited trading activity.
In a circular issued today, Sebi said that the liquidity enhancement schemes enhance would have to be “objective, transparent, non-discretionary and non-discriminatory.
The scheme would not compromise on market integrity or risk management.
Sebi said liquidity enhancement scheme would have the prior approval of the stock exchange’s board. Besides, the implementation and outcome of the scheme would be monitored by the board at quarterly intervals.
Also, the scheme is required to specify the incentives available to market makers /liquidity providers and such incentives include discount as well as adjustment in fees in other segments, cash payment or issue of shares, including options and warrants.
The effectiveness of the scheme will be reviewed by exchanges every six months. The regulator said the schemes can be discontinued any time with advance notice of 15 days.
It said the outcome of the scheme like incentives granted and volumes achieved, and security would be disseminated on a monthly basis.
Regarding illiquid securities, Sebi said the stock exchange would formulate it’s own benchmarks for selecting such securities for liquidity enhancement.
Sebi said that once the scheme is discontinued, it can be reintroduced on the same security provided it is less than the three-year period since the introduction of scheme on that security.
“Further, a exchange may introduce liquidity enhancement schemes in securities where liquidity enhancement scheme has been introduced in another exchange. Such schemes cannot be continued beyond the period of liquidity enhancement schemes of the initiating exchange,” Sebi noted.
The list of securities eligible for liquidity enhancement will be disseminated to the market.