SEBI to Launch Settlement Scheme for Brokers in Algo Violation Cases

The Securities and Exchange Board of India (SEBI) is preparing to introduce a settlement scheme for stock brokers who received show-cause notices related to their association with unregulated algorithmic trading platforms. The scheme will be presented to SEBI’s board on March 24 as an information memorandum and is expected to be notified soon after.

Low Settlement Amount, Limited Window

The proposed settlement amount is to be in the range of ₹1–2 lakh. Brokers who want to opt for the scheme must apply to SEBI. The application window will be open for 3 months and may be extended depending on the number of responses received.

Over 110 Brokers Issued Notices

In 2023, SEBI sent show-cause notices to more than 110 brokers, including Zerodha, 5Paisa Capital, and Motilal Oswal Financial Services. These brokers were found to be associated with platforms offering algorithmic trading strategies that promised assured returns, a practice not permitted under SEBI’s regulations.

Previous Warnings and Circulars

SEBI had issued a public warning in June 2022, followed by a circular in September 2022. The circular prohibited brokers from associating with unregulated platforms that claimed performance or return-based algo strategies. It also instructed brokers to terminate any such partnerships within seven days.

Despite these directives, SEBI found that several brokers continued their affiliations with such platforms, prompting further investigation and the issuance of show-cause notices.

New Rules Introduced in February 2024

On February 4, SEBI introduced new regulations requiring brokers to act as principals for all algo trading executed via APIs. Algo providers must now be empanelled with stock exchanges and will act as agents of the brokers. Brokers are prohibited from onboarding non-empanelled algo vendors.

Conclusion

SEBI has also issued a consultation paper suggesting changes to the Issue of Capital Disclosure Requirements (ICDR) and Share-Based Employee Benefits (SBEB) norms. These changes aim to clarify minimum holding periods and ESOP-related rules. Public comments on these proposals are open until April 10.

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