SEBI's Circulars About Enhancing Liquidity And Curbing Manipulation Regarding Illiquid Scrips

SEBI recently has come out with two different circulars in respect to illiquid scrips wherein one circular talks about enhancing liquidity in the illiquid scrips by promoting incentives by stock exchanges on trading in such scrips, another circular aims at curbing manipulations in the illiquid scrips by introducing Periodic Call Auction in illiquid scrips.

Ms. Deepika Vijay Sawhney
Partner
+919818316936
deepika@indiacp.com

The definition of illiquid scrips is kept different in both the circulars with the definition being much wider in case of scrips qualifying for Periodic Call Auctions.
The provisions of both the circulars are discussed in detail hereunder:

1. Introduction of Liquidity Enhancement Scheme for illiquid scrips in Equity Cash Market by Circular dated February 08, 2013:

• Likewise the already in force Liquidity Enhancement Scheme in derivatives segment, SEBI has now permitted stock exchanges to introduce incentives under Liquidity Enhancement Scheme (LES) for trading in illiquid scrips of Equity Cash Market Segment.

• The stock exchanges will come out with the list of illiquid securities to qualify for LES. The securities that will fall under the category of illiquid scrip and may qualify for incentives under LES shall be:

• Securities having a mean impact cost greater than or equal to 2% for an order size of Rs.1 lakh, where mean impact cost of the security on the stock exchange is calculated over the past 60 trading days.

• Securities introduced for trading in the “permitted to trade” category.

• Any security which is introduced under LES by one stock exchange may also be introduced by another stock exchange (even if such security in not eligible on that exchange).

• Discontinuance of any security from LES by any stock exchange shall be with an advance notice of 15 days.

• The stock exchanges are required to come up with list of qualifying securities (as per above mentioned criteria) as well as detailed guidelines w.r.t. incentives, its distribution and obligations of participating parties (i.e. stock brokers, market makers etc.) and shall ensure transparency, market integrity and compliance with relevant laws.

• Stock Exchanges are further to ensure following:

• No incentives to trading members indulging in trades solely for seeking incentives

• No incentives for trades where the counterparty is self (i.e. buy and sale by same entity)

2. Introduction of Periodic Call Auction for Illiquid Scrips and Extension of Pre-open Session to all scrips vide circular dated February 14, 2013

• Apparently with an intent to curb price manipulations and artificial and non genuine trades in illiquid scrips, SEBI has mandated trading only though periodic call auction mechanism in illiquid scrips in the equity market. Thus from April 1, 2013, trading in all illiquid scrips (as defined hereunder) would be only through Periodic Call Auction Sessions.

• Scrips will be identified to be illiquid quarterly on the following basis:

• The average daily trading volume of a scrip in a quarter is less than 10000;

• The average daily number of trades is less than 50 in a quarter;

• The scrip is classified as illiquid at all exchanges where it is traded.

• The scrips will be transferred back to the normal market segment once either they are traded in periodic call auction for two quarters or the aforesaid criteria is not met. Any entry or exit of scrip in call auction mechanism will be with a two trading days notice

• The trading in periodic call auction session shall be in following manner:

• Each Periodic call auction session would be of one hour duration.

• First session to start at 9.30 am (total no. of sessions still to be determined)

• 45 minutes of each session will be for order entry, modification and cancellation.

• 8 minutes thereafter will be for order matching and trade confirmation. 

• Last 7 minutes shall be buffer period for closing and transition to next session.

• The session to close randomly which will be system driven during last one minute of order entry between 44th & 45th minute.

• All unmatched orders at the end shall stand cancelled.

• The maximum price band will be of 20% on all scrips or as reduced uniformly based on surveillance.

• SEBI with an intent to prevent price manipulation has also provided for penalty provision wherein the maximum of buy price entered by a particular client equals or is higher than the minimum sell price entered by the same client and if this results in trades. The penalty for such trade will be 0.5 per cent of the trade value for buy and sale orders each or Rs 2,500 for a buy trade and Rs 2,500 for a sell trade, whichever is higher. The penalty to be calculated and collected from trading members by the exchanges on a daily basis.

• In addition to above SEBI has further provided that Pre-Open Call Auction session is to be now applicable on all exchanges for all scrips (and not only index scrips) except for those classified as illiquid as per this circular.