Section 28A of the SEBI Act, 1992 An Overview

Section 28A was introduced into the Securities and Exchange Board of India (SEBI) Act, 1992 by the SEBI (Amendment) Act, 1993. It empowers the Securities and Exchange Board of India (SEBI) to regulate the conduct of entities engaged in the business of acting as a "stock exchange" or a "clearing corporation", and to prescribe the manner in which securities are to be dematerialised, transferred and settled.

1. Purpose and Rationale

The Indian capital market, after liberalisation, witnessed a rapid increase in the number of securitiesrelated intermediaries stock exchanges, clearing houses, depositories and other participants. Prior to the amendment, the regulatory framework lacked a specific provision to deal with the infrastructure of the securities settlement system. Section 28A was inserted to fill this gap, giving SEBI the authority to:

• Define the parameters for the registration and operation of stock exchanges and clearing corporations.
• Lay down standards for the dematerialisation of securities.
• Regulate the processes of transfer, settlement and clearing of securities.
• Ensure that the overall market infrastructure is robust, transparent and fair to all market participants.

2. Key Provisions

2.1 Definition of Clearing Corporation

For the purposes of this section, a clearing corporation is any corporation that provides clearing and settlement services for securities traded on a stock exchange. This definition includes both domestic and foreign clearing houses operating in India.

2.2 Power to Issue Directions

SEBI may, by way of a direction:

• Set out the eligibility criteria for an entity to become a stock exchange or clearing corporation.
• Prescribe the format and content of the agreements between such entities and their members.
• Specify the standards for the technology and riskmanagement systems to be employed.
• Mandate the maintenance of adequate capital and reserve requirements.
• Require periodic reporting and audit of the settlement process.

2.3 Registration and Licencing

Any entity seeking to operate as a stock exchange or clearing corporation must obtain a licence from SEBI. The licence is granted only after the applicant demonstrates compliance with the standards laid down under Section 28A, including:

• Robust IT infrastructure capable of handling highvolume trade data.
• Effective riskmitigation mechanisms such as margin requirements and default funds.
• Transparent governance structures with independent board members.

2.4 Dematerialisation of Securities

Section 28A empowers SEBI to prescribe the method of dematerialisation the conversion of physical certificates into electronic form. The SEBI (Depositories) Regulations, 1996, issued under this power, require all listed securities to be held in dematerialised form, thereby reducing settlement risk and fraud.

2.5 Settlement Cycle

SEBI may fix the settlement cycle (e.g., T+2) for all securities traded on recognised exchanges. The direction must be communicated to all market participants, and noncompliance attracts penalties under the SEBI Act.

3. Impact on Market Participants

3.1 Stock Exchanges

The provision has forced exchanges to upgrade their clearing and settlement backends, adopt central depositories like NSDL and CDSL, and adhere to strict riskmanagement norms. Failure to comply can lead to withdrawal of the exchanges licence.

3.2 Clearing Corporations

Clearing houses now operate under a regulatory regime that ensures they maintain sufficient financial resources to meet participant defaults. The introduction of a default fund, mandatory margins, and realtime monitoring has increased confidence among investors.

3.3 Brokers and Depositories

Brokerdealers must route all client transactions through authorised clearing corporations and maintain proper records of dematerialised securities. Depositories are required to maintain a secure, tamperproof ledger, with SEBI audit rights to verify compliance.

4. Enforcement and Penalties

If a stock exchange or clearing corporation contravenes any direction issued under Section 28A, SEBI may:

• Issue a showcause notice and impose a monetary penalty (up to 5 crores or 5% of the turnover, whichever is higher).
• Suspend or cancel the licence of the errant entity.
• Initiate criminal prosecution where the violation also breaches provisions of the Indian Penal Code or the Companies Act.

5. Recent Developments

In the last few years, SEBI has used Section 28A to address emerging challenges:

• Algorithmic Trading: By directing exchanges to implement pretrade risk checks, SEBI curbed excessive volatility caused by highfrequency trading.
• CrossBorder Clearing: SEBI issued guidelines for Indian clearing houses to interface with overseas counterparts, ensuring that foreignexchange risks are covered.
• Blockchain Pilots: Under Section 28A, SEBI allowed a limited trial of blockchainbased settlement for government securities, assessing its feasibility for the broader market.

6. Criticisms and Debates

While Section 28A is widely regarded as a cornerstone of market infrastructure regulation, some critics argue that:

• The onesizefitsall approach may stifle innovation in fintechdriven settlement solutions.
• Stringent capital requirements can act as a barrier to entry for new, potentially competitive clearing houses.
• Frequent circulars can create compliance fatigue among smaller brokers.

SEBI has responded by establishing a Consultation Committee to periodically review the norms and incorporate stakeholder feedback.

7. Conclusion

Section 28A of the SEBI Act, 1992, equips the regulator with essential tools to safeguard the integrity, efficiency, and transparency of Indias securities settlement system. By mandating clear standards for stock exchanges, clearing corporations, and dematerialisation processes, it has significantly reduced systemic risk and bolstered investor confidence. Ongoing refinements and technologydriven initiatives will ensure that the framework remains fit for purpose in an increasingly digital market environment.

Reference: SEBI (Amendment) Act, 1993; SEBI (Depositories) Regulations, 1996; SEBI Circulars on Settlement Cycle and Risk Management (20222024).