SEBI has allowed stock exchanges to introduce liquidity enhancement schemes (LES) for illiquid stocks in the equity derivatives segment.
In a circular issued on Thursday, SEBI said that the incentive to be offered shall be transparent, measurable and can take two forms. The first would be a discount in fees, adjustment in fees in other segments or cash payment while the second may take the form of shares of the stock exchange including options and warrants.
Stock exchanges cannot give discounts in excess of 25 per cent of their net profits or 25 per cent of their free reserves (of the previous fiscal) whichever is higher.
In case the exchange issues shares, options or warrants, it shall not exceed 25 per cent of its issued or outstanding shares of the preceding fiscal
“This is a welcome move. It is going to be a very important tool, for us to improve liquidity in the market. We will study the SEBI circular and come out with our plans,” said Mr Madhu Kannan, MD and CEO of the BSE.
Opportunity
He said simply put, this facility would allow the exchanges to provide LES for members. For contracts that are not liquid, one can go out and compensate members so as to provide liquidity. LES is a way by which one can build liquidity in a new product. There is going to be an opportunity for market makers. SEBI has now given flexibility for doing this in a transparent way, in a very clear manner where certain people can take responsibility to become market makers.
LES can be introduced on new securities in existing stock exchanges, existing securities in a new exchange or segment and in securities whose average trading volumes in the last 60 days is less than 0.1 per cent of its market capitalisation.
Compliance rule
Stock exchanges have been asked to ensure that LES has prior permission from their board, prescribes and monitors the obligations of liquidity enhancers and disburses incentives linked to performance. Exchanges are also expected to ensure that they are objective, transparent, non-discretionary, non-discriminatory and do not compromise on market integrity and risk management. Exchanges are expected to comply with all relevant laws, and disclose modifications or discontinuation in LES at least 15 days in advance and the outcome of the scheme on a monthly basis within seven days after every month end.
LES may be discontinued at any time with a 15 day prior notice and can also be discontinued as soon as average trading volume reaches one per cent of the market capitalisation of the underlying (during the last 60 trading days or six months from the introduction of LES whichever is earlier.
The circular comes into force with immediate effect.
BSE's SME Platform
Meanwhile, on an SME platform, Mr Kannan said, that he wants the exchanges to go live as early as possible. He also said that a new Web site — www.bsesme.com had gone live on Thursday. There are indications that BSE may approach SEBI for obtaining final approval for its SME platform next week.
On listing plans, he said BSE is in favour of listing as early as possible. “Our shareholders are keen that the exchange goes in for listing at the earliest,” said Mr Kannan.