Regulatory Changes Provide Much-Needed Relief
The Securities and Exchange Board of India (SEBI), in collaboration with stock exchanges, has introduced relaxed norms for technical glitches in brokerage systems, effective April 1, 2025. This regulatory shift comes as a major relief for brokers who have long been subjected to strict penalties and operational restrictions due to system malfunctions, even in cases where they were not at fault.
Under the new framework, financial penalties have been eliminated in certain cases, fines for non-reporting have been capped, and business restrictions will not apply if only a small percentage of clients are affected. SEBI’s decision aims to enhance transparency in reporting system failures while ensuring brokers are not unfairly penalized for issues beyond their control.
Scenarios Where Brokers Will No Longer Face Penalties
A recent circular issued by SEBI outlines specific cases where brokers will not be penalized for technical glitches. These scenarios include:
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System failures at the exchange, depository, or clearing corporation level
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Global outages affecting cloud service providers
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Back-office operational issues that do not impact trading execution
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Delays in KYC verification for new clients
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Payment gateway failures caused by banking system errors
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Minor feature-related failures, such as charting errors or missing news updates
While these incidents will still be classified as technical glitches, brokers will not be financially penalized for them. However, they will be required to report such issues and take necessary corrective actions to prevent recurrences.
Definition of a Technical Glitch Remains Broad
Despite broker requests for a more specific classification, SEBI has maintained a broad definition of what constitutes a technical glitch. Under the revised guidelines, any malfunction in a broker’s systems lasting five minutes or more—whether related to hardware, software, network, or electronic services—will still be considered a technical glitch.
This means that even temporary slowdowns or minor deviations in system performance will still require brokers to report incidents to exchanges. SEBI believes that this approach ensures greater transparency and accountability, but brokers argue that it places an unnecessary compliance burden on them.
Revised Penalty Structure with New Caps
One of the most significant changes is the introduction of caps on penalties for failing to report glitches. Previously, brokers faced unlimited financial penalties that increased daily, leading to huge compliance costs. Under the new structure, the penalties are capped as follows:
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₹5 lakh for large brokers
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₹1 lakh for small brokers
Previously, brokers hesitated to report even minor issues due to the fear of severe financial penalties and business restrictions. The introduction of penalty caps ensures that firms can now comply with reporting requirements without facing excessive financial consequences.
Eased Business Restrictions for Brokers
SEBI has also introduced relaxed business restrictions by modifying a rule that previously prevented brokers from onboarding new clients after facing five technical glitches in a financial year. Now, brokers will be exempt from onboarding restrictions if fewer than 5% of their active clients are affected by a glitch.
Under the revised framework:
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For the first and second incidents, brokers will receive observation and warning letters.
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For large brokers, the penalty for the third incident will start at ₹50,000, increasing by ₹25,000 for each subsequent incident.
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For small brokers, the penalty for the third incident will start at ₹20,000, increasing by ₹5,000 for each subsequent case.
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The severity of penalties will be based on an assessment by exchanges, ensuring that minor issues are not penalized excessively.
This update is seen as a positive step toward reducing unnecessary restrictions while still ensuring brokers take corrective actions when technical failures occur.
Brokers’ Reactions to the New Norms
While the broking industry has largely welcomed SEBI’s relaxed norms, some experts believe that the relief is only partial. A senior official from a leading brokerage firm stated:
“We had requested SEBI to classify an event as a technical glitch only if at least 10% of active clients were impacted. However, the 5% threshold is a reasonable compromise.”
Despite the improvements, some brokers remain concerned that the broad definition of technical glitches will continue to create operational challenges. Many argue that SEBI should reconsider its classification criteria to prevent minor issues from being unnecessarily categorized as major glitches.
Stricter Reporting and Compliance Requirements Remain
Even though SEBI has reduced financial penalties, brokers must still adhere to strict reporting timelines whenever a glitch occurs. The reporting requirements include:
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Immediate notification to exchanges or within one hour of a glitch occurring
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Submission of a preliminary report within one working day
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Completion of a root cause analysis report within 14 days
Failure to comply with these reporting deadlines will result in penalties and potential operational restrictions. Additionally, SEBI has clarified that brokers must implement preventive measures to minimize the recurrence of similar glitches.
Investor Risk Reduction Access (IRRA) Platform Still in Effect
SEBI has also reaffirmed the continuation of the Investor Risk Reduction Access (IRRA) platform, which was introduced in 2022. This platform allows investors to exit their positions directly through exchanges in the event of a broker-side technical glitch. The move ensures that investor interests remain protected even as regulatory norms are relaxed for brokers.
SEBI’s Long-Term Approach Balances Compliance and Flexibility
SEBI’s latest amendments indicate an effort to strike a balance between oversight and operational flexibility. While the regulator had initially implemented strict technical glitch norms in 2022 to address frequent disruptions, excessive penalties led to hesitation in reporting issues by brokers.
With the new penalty caps, reporting requirements, and business flexibility, SEBI is aiming to encourage transparency while ensuring brokers are not unfairly penalized for minor system failures. However, the broking industry continues to seek further refinements, particularly in redefining what qualifies as a reportable technical glitch.
