Stock and Exchange Board of India has introduces liquidity enhancement scheme for illiquid equity derivatives. SEBI with a circular no. 5 dated 2-6-2011 introduces this scheme for the securities which are illiquid and need liquidity to flow and do better in the stock market. The LES(liquid enhancement scheme) is introduced with some rules which are as follows with the circular of SEBI.
CIR/DNPD/5/2011 June 2, 2011
Managing Director/ Chief Executive Officer
Recognized Stock Exchanges
Sub: Liquidity Enhancement Schemes for Illiquid Securities in Equity Derivatives
1. In consultation with BSE, MCX-SX, NSE and USE, it has been decided to permit
Stock Exchanges to introduce one or more liquidity enhancement schemes (LES) to
enhance liquidity of illiquid securities in their equity derivatives segments.
2. The Stock Exchange shall ensure that the LES, including any modification therein or
a. has the prior approval of its Board and its implementation and outcome is
monitored by the Board at quarterly intervals;
b. prescribes and monitors the obligations of liquidity enhancers (liquidity
provider, market maker, maker-taker or by whatever name called);
c. disburses the incentives linked to performance;
d. is objective, transparent, non-discretionary and non-discriminatory;
e. does not compromise market integrity or risk management;
f. complies with all the relevant laws; and
g. is disclosed to market at least 15 days in advance and its outcome
(incentives granted and volume achieved – liquidity enhancer wise and
security wise) is disseminated monthly within a week of the close of the
3. The LES can be introduced in any of the following securities:
a. New securities permitted on the Stock Exchange after the date of this
b. Securities in case of a new Stock Exchange / new Segment, and
c. Securities where the average trading volume for the last 60 trading days on
the Stock Exchange is less than 0.1% of market capitalization of the
4. The LES can be discontinued at any time with an advance notice of 15 days. It shall,
however, be discontinued as soon as the average trading volume on the Stock
Exchange, during the last 60 trading days, reaches 1% of market capitalization of the
underlying, or six months from introduction of the scheme, whichever is earlier.
5. If a Stock Exchange introduces LES on securities eligible under Para 3 above, other
Stock Exchanges may introduce LES in the same / competing securities even if those
are not eligible under Para 3 above. Such LES of the other Stock Exchanges cannot
be continued beyond the period of LES of the former stock Exchange.
6. The incentives under LES shall be transparent and measurable. These may take
either of the two forms:
a. Discount in fees, adjustment in fees in other segments, cash payment;
b. Shares, including options and warrants, of the Stock Exchange.
7. If a Stock Exchange chooses the form specified in Para ‘6a’ above, the incentives
under all LES, during a financial year, shall not exceed 25% of the net profits or 25%
of the free reserves of the Stock Exchange, whichever is higher, as per the audited
financial statements of the preceding financial year. If, however, a Stock Exchange
chooses the form specified in Para ‘6b’ above, the shares, including the shares that
may accrue on exercise of warrants or options, given as incentives under all LES,
during a financial year, shall not exceed 25% of the issued and outstanding shares of
the Stock Exchange as on the last day of the preceding financial year.
8. The Stock Exchange shall submit half-yearly reports on the working of its LES for
review of SEBI.
9. The implementation of this circular shall be covered in the inspection of the Stock
10. This circular is issued in exercise of the powers conferred under Section 11(1) of the
Securities and Exchange Board of India Act 1992, read with Section 10 of the
Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in
securities and to promote the development of, and to regulate the securities market.
11. The circular shall come into force from the date of the circular.
12. This circular is available on SEBI website at www.sebi.gov.in under the category
Tags-liquid enhancement scheme,les,sebi les scheme