Sebi wants to review and rename ‘penalties’ to avoid stigmatising brokers

In a bid to reform market language and promote fairness, SEBI considers rebranding penalties for minor broker violations

In a significant move aimed at softening the perceived harshness of regulatory terminology, the Securities and Exchange Board of India (SEBI) is considering a proposal to review and possibly rename the term ‘penalties’—particularly in instances of minor infractions by brokers. The initiative reflects a broader effort to ensure that market participants are not unduly stigmatized for procedural lapses, especially those that do not result in investor harm.

This move, still under internal review, is expected to redefine the regulator’s communication style while maintaining the rigor of enforcement.

SEBI’s Intent: A Softer, More Nuanced Regulatory Tone

According to sources familiar with the matter, SEBI is actively discussing alternative terminology that better reflects the severity—or lack thereof—of certain transgressions. Terms such as ‘administrative fees’, ‘processing charges’, or ‘regulatory costs’ are being floated as possible replacements for what is currently broadly termed as "penalties".

An official aware of the internal deliberations said, “The intent is not to dilute the seriousness of violations, but to distinguish between willful misconduct and technical or inadvertent errors. This distinction is important for the reputation of brokers and public confidence in the regulatory process.”

The move has found support within segments of the broking community, which has long contended that even minor clerical or procedural errors—when labeled as "penalties"—can tarnish their standing with clients and investors.

Historical Context and Industry Concerns

SEBI’s enforcement actions are typically categorized into two broad types: serious violations that involve fraud or investor losses, and technical breaches such as delays in filing reports, incorrect disclosures, or procedural lapses. While the latter does not imply malicious intent, the public disclosure of “penalties” has often been seen as disproportionately harsh.

Market participants argue that this one-size-fits-all terminology has reputational implications. In an industry where credibility is paramount, the mere mention of the word "penalty" on an official notice can have significant business consequences.

Kavita Mehra, Partner at a Mumbai-based compliance advisory firm, commented,

“Language matters. When every violation is labelled a penalty, it sends a uniform signal of guilt. SEBI’s effort to reclassify this language is both timely and progressive.”

Market Reaction and Stakeholder Support

The broking community has generally welcomed SEBI’s initiative. Organizations such as the Association of National Exchanges Members of India (ANMI) have previously appealed to the regulator to make a distinction between punitive action and procedural non-compliance.

Rajesh Doshi, a senior member of ANMI, told reporters:

“SEBI has always been a fair regulator, and this shows they are listening. Brokers are not asking for leniency—just clarity and fairness in how lapses are portrayed.”

From a market perspective, this move is seen as a positive step that may help boost confidence among retail investors and newer entrants into the financial services space. Several industry veterans believe that the regulatory shift may also encourage more transparent self-reporting by brokers, knowing they won’t be publicly shamed for non-material issues.

Balancing Accountability with Fairness

Critics of the move caution that while the change in terminology may appear cosmetic, it must not result in reduced deterrence for violations. The challenge for SEBI will be to clearly define thresholds—distinguishing serious misconduct from minor or technical breaches—and implement a categorization system that is both transparent and consistent.

A former SEBI official noted,

“The language used in enforcement actions is critical. It must protect investors, ensure accountability, but also preserve the integrity of market participants who are largely compliant.”

In response, SEBI is reportedly considering a tiered framework that would continue to label serious violations as penalties or fines, while categorizing others as ‘remedial actions’ or ‘compliance levies’.

Broader Regulatory Implications

SEBI’s move aligns with a growing global trend among regulators to adopt less adversarial approaches in non-criminal enforcement. Similar discussions have taken place at financial watchdogs in the UK, Australia, and Canada, where distinctions are increasingly made between “breach notices”, “warnings”, and “penalties”.

Legal experts believe SEBI’s effort could pave the way for a more holistic regulatory environment where the emphasis is on corrective action and systemic improvement rather than punitive labeling.

Investor Outlook: Confidence through Transparency

For investors, especially retail participants, the shift could bring more nuanced understanding of compliance actions. Rather than being alarmed by headlines indicating a brokerage was "penalized", investors will be able to distinguish between genuine misconduct and minor compliance delays.

Neha Verma, a financial analyst at a domestic brokerage, said,

“This is a smart move. Retail investors often misinterpret minor regulatory disclosures as red flags. Clarifying terminology will improve trust and reduce unnecessary panic.”

The Road Ahead

While no formal timeline has been announced for the implementation of this change, SEBI is expected to hold stakeholder consultations and release a draft framework for public feedback in the coming months. The final decision will likely follow input from market intermediaries, legal advisors, and investor associations.

Until then, market watchers will closely track SEBI’s evolving regulatory philosophy—balancing strong enforcement with greater empathy and precision.