SEBI Strengthens Governance Framework for MIIs: What You Need to Know

The capital markets regulator, the SEBI on Friday tightened governance norms for Market Infrastructure Institutions (MIIs), including stock exchanges, by mandating the appointment of two executive directors (EDs) to enhance operational efficiency and regulatory oversight.

Under the revised structure, the ED of Vertical 1 will oversee critical operational functions, while the ED of Vertical 2 will be responsible for regulatory affairs, compliance, risk management and investor grievance redressal. Both EDs will be inducted into the MII’s Governing Board, strengthening accountability at the board level.

Transparent and Merit-Based Appointment Process

To ensure transparency, SEBI has directed MIIs to fill ED positions through open advertisements. Applicants must possess qualifications and experience relevant to their respective verticals, as specified in the regulator’s circular. MIIs must submit at least two candidate names, without indicating preference for each ED role to SEBI for approval, along with the proposed compensation package. Any subsequent changes to approved remuneration will require prior regulatory consent.

Leadership Continuity and Performance Evaluation

SEBI has also prescribed timelines to ensure continuity in leadership. MIIs must forward proposed names for ED appointments at least two months before the incumbent ED’s term expires.

Public Interest Directors (PIDs) will oversee the annual performance assessment of EDs through an evaluation framework aligned with that applicable to Managing Directors (MDs).

Recognising that MIIs differ in size, financial strength and stage of growth, SEBI has allowed flexibility in implementing the new norms. MIIs facing genuine operational constraints may seek time-bound exemptions, which will be considered on a case-by-case basis. Despite the flexibility, SEBI has emphasised that both EDs will report directly to the MD for all purposes, reinforcing accountability within MIIs.

Enhanced Oversight and Appraisal Mechanism

As part of the strengthened oversight framework, the Standing Committee on Technology (SCOT) will hold quarterly meetings with the ED overseeing critical operations, without the presence of the MD or other executives. Inputs from SCOT and the MD will be considered by the Nomination and Remuneration Committee (NRC) while finalising performance appraisals.

Similarly, the Regulatory Oversight Committee (ROC) and the Risk Management Committee (RMC) will independently meet the ED responsible for regulatory, and risk functions every quarter. The NRC will consider feedback from the ROC, RMC and the MD during performance evaluations.

Both EDs will present quarterly reports to the Governing Board on matters relating to their respective verticals. They will also have the authority to directly escalate important or urgent issues to SEBI.

Realignment of Key Management Reporting Lines

SEBI has realigned reporting structures for key management personnel (KMPs). Heads of departments under the operations vertical—including the Chief Technology Officer (CTO) and Chief Information Security Officer (CISO)—will report to the ED of Vertical 1. The Compliance Officer and Chief Risk Officer (CRiO) will report to the ED of Vertical 2.

Although reporting lines have shifted from the MD to the EDs, statutory committees will continue to meet these KMPs independently at least once every quarter.

Expanded Role of the Chief Risk Officer

Clarifying the responsibilities of the CRiO, SEBI stated that the officer will oversee all technology-related audits, including system and cybersecurity audits. The CRiO will also attend SCOT meetings as an invitee, alongside the CTO and CISO, further strengthening technology and risk oversight.

Phased Implementation Timeline

To ensure a practical rollout, SEBI has permitted MIIs to follow a glide path. The first ED must be appointed within six months of the amendments to the SECC Regulations, 2018 and the D&P Regulations, 2018 coming into force. The second ED must be appointed within 9 months of the implementation of these amendments.

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