SEBI Proposes Amendments in Governance Framework of Market Infrastructure Institutions

The capital market regulator, the Securities and Exchange Board of India (SEBI) has laid down a proposal on June 24, which aims to reform the governance structure of key Market Infrastructure Institutions (MIIs), including stock exchanges, clearing corporations, and depositories. The proposal seeks public feedback until July 15.

Why the Change?

SEBI cited the surge in investor participation, increased trading volumes, and the expanding web of market intermediaries as driving factors behind the proposed reforms. According to the regulator, strengthening the governance of MIIs is essential to sustain orderly capital formation and ensure market integrity.

Functional Segregation: A New Governance Blueprint

A key highlight of the proposal is the division of MII operations into three functional verticals:

1. Critical Operations – Trading, clearing, and settlement functions.
2. Regulatory Operations – Compliance, risk management, and investor grievance redressal.
3. Other Functions – Business development and auxiliary activities.

This structural delineation aims to ensure operational clarity, accountability, and regulatory discipline within MIIs.

Mandatory Appointment of Executive Directors

To enhance operational leadership and governance, SEBI recommends the appointment of two Executive Directors (EDs) on the governing board of every MII. These EDs will be classified as Key Management Personnel (KMP) and will oversee critical operations and regulatory functions alongside the Managing Director (MD).

Currently, the MD exercises control over all three verticals, leading to disparities in authority and compensation across the top leadership. Introducing EDs on the board is expected to streamline decision-making and address governance asymmetries.

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Clarifying Roles: MD, EDs, CTO, and CISO

SEBI’s proposal also outlines well-defined roles and responsibilities for senior personnel:

• Managing Director (MD): Overall leadership with an emphasis on strategic and regulatory oversight.
• Executive Directors (EDs): Operational heads with a focus on compliance, risk, and investor-related matters.
• Chief Technology Officer (CTO): Responsible for system architecture, technology infrastructure, and operations.
• Chief Information Security Officer (CISO): Charged with identifying and mitigating cybersecurity risks and managing security incident responses.

These definitions address existing gaps in regulatory norms, where roles and responsibilities for key positions were previously vague.

Regulating External Directorships to Mitigate Conflicts

To prevent potential governance conflicts, SEBI has proposed stricter rules around external directorships for senior MII officials:

• MDs may serve as non-executive directors on the boards of unlisted public entities that do not engage in commercial activities.
• EDs, however, will not be allowed to serve on the boards of any company except subsidiaries of the MII.

This measure aims to safeguard the neutrality and public accountability of MIIs.

Conclusion

SEBI emphasised that the primary obligation of MIIs is to uphold public interest over commercial gain. Strengthening governance mechanisms is a step towards fostering greater transparency, accountability, and efficiency in India’s capital markets.

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