SEBI Proposes Strengthening Governance and Independence of MII

Ananth Narayan, whole-time member (WTM) of the Securities and Exchange Board of India (SEBI), cautioned that a strong focus on commercial objectives by market infrastructure institutions (MIIs) could result in the de-prioritisation of their primary role as regulators and public utility providers. Speaking at the Business Standard BFSI Insight Summit on Thursday, Narayan outlined the potential risks of MIIs shifting focus away from their regulatory responsibilities to maximise commercial gains, which may compromise their core duties in investor protection and market stability.

Narayan emphasised that MIIs — including stock exchanges, clearing corporations, and depositories — serve as the backbone of India’s financial ecosystem. These institutions are critical for maintaining market stability, efficiency, and safeguarding investor interests. However, with MIIs often functioning as commercial entities, they may prioritise profit maximisation over their regulatory obligations, especially when driven by incentives like competition, public shareholding, and listing.

He pointed out that most MIIs operate with high-profit margins (often exceeding 60%), possess strong price-to-earnings multiples, and distribute significant dividends. Narayan expressed concern that this commercial focus could lead to a de-prioritisation of critical investments in areas like security, technology, risk management, and operational safeguards, which are essential for the long-term health and stability of the capital markets. He warned that such a shift could result in the launch and persistence of financial products that do not adequately protect investors, potentially undermining trust in the market.

Given the central role of MIIs in the market, they must comply with stringent norms of transparency and governance, ensuring their actions are aligned with the public interest. Narayan revealed that SEBI is considering several measures to strengthen the MII ecosystem, including the independent evaluation of MIIs, the possible demerger of clearing corporations (CCs) from stock exchanges, and the appointment of key officials such as public interest directors (PIDs) to enhance governance.

Narayan noted that currently, clearing corporations are fully owned by stock exchanges, which raises concerns about potential conflicts of interest. He pointed to the dominant equity clearing corporation, which clears over 85% of all trades on large exchanges, as an example of how full ownership by a single exchange can create conflicts, either real or perceived. In this context, SEBI is exploring the demerger of clearing corporations from exchanges, with a public consultation paper set to be released soon on the subject.

He explained that while stock exchanges can list and have public shareholders, clearing corporations — which are fully owned by these exchanges — are not allowed to do so. The listing of stock exchanges, such as BSE Ltd and the National Stock Exchange (NSE), effectively leads to the indirect listing of the clearing corporations, since shareholders of the parent exchanges consider the consolidated financials of both the exchange and the clearing corporation. This interdependency, exacerbated by the interoperability introduced between clearing corporations and multiple exchanges, has prompted a reassessment of the ownership structure of clearing corporations.

Significance of Interoperability 

The introduction of interoperability, which allows a clearing corporation to clear trades from multiple exchanges, has changed the dynamics of the MII ecosystem, making it more efficient for investors while also providing better backup and redundancy. However, this has also shifted the conversation on the independence of clearing corporations, which are often dependent on their parent exchanges for capital infusion, risk management, and other resources.

Narayan stressed the need for clearing corporations to be truly independent and self-sufficient, with broad-based ownership and participation from clearing members, who should have a stake in the Settlement Guarantee Fund (SGF). He called for a fundamental review of the existing construct of CCs to ensure a level playing field and mitigate potential conflicts of interest.

The SEBI official also highlighted that SEBI is reviewing its involvement in the appointment process for key officials at MIIs. Currently, SEBI selects public interest directors (PIDs) from a list provided by the MII, but the regulator is considering whether to take a more active role in the appointment of other key managerial personnel, similar to its involvement in selecting managing directors (MDs) and chief executive officers (CEOs).

Narayan revealed that SEBI is working on ways to make the appointment process for PIDs more institutionalised and improve the ease of doing business for these directors. Moreover, SEBI is looking to ensure that key managerial personnel, such as the chief technology officer, chief information security officer, chief risk officer, and chief compliance officer, have direct interactions with the governing board committees, which will also play a role in their annual performance evaluations. This, according to Narayan, would help strengthen the overall governance and accountability framework of MIIs.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.