SEBI Enhances Oversight of Market Infrastructure Institutions

The capital market regulator,  the Securities and Exchange Board of India (SEBI) has introduced a robust regulatory framework to strengthen the oversight of Market Infrastructure Institutions (MIIs), including stock exchanges, clearing corporations, and depositories. This comprehensive framework has been introduced to ensure transparency, accountability, and investor protection within these critical market entities.

The main emphasis of the new framework is the requirement for both listed and unlisted MIIs to disclose their shareholding patterns quarterly on their websites, aligning with SEBI’s Listing Obligations and Disclosure Requirements (LODR) norms. This transparency measure empowers investors to make informed decisions and facilitates effective market surveillance.

To further strengthen oversight, each MII is required to appoint a non-associated Designated Depository (DD) responsible for monitoring adherence to shareholding limits. The DD will vigilantly track breaches of the 5% and 15% threshold limits outlined in the Securities Contracts (Regulation) Act, 1956, and the Depositories and Participants Regulations, respectively. Additionally, the DD will alert the MII and the relevant stock exchange when the combined holding of 49% by non-residents is exceeded, enabling timely action to address potential risks.

SEBI has also implemented measures to prevent excessive concentration of ownership within MIIs. Stock exchanges are prohibited from allowing Trading Members (TMs), along with their associates and agents, to collectively hold more than 49% of an MII’s equity. Prior approval is necessary for purchases exceeding 45%. Moreover, clearing corporations must maintain a minimum of 51% ownership by stock exchanges, preventing any single exchange from exerting undue influence over multiple clearing corporations.

To ensure the integrity of MIIs, SEBI has introduced stringent fit and proper criteria for shareholders holding 2% or more equity. MIIs are obligated to notify their shareholders of these requirements and report any non-compliance to SEBI on a quarterly basis. In cases of breaches, the DD will take decisive action by freezing excess shares, disabling voting rights, and transferring dividends from excess holdings to Investor Protection Funds (IPF) or Settlement Guarantee Funds (SGF).

The framework also addresses the divestment of excess shareholding. For listed MIIs, a special window will be provided by the stock exchange to facilitate the sale of excess shares. Unlisted MIIs will be subject to specific directions from SEBI on a case-by-case basis.

The implementation of this comprehensive framework is expected to significantly enhance the governance and transparency of MIIs, fostering a more robust and resilient market ecosystem. The new regulations will take effect on January 12, 2025, 90 days after the circular’s issuance.

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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.