Sebi strengthens governance at exchanges and other MIIs with approval for new vertical heads

By offering this unified platform, SEBI aims to enhance transparency, improve operational efficiency, and attract greater foreign investment into Indian capital markets.

The Sebi board has cleared proposals to strengthen the governance of Market Infrastructure Institutions (MIIs) such as stock exchanges, clearing corporations, and depositories, the regulator informed on September 12.

Citing growing scale, profitability, and their role as first-line regulators, the board approved appointing two Executive Directors (EDs) of comparable stature to head key verticals, alongside the Managing Director (MD) on the governing board. MIIs will be free to appoint the third ED for the other functions including business development vertical.

The appointment and re-appointment process for these EDs will be similar to that of the MD, requiring prior Sebi approval and as specified from time to time.

While the MD will continue to oversee overall affairs, EDs will manage operations in their verticals, with risk and compliance overseen by the EDs. Committees within an exchange such as the Standing Committee on Technology, Regulatory Oversight Committee and Risk Management Committee will hold meeting with respective vertical EDs without the presence of MD.

While the EDs will report to the MD, the Nomination and Remuneration Committee (NRC) of the governing board shall take inputs from the MD and the appropriate committee of the governing board in finalising the appraisal of the EDs.

Key managerial personnel like the Chief Technology Officer (CTO) and Chief Information Security Officer (CISO) will report to the EDs, with defined roles in technology resilience and cybersecurity.

The Sebi chairman also stressed that MIIs must prioritize public interest, risk management, and compliance over commercial goals. Sebi also proposed restricting directorships of MDs and EDs to avoid conflicts of interest.  EDs will report to the Governing Board and Sebi quarterly on matters concerning their respective verticals. As and when necessary, the EDs shall directly raise issues to the Governing Board and Sebi.

Currently, MIIs have three verticals - Critical operations such as trading, clearing, settlement, securities holding etc are called Vertical 1. The Certical 2 covers regulatory, compliance, risk management, and investor grievances. Vertical 3 covers all other issues including business development.

Sebi has been of the view that operations and regulatory verticals should be given higher priority in resource allocation, and failure or mis-governance in these critical institutions may cause adverse impact on the market.

Appointment of MDs, EDs in other boards

Currently, there are no clear norms on external directorships of MDs, creating potential governance risks. Sebi said that given the MD's full-time role and the significant growth of the securities market, their role as the first-line regulator has become increasingly critical.

Sebi is also of the view that absence of clear provisions in this regard may lead to various risks, including conflicts of interest, divided focus, and reputational risk.

An MD may be permitted to be appointed as a non-executive director on the board of a company registered as non-profit company under Section 8 of the Companies Act, 2013, and an unlisted state or central government company that is not involved in any commercial activity. Similarly, the EDs of an MII will not serve on the board of any other company, except for a subsidiary of the MII.

This will also ensure robust succession planning and adept governance structures.