The Securities and Exchange Board of India (SEBI) has consistently championed reforms to position India’s securities markets to attract capital to connect with its economic aspirations. Its aspirations for robust, cost-efficient, and technologically advanced market infrastructure trading innovative products have been evident through initiatives like interoperability among clearing corporations, blockchain experimentation, and the introduction of instruments like REITs, InvITs, corporate bonds, and municipal bonds. However, achieving these ambitions demands a recalibration of clearing corporations' ownership structures. Central to this recalibration is diversifying ownership and strategically increasing the stake eligibility domestic/foreign regulated entities can hold in clearing corporations.
The latest regulatory consultation paper rightly emphasizes operational independence, technological innovation, and financial resilience in clearing corporations preparing for Securities Markets (3.0). Unlike stock exchanges, which may rely on broader public shareholding for governance, clearing corporations are tightly regulated utilities. To achieve SEBI’s goals, it is critical to make clearing corporations commercially attractive to all domestic and foreign stakeholders by raising ownership limits and allowing them to contribute more meaningfully to the ecosystem.
Diversified Ownership: Building Resilience and Independence
Clearing corporations have traditionally been dominated by their parent exchanges. While this arrangement has provided stability, it has also limited operational independence and exposed CCPs to governance blind spots. Diversified ownership offers a pathway to enhanced resilience and governance. During the 2008 global financial crisis, the Clearing Corporation of India Limited (CCIL) showcased how diversified ownership can deliver systemic stability. With banks, financial institutions, and primary dealers as its stakeholders, CCIL benefited from a breadth of expertise that allowed it to respond effectively to market volatility. This collaborative governance approach ensured that CCIL could maintain stability across the government securities and forex markets, reinforcing the importance of shared decision-making in mitigating risks.
Diversified ownership also bolsters capital resilience. Settlement Guarantee Funds (SGFs), essential for absorbing member defaults, require significant financial buffers. By allowing domestic entities, such as banks, exchanges, and other financial institutions, to hold up to 25% ownership, clearing corporations can access a deeper pool of capital. This strengthens their ability to fund critical technological upgrades and operational expansions, mainly as there is a strong case for a regulatory push for multi-asset clearing structures that include newer instruments like REITs and municipal bonds. Shorter settlement cycles in the equity markets add another angle to the need for robust risk management besides technology solutions to move in the same direction seamlessly.
Foreign Ownership: A Catalyst for Innovation and Global Integration
While diversified domestic ownership strengthens governance, foreign ownership introduces transformative advantages. Currently, foreign ownership in clearing corporations is capped at 15%, limiting the ability of global entities to contribute meaningfully. Raising this limit to 25% for foreign-regulated entities, aligned with the proposed cap for domestic entities, would make clearing corporations more commercially viable and strategically attractive.
Driving Technological Advancements
Foreign-regulated entities bring cutting-edge technologies, such as blockchain and AI, that can revolutionize clearing and settlement processes. For example, the US Depository Trust & Clearing Corporation (DTCC) introduced a blockchain-based settlement platform that significantly reduces settlement times and enhances transparency. Similarly, portfolio margining innovations by LCH in the UK optimize collateral usage, reducing costs for clearing members. Allowing foreign stakeholders to hold meaningful stakes in Indian CCPs can accelerate the adoption of these technologies/practices, aligning with regulatory aspirations for technological innovation and investor protection.
Enhancing Cross-Border Settlements
As India’s markets attract more global investors, efficient cross-border clearing mechanisms are becoming critical. Foreign entities with global expertise can help CCPs establish seamless linkages with international markets. For instance, Euroclear and Clearstream have leveraged their ownership by global banks to handle cross-border transactions effortlessly. Allowing higher foreign ownership in Indian CCPs could facilitate similar integration, ensuring faster, more reliable settlements for international participants in instruments like corporate bonds and InvITs.
Improving Collateral Efficiency
Collateral management remains a critical challenge for clearing members, particularly given the increasing complexity of India’s securities ecosystem, which could impede the clearing ecosystem's cost efficiency and hence the cost-competitiveness of Indian markets. Innovations in collateral efficiency, such as portfolio margining, allow participants to offset risks across multiple asset classes, minimizing collateral requirements. Higher foreign ownership in Indian CCPs can bring this expertise into the domestic market, reducing costs for participants and improving liquidity.
More Foreign Investment equals More Forex Outflows, too?
One common argument against higher foreign ownership is the fear of sustained forex outflows through dividend repatriation. However, this concern must be weighed against the broader benefits of foreign expertise and capital. Strategic safeguards can address these fears:
1. Reinvestment Requirements: Mandating that a portion of profits earned by foreign stakeholders be reinvested in India’s financial infrastructure and technology ensures that gains directly benefit the local market.
2. Dividend Caps: Setting reasonable limits on dividend payouts can retain a significant portion of earnings within India, supporting growth and operational resilience.
Singapore’s approach provides valuable lessons. The Singapore Exchange Derivatives Clearing (SGX-DC) has successfully balanced foreign ownership with domestic reinvestment, leveraging global expertise to strengthen its infrastructure while ensuring local market benefits.
Aligning Ownership with Regulatory Aspirations
SEBI’s ambitions for the Indian securities market go beyond systemic stability—they aim to create a market infrastructure that is globally competitive, innovative, and inclusive. Increasing the ownership cap for both foreign and domestic entities to 25% aligns perfectly with these goals. It ensures a balanced governance structure and makes clearing corporations commercially attractive to all stakeholders. First, such reforms would attract foreign-regulated entities to invest in CCPs for strategic and commercial reasons, bringing advanced technologies and global expertise. Second, domestic exchanges and institutions holding meaningful stakes would strengthen their alignment with the ecosystem, ensuring that CCPs prioritize market efficiency and cost reduction without compromising efficiency in their fiduciary duty of settlement of contracts.
India’s securities markets are poised for exponential growth, but their infrastructure must evolve to meet the demands of global integration and technological innovation. Increasing ownership limits for foreign and domestic entities to 25 percent offers a pragmatic solution, fostering collaboration, innovation, and financial resilience in clearing corporations. Investing entities would find it commercially attractive and remain interested in working with the investee entities. This shift would align SEBI’s regulatory ambitions with practical outcomes, transforming CCPs into engines of growth, stability, and global competitiveness. By embracing broader ownership structures, India can ensure its financial markets are ready to lead globally, delivering unmatched efficiency, innovation, and security for investors worldwide.
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