Exclusive: SEBI is mulling tweaks in oversight mechanism of stock exchanges & other MIIs

Market regulator Securities and Exchange Board of India (SEBI) is considering tweaking the reporting structure of key people in stock exchanges, clearing corporations, and depositories. The idea is to further enhance the role of oversight committees, in ensuring good governance at the market infrastructure institutions (MIIs). As per people aware of the development, “SEBI is proposing that key people like Chief Regulatory Officer, Chief Technology Officer, Chief Risk Officer should have dual reporting structure, i.e. besides the MD and CEO of the MII, they should also report to the respective oversight committee as well."

The Chief Regulatory Officer will report to the Regulatory Oversight Committee, the Chief Technology Officer and Chief Information Security Officer will report to the Standing Committee on Technology (SCOT), and the Chief Risk Officer will report to the Risk Management Committee of the market infrastructure institution (MII).

The existing regulations mandate such managerial personnel to meet with these committees once a quarter in the absence of the MD and CEO. Now the idea is that these KMPs should regularly report to these committees so that they are free to share and update these oversight committees if they find or notice any concern. SEBI has discussed the proposal in a committee and sought the feedback of stock exchanges, depositories, clearing corporations, and other stakeholders; broadly there is an agreement on the proposal.

In June, SEBI came up with a circular based on the recommendations of the Committee on Strengthening Governance of Market Infrastructure Institutions. The functions, composition, and Terms of Reference of the statutory committees of MIIs were further deliberated in the Industry Standards Forum (ISF). As per that circular, all the oversight committees should be chaired by Public Interest Directors. Public Interest Directors in market infrastructure institutions are like independent directors in the companies, to protect the interest of investors. The appointment of public interest directors is approved by SEBI.

SEBI had constituted a committee, in April 2022, under the chairmanship of its former Whole-Time Member G Mahalingam, to review the existing governance framework and make recommendations for further strengthening of governance norms at MIIs. The committee submitted its report in November 2022.

The committee suggested various measures to strengthen corporate governance at stock exchanges and clearing corporations.

Mahalingam committee had recommended that “the Board of the MII or the Chairperson of the Board (without the presence of the MD  and any other executive director), on a periodic basis as specified by SEBI, should meet the Chief Regulatory Officer (CRO)/Compliance Officer, the Chief Risk Officer (CRiO), the Chief Information Security Officer (CISO), the Statutory Auditor of the  MII  and any other person as determined by the  Public Interest Directors (PIDs)  and Non-independent Directors ( NIDs) to discuss important issues concerning the MII”.

It also suggested that the PIDs should continue to meet twice a year and submit to SEBI a periodic report highlighting issues of importance/concern to MIIs.

After this, SEBI issued a detailed circular and detailed the role of each committee. Like the Standing Committee on Technology (SCOT) to ensure the availability of required IT infrastructure for core and critical functions under verticals for "critical operations" and "regulatory, compliance, risk management, and investor grievances”, and ensure the existence of adequate Business Continuity Plans (BCP) and Disaster Recovery (DR) plans, while ensuring sound and prudent policies, standards, and procedures for managing technology risks and safeguarding information assets in the stock exchange among others.

Similarly, the Regulatory Oversight Committee ensures all the matters related to the surveillance and investigation, Listing of Securities,  compliance, laying down code of conduct, grievance redressal, and investor protection services among other issues.

The Risk Management Committee (RMC) has to formulate a risk management framework, including the framework for identification of internal and external risks, Measures for risk mitigation including systems and processes for internal control, review of risk mitigation measures, and a Business continuity plan.

As per the recommendations of the Bimal Jalan committee, SEBI has to review the regulations related to market infrastructure institutions. SEBI was last reviewed in 2017 and then in 2022, the Mahalingam committee was formed.

The proposal will require amendments in SECC regulations and Depository and Participants Regulation 2018.  

At the time of publishing this report, Zee Business awaited SEBI's response to queries emailed to it seeking comments on the issue.