SEBI panel suggests steps to strengthen governance of stock exchanges, other market infra institutions - check details

A Sebi panel on Wednesday recommended measures for strengthening the role played by the governing board and committees of stock exchanges and other market infrastructure institutions (MIIs).

Also, it has reviewed the requirements related to appointment and role as well as responsibility of directors on the board and key managerial persons (KMPs), Sebi said in a statement.

The committee headed by Sebi's former whole-time member G Mahalingam suggested measures for developing effective metrics for monitoring various aspects of the functioning of the MIIs -- stock exchanges, depositories and clearing corporation -- and its KMPs.

In addition, it recommended steps to enhance accountability and transparency and reviewed the policy on safekeeping and sharing of information held by MIIs, revisited the code of conduct and code of ethics for directors of the governing board and KMPs activities.

Besides, any activity being carried out by any of MII's investee companies which is in conflict with its role as a first line regulator should be phased out in a time-bound manner.

The regulator had set up the committee in April 2022 to review the existing governance framework and make recommendations for further strengthening of governance norms at MIIs.

The panel submitted its report to the regulator last week.

The panel was set up in the backdrop of the governance lapses observed in some of the MIIs, rapidly changing market dynamics and increasing reliance of MIIs on technology.

The committee consulted various stakeholders, including Public Interest Directors (PIDs), chief regulatory officers, representatives of MIIs and other relevant persons. It also took into consideration the past committee reports on governance of MIIs.

The Securities and Exchange Board of India (Sebi) has sought comments from the public till November 30 on the proposals.

"To ensure greater independence of the board of the MII, at least two-third members of the board of the MII shall comprise of PIDs," the panel suggested.

The roles and responsibilities of all directors should be clearly outlined, especially their responsibilities towards regulatory compliance and risk management function, it added.

The existing process of appointment of PIDs, non-independent directors and managing director should be rationalised by mapping certain expertise to PIDs while maintaining an overall balance of expertise required in the board.

Further, provisions in SECC and D&P Regulations should be incorporated to enable Sebi to appoint PIDs on the board of the MII.

Under the proposal, the functions of MIIs should be categorised into three verticals -- critical operations; regulatory, compliance and risk management; and other functions including business development. The KMPs heading the functions under the first two verticals should be at par in hierarchy with the KMPs heading the third vertical.

In order to enhance transparency, the MIIs should disclose the agenda and minutes of meetings of their board, keeping in mind their role as a 'first-level regulator'.

To begin with, agendas related to regulatory, compliance and risk management areas may be disclosed on the website of the MII.

"If any KMP or board member becomes/is aware of any acts of wrongdoing and fails to report the same to the board of the MII or to Sebi, respectively, then such person should be held accountable," the panel suggested.

The existing code of conduct and code of ethics for the directors and KMPs of the MIIs should be rationalised into a single code of conduct to specifically include regulatory, compliance and risk management, good governance and due diligence as important components of operations.

The scope of Sebi' powers under SECC Regulations should include levy of penalty and taking other disciplinary action like suspension, barring to attend meetings etc on individuals of MII, including its directors, members of statutory committees, KMPs, employees and other persons associated with the MIIs, for any contravention of rules.

In exceptional cases including repeated breaches or violations, Sebi should explore harsher options of debarring MIIs from introduction of new products and restricting their existing activities.

Further, the SCRA, the Sebi Act, and the Depositories Act may be reviewed by the regulator to increase the penalty amount that may be applicable for MII and relevant persons associated with MII.

The definition of KMPs should be changed to cover employees based on importance of activities carried out by them and their relative hierarchy within the MII. Further, the MII must clearly segregate the roles and responsibilities of such KMPs.

Video and audio recordings of the meetings of the board of the MII should be made mandatory.

Apart from the usual self-appraisals, an external agency should also be appointed to independently assess the performance of the board and statutory committees of the MII, the committee recommended.