SEBI Guidelines For Market Infrastructure Institutions: Key Provisions And Implications

Introduction

On November 22, 2024, the Securities and Exchange Board of India (SEBI) released guidelines for Stock Exchanges, Clearing Corporations, and Depositories to enhance governance and strengthen their role as Market Infrastructure Institutions (MIIs).[1] These guidelines, based on recommendations from the Committee on Strengthening Governance of MIIs and deliberations in the Industry Standards Forum, aim to safeguard investor interests and promote transparency and accountability in the securities market. The provisions, effective from April 1, 2025, are issued under statutory powers conferred by the SEBI Act, the Depositories Act, and related regulations, emphasizing the importance of robust market practices and adherence to regulatory expectations. 

Key Provisions of the Circular

Enhanced Role of Public Interest Directors (PIDs)

• Regular Meetings: PIDs must meet at least twice a year to review:
  • Compliance with regulations, circulars, and guidelines issued by SEBI
  • Functioning of critical operations and regulatory/compliance functions
  • Adequacy of resources (financial and human)
  • Potential conflicts of interest
• Reporting Obligations: PIDs must submit reports to SEBI and the MII’s governing board on the outcomes of their meetings.

Enhanced Compliance and Risk Management

• Quarterly Reports by Compliance Officers (COs):
  • COs must submit quarterly reports to SEBI on any non-compliance with regulations and investor grievance redressal.
  • Reports must be submitted within 45 days of the end of each quarter.
  • The format of the reports varies for different types of MIIs (Annexure A1 and A2).
• Half-Yearly Reports by Chief Risk Officers (CRiOs):
  • CRiOs must submit half-yearly reports to SEBI on the MII’s overall risk management.
  • Reports must be submitted within 90 days of the end of each half-year.
  • The content and format of the reports are specified in Annexure B.

Transparency and Disclosures: Board Meeting Agenda and Minutes

• MIIs must disclose the agenda and minutes of their board meetings pertaining to regulatory, compliance, risk management, and investor grievance areas on their websites.
• Confidential items can be excluded, but the reasons for confidentiality must be documented by the governing board.

Disciplinary Actions

• Standard Operating Procedures (SOPs):
  • MIIs must establish SOPs for taking disciplinary actions against Key Management Personnel (KMPs) for non-compliance with regulations and internal guidelines.
  • SOPs must be approved by the Nomination and Remuneration Committee (NRC) and the governing board.
• Disciplinary Actions: SOPs should outline potential disciplinary actions, including advisories, warnings, impact on increments or promotions, invocation of malus clawback provisions, suspension, termination, and other actions as suggested by the NRC.

Whistle Blower Policy

• Complaint Resolution: MII whistleblower complaints must be resolved within 60 days.
• Audit Committee Responsibilities:
  • The Audit Committee is responsible for receiving, investigating, and making decisions on whistleblower complaints.
  • The Audit Committee must submit a report to the governing board quarterly, detailing complaints received and actions taken.
• Disincentives for Misreporting: MIIs must implement safeguards to encourage genuine whistle-blowing and discourage false or malicious reporting.
• Annual Review: The Regulatory Oversight Committee must review the MII’s whistleblower policy annually.
• Public Disclosure: The whistleblower policy must be published on the MII’s website.

Enhancing Supervision and Monitoring

• Technological Advancements: MIIs are encouraged to adopt RegTech and SupTech solutions to strengthen their regulatory and supervisory mechanisms.
• Online Submissions: MIIs should enable online submissions from members/participants to reduce reliance on physical information sharing and facilitate the generation of alerts for regulatory purposes.
• Disclosure of Member/Participant Information: MIIs must disclose material information about their members or participants on their websites, including:
  • Investor complaints (past 3 years)
  • Regulatory actions against members (past 3 years)
  • Net worth
  • Other relevant information
• Sharing of Significant Non-Compliance: Significant non-compliance observed by an MII regarding its members or participants should be shared with other MIIs.
• Policies for Back-Office Vendors: MIIs need to have policies for appointing and monitoring back-office vendors and outsourced agencies to ensure compliance with regulations.

Training and Capacity Building

• Board of Directors: MIIs are required to provide at least seven days of annual training to directors on ongoing developments in the capital markets, regulatory space, RegTech/SupTech, etc.
• New Directors: MIIs must offer familiarization programs to new directors regarding their roles, responsibilities, expectations, and applicable regulations.

Data Sharing Policy

• Internal Policy: MIIs must have an internal policy for secure sharing and monitoring of confidential and sensitive data, covering online and offline methods.
• Monitoring and Audits: Regular monitoring through technology and periodic audits (every 6 months) are required to ensure compliance with the data-sharing policy.
• Non-Compliance Reporting: Data breaches and leakages must be reported within 15 days to the MII board and SEBI by the CO, along with remedial actions taken/planned.
• Non-discriminatory Sharing: Data sharing should be done on a non-discriminatory basis.

Appointment/Reappointment of Directors

• Simplified Process: A two-stage process is introduced for SEBI approval of directors.
  • Stage 1: MII submits brief profiles of at least two candidates. SEBI shortlists and grants NOC to one.
  • Stage 2: MII submits complete application documents for the shortlisted candidate for SEBI approval.
• Reappointment of PIDs: No need to send two names for existing PIDs seeking reappointment.
• Skill Evaluation Metrics: MIIs shall develop a skill evaluation framework to assess candidates for appointment/reappointment of PIDs.

Implications for Market Infrastructure Institutions (MIIs)

Action Steps for MIIs

Review and Update Internal Policies and Procedures

• Review and update internal policies and procedures, including those related to compliance, risk management, whistle-blower mechanisms, and data security.
• Ensure that these policies align with the new SEBI regulations.

Implement Enhanced Monitoring and Supervision Systems

• Utilize technology solutions (RegTech and SupTech) to strengthen monitoring and surveillance capabilities.
• Implement robust systems to monitor the activities of members and participants.
• Establish clear procedures for identifying and addressing potential risks.

Strengthen Governance Practices

• Ensure that the board of directors and key management personnel (KMPs) are aware of their roles and responsibilities under the new regulations.
• Establish effective channels of communication between the board, management, and regulatory authorities.
• Implement a robust whistle-blower mechanism and ensure its effectiveness.

Enhance Training and Capacity Building

• Provide comprehensive training to directors, KMPs, and other relevant staff on the new regulations.
• Establish a robust training program to develop the necessary skills and knowledge within the organization.

Ensure Compliance with Data Protection and Security Regulations

• Implement robust data security measures to protect sensitive information.
• Establish clear data-sharing protocols and ensure compliance with data privacy regulations.
• Conduct regular security audits and vulnerability assessments.

Engage with Regulators

• Maintain open and regular communication with SEBI and other relevant regulatory authorities.
• Proactively seek clarification on any ambiguities or concerns regarding the implementation of the new regulations.

Implications for MIIs

• Increased Compliance Costs: The new regulations may increase compliance costs due to additional resources, systems, and training requirements.
• Enhanced Operational Risk: MIIs must strengthen their operational risk management practices to mitigate potential risks.
• Regulatory Scrutiny: MIIs can expect increased regulatory scrutiny and potential enforcement actions for non-compliance.
• Reputational Risk: Non-compliance with regulations can damage the MII’s reputation and erode investor confidence.

Conclusion

The SEBI guidelines for MIIs emphasize stronger governance, enhanced transparency, and better risk management to safeguard the securities market. While these changes require MIIs to invest in updating systems and policies, they also create opportunities to build greater investor confidence and operational strength. By focusing on technology adoption, data security, and effective board oversight, MIIs can not only meet regulatory expectations but also enhance their role in ensuring a stable and efficient financial ecosystem.

[1] https://www.sebi.gov.in/legal/circulars/nov-2024/guidelines-to-stock-exchanges-clearing-corporations-and-depositories_88709.html.

King Stubb & Kasiva,
Advocates & Attorneys

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