Breaking Down SEBI’s 2024 Framework For Shareholding In Market Infrastructure Institutions

Introduction:

The Securities and Exchange Board of India (“SEBI”) has introduced a framework to regulate the ownership and shareholding structures of Market Infrastructure Institutions (“MIIs”), including stock exchanges, clearing corporations, and depositories. Implemented on October 14, 2024[1], this framework sets guidelines to ensure adherence to ownership restrictions, public shareholding norms, and shareholder eligibility criteria.

About the Framework:

One of the core components of the framework is the requirement for all MIIs, regardless of whether they are listed or unlisted, to comply with SEBI’s Listing Obligations and Disclosure Requirements (“LODR”). Under these obligations, MIIs must disclose their shareholding patterns on a quarterly basis. Such a move ensures that investors and regulatory bodies are well-informed about the composition of ownership, enabling them to make better-informed decisions and evaluations

To monitor compliance with these ownership restrictions, SEBI mandates that each MII appoint a Designated Depository (“DD”). The DD is responsible for tracking and ensuring that MIIs do not breach the regulatory shareholding limits. Importantly, the appointed DD must not have any association with the MII it oversees, ensuring that its actions remain impartial. One of the DD’s primary responsibilities is to oversee the combined shareholding of foreign investors, which is capped at 49%. If this threshold is breached, the DD must notify the MII and the relevant stock exchange, triggering immediate corrective measures.

In addition to monitoring foreign ownership, SEBI has implemented strict limits on the shareholding of trading members (“TMs”), their associates, and agents in MIIs. Collectively, their stake must not exceed 49% of the MII’s equity. Furthermore, if their combined shareholding reaches 45%, they are required to obtain prior approval from the relevant stock exchange before acquiring additional shares.

The new framework also introduces specific rules for stock exchanges that hold stakes in clearing corporations. Recognized stock exchanges must maintain a minimum of 51% ownership in clearing corporations to retain majority control. However, a single exchange is not permitted to own more than 15% of the equity in a clearing corporation. These provisions are designed to prevent excessive consolidation of power within a single entity.

To uphold the integrity of the securities market, SEBI has also emphasized the “fit and proper” criteria for shareholders. This requirement ensures that only credible and eligible individuals or entities hold shares in MIIs. Shareholders who acquire or hold 2% or more of an MII’s equity must meet these criteria at all times. MIIs are required to conduct continuous monitoring of their shareholders and report any non-compliance to SEBI. In cases where shareholders fail to meet the “fit and proper” requirements, their voting rights and corporate benefits, such as dividends, can be frozen. Additionally, any shareholding that exceeds the regulatory limits must be divested through SEBI-specified channels for listed MIIs or as per SEBI’s directives for unlisted entities.

SEBI’s framework also introduces measures to handle breaches of ownership limits. For instance, when the shareholding threshold of foreign investors or trading members is breached, the DD is tasked with freezing the excess shares in demat accounts and informing the relevant stakeholders. Further, voting rights associated with the excess shares are disabled to ensure that regulatory violations do not translate into undue influence or decision-making power. Corporate benefits arising from these shares are also diverted to investor protection or settlement guarantee funds to maintain regulatory compliance.

Conclusion:

In conclusion, SEBI’s latest framework represents a decisive step toward strengthening the governance and transparency of Market Infrastructure Institutions. By addressing critical aspects such as ownership restrictions, shareholder eligibility, and compliance monitoring, the framework ensures a level playing field for all stakeholders. These regulations not only protect investor interests but also enhance the operational integrity of MIIs, contributing to a more robust and reliable securities market. Through these measures, SEBI reinforces its role as a vigilant regulator committed to the development and regulation of the financial ecosystem.

[1] https://www.sebi.gov.in/legal/circulars/oct-2024/monitoring-shareholding-of-market-infrastructure-institutions-miis-_87535.html