• Because of the contradictory nature of MIIs’ roles, MII governance standards must be robust in order to increase market confidence and deter malpractice
• Earlier SEBI formulated a Committee on Strengthening Governance of Market Infrastructure Institutions and on November 2, 2022, the Committee submitted its report to SEBI
• To ensure greater independence of the MII Board, at least two-thirds of the MII Board shall be comprised of Public Interest Directors

SEBI formulated a Committee on Strengthening Governance of Market Infrastructure Institutions (MIIs), chaired by Shri G. Mahalingam.

Market Infrastructure Institutions, which include stock exchanges, commodity exchanges, clearing corporations, and depositories, play an important role in the securities market.

Market Infrastructure Institutions (MIIs) are one-of-a-kind organisations that provide critical infrastructure for trading, settlement, and record keeping. They have regulatory responsibilities while also pursuing commercial interests like other profit-seeking entities.

Because of the contradictory nature of MIIs’ roles, MII governance standards must be robust in order to increase market confidence and deter malpractice. In light of governance lapses observed in some MIIs, rapidly changing market dynamics, and increasing reliance of MIIs on technology, SEBI established the Committee to make recommendations for further strengthening MII governance norms.

On November 2, 2022, the Committee submitted its report to SEBI. The Committee’s task was to review the existing governance framework of Market Infrastructure Institutions and make recommendations to strengthen governance further.

Recommendations provide that MII functions should be divided into three categories: critical operations, regulatory, compliance, and risk management, and other functions such as business development. The KMPs in charge of the functions in the first two verticals should be on the same level as the KMPs in charge of the third vertical.

In terms of resource allocation and utilisation, MIIs should prioritise functions from the first two verticals over functions from the third vertical.

To ensure greater independence of the MII Board, at least two-thirds of the MII Board shall be comprised of Public Interest Directors ( PIDs)

The regulations should be amended to include a minimum (25%) and maximum (50%) variable component of KMP compensation. For each KMP, due consideration should be given to regulatory, risk management, and compliance aspects, including the Code of Conduct/Ethics, when determining variable pay.

The Committee noted that approximately 30 stock brokers have defaulted in the last few years on various grounds, such as misuse of client funds, non-resolution of investor complaints, and non-cooperation with exchanges, which may have undermined the effectiveness of the current system and prompted SEBI to implement additional policy measures to prevent stock broker defaults. The Committee felt there was a need to develop specific metrics to assess the effectiveness of the MIIs’ systems and procedures for preventing stock broker default.

The Committee recognised that MIIs are a distinct type of institution with regulatory responsibilities as well as commercial interests like any other profit-oriented entity. Given their critical role in the capital market ecosystem, they cannot be solely concerned with profit, which dilutes their focus on the regulatory role. At the same time, they must be viable institutions that generate sufficient surpluses to effectively discharge their public utility role while also providing strong investor protection. As a result, the business model of a MII is inherently contradictory.

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