Sebi Proposes Automatic Approval Route For Stock Exchanges, Depositories’ Investments

The Securities and Exchange Board of India (Sebi) has proposed allowing stock exchanges and depositories to undertake specified related activities and deploy funds without seeking prior regulatory approval, subject to financial limits and governance safeguards.

The proposal, outlined in a consultation paper issued on October 22, seeks to ease the approval process for market infrastructure institutions (MIIs), which currently need Sebi’s permission for activities involving fund deployment or otherwise, except treasury investments made under a board-approved investment policy.

Sebi has invited public comments on the proposed amendments to the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, and the Depositories and Participants Regulations, 2018. The deadline for submitting comments is November 12, 2026.

Two Categories Of Activities Proposed Under Automatic Route

Under the proposed framework, stock exchanges and depositories would be allowed to undertake two categories of activities without prior Sebi approval.

The first covers activities related to or incidental to their core functions in the securities market. These include activities undertaken at Sebi’s direction, transfers of shares between an MII and its subsidiaries, and investments made by operating subsidiaries exclusively from funds generated through their own operations.

The second category covers activities similar in function to those carried out by an MII but undertaken through an investee company regulated by another Indian financial sector regulator. The activity must have been previously approved by Sebi and must remain unchanged.

Recognised clearing corporations have been excluded from the proposed automatic approval route.

Investment Cap Linked To Net Worth

Sebi has proposed an annual cap on fund deployment under the automatic route. The aggregate amount invested by an MII and its subsidiaries in a financial year cannot exceed the lower of five per cent of the MII’s net worth as of March 31 of the preceding financial year and the regulatory minimum net worth.

The MII’s net worth after the proposed deployment must also remain at least 1.5 times the minimum net worth prescribed by Sebi. Investments made by the parent institution and its subsidiaries would be aggregated for calculating the annual limit, irrespective of which entity deploys the funds.

Board Approval And Governance Safeguards

Although the proposal removes the requirement for prior Sebi approval for eligible activities, each new activity or instance of fund deployment would still require approval from the MII’s governing board.

The board must ensure there is no conflict of interest with the institution’s core functions or its role as a first-level regulator. It must also ensure that adequate resources, including liquid net worth, remain available for technology upgrades, regulatory obligations, investor awareness initiatives and the piloting of innovative solutions in the securities market.

MIIs would have to establish board-approved standard operating procedures for such activities and investments. Any sharing of resources with an investee entity would require an agreement to ring-fence those resources and protect the MII’s operations and financial health. The sharing of logos and brands would have to be on an arm’s-length basis or receive specific board approval.

The proposal also requires MIIs to ensure that investee companies, their directors and shareholders meet the prescribed fit-and-proper criteria at all times.

MIIs would have to submit half-yearly reports to Sebi detailing activities undertaken through the automatic route, including fund deployment, and explaining the basis for classifying each activity as related or incidental to their core functions. These reports would be due within 30 days of the end of each half-year.

Why Sebi Wants To Change The Rules

Sebi said the existing framework requires prior approval irrespective of an activity’s size, nature or regulatory mandate, increasing the approval burden on MIIs.

The regulator cited the example of a small investment in a technology platform that directly supports market operations attracting the same approval requirement as a large investment in an unrelated business.

It also flagged duplication of regulatory scrutiny where activities are undertaken at Sebi’s direction or through entities already regulated by other financial sector regulators, including the International Financial Services Centres Authority, the Insurance Regulatory and Development Authority of India, the Reserve Bank of India and the Pension Fund Regulatory and Development Authority.

Sebi said board oversight, standard operating procedures and periodic reporting could provide effective regulatory supervision while giving MIIs greater operational flexibility.

“The proposed framework seeks to distinguish between activities that are related to an MII's core function and those that are unrelated and introduce proportionate governance safeguards and retain mandatory prior approval for activities that are unrelated or not incidental to the MII's core function, thereby aligning regulatory oversight with actual risk,” the consultation paper said.

The proposed changes follow deliberations by Sebi’s Secondary Market Advisory Committee, which supported introducing an automatic approval framework based on specified parameters. The committee left the final decision on eligibility criteria, including financial limits, to Sebi.

Activities that do not meet the proposed conditions would continue to require prior approval from the regulator.