Summary of this article
Sebi wants to widen eligibility for directors on MII boards
The regulator also proposes standard rules for four key senior roles
Sebi has invited comments on the proposals until September 30, 2026
Securities and Exchange Board of India (Sebi) issued a consultation paper on September 9 titled "Strengthening Governance of MIIs," proposing changes to how directors are appointed to the boards of market infrastructure institutions (MIIs) such as stock exchanges, clearing corporations and depositories, and how these institutions select their top technology, cybersecurity, compliance and risk officers.
Sebi’s paper seeks feedback on two separate proposals, one to review the eligibility criteria for directors on a MII’s governing board and the other to establish a standard operating procedure (SOP) covering the qualifications, experience, skill sets and certifications required for appointing a Chief Technology Officer (CTO), Chief Information Security Officer (CISO), Compliance Officer (CO) and Chief Risk Officer (CRiO).
Why Do These Board Restrictions Exist In The First Place
After stock exchanges were demutualised, Sebi gradually reduced the representation of trading members (TMs) and clearing members (CMs) on exchange boards. Their combined representation was first capped at one-third of the board and later reduced to one-fourth.
The committee on ownership and governance of MIIs, headed by Dr Bimal Jalan, recommended going a step further by completely barring TMs and CMs from exchange boards. Sebi’s board approved the proposal on April 2, 2012, and it was later included in the Securities Contracts (Regulation) Regulations, 2018. A similar restriction was introduced for depository participants (DPs) on depository boards under the Depositories and Participants Regulations, 2018.
Under the rules, a person can be treated as a TM, CM or DP even if they are only a director in another company that has one of these entities as an associate.
There is, however, an exemption for directors of public financial institutions or banks. They are not treated as TMs, CMs or DPs in such cases if the institution is in the public sector, does not have an identifiable ultimate promoter, has a public-sector promoter or has a well-diversified shareholding.
What Problem Is Sebi Trying To Fix?
Sebi says MIIs have struggled to find suitable directors, particularly Public Interest Directors, because the current rules disqualify people who have only a distant connection with a TM, CM or DP.
Large conglomerates often run subsidiaries independently of each other, and Sebi noted that such units "operate with Chinese walls, with little or no interference in their operations" from one another. So, a person who is a director in one company should not be disqualified from joining an MII board simply because another, unrelated company in the same group happens to be a market intermediary.
How Sebi Plans To Change The Rules
Sebi proposes extending the exemption currently available only to public financial institutions and banks to companies that have a TM, CM, orDP as an associate. The company would, however, have to have well-diversified shareholding. Sebi said the existing carve-out "may be extended to directors of companies which have associates as TM/CM or DP" if they meet this ownership condition.
What Would Count As Well-Diversified Shareholding
Sebi also proposes a clear definition of "well diversified shareholding". No shareholder other than a public-sector entity, either alone or acting in concert with others, should directly or indirectly own, control or hold 10 per cent or more of the company’s shares or voting rights.
The proposal also works the other way around. If a public-sector shareholder, either alone or along with others acting in concert, holds 10 per cent or more of the company, that would be enough for the company to qualify as having diversified shareholding.
Sebi said the proposal also takes into account how banking and financial groups operate today. Such groups often have businesses across insurance, stock broking and asset management under the same umbrella. This makes it difficult to apply the same conflict-of-interest rule to every company within a group.
Part B: Standard Operating Procedure For Top Officers
Sebi already approves the appointment and removal of MDs and executive directors at MIIs, while the Governing Board approves CTO, CISO, CO and CRiO appointments on the recommendation of its Nomination and Remuneration Committee.
However, Sebi says there are no standard requirements for the qualifications and experience needed for these four roles.
The proposed SOP aims to address this gap. Sebi says these positions are meant to give "primacy to technological resilience, cyber-security, compliance and risk management over commercial considerations."
Under the proposal, each MII’s Governing Board would set the qualification criteria based on inputs from Sebi’s relevant committees. Any vacancy would have to be filled within three months, with MIIs expected to plan ahead for vacancies that can be anticipated.
Sebi has also asked, separately, whether MIIs should appoint deputies to these four roles to guard against gaps in continuity. The regulator has invited comments on both parts of the paper until September 30, 2026. Stakeholders can submit their feedback through Sebi’s website. The proposals will take effect only after Sebi finalises the amendments.
