Consultation Paper – Strengthening Governance of Market Infrastructure Institutions

In light of the significant growth in the Indian securities market and the expanding role of Market Infrastructure Institutions (MIIs) such as stock exchanges, clearing corporations, and depositories SEBI has released a consultation paper on June 24, 2025, proposing major governance reforms. MIIs have seen a surge in investor participation, trading volumes, profitability, and technological reliance, reinforcing their critical function as first-line regulators. The proposed steps aim to reinforce that MIIs must prioritise public interest, technology and operations, and risk and compliance over commercial considerations.

Appointment of Two Executive Directors (EDs)

• MIIs must appoint two EDs as Key Management Personnel (KMPs). One will head “Critical Operations” (Vertical 1), and the other “Regulatory, Compliance, Risk Management, and Investor Grievances” (Vertical 2). Both will serve on the Governing Board. MIIs at their discretion may appoint an ED for Vertical 3 (business development). These EDs must have stature comparable to the Managing Director (MD) and require SEBI approval for appointment/re-appointment.
• EDs, though administratively reporting to the MD, will be evaluated independently by relevant board committees and will report quarterly to both the Governing Board and SEBI on their respective verticals.
• All department heads within their verticals (e.g., CTO and CISO for Vertical 1; Compliance Officer and Chief Risk Officer for Vertical 2) will report to the respective EDs.

Defining Roles and Responsibilities

• The MD is responsible for overall management, compliance, risk management, and infrastructure adequacy.
• EDs are responsible for all affairs within their verticals and must ensure activities are aligned with public interest, not revenue-driven goals. The ED of Vertical 2 holds additional responsibility for overall risk management.
• KMPs such as the CTO and CISO are now more concretely tasked with technology oversight, cybersecurity, and IT risk management.

Norms on Directorships Outside MIIs

• The MD may serve only as a non-executive director in a Section 8 (not-for-profit) company or an unlisted State/Central Government company with no commercial activities, in addition to MII subsidiaries. EDs are restricted from holding directorships in any company except MII subsidiaries.

The proposal elevates the governance standards for MIIs, placing greater emphasis on public interest and ensuring that critical operational and regulatory verticals have adequate leadership and board presence. Introducing two board-level EDs responsible for critical functions is expected to strengthen governance and establish independent lines of communication with the Board, Committees and SEBI. However, while SEBI mandates that these EDs be of comparable stature to the MD, their reporting to the MD may create challenges in maintaining a clear and effective hierarchy. To address this, it is recommended that an ED be mandatorily appointed to oversee the operations of Vertical 3. This will ensure that each of the three EDs, responsible for Verticals 1, 2, and 3 respectively, reports directly to the MD, who will have overall oversight of all three verticals.

Submission of Comments– Public comments are invited on the above recommendations. The consultation paper is available here, and comments may be submitted no later than July 15, 2025

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

KC Jacob, Partner, Email – kcjacob@elp-in.com

Aarya Padhye, Advocate – Email – aaryapadhye@elp-in.com