SEBI proposes wider pool of directors, norms for key officials

The Securities and Exchange Board of India (SEBI) has suggested modifications to the governance structure of market infrastructure institutions (MIIs), which consist of stock exchanges, clearing corporations, and depositories. The primary objectives are to expand the eligible pool of directors and enforce stricter regulations for key personnel such as those responsible for technology, cybersecurity, compliance, and risk management. The regulator detailed its proposals in a consultation paper released on Wednesday.

SEBI's proposal consists of two main changes. The first involves loosening the current limitations on who can be appointed to the governing boards of MIIs. The second is the introduction of a standard operating procedure (SOP) that specifies the qualifications, experience, skills, and certifications required for four crucial managerial positions: Chief Technology Officer (CTO), Chief Information Security Officer (CISO), Compliance Officer (CO), and Chief Risk Officer (CRiO).

The regulator has considered extending an existing exemption to companies with diversified shareholdings. Currently, SEBI exempts directors of public financial institutions and certain banks from being considered trading or clearing members when determining board restrictions, even if the institution or its affiliated entity holds such a market role.

SEBI now seeks to apply this same exemption to directors of companies that have associates who are trading members, clearing members, or depository participants, provided the company itself demonstrates a sufficiently diversified shareholder base.

SEBI has also proposed a precise definition of "well-diversified shareholding." According to this definition, no shareholder, excluding those belonging to the public sector, should collectively or individually own 10% or more of the company, control it, or hold shares with at least 10% of the voting rights. This explicit definition aims to clarify the criteria for companies to qualify for the exemption.

The changes are motivated by the increasingly interconnected financial sector, where conglomerates often operate across various financial services such as stock broking, insurance, asset management, and other capital market activities. The concept of a blanket approach to identify conflicts of interest due to overlapping business interests is impractical.

Earlier regulations were enacted following the demutualization of stock exchanges when SEBI implemented restrictions on the representation of trading and clearing members on exchange boards. Similarly, similar restrictions were enforced on depositories in relation to their depository participants. The rationale behind these restrictions was to prevent conflicts of interest.

MIIs serve not only as commercial entities but also as critical market infrastructure components that perform regulatory functions. The objective of barring representatives of entities that directly utilize their platforms from their governing boards is to uphold independence and deter potential conflicts. However, based on the SEBI's experience with director appointments on the governing boards of MIIs, difficulties in recruiting suitable directors, particularly public interest directors (PIDs), arose due to the existing provisions.

Under the current rules, individuals can be classified as trading members, clearing members, or depository participants merely because they hold directorships in entities that have associates operating as trading members, clearing members, or depository participants. This can create complications in large conglomerates or holding-company structures, where subsidiaries might function independently and have little operational connection with one another. SEBI believes that this criterion can restrict the talent pool available to MIIs.