Strengthening Governance of Market Infrastructure Institutions

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    • Recently, the SEBI Committee was constituted for ‘Strengthening governance of market infrastructure institutions (MIIs)’. 

    More about the news

    • The SEBI Committee has proposed stricter regulations for enhancing the accountability and transparency of MIIs like stock exchanges, depositories and clearing houses.
    • The committee has mooted measures for: 
      • Strengthening the role played by the governing board and committees of MIIs, 
      • Reviewing the requirements related to appointment and role & responsibility of directors on the board and key managerial persons (KMPs) and 
      • Developing effective metrics for monitoring various aspects of their functioning.
    • The committee also proposed: 
      • Reviewing the policy on safekeeping and sharing of information held by MIIs, 
      • Revisiting the code of conduct and code of ethics for directors of the governing board and KMPs and 
      • Activities and governance of investee companies of MIIs.
    • Functions of MIIs:
      • It said the functions of MIIs should be categorized into three verticals: 
        • Critical operations, 
        • Regulatory, compliance and risk management and 
        • Other functions include business development. 
        • The KMPs heading the functions under the first two verticals should be at par in hierarchy with the KMPs heading the third vertical, the report said.
    • Independence:
      • To ensure greater independence of the Board of the MII, at least two-third members of the Board of the MII should comprise public interest directors (PIDs)
    • Roles and responsibilities: 
      • The roles and responsibilities of all directors should be clearly outlined, especially their responsibilities towards regulatory, compliance and risk management functions.
    • Periodic evaluation:
      • The panel said periodic review through an internal as well as external mechanism, should be conducted to evaluate the effectiveness of the MIIs in discharging their core and critical functions. 
        • Accordingly, the MIIs, as an entity, should internally evaluate its own performance on an annual basis and engage an external agency for evaluating its performance once in every three years.

    More about the MIIs

    • What are the MIIs?
      • Stock exchanges, depositories and clearing houses are all Market Infrastructure Institutions and constitute a key part of the nation’s vital economic infrastructure. 
    • Meaning of ‘market infrastructure’?
      • A panel set up under the chairmanship of former RBI Governor Bimal Jalan — to examine issues arising from the ownership and governance of MIIs — in its 2010 report said:
        • The term ‘infrastructure’ would mean the basic, underlying framework or features of a system
        • The term ‘market infrastructure’ denotes such fundamental facilities and systems serving this market. 
    • Purpose of securities /capital market:
      • The primary purpose of the securities /capital market is to enable allocation/reallocation of capital/financial resources.
      • Such movement helped optimal use of money in the economy and fostered economic development. 
      • Well-functioning MIIs, constitute “the nucleus of (the) capital allocation system”, are indispensable for economic growth and have a net positive effect on society like any other infrastructure institution
    • Specific institutions in India that qualify as MIIs:
      • Among stock exchanges: 
        • The SEBI lists seven, including the BSE, the NSE, the Multi Commodity Exchange of India and the Metropolitan Stock Exchange of India. 
      • There are two depositories: 
        • Charged with the safekeeping of securities and enabling their trading and transfer — that are tagged MIIs: 
          • The Central Depository Services Ltd. and the National Securities Depository Ltd.
      • Clearing houses:
        • The regulator also lists seven clearing houses including the Multi Commodity Exchange Clearing Corporation.
          • Clearing houses, for their part, help validate and finalise securities trades and ensure that both buyers and sellers honour their obligations.

    Why are MIIs considered to be systemically important?

    • Size & growth of the infrastructure: 
      • MIIs are systemically important in India is clear from the phenomenal growth of these institutions in terms of market capitalization of listed companies, capital raised and the number of investor accounts with brokers and depositories and the value of assets held in the depositories’ account.
      • Unlike typical financial institutions, the number of stock exchanges, depositories and clearing corporations in an economy is limited due to the nature of its business, although they cater to the entire marketplace.
    • Criticality:
      • Any failure of such an MII could lead to even bigger cataclysmic collapses that may result in an overall economic downfall that could potentially extend beyond the boundaries of the securities market and the country.

    Securities and Exchange Board of India (SEBI)

    • About:
      • SEBI is a statutory body established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
      • Initially SEBI was a non statutory body without any statutory power.
      • It became autonomous and given statutory powers by SEBI Act 1992.
    • Aim: 
      • To protect the interests of investors in securities and to promote the development of, and regulate the securities market.
      • It is the regulator of the securities and commodity market in India owned by the Government of India.
    • Powers & Functions:
      • It is a quasi-legislative and quasi-judicial body which can draft regulations, conduct inquiries, pass rulings and impose penalties.
      • To promote the development and hassle-free functioning of the securities market.
      • To regulate the business operations of the securities market.
      • To prohibit fraudulent and unfair trade practices within the securities market and related to it.
      • By Securities Laws (Amendment) Act, 2014, SEBI is now able to regulate any money pooling scheme worth Rs. 100 cr. or more and attach assets in cases of non-compliance.

    Source: TH