MIIs are institutions providing infrastructure of trading, settlement and record keeping and include stock exchanges, clearing corporations and depositories.
In April, the market regulator formed a committee under G. Mahalingam, a former whole-time member, to strengthen governance norms at the MIIs. This comes after India’s largest stock exchange--the NSE, grappled with corporate governance issues pertaining to the co-location scam.
This was done after the committee deliberated with various stakeholders, representatives of MIIs and other relevant individuals.
“In order to enhance transparency, the MIIs should disclose the agenda and minutes of meetings of their board, keeping in mind their role as a ‘first-level regulator’. To begin with, agendas related to regulatory, compliance & risk management areas may be disclosed on the website of the MII," said the 108-page report.
According to Sebi, the functions of MIIs should be categorized into three verticals—critical operations; regulatory, compliance and risk management; and other functions, including business development. The key managerial persons (KMPs) heading the functions under the first two verticals should be on a par in hierarchy with the KMPs heading the third vertical.
With respect to resource allocation and utilization, Sebi said that the function under critical operations and regulatory verticals should be given higher priority by the MIIs over functions of the compliance and risk management vertical.
The human, financial, and technological resources that MIIs use for each of the fundamental tasks associated with the various verticals should be quantified and disclosed in the MIIs’ annual report, it said.
Based on the report, the market regulator clarified that accountability and unbiased evaluations of the board of directors, statutory committees, and KMPs at the board level are paramount.
The board meetings of MIIs should be required to have audio and video recordings. In addition to the customary self-evaluations, a ‘third party’ should be selected to objectively evaluate the board and statutory committees of the MII.
Further, the market watchdog stated that the regulations should be amended to provide for a minimum (25%) as well as a maximum (50%) amount as a variable component of the KMPs’ compensation.
For each KMP, due weightage should be provided to the regulatory, risk management and compliance-related aspects, including the code of conduct/ethics for determining variable pay.
Additionally, the report also specified that MII’s policy should adequately cover all methods of data sharing (including emails and social media) with appropriate delegation of powers for sharing data.
MIIs should develop an escalation matrix for sharing confidential and sensitive information for any legitimate purpose.
Moreover, it suggested that the scope of Sebi’s powers under SECC Regulations 2018 and D&P Regulations 2018 should include the levy of penalties and taking other disciplinary action (like suspension, barring from attending meetings, etc.) on individuals of MII, including its directors, members of statutory committees, KMPs, employees and other persons associated with the MIIs, for any contravention of regulations.
The role of the Board of the MII and its senior management team in upholding a strong culture in the MIIs should be clearly outlined through a set of guiding principles, especially focused on regulatory, compliance, risk and conduct-related aspects, Sebi said.
If any KMP or Board member becomes/ is aware of any acts of wrongdoing and fails to report the same to the Board of the MII or to SEBI, respectively, then such person should be held accountable. The existing Code of conduct and Code of ethics for the directors and KMPs of the MIIs may be rationalized into a single code of conduct to specifically include regulatory, compliance and risk management, good governance and due diligence as important components of operations.
