I have a piece in today's Financial Express on SEBI's proposed amendment to stock exchanges and other MIIs governance with Navneeta Shankar and Purva Mandale. We argue that SEBI's micro-management is not a good idea and creates a moral hazard of 'SEBI certified' combined with a power vacuum at the top as the MD's powers are sought to be curtailed and who reports to whom is also prescribed. The full pieces is as below:
India’s capital markets regulator, SEBI, is once again in the spotlight with its latest consultation paper on the governance of Market Infrastructure Institutions (MIIs), released on June 24, 2025. While the paper aims to reinforce systemic accountability and operational transparency, it has triggered a strong resistance from within the very institutions it seeks to regulate. The proposed framework is a classic instance of regulatory overreach, one that risks undermining the foundational principles of effective governance, blurring the lines of accountability, and constraining the operational flexibility essential for market resilience and innovation. It has shadows of the erstwhile regime where senior SEBI officers sat on the board of MIIs, a practice which cannot adequately be condemned.
SEBI’s efforts to enhance governance within MII are not new. From the Kania Committee in 2002 to the Bimal Jalan and R. Gandhi Committees in 2010 and 2017 respectively, and more recently the Mahalingam Committee in 2022, there has been a steady evolution of oversight frameworks. However, a growing concern is that the regulator’s posture has shifted – from enabling strong, principle-based self-governance to imposing rigid, top-down structural mandates. A similar push last year, in the November 2024 consultation paper, proposed direct SEBI involvement in the appointment and termination of key managerial personnel (KMPs) of MIIs through an external agency-led process. That proposal was met with firm opposition and ultimately not taken up by SEBI in its subsequent board meetings.
One of the most controversial proposals in SEBI’s recent consultation paper is the mandatory appointment of two Executive Directors (EDs) to separately head Vertical 1 (critical operations) and Vertical 2 (regulatory compliance, risk, and investor grievance) of the MIIs, and further, to induct both into the Governing Board, when necessary. For MIIs, this not only blurs the fundamental distinction between management and oversight, but it also risks weakening the effectiveness of Public Interest Directors (PIDs), who are statutorily tasked with protecting market integrity and public interest. More importantly, introducing parallel power centres into an operationally complex environment could lead to confusion, overlapping authority, and weakened coordination. At the heart of this resistance is the belief that a single point of executive authority, i.e., the Managing Director (MD), is essential to ensure clarity, alignment, and accountability across the institution.
Another significant concern is SEBI’s attempt to prescribe in granular detail the roles and responsibilities of the MD, EDs, and specific KMPs like the Compliance Officer, Chief Risk Officer, Chief Technology Officer, and Chief Information Security Officer. SEBI’s proposals fail to consider that these functions are already embedded within the MIIs’ internal policy frameworks, are subject to extensive Board oversight, and regularly reviewed through SEBI’s inspection and audit processes. Codifying them at the regulatory level may inadvertently create rigidity, duplicate existing obligations, and reduce the institution’s ability to adapt. Many within the industry would argue that SEBI should focus on setting broad principles and let MIIs determine how best to implement them, through Board-approved structures suited to their specific scale and operating models. This is also in line with the Mahalingam Committee’s vision, which advocated a balance between rule-based and principle-based regulation.
On the global front, this prescriptive approach appears out of sync with the prevailing international standards. The Principles for Financial Market Infrastructures (PFMI), issued by the Committee on Payment and Market Infrastructures and the Technical Committee of the International Organization of Securities Commissions (IOSCO), stress the importance of clear and transparent governance structures. Importantly, they stop short of prescribing internal hierarchies. The PFMI framework leaves room for jurisdictions to shape governance in ways that reflect local conditions, so long as the end goals of safety, efficiency, and market stability are met. In most mature jurisdictions, MIIs are regulated through outcome-based principles and not organizational templates. By contrast, SEBI’s proposals risk binding all MIIs into a one-size-fits-all framework, regardless of whether the underlying risk justifies such intervention.
Another key proposal in the consultation paper is the treatment of external directorships held by senior MII leadership. In a welcome shift from its earlier restrictive stance, SEBI now proposes to allow MDs to hold directorships in government companies and not-for-profit entities, subject to prior approval and appropriate disclosures. This marks a more balanced and pragmatic approach. While restrictions on commercial board memberships are justified to avoid conflicts of interest, a complete ban would have been unnecessarily limiting. Senior executives often contribute to such bodies in non-remunerative capacities, and their involvement can support sector-wide coordination, knowledge-sharing, and policy alignment. SEBI’s revised position acknowledges the value of such engagements, and ensures that MIIs can continue to benefit from experienced leadership without disconnecting them from the broader market ecosystem.
What is perhaps most concerning to many MIIs is that the proposed reforms could unintentionally erode the authority of the Governing Board itself. By prescribing who must occupy key management positions, who reports to whom, and who must sit on the Board, the proposals effectively constrain the Board’s ability to shape the organization’s executive structure – a power that is fundamental to good corporate governance. There is little evidence to suggest that the absence of designated executive positions has led to any governance failures within MIIs. The objective that SEBI seeks to achieve from the appointment of EDs, particularly ensuring highest priority to public interest, technology and operations, and risk and compliance, over commercial considerations, are already being discharged under the supervision of KMPs, PIDs and the Board of the MIIs. This raises questions about whether the creation of additional executive roles is necessary or justified under the existing, functioning framework.
The issue at hand is not whether MII governance can be improved – it can and should evolve with time. However, governance reform must be based on proportionality, trust, and evidence rather than an assumption that regulatory micro-management is the only way to safeguard the public interest. By preserving the MD’s executive leadership, ensuring robust Board oversight, and allowing MIIs the freedom to design their internal frameworks, SEBI can achieve its goals without sacrificing the flexibility and responsiveness that are essential in a fast-moving market environment.
Ultimately, the regulator’s challenge lies in finding the right balance, i.e., strengthening accountability while letting the MDs run the show, the Boards to effectively govern and the MIIs to breathe without stifling their autonomy. In fact, SEBI needs to travel in the other direction, relaxing the limits to compensation (currently at 0 beyond sitting fees) for independent directors and removal of such nomenclature as ‘public interest’ directors, as if the other directors are compromised acting in self interest.
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