SEBI is reviewing regulations concerning Market Infrastructure Institutions (MIIs) to enhance governance and independence. The review focuses on Public Interest Director (PID) appointments, cooling-off periods for key personnel, and the selection process for crucial Key Management Personnel (KMPs). Regarding PIDs, SEBI proposes maintaining the current approval process without shareholder involvement, rejecting the idea of a High-Level Appointment Committee. For cooling-off periods, SEBI suggests allowing MII Governing Boards to set their own policies, moving away from mandated periods. For KMP appointments (Compliance Officer, Chief Risk Officer, Chief Technology Officer, and Chief Information Security Officer), SEBI proposes a process involving external agencies and the Nomination and Remuneration Committee (NRC), with the Governing Board making the final decision. These changes aim to balance public interest with efficient MII operations, addressing feedback from stakeholders and advisory committees. SEBI plans to implement these proposals through regulatory amendments and circulars.
Source: SEBI Press Release No.15/2025 Dated: 24/03/2025
Securities and Exchange Board of India
Provisions relating to appointment of Public Interest Directors on the Governing Board of Market Infrastructure Institutions; cooling-off period for KMPs and Directors of an MII joining a competing MII; and process of appointment of specific KMPs of an MII.
1. Objective
1.1. This memorandum captures the outcomes of the deliberations and consultations with respect to the following questions and proposals:
1.1.1. Should shareholders of Stock Exchanges, Clearing Corporations and Depositories (Collectively referred as the Market Infrastructure Institutions (MIIs)) have a say in the appointment of Public Interest Directors (PIDs);
1.1.2. A proposal to relax the regulatory restrictions around mandatory cooling-off period for PIDs to join other MIIs, leaving any such stipulation to the Governing Board of the MII; and
1.1.3. A proposal to involve the Governing Board of the MII, and ensure an independent process, in the appointment, re-appointment, and termination of four crucial Key Management Personnel (KMPs) of MIIs.
A. Part-A: Provisions related to appointment of PIDs
2. Background
2.1. MIIs are unique institutions providing vital market infrastructure for trading, settlement and record keeping. They help in enforcing market regulations and supporting regulatory initiatives aimed at enhancing investor protection, market transparency, fair access and treatment to all stakeholders, and managing risk, while pursuing commercial objectives.
2.2. The Governing Board of MIIs play a critical role towards ensuring that the objective of Public Interest is given primacy in the operation of an MII. The Governing Board of MIIs consists of Managing Director (MD), Non-Independent Directors (NIDs) and Public Interest Directors (PIDs). The role of PIDs is important in enhancing corporate integrity and governance standards in any MII. PIDs, especially, play a critical role in balancing the interests of MII’s management, its shareholders and more importantly ensuring the safety, efficiency and integrity for the market participants using the infrastructure of these MIIs. PIDs ensure that in pursuance of their business objectives, MIIs do not lose sight of responsibilities vested upon them as public utility infrastructure institutions and as first line regulators.
2.3. Regulation 2(1)(o) of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (hereinafter referred as SECC Regulations, 2018) and Regulation 2(1)(m) of Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 (hereinafter referred as D&P Regulations, 2018) inter-alia define PID as an independent director representing the interests of investors in securities market and who is not having any association, directly or indirectly, which in the opinion of the Board, is in conflict with his role. As per regulatory provisions, the number of PIDs shall not be less than the number of NIDs (including the MD) on the Governing Board of the MII, which aim to ensure that the decisions taken by the Governing Board of the MII consider the interest of the investing public.
2.4. SEBI approves the appointment of all directors, including the PIDs on the governing board of MIIs. PIDs, unlike independent directors in a corporate entity, do not require shareholder approval for their appointment at any stage, before or after SEBI approval. This dichotomy has been by design as MIIs, which are public utility infrastructure institutions, have been kept on a higher pedestal than other companies. The approval by SEBI protects the interest of investing public.
2.5. SEBI has, however, received feedback from few quarters that, under the current regulatory requirement, shareholders do not have material oversight powers with respect to the functioning of the Board of MIIs. In case of decisions of Governing Board impacting the interest of shareholders, in hindsight, they may feel aggrieved about not being included in the PID appointment process.
3. Consultation
3.1. A Working Group (WG) consisting of 3 members was formed to deliberate on the existing process of appointment of PIDs on the governing board of MII and to recommend modification in the aforesaid process, if deemed appropriate. The WG was chaired by Smt. Usha Thorat, Former Deputy Governor, RBI. Other members of the Working Group were Shri Mohan Narayan Shenoi, Ex-COO, Kotak Mahindra Bank Ltd. and NID of the Multi Commodity Exchange of India Limited; and Shri Sunil Gulati, Independent Director and Chairman of SBI Mutual Fund Trustee Company Private Limited.
3.2. The WG noted the observations and recommendations made by the past Committees constituted by SEBI viz. Kania Committee in 2002, Bimal Jalan Committee in 2012, Gandhi Committee in 2017 and G. Mahalingam Committee in 2022. The WG also noted that SEBI has allowed NIDs to be part of Nomination and Remuneration Committee (NRC). The recommendations of the WG are as under:
3.2.1. The WG felt that since NIDs would be part of composition of NRC, it would have sufficient representation of shareholders to provide requisite feedback to the appointment process of PIDs. In view of the same, the WG recommended that there is no need to change the process for appointing PIDs to the Governing Board of an MII and the present process of SEBI approval may continue.
3.2.2. The WG also deliberated on supplementary mechanisms like establishment of a High Level Appointment Committee (HLAC) to recommend a name to SEBI. The proposal was left to SEBI to decide upon.
3.3. All the above proposals were discussed in the PID Conclave held during August 26-27, 2024 where PIDs voiced their views on various proposals.
3.4. Based on the recommendation of the WG and views expressed during PID Conclave, a Consultation Paper, seeking comments of the public, on various proposals related to appointment of PIDs was issued on August 29, 2024. Further, the proposals were also discussed in the Secondary Market Advisory Committee of SEBI (SMAC) on September 09, 2024.
4. Proposals: The issue wise recommendation of SMAC and public comments received and proposals are given as under:
4.1. Appointment of PIDs with approval of Shareholders
4.1.1. Issue under Consideration: Appointment of PIDs would be subject to approval of shareholders and SEBI.
4.1.2. Recommendation of SMAC: As the role of PIDs is more towards protecting the interest of the investing public over minority shareholders of the MII, SMAC was of the view that the existing process of appointment of PIDs without the approval of the shareholders but subject to the approval of SEBI should continue. Further, involving shareholders’ approval for appointment of PIDs would make the process lengthy and cause delay in such important appointment.
4.1.3. Public Comments: A total of 12 responses were received on this proposal. 9 out of 12 of the public responses favored appointment of PIDs through the existing process i.e. without the approval of the shareholder but subject to approval of SEBI.
4.1.4. Proposal: In view of the recommendation of SMAC and public comments received, it is proposed that the existing process for appointment of PIDs may be continued.
4.2. Constitution of a High Level Appointment Committee (HLAC) for appointment of PIDs and MD of the MIIs
4.2.1. Issue under Consideration: To establish a High Level Appointment Committee (HLAC) consisting of reputed external experts, which may consider the candidates suggested by the Governing Board of MIIs for appointment as PIDs and MD and independently recommend a suitable name to SEBI.
4.2.2. Recommendation of SMAC: The existing process of appointment subject to approval of SEBI is working well. If such a HLAC is formed, there could be questions raised with regard to the independence of its members from the MIIs, its shareholders, its existing or forthcoming directors, etc. Further, this may delay the process of appointment. In view of the same, SMAC recommended that constitution of such HLAC is not warranted.
4.2.3. Public Comments: A total of 9 responses were received on this proposal. 5 out of 9 of the public responses did not favor constitution of HLAC for recommending a name to SEBI.
4.2.4. Proposal: In view of the recommendation of SMAC and public comments received, it is proposed that the existing process for appointment of PIDs may be continued.
4.3. Re-appointment of existing PIDs
4.3.1. Issue under Consideration: An existing PID, if eligible, should become a default candidate for reappointment with approval of SEBI, subject to compliance with other regulatory requirements.
4.3.2. Recommendation of SMAC: The Committee felt that even if an existing PID is eligible and qualifies for re-appointment, it should be the prerogative of the MII’s Governing Board to decide whether his/her name should be sent to SEBI or not, for re-appointment. The collective wisdom of Governing Board of MII, which also contain PIDs, should be respected. In view of the same, the Committee did not agree with the proposal that an existing PID, if eligible, should be a default candidate for re-appointment.
4.3.3. Public Comments: A total of 11 responses were received on this proposal. 9 out of 11 responses favored the proposal where the existing PID should be a default candidate for reappointment.
4.3.4. Comments of SEBI: The comments of SEBI on the above proposal are given as under:
4.3.4.1. Views of NRC and Governing Board of MIIs are important as they evaluate whether an existing PID is suitable for the MII and contributing towards the objectives for which they are appointed. They should have the freedom to recommend a name as per the requirements of the MII. Mandating the existing PID as the default candidate takes away that freedom and shows distrust in the collective wisdom of the governing board.
4.3.4.2. Further, in terms of Clause (III)(4) of Part H of Schedule II of SECC Regulations, 2018 and Clause (III)(4) of Part C of Schedule II of D&P Regulations, 2018, in case of re-appointment of the PID, the recognised stock exchange or recognised clearing corporation or depository shall apply to the Board four months before the expiry of the term (instead of two months before such vacancy). In addition to the other requirements specified herein, the application for re-appointment of the PID shall be accompanied with, their attendance details on meetings of various mandatory committees and on the Governing Board of the recognised stock exchange or recognised clearing corporation or depository, performance review and the reasons for extension of term.
4.3.4.3. However, in case the existing PID after completion of his first term is not considered for re-appointment by the Governing Board of the MII, the rational for the same may be recorded and informed to SEBI.
4.3.5. Proposal:
4.3.5.1. In view of the above and recommendation of SMAC, it is proposed that the proposal given at paragraph 4.3.1 above may not be accepted; and
4.3.5.2. In case the existing PID after completion of his first term is not considered for re-appointment by the Governing Board of the MII, the rational for the same may be recorded and informed to SEBI.
4.4. Process for documentation for appointment of PIDs
4.4.1. Issue under Consideration:
4.4.1.1. Currently SEBI requires at least two names from MIIs for appointment of PIDs. The selection of one candidate over other(s) causes discomfort to non-selected candidates especially after going through detailed scrutiny in terms of paper-work, presentation given to Board, etc. Since the proposed candidates are professionals of high stature and caliber, such non-selection may also cause embarrassment to non-selected candidates.
4.4.1.2. Therefore, a two stage process in obtaining such approval from SEBI was proposed.
Stage-1: In the first stage the MIIs shall submit brief profiles of at least two prospective candidates. SEBI, based on the information available, shall prima facie shortlist and give NOC to one candidate.
Stage-2: In the second stage, MIIs, shall collect all the information and documents required under the extant regulations from the shortlisted candidate and submit the same to SEBI. SEBI shall then consider the complete application and grant its approval subject to compliance with regulatory requirements.
4.4.2. Recommendation of SMAC: The Committee agreed with the two stage process of documentation as proposed. The Committee observed that on the one hand, this will save the prospective candidates from submitting the documents and declarations beforehand and on the other hand, it may make the process faster as the MIIs have to carry out the required documentations and declarations from one candidate only. SMAC also suggested to start the process at least six months in advance and the MII’s may submit one name for SEBI’s consideration.
4.4.3. Public Comments: A total of 9 responses were received on this proposal. 6 out of 9 responses favored the two stage process of obtaining SEBI approval.
4.4.4. Comments of SEBI: Considering the recommendation of SMAC and public comments received, the two stage process for obtaining approval of SEBI and the requirement of only one name in case of re-appointment has already been implemented through issuance of circular dated November 22, 2024 on “Guidelines to Stock Exchanges, Clearing Corporations and Depositories”.
4.4.5. Proposal: With regard to the additional suggestion of the SMAC that the appointment process of PIDs should start with one name at least six months in advance from the date of creation of vacancy, it is stated that the requirement of at least two names to be provided to SEBI is to ensure that choice is there and an appropriate candidate is being appointed as PID on the Governing Board of the MII. Further, it is submitted that in case of re-appointment of PID, as per the existing regulatory requirement, the MIIs shall apply to SEBI four months before expiry of the term, instead of two months before such vacancy. Thus, the recommendation to increase the time for making application for PIDs may not be accepted.
B. Part-B: Cooling-off period for KMPs and Directors of an MII joining a competing MII
5. Background
5.1. Regulation 24 (3) of the SECC Regulations, 2018 inter alia state that
“Public interest directors shall be appointed for a term of three years, extendable by another term of three years, subject to performance review in the manner as may be specified by the Board:
Provided that post the expiry of term(s)at the recognized stock exchange or the recognized clearing corporation, a public interest director may be appointed with the prior approval of for a further term of three years in other recognized clearing corporation or recognized stock exchange, or a depository, only after a cooling-off period of one year:
Provided further that a person may be appointed as a public interest director for a maximum of three terms across recognized stock exchanges or recognized clearing corporations / depositories, subject to a maximum age limit of seventy five years:
…. ”
5.2. Regulations 24(6) and 24(7) of SECC regulations, 2018 states that
“(6) No public interest director shall become a non-independent directors unless there is a cooling-off period of three years after ceasing to be a public interest director.
(7) No public interest director on the board of a recognized stock exchange or a recognized clearing corporation, shall become a director on the board of subsidiary of that recognized stock exchange or recognized clearing corporation, as the case may be, unless there is a cooling-off period of three years after ceasing to be a public interest director.”
Similar provisions as stated at paragraphs 5.1 and 5.2 above are also applicable to depositories under D&P Regulations, 2018.
5.3. Therefore, PIDs after completion of their two terms in one MII and seeking appointment as PID into another MII have to wait for a period of one year before such appointment. Additionally, they cannot join the subsidiary of the existing MII or become a NID of the same before a cooling-off period of three years.
6. Need for Review
6.1. As per feedback received from MIIs and PIDs, there is shortage of quality PIDs in the market. Further, the services of experienced and well trained PIDs cannot be utilized by other MIIs because of the restriction of one year cooling-off period.
6.2. While regulations specify a minimum cooling-off period for PIDs to move to another MII, there is no such restriction for the MD, other Directors, and KMPs. This anomaly needs to be addressed.
6.3. In view of the above, it was felt that MII may adopt and implement a policy approved by its governing board prescribing a minimum cooling-off period for KMPs (including the MD) and their Directors (including PIDs) before joining a competing MII. SEBI shall no longer prescribe a cooling-off period for PIDs of an MII joining another MII.
7. Consultation
7.1. A consultation paper on “Process for appointment of specific KMPs of an MII; and cooling-off period for KMPs and Directors of an MII joining a competing MII” was issued on November 22, 2024 soliciting public comments. In this regard, a total of 10 responses were received on the proposal for cooling-off period for KMPs and Directors of an MII joining a competing MII, out of which 8 broadly favored the proposal.
7.2. Recommendation of SMAC: The matter was discussed in SMAC in its meeting held on February 24, 2025. The Committee agreed with the proposals for minimum cooling-off period for KMPs and Directors of an MII before joining a competing MII and the same may be prescribed by the Governing Board of the MII.
8. Proposal: In view of the above, it is proposed that the Governing Board of an MII may prescribe a minimum cooling-off period for KMPs (including the MD) and their Directors (including PIDs) before joining a competing MII. SEBI shall no longer prescribe a cooling-off period for PIDs of an MII joining another MII.
Explanation: For the purpose of this proposal, the term “competing MII” refers to movement from one Stock Exchange to another Stock Exchange, one Clearing Corporation to another Clearing Corporation and one Depository to another Depository. However, in case the Clearing Corporation is a subsidiary of a Stock Exchange, then in that case the Stock Exchange and the Clearing Corporation shall be considered as a single entity.
C. Part C: Process of appointment of specific KMPs of MIIs
9. Background
9.1. MIIs are institutions that provide vital capital market infrastructure for trading, clearing & settlement, and holding, transfer, & record keeping of securities. They have a unique operating model in that they are empowered by law to regulate their own paying members such as the Listed Corporates, Trading Members, Clearing Members, and Depository Participants. They are required to primarily focus on serving as crucial public utilities for capital markets and as first line regulators, while also operating as efficient, innovative, and competitive commercial profit-making entities.
9.2. Specifically, the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (SECC Regulations, 2018) and Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 (D&P Regulations, 2018), require MIIs to give higher priority to Critical Operations (Vertical 1, covering operations and technology), and Regulatory, Compliance, Risk Management and Investor Grievances (Vertical 2) over other functions including Business Development (Vertical 3).
9.3. To ensure this prioritization, MIIs have a Governing Board that must have an equal or majority of non-executive PIDs over other directors. SEBI selects and approves appointment of PIDs from amongst the candidates suggested by the Governing Board of the MII. SEBI also selects and approves the appointment of the Managing Director (MD) of the MII, from amongst the candidates suggested by the Governing Board of the MII. MIIs are also subject to the regulatory oversight by SEBI.
9.4. The appointment and removal of other KMPs (including the Compliance Officer (CO), Chief Risk Officer (CRiO), Chief Technology Officer (CTO) and Chief Information Security Officer (CISO), who are collectively referred to as Vertical 1 and 2 KMPs) currently come under the purview of the NRC of the MII.
9.5. It may be noted that the larger MIIs currently enjoy high operating margins with Profit Before Tax to Income margins of 60% or more, high equity price to earnings multiples, and significant dividend pay-out ratios.
10. Need for Review
10.1. While the Governing Board of the MII sets the tone at the top, the culture of giving primacy to public interest (Verticals 1 and 2) over commercial interest (Vertical 3) must run deep at the operating level as well. Note that the MD has overall authority and responsibility over all three Verticals (1, 2, and 3).
10.2. Along with having a capable MD, there is a need for KMPs of appropriate stature and ability in Vertical 1 and 2. These KMPs, in particular, are responsible for ensuring appropriate Compliance Standards, Risk Management, Technology Infrastructure, and Information Security at the MII, while not being constrained by considerations of Vertical 3. These KMPs must be able and willing, and be seen to be able and willing, to operate independent of short-term commercial considerations of Vertical 3 as necessary, to ensure that the MII delivers its primary mandate as a public utility infrastructure institution and as a first line regulator.
10.3. It has been observed that in certain large MIIs, there is a significantly large gap between the compensation of the MD and the KMPs heading Verticals 1 and 2 of the MII. These KMPs also report to the MD. In this regard it may be noted that recently, SEBI has issued guidelines requiring these 4 KMPs to independently interact with the appropriate Statutory Committees of the Governing Board, which would also in turn additionally contribute to their annual performance appraisals.
10.4. In view of the above, it was felt that appointment of KMPs shall be initiated through an external agency, which will submit its recommendations to the NRC of the MII. NRC may submit its own recommendations to the Governing Board of the MII and SEBI simultaneously. SEBI will review the recommendations of NRC and will provide its comments in a time bound manner. The Governing Board shall make the final decision for appointment after considering NRC’s recommendations and SEBI’s comments, if any. Similarly, for re-appointment or termination, the NRC may submit its recommendations to the Governing Board of the MII and SEBI simultaneously. The Governing Board shall make the final decision for re-appointment or removal after considering NRC’s recommendations and SEBI’s comments, if any.
11. Consultation
11.1. A consultation paper on “Process for appointment of specific KMPs of an MII; and cooling-off period for KMPs and Directors of an MII joining a competing MII” was issued on November 22, 2024 soliciting public comments. In this regard, a total of 13 responses were received on the proposal. The summary of public comments are as under:
11.1.1. 12 out of the 13 responses (mostly from MIIs) did not favor the proposed process for appointment of such specific KMPs;
11.1.1.1. Involving shortlisting of candidates through an external agency, which may delay the whole process of appointment; and
11.1.1.2. The requirement of seeking comments of SEBI.
11.2. Recommendations of SMAC: The matter was discussed in the SMAC (having membership of 6 MIIs) meeting held on February 24, 2025. After detailed discussion, SMAC recommended the following:
11.2.1. To start with, the proposed mechanism may be applicable only for the CO, CRiO, CTO and CISO, or by whatever designations called of an MII. However, the MIIs can extend the above mechanism for all KMPs.
11.2.2. The external agency for identification and recommendation of suitable candidates for appointment of such specific KMPs may be engaged by the MII.
11.2.3. NRC after discussion with the management of the MII (an addition to the original consultation), may submit its recommendations for appointment, reappointment and termination of specific KMPs to the Governing Board of the MII. Comments of SEBI may not be required.
12. Proposals: In view of the above and considering the recommendation of SMAC the following are proposed:
12.1. For Appointment: The process for appointment of specific KMPs of Verticals 1 & 2 of an MII may be as under:
12.1.1. MIIs shall engage an independent external agency to identify and recommend suitable candidates for appointment of CO, CRiO, CTO and CISO by whatever designations called, in Verticals 1 and 2 of the MII.
12.1.2. The Agency shall submit its recommendations to the NRC of the MII.
12.1.3. The NRC will evaluate the recommendations of the agency and after discussion with the management of the MII may submit its recommendations for appointment to the Governing Board of the MII.
12.1.4. The Governing Board shall make the final decision for appointment of such KMPs after considering the recommendations of the NRC.
12.1.5. SEBI will not be involved in the process.
12.2. For Re-appointment and Termination: The process for re-appointment or termination of specific KMPs of an MII may be as under:
12.2.1. The NRC shall evaluate the cases of re-appointment or termination of CO, CRiO, CTO and CISO by whatever designations called, in Verticals 1 and 2 of the MII and submit its recommendations to the Governing Board of the MII.
12.2.2. The Governing Board shall make the final decision for re-appointment or termination of such KMPs after considering the recommendations of NRC. 12.2.3. SEBI will not be involved in the process.
12.3. The appointment and termination of KMPs other than the above referred 4 KMPs shall continue to be with the NRC of the MII. However, the MIIs are free to implement the above mechanism for all KMPs.
D. Part-D: Proposals for consideration and approval of the Board
13. The Board may consider and approve the proposals at paragraphs 4.1.4, 4.2.4, 4.3.5 and 4.4.5 of Part-A; paragraph 8 of Part-B; and paragraph 12 of Part-C above.
13.1. If approved,
13.1.1. Proposals at paragraphs 4.1.4, 4.2.4, 4.3.5.1 and 4.4.5 of Part-A does not require any change in the existing regulatory requirement; and proposal at paragraph 4.3.5.2 of Part-A may be implemented by issuance of a circular;
13.1.2. Proposal at paragraph 8 of Part-B may require amendments to SECC Regulations, 2018 and D&P Regulations, 2018. The existing and proposed amendments to SECC Regulations, 2018 and D&P Regulations, 2018 is placed at Annexure A. The provisions regarding the cooling-off period for KMPs may be issued through a circular; and
13.1.3. Proposals at paragraph 12 of Part-C may be issued through a circular.
13.2. The draft notification for amendments to SECC Regulations, 2018 and D&P Regulations, 2018 are placed at Annexure B and Annexure C respectively.
13.3. The proposals may be effective from 90th days from the date of notification of amendments to regulations or issuance of circulars in this regard.
13.4. The Board may authorize the Chairman to take steps to implement the proposals with consequential, incidental and appropriate changes, as may be required in this regard, and any subsequent revisions thereto based on the evolving market context.
Annexure-A
(This has been excised for reasons of confidentiality)
Annexure-B
(Amendments shall be notified after following the due process)
Annexure-C
(Amendments shall be notified after following the due process)
