Financial Infrastructure Reform: SEBI’s Strategy for MIIs

Context:

• In June 2025, the Securities and Exchange Board of India (SEBI) released a consultation paper proposing reforms to strengthen the governance framework of Market Infrastructure Institutions (MIIs).

• These proposals were prompted by the growing scale of India's securities markets and concerns arising from past governance lapses in MIIs.

• MIIs are crucial for ensuring the orderly functioning, safety, and stability of financial markets.

What are MIIs?

Market Infrastructure Institutions (MIIs) are critical entities that support the structure and functioning of capital markets. These include:

• Stock Exchanges – platforms for trading of securities.

• Clearing Corporations – manage counterparty risk and settlement.

• Depositories – hold securities in electronic form and facilitate ownership transfer.

They form the institutional backbone of India's securities market.

Why Governance Reform is Necessary:

• Expanding scope and complexity of India’s securities market requires stronger regulatory oversight.

• Past governance slippages in some MIIs raised concerns about internal checks, transparency, and independence.

• Need to separate commercial and regulatory functions to avoid conflicts of interest.

• Ensure investor protection and prevent systemic risks to the broader economy.

Key Proposals by SEBI:

1. Mandatory Appointment of Two Executive Directors (EDs):

   • ED 1: To head Critical Operations.

   • ED 2: To lead Regulatory, Compliance, Risk Management, and Investor Grievances.

2. Optional Appointment of a Third ED:

   • For the Business Development/Commercial Interests vertical.

   • Appointment left to the discretion of the MII.

3. Inclusion in Governing Board:

   • EDs for the two critical verticals will be part of the MII Governing Board.

   • Their appointment and re-appointment will follow a process similar to that of the Managing Director (MD), including possible SEBI approval.

4. Quarterly Reporting Obligations:

   • EDs must report every quarter to the Governing Board and SEBI on their designated areas.

5. Restrictions on Directorships:

   • MDs can serve as non-executive directors in:

     • Unlisted Government Companies (Central/State)

     • Not-for-Profit Companies

   • EDs are barred from holding any directorship outside the MII’s subsidiaries.

Significance of the Proposals:

• Brings clarity in segregation of regulatory vs. commercial roles within MIIs.

• Strengthens institutional accountability and regulatory compliance.

• Promotes greater transparency in decision-making.

• Enhances investor confidence and market integrity.

• Contributes to financial sector reforms in line with India’s growing capital market ecosystem.