SEBI proposes appointment of EDs in exchanges for strengthening corporate governance

Market regulator Securities and Exchange Board of India (SEBI) has proposed measures for strengthening governance framework for exchanges, depositories and clearing corporations, collectively called Market Infrastructure Institutions (MIIs). SEBI has proposed appointment of two executive directors (EDs) to the governing board one for the critical operations vertical and another for regulatory, compliance and risk management vertical. MIIs will be free to appoint the third ED for the other functions including business development vertical.

As per the proposal MD will continue to oversee the overall MII and the appointed EDs must be of comparable stature to the MD. The appointment and re-appointment process for these EDs will be similar to that of the MD, requiring prior SEBI approval and as specified by SEBI from time to time. For administrative purposes, EDs will continue to report to the MD.

As per the proposal, EDs will report to the Governing Board and SEBI quarterly on matters concerning their respective verticals. As and when necessary, the EDs shall directly raise issues to the Governing Board and SEBI.

Currently MIIs have three verticals, critical operations like trading, clearing, settlement, securities holding etc are called vertical 1. And then there is vertical 2, which covers regulatory, compliance, risk management, and investor grievances. Vertical 3, covers all other issues including business development. SEBI is of the view that operations and regulatory verticals should be given higher priority in resource allocation. SEBI believes that any failure or mis-governance in these critical institutions may cause adverse impact on the market.

Role of MDs, EDs and KMPs to be defined

SEBI has also proposed for clearly outlining the broad roles and responsibilities of the Managing Director (MD), the proposed EDs, and specific Key Managerial Persons (KMPs) such as the Chief Technology Officer (CTO) and Chief Information Security Officer (CISO) and norms on directorships for establishing clear norms for the directorships of MDs and the proposed EDs of an MII in other companies.

SEBIs consultation paper noted, the MD will be entrusted with the overall management of the MII's affairs and ensure the compliance with all applicable regulations, related guidelines or circulars. Also, MD will ensure that functions under operations and regulatory verticals operate in the interest of the securities market.

The EDs of the critical operations and regulatory compliance vertical will be responsible for the overall affairs of their respective verticals. EDs to also ensure that functions under their respective vertical operate in the interest of the securities market, guided by public interest, and without revenue-oriented objectives.

CISO to asses, identify, and reduce cybersecurity risks; respond to incidents; establish appropriate standards and controls; and direct the establishment and implementation of processes and procedures as per the cybersecurity and cyber resilience policy approved by the governing board.

Similarly, CTO to oversee and manage overall technology-related system design, infrastructure, and operations to be accountable for managing risks in all IT-related functions.

Heads of department within critical operations vertical, including the CTO and CISO, shall report to the ED. Similarly, all Heads of Department within regulatory compliance and chief risk officer will report to the ED. Smaller MIIs facing practical difficulties in complying with the proposed norms may seek exemptions from SEBI.

Appointment of MD in other boards

Currently, there are no clear norms on external directorships of MDs creating potential governance risks. SEBI paper says, given the MD's full-time role and the significant growth of the securities market, the MD's role as a first-line regulator has become increasingly critical. The absence of clear provisions in this regard may lead to various risks, including conflicts of interest, divided focus, and reputational risk.

SEBI paper proposes, the MD may be permitted to be appointed as a non-executive director on the board of a company registered as non-profit company under Section 8 of the Companies Act, 2013, and an unlisted state or central government company that is not involved in any commercial activity. Similarly, the EDs of an MII will not serve on the board of any other company, except for a subsidiary of the MII.

The proposed measures are designed to instil a culture that prioritizes regulatory and operational excellence at both the governing board and operating levels of MIIs, said SEBI in the consultation paper. They will also ensure robust succession planning and adept governance structures. SEBI has sought views of stakeholders by July 15, 2025.