SEBI has floated a discussion paper to review the extant framework of ownership and governance norms in Stock Exchanges and Depositories (also known as Market Infrastructure Institutions or MIIs), with a view to facilitate new entrants to set up MIIs and liberalize their ownership framework.

The extant framework under Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 and the Depositories and Participants Regulations, 2018, caps the ownership of MIIs at a shareholding limit of not  more  than  5%  for  individuals and other entities  (domestic  or  foreign)  and  up to 15% for institutions (domestic or foreign) such as stock exchange, depository, banking company, insurance company etc. Unlike the banking and  insurance  sectors where there are no limits on shareholding for promoters at the initial stage of setting up of the business subject to dilution of shareholding over time, the ownership framework in MIIs have a default precondition of dispersed shareholding at the time of setting up of a MII. In SEBI’s view, this deprives the promoter / potential entrant of a chance to exercise sufficient control and limits the upside gains of entrepreneurial capital to the extent of one’s shareholding. It is therefore thought necessary to consider a liberalized framework for MIIs so as to allow a higher shareholding at the initial / inception stage and thereafter a dilution in the ownership over a period of time.

To this end the paper makes the following key proposals:

In case of setting up of a new MII :

• The promoter of a resident individual/ domestic institution setting up the MII may hold up to 100 per cent. shareholding, which shall be brought down to not more than either 51 per cent. or 26 per cent. in 10 years from the date of commencement of business. The MII shall be a public limited company.

• A foreign  promoter  (from  FATF  member  jurisdictions) setting  up  the  MII  may hold  up  to  49 per cent. shareholding which shall be brought down to not more than either 26 per cent. or 15 per cent. in 10 years. Foreign individuals / entities from other than FATF member jurisdictions, may acquire or hold up to 10 per cent. in a MII.  Combined holdings of all persons resident outside India in a MII, shall not exceed, at any time, 49 per cent. in terms of consolidated FDI Policy 2020.

• At least 50 per cent. of ownership of the MII to be represented by Individuals/ Entities having experience of 5 years or more in areas of capital markets or technology related to financial services.

• The applicant/ promoter (both domestic and foreign) shall ensure that there is no conflict of interest.

In case of an existing MII :  The framework would be the same as for setting up a new MII, except that any acquisition of 25 per cent. or more shall be subject to prior approval of  SEBI  and  compliance  with  provisions  of  SEBI  Takeovers  Regulations  (in case of both, listed or unlisted MII). Any merger & acquisition in a MII shall be subject to prior approval from SEBI.

Changes in Governance norms : It is proposed that a Public Interest Director (PID) should be one out of the three members in the Grievance Redressal Committee in case of claims exceeding Rs. 25 lakhs. The Nomination and Remuneration Committee (NRC) should have two PIDs and an equivalent number of shareholder directors, if available. An Independent External Person (IEP) may be inducted in the NRC only for recommending the selection of the Managing Director (MD) and not of the Chief Executive Officer (CEO). The MD & CEO shall be permanent invitees to the NRC, except when his/ her appointment/ compensation/ performance appraisal is being considered.

The Standing Committee on Technology shall include the MD & CEO and Chief Technology Officer as permanent invitees ; The Regulatory Oversight Committee may comprise of PID (at least 50%), SHDs (including MD & CEO) and IEP. KMPs may be invitees. The Risk Management Committee should have at  least two PIDs along with IEPs and Shareholder Directors (including MD& CEO). The appointment of MD & CEO shall be for a maximum three terms of three years each in place of the present two terms of up to five years each.

Public comments are invited on these proposed changes by 5 February 2021. To refer to the discussion paper, dated 6 January 2021, click here.