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SEBI seeks to step up sway over boards of bourses, clearing corporations

March 7, 2023 

SEBI to appoint three public interest directors on the board of stock and commodity exchanges, clearing corporations

SEBI will exercise more power in board-related appointments of stock exchanges and clearing corporations (CCs). As per the latest amendment to the rules governing exchanges and CCs, SEBI can now appoint three public interest directors (PIDs) on the board of stock and commodity exchanges and CCs. Also, shareholder approval is not needed for PIDs.

Earlier, SEBI would ask the exchanges or CCs to suggest two or three names in the hierarchy for the appointment of PIDs and approve these. But now, SEBI will send the names of PIDs to the exchanges and CCs for appointment. As the name suggests, PIDs are meant to safeguard public interest. Unlike in other listed companies, the PIDs of exchanges and CCs enjoy a higher dominance on the board.

PIDs have a tenure of three years; for an extension, according to the new rules, the exchange or CC should apply to SEBI four months before expiry of term. For a new appointment, two names should be submitted to SEBI two months before the expiry of term, says the government notification.

Legal experts say the rules should also specify a deadline for SEBI’s approval, given that the regulator has in the past kept crucial PID appointments pending for months.

The rules require exchanges and CCs to follow a “Chinese Wall” policy to separate the functions under a vertical. But another troublesome aspect of the amendment, according to legal experts, is that officials from the regulatory, compliance, risk management and investor grievances will not interact with other exchange officials. The notification says these employees will not communicate any information concerning their activity to anyone in the other verticals and may be physically segregated, including with respect to access controls.

Experts say such a rule will impede the day-to-day functioning of the exchanges and CCs. The rules also suggest that exchanges and CCs should appoint a chief risk officer to identify, monitor and initiate steps to mitigate the risk associated with the functioning of the organisation.

More provisions have been made to give PIDs more dominance on the board. The rules say that PIDs should meet separately, at least once in six months, to exchange views on critical issues and submit a report to SEBI and their respective organisation. They should assess the performance of managing directors on a continuous basis, identify important issues which may involve conflict of interest or may have significant impact on the functioning of the organisation and report to SEBI. PIDs will have regular oversight on the observations of SEBI inspection, particularly on issues of governance standards, technology and cyber security, and system audit and cyber security audit observations

Legal experts say the government must issue a similar notification for depositories like NSDL and CDSL under the Depository Act.

[The Hindu Business Line]

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