In a 108-page report submitted to the Securities and Exchange Board of India (Sebi), the expert committee has said that all such institutions should create three distinct verticals to avoid conflict of interest. These include 1) critical operations; 2) regulatory, compliance and risk management; and 3) other functions such as business development. The committee suggested the first two verticals get priority in terms of resource allocation and utilisation. Further, the functions under the first two verticals separately should be given higher priority.
Market infrastructure institutions (MIIs) include the stock exchanges, depositories and clearing corporations, which perform important functions in the market and act as first-level regulators.
In April, Sebi had constituted an ad hoc committee under the leadership of its former whole-time member G Mahalingam. The committee was formed after the market regulator found several governance lapses at the National Stock Exchange (NSE) while Chitra Ramkrishna was at the helm of the exchange.
“They are vested with regulatory responsibilities, while pursuing commercial interests like other profit-oriented entities. Because of this conflicting nature of MII’s role, the governance standards of MIIs need to be robust to increase market confidence and deter malpractices,” the committee said in its report.
The committee said a rule-based approach for the regulation of MIIs should be balanced with a principle-based approach.
The committee has put responsibility on roles and responsibilities on public interest directors (PID) to ensure greater independence of the board.
The committee has also suggested at least two-third members of the Board of the MII shall comprise of PIDs. Further, the roles and responsibilities of all directors must be clearly outlined, especially their responsibilities toward regulatory, compliance and risk management functions.
The PIDs will be expected to continue to meet twice a year and submit to Sebi a periodic report highlighting issues of importance and concern to MIIs.
Further it has been recommended that the definition of key managerial personal (KMPs) be changed to cover employees based on importance of activities carried out by them and their relative hierarchy within the MII.
The panel has also recommended that all KMPs should have a salary structure where minimum of 25% and maximum 50% of their salary should be categorised as variable component in compensation.
