The regulatory puzzle of MIIs

Source: The post is based on the article “The regulatory puzzle of MIIs” published in the Business Standard on 29^th November 2022.

Syllabus: GS 3 – Indian Economy and issues relating to planning, mobilization, of resources.

Relevance: About Market Infrastructure Institutions (MIIs).

News: Securities and Exchange Board of India (SEBI) constituted a committee to review the governance framework for market infrastructure institutions (MIIs). The committee recently released its draft report for public comments.

What are Market Infrastructure Institutions (MIIs)?

MIIs are unique institutions providing vital infrastructure for trading, settlement and record-keeping. Stock exchanges, depositories and clearing houses are all Market Infrastructure Institutions(MIIs) and constitute a key part of the nation’s vital economic infrastructure.

They are vested with regulatory responsibilities while also pursuing commercial interests like other profit-oriented entities.

What are some key recommendations of the committee on MIIs?

-The regulatory framework should ensure that MIIs, in pursuance of their business objectives, should not lose sight of the regulatory roles vested in them as the first-line regulators.

-Tightening the norms should not deter innovation or customer focused service provision by MIIs. Hence, the committee calls for a review of the requirements related to the appointment and the role and responsibility of directors on the board and key managerial personnel (KMPs).

-The committee proposes a) Steps to improve the transparency and accountability in the functioning of MIIs, b) Metrics for the monitoring of their performance and measures for the safekeeping and sharing of information held by them, c) Independent directors must constitute two-thirds of the total strength of the board, d) Roles and responsibilities of the directors should be clearly defined, and the board should play an active role in the risk management framework of MIIs, e) Periodical assessment of the performance of the board and its members by an external agency, and f) SEBI meetings with independent and non-independent directors once a year.

What is the success story of the National Stock Exchange (NSE)?

The BSE had a record of several governance failures by the late 1980s. Then a government expert committee recommended the creation of the National Stock Exchange (NSE).

In the newly created NSE the three groups — ownership, management and trading — were kept separate. The NSE had the freedom of a private organisation, though its entire ownership was with public sector units.

What are the challenges in the functioning of MIIs?

MIIs have severe design challenges because,

1) They have to make a profit for the shareholders and perform regulatory functions. These two can be in conflict, 2) Misgovernance is another challenge with MIIs. Every key management person’s appointment decision of exchanges is controlled by the regulator(government), 3) Personnel at MIIs have begun to behave like civil servants: Not take decisions and push every small question up through the hierarchy and get multiple signatures. This has hampered operational capability, 4) Exchanges (and MIIs) in India can no longer be described as autonomous organisations that rapidly take decisions.

What should be done?

There is a need to get back to the journey of establishing capable exchanges. India needs to question the process of turning MIIs into de facto PSUs.  Further, the SEBI report emphasises increased government control of exchanges. This should be avoided. India needs to follow NSE like approach to improve the performance of MIIs.