STRENGTHENING INDIAN FINANCIAL MARKET INFRASTRUCTURE: EXAMINING SEBI’S MARKET INFRASTRUCTURE INSTITUTIONS REFORMS

- by Yash Sharan and Vaibhav Singh Tiwari, students at HNLU Raipur and DNLU Jabalpur respectively.

I. Introduction

On June 24, 2025, the Securities & Exchange Board of India (“SEBI”) issued a Consultation paper on Strengthening Governance of Market Infrastructure Institutions (“MIIs”). The Consultation paper released by the SEBI proposed three major reforms, which are, firstly, the appointment of two Executive Directors in MIIs to head Critical Operations and Compliance functions; secondly, defining clear roles and responsibilities of MDs, EDs, etc.; and lastly, establishing clear norms for directorships.

In recent years, MIIs have experienced significant growth in their investor base and trading, which has also amplified systemic risk through systematic interconnections and governance weaknesses, underscoring the need for enhanced checks and structural safeguards. Past episodes, such as the failure in governance of the NSE, where unfair preferential access by some brokers led to the market breakdown, have further confirmed this risk. Consequently, the SEBI has released the Consultation paper proposing enhancement to the governance framework in MIIs particularly at the Governing Board and key managerial levels of MIIs.

This blog presents a comprehensive analysis of the prevailing regulatory framework for the governance of MIIs, critically engaging with the key features of proposed reforms, and evaluating their effectiveness in addressing structural and operational challenges. 

II. Decoding MII Governance: Examining the Existing Framework and SEBI’s Recent Reform Push

Current Framework for governing MIIs:

Stock exchanges (such as NSE or BSE), depositories (such as CDSL or NSDL), and clearing houses constitute part of securities’ MIIs, helping in the effective trading, clearing, and record keeping of the securities. The regulatory oversight of the MIIs is governed by various acts and regulations, such as the Securities Contracts (Regulation) Act, 1956, the SEBI Act, 1992, and the Depositories Act, 1996, along with sector-specific regulations such as Securities Contracts (regulation) (stock Exchanges And Clearing Corporations) Regulations, 2018, and SEBI (Depositories and Participants) Regulations, 2018 Regulations, 2018. SEBI prescribes each MII with a governing board composition. This board includes the Managing Director (“MD”), Shareholder or non-independent directors, and SEBI-nominated Public Interest Directors (“PIDs”), whose appointment is done with SEBI’s approval. SEBI regulatory oversight is also extended to the appointment of key committees under MIIs and approves the selection of PIDs and the MDs as per the recommendations of the board.

The MIIs are also segregated into three verticals, i.e. firstly, critical operations, secondly, risk and compliance, and lastly, the other business functions for smooth functioning, and the MD has overall authority over all the verticals. The vertical separation also provides performance of the roles and reduce overlaps - the vital operations are directed to the stability of market infrastructure, the safety and compliance protect regulatory compliance, and the other business areas are aimed at innovation and growth. By delegating general powers to the MD, it will aid in creating a unanimity of control, whereas the required board committees serve as a check and balance, alleviating the struggle of interests. This bi-polarity is what separates operational implementation and regulatory protection, promoting efficiency as well as accountability in MIIs. Additionally, the SEBI also requires the stock exchanges and clearing corporations to form a board of committees for mitigating conflicts of interest and functioning.

Recent MIIs reform push by SEBI

Firstly, the SEBI, through a Consultation paper, proposes the mandatory appointment of two EDs on the boards of MIIs for overseeing the critical functions such as trading, clearing, settlement, compliance, risk management and investor grievance redressal. A third ED may also be appointed at the discretion of MII. The SEBI aims to bring board-level attention and planning by mandating dedicated ED appointments. Secondly, another notable part of the paper proposes a formal codification of roles and responsibilities of top executive duties, such as MDs, EDs and other key officers. Currently, many duties are loosely and informally distributed. The proposal aims to write these functions into law to give a clear mandate to key officers, to prevent overlaps. Lastly, SEBI proposed strict restrictions on board roles for curbing the conflict of interest. As per the proposal, an MD of MII could only accept an external directorship in a non-commercial entity and EDs would be allowed to serve only on boards of subsidiaries. This is done in order to curb the conflicting loyalties of MDs and EDs and thus reinforce the full-time commitment to public utility function.

Through these proposals, SEBI ensures that the MIIs remain “first-line regulators,” prioritising systemic safety over profit.

III. Unaddressed Risks in SEBI’s MII Governance Reforms Push

While the Paper is a watershed reform and appears to be a timely regulatory intervention, as it responds to MIIs, which have become the neural backbone of a rapidly digitising capital market ecosystem. However, despite their centrality, SEBI’s prior interventions have tended to follow rather than foresee risk trajectories, and also raise concerns of disrupting current leadership structure and reducing the authority of MDs. This section critically elucidates on shortcomings in the proposed governance reform.

Firstly, the proposal maintains the existing PID regime, as currently SEBI mandates that an equal or higher number of PIDs in the governing body to prioritise public interest. Additionally, the proposal also mandates adding two EDs to the board for running the first and second verticals, respectively. While this addresses the issue of placing key executives on the boards, it does not mandate a majority of truly independent directors on the board.

In Singapore, the Monetary Authority of Singapore (“MAS”) requires the majority of independent directors in the governing board. Similarly, Basel’s banking governance guidelines require the majority of independent directors. It is also seen in the comparative view that both MAS and Basel have independent board majorities to promote unbiased oversight and minimise conflict of interests. In the case of India, embracing a similar structure would make governance in MIIs more robust as it is aligned to world-best practice, increases investor trust, and reduces the risks of regulatory capture. Nonetheless, the special market architecture of India requires a more moderate solution that will present a balance between independence and representation of the stakeholders, thus promoting not only accountability but also inclusivity in the financial market governance.

Secondly, SEBI’s reform, pushing towards prioritising “public interest” by emphasising market integrity over profitability, is appreciable, and PIDs are intended to represent a broader public view on the board. However, it does not create any formal stakeholders (eg, investors) other than PIDs on the board. In contrast, the USA’s Self-Regulatory Organisation (“SRO”) are required to oversee the public function through both regulatory and non-regulatory means, thus incorporating a broader stakeholder engagement. Thus, SEBI’s push towards public interest is devoid of structured stakeholder input (beyond PIDs) as suggested by international best practices.

Lastly, the SEBI has tried to clearly define the roles and responsibilities of executives in MII through its consultation paper, which marks a welcome shift towards structured internal governance, but it falls short of external accountability measures adopted globally. For instance, in Singapore, MAS has extended the Senior Manager Regime (“SAR”), forcing senior manager certification for each function. Similarly, the UK also has a senior manager certification regime.

IV. A Shift Towards Structured Accountability in MII Governance

While the Consultation Paper is a watershed reform and has profound implications on the Indian financial landscape, concerns persist over potential risks that could challenge its effectiveness. The Consultation Paper, while enhancing transparency, poses risks, the solutions of which this section elucidates.

Firstly, the system of having PIDs, as currently done, is more of a façade of independence with no operational teeth in it. The structural dependency on SEBI is brought about by having the appointment of PIDs go through a top-down nomination process that compromises the whole concept of fiduciary autonomy. A better governance model may demand that the majority of the MII board would be functionally independent, with the directors being selected in a process ratified by the stakeholders that would include the public shareholders, institutional investors and market players. In order to mechanise this strategy, a systematic nomination and ratification process may be proposed with the shortlist of candidates to board positions being shortlisted by an independent nomination committee through the representatives of the public shareholders, institutional investors and market participants. Stakeholder ratification of these candidates would then be done by an open vote. This model enhances the board’s functionality, increases accountability, and entrenches participatory governance, thereby safeguarding the integrity of MIIs.

This is in line with the Corporate Governance Code of the Monetary Authority of Singapore, where it is required that independent directors should be independent in character as well as in judgment. In addition, Indian jurisprudence gives credence to this. The Supreme Court, in Union of India v. R. Gandhi, said that judicial or institutional independence should be both de facto as well as de jure, and warned against having a mere tokenism in making appointments. Applying this principle to the financial sector necessitates a clear demarcation between the governance and regulatory functions within the MII, thereby mitigating the risk associated with regulatory capture and groupthink, and ensuring the impartiality of the financial oversight.

Secondly, the concept of public interest cannot be maintained only in the limiting perspective of PIDs. Involvement of key stakeholders should also be institutionalized, especially in those institutions that carry out quasi-regulatory roles. Another more prospective reform may be establishing Stakeholder Advisory Councils in every MII, including members of retail investor groups, clearing corporations, broker-dealers, and technology-related interests. Such councils may be allowed the right to observe and comment on core board committees. This model draws its support from the US FINRA model, where the policy is controlled by the joint interest of the industry participants and the citizens in the form of public interest, which makes the policy transparent and more legitimised. One such regulatory blemish in the NSE co-location case came in part due to the lack of this kind of stakeholder scrutiny, where collusion and opacity inside the company allowed years of privileged access to pass unchallenged. Such inclusion of a variety of voices would have established a circuit breaker in real time.

Thirdly, SEBI’s focus on the codification of MD, ED, and KMP roles may be transformed into the Senior Executive Accountability Regime, as is the case in the UK SMCR or Singapore SAR, so that the individual responsibilities are legally binding. Every senior executive is required to submit a form called a statement of responsibilities and a responsibility map that clearly identifies his or her operational and compliance responsibilities. Any negligence in the discharge of duty may give rise to personal liability under Section 24 of the SEBI Act of 1992, which allows the prosecution of the so-called officers-in-default. Such legal tools are essential in the process of ensuring that no one loses accountability in the corporate structure or is swallowed by institutional inertia. The IL&FS crisis is a prime example of the failure of personal accountability in financial governance that can turn into systemic risk, which ultimately becomes a burden on the exchequer and destroys investor confidence. In this instance, the company’s default of over Rs. 94,000 crores in debt was attributed to mismanagement and lack of oversight. This failure underscores the necessity for stringent personal liability provisions to enforce accountability and to prevent systematic risks.

Ultimately, the reforms taken by SEBI must not only be structural formalism, but rather a governance culture that should be democratic, legally sound, and harmonized across the world. Not only will this help mend the trust of investors in MIIs, but it will also help strengthen India as a much-trusted global financial centre.

Conclusion

The Consultation Paper is a necessary and revolutionary initiative in redefining MII governance in the fast-changing financial landscape of India. Although it codifies executive functions and injects structural reforms, this piece contends that it lacks stakeholder integration, functional board independence and holding executives to account. Such loopholes may jeopardise the regulatory purpose and can recreate historic systemic breakdowns.

In the future, SEBI should incorporate the stakeholder-approved model of appointing people and institutionalise the public oversight by the Stakeholder Advisory Councils and implement the legally binding Senior Executive Accountability Regime. Aligning SEBI to international best practices and judicial tests of true independence, the MIIs could be enforced not just as facilitators of the market, but as powerful, responsible bodies of the people they trust, to reinforce the Indian dream of becoming a credible international financial centre.