Co-authored with Navneeta Shankar and Purva Mandale, associates at Finsec Law Advisors.
The Securities and Exchange Board of India (Sebi) is once again in the spotlight with its latest consultation paper on the governance of market infrastructure institutions (MIIs) released on June 24. While the paper aims to reinforce systemic accountability and operational transparency, it has triggered a strong resistance from within the very institutions it seeks to regulate. The proposed framework is a classic instance of regulatory overreach, one that risks undermining the foundational principles of effective governance, blurring the lines of accountability, and putting constraints on the operational flexibility essential for market resilience and innovation.
Sebi’s efforts to enhance governance within MIIs are not new. From the Kania Committee in 2002 to the Bimal Jalan and R Gandhi Committees in 2010 and 2017 respectively, and more recently, the Mahalingam Committee in 2022, there has been a steady evolution of oversight frameworks. However, a growing concern is that Sebi’s posture has shifted—from enabling strong, principle-based self-governance to imposing rigid, top-down structural mandates. A similar push in the November 2024 consultation paper proposed Sebi’s direct involvement in the appointment and termination of key managerial personnel (KMP) of MIIs through an external agency-led process. That proposal was met with firm opposition and ultimately not taken up by Sebi.
One of the most controversial proposals in Sebi’s new consultation paper is the mandatory appointment of two executive directors (EDs) to separately head vertical 1 (critical operations) and vertical 2 (regulatory compliance, risk, and investor grievance) of MIIs, and to induct both into the governing board when necessary. For MIIs, this not only blurs the fundamental distinction between management and oversight, but also risks weakening the effectiveness of public interest directors (PIDs) statutorily tasked with protecting market integrity. More importantly, introducing parallel power centres into an operationally complex environment could lead to confusion, overlapping authority, and weakened coordination. At the heart of the resistance is the belief that a single point of executive authority—the managing director (MD)—is essential to ensure clarity, alignment, and accountability across the institution.
Another big concern is Sebi’s attempt to prescribe in granular detail the roles and responsibilities of the MD, ED, and specific KMP like the compliance officer, chief risk officer, chief technology officer, and chief information security officer. Sebi’s proposals fail to consider that these functions are embedded within MIIs’ internal policy frameworks, subject to extensive board oversight, and regularly reviewed through Sebi’s inspection and audit processes. Codifying them at the regulatory level may inadvertently create rigidity, duplicate existing obligations, and reduce the institution’s ability to adapt. Many within the industry would argue that Sebi should focus on setting broad principles and let MIIs determine how best to implement them with board-approved structures suited to their scale and operating models. This is also in line with the Mahalingam Committee’s vision, which advocated a balance between rule- and principle-based regulations.
This prescriptive approach appears out of sync with international standards. The principles for financial market infrastructures (PFMI), issued by the Committee on Payments and Market Infrastructures, and the technical committee of the International Organization of Securities Commissions stress the importance of clear and transparent governance structures. Importantly, they stop short of prescribing internal hierarchies. The PFMI framework leaves room for jurisdictions to shape governance in ways that reflect local conditions, so long as the end goals of safety, efficiency, and market stability are met. In most mature jurisdictions, MIIs are regulated through outcome-based principles and not organisational templates. Contrarily, Sebi’s proposals risk binding all MIIs into a one-size-fits-all framework.
Another key proposal in the consultation paper is the treatment of external directorships held by senior MII leadership. In a welcome shift from its earlier restrictive stance, Sebi proposes to allow MDs to hold directorships in government firms and not-for-profit entities, subject to prior approval and appropriate disclosures. While restrictions on commercial board memberships are justified to avoid conflicts of interest, a complete ban would have been unnecessarily limiting. Senior executives often contribute to such bodies in non-remunerative capacities, and their involvement can support sector-wide coordination, knowledge-sharing, and policy alignment. Sebi’s revised position acknowledges the value of such engagements, and ensures MIIs can continue to benefit from experienced leadership without disconnecting them from the broader market ecosystem.
What is perhaps most concerning to many MIIs is that the proposed reforms could unintentionally erode the authority of the governing board itself. By prescribing who must occupy key management positions, who reports to whom, and who must sit on the board, the proposals effectively constrain the board’s ability to shape the organisation’s executive structure—a power that is fundamental to good corporate governance. There is little evidence to suggest the absence of designated executive positions has led to any governance failures within MIIs. The objective that Sebi seeks to achieve from the appointment of EDs, particularly ensuring the highest priority to public interest, technology and operations, and risk and compliance over commercial considerations are already being discharged under the supervision of KMP, PIDs and MII boards. This raises questions about whether additional executive roles are necessary or justified under the existing and functioning framework.
The issue at hand is not whether MII governance can be improved—it can and should evolve with time. However, governance reform must be based on proportionality, trust, and evidence rather than an assumption that regulatory micro-management is the only way to safeguard public interest. By preserving the MD’s executive leadership, ensuring robust board oversight, and allowing MIIs the freedom to design their internal frameworks, Sebi can achieve its goals without sacrificing the flexibility and responsiveness that are essential in a fast-moving market environment.
Ultimately, the regulator’s challenge lies in finding the right balance—strengthening accountability while letting the MDs run the show, the boards govern effectively, and without stifling the autonomy of MIIs.
