On October 14, 2024, the Securities and Exchange Board of India (SEBI) issued a groundbreaking circular aimed at tightening its oversight of Market Infrastructure Institutions (MIIs), which include stock exchanges, clearing corporations, and depositories. This revamped approach will affect both listed and unlisted MIIs, focusing on shareholding limits, public shareholding requirements, and the stringent "fit & proper" criteria for stakeholders. The SEBI’s New Framework for Market Infrastructure Institutions, which will come into effect from 90th day from the issuance of the circular, aim to promote transparency and ensure greater compliance within the financial ecosystem.
What are MIIs and Why is this Important?
MIIs are pivotal in India’s financial markets. These institutions ensure the smooth functioning of trading, settlement, and depository services, maintaining the integrity of the capital markets. As key players in safeguarding market stability, it’s essential that MIIs adhere to strict standards of governance and transparency. SEBI’s newly introduced framework is set to reinforce these standards, providing a more structured approach to monitoring shareholding patterns and ensuring compliance with the applicable regulations.
Quarterly Disclosures and Shareholding Limits: The Core of the Framework
Under this framework, MIIs will now be required to disclose their shareholding patterns quarterly on their websites, in line with SEBI's Listing Obligations and Disclosure Requirements (LODR). Whether a MII is listed or unlisted, this level of disclosure ensures that the market remains aware of who holds significant stakes in these critical entities.
Moreover, MIIs must appoint a Designated Depository (DD) to oversee compliance with shareholding limits. For depositories, the other depository will act as the DD, ensuring unbiased monitoring. The DD will actively monitor thresholds such as the 5 percent or 15 percent limits specified under the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (SECC) and the Depositories and Participants (D&P) Regulations, 2018.
Foreign Ownership Under Scrutiny
A significant change in the framework involves the monitoring of foreign shareholding. The DD must closely watch when foreign ownership hits the threshold of 49 percent in the paid-up equity share capital of an MII. If this cap is breached, swift action will be taken to rectify the situation.
The framework also stipulates that trading members, along with their associates and agents, should not collectively hold more than 49 percent equity in a stock exchange. Any holding over 45 percent will require prior approval for further purchases, ensuring that no individual or group gains disproportionate influence over MIIs.
Maintaining the Right Balance of Ownership
In the case of clearing corporations, at least 51 percent of their ownership must remain with stock exchanges, and no exchange can hold more than 15 percent in multiple clearing corporations. This will maintain a healthy balance of ownership, limiting the concentration of power within one entity.
The "Fit & Proper" Criteria: Ensuring Trustworthy Shareholders
A key aspect of the new framework is the emphasis on the "fit & proper" criteria for shareholders who hold 2 percent or more equity in MIIs. MIIs are tasked with notifying shareholders of these requirements and must report non-compliance to SEBI on a quarterly basis. Should any shareholder fail to meet these criteria, the DD will freeze their excess shares, disable voting rights, and redirect dividends from these shares to Investor Protection Funds (IPF) or Settlement Guarantee Funds (SGF).
Consequences for Excess Shareholding
In instances where shareholders exceed the prescribed limits, SEBI has laid down clear rules. For listed MIIs, the excess shareholding will be divested through a special window provided by the stock exchange where the MII's shares are listed. In contrast, for unlisted MIIs, SEBI will provide directions on a case-by-case basis for divestment of excess shares.
A Step Towards Greater Transparency
The introduction of this framework by SEBI is a step towards reinforcing the accountability and transparency of MIIs. By monitoring shareholding patterns, imposing stricter ownership limits, and enforcing fit & proper criteria, SEBI aims to ensure that these critical market institutions are governed fairly and operate with the highest standards of integrity.
"The provisions of this circular shall come into effect from 90thday from the date of issuance of the circular"
With the implementation date almost three months away, MIIs and their shareholders have ample time to get ready for these upcoming changes. However, the framework sends a clear message: SEBI is committed to maintaining a robust and transparent financial system, ensuring that the institutions driving India’s markets remain resilient and free from undue influence. This is undoubtedly a significant milestone in the evolution of regulatory oversight in India’s financial markets.
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