The Securities and Exchange Board of India (SEBI) released a circular on the performance evaluation parameters for market infrastructure institutions (MII). 含羞草社区 spoke to Narayan Kedia, vice president legal of Sammaan Capital (formerly known as Indiabulls), to explain this development.
Q1. What are market infrastructure institutions?
Traditionally, stock exchanges such as the BSE [Bombay Stock Exchange] and NSE [National Stock Exchange of India], depositories like the CDSL [Central Depository Services Limited] and NSDL [National Securities Depository Limited], and clearing corporations form the securities’ MIIs. These serve as the cornerstone of capital markets, providing essential services like trading, clearing, settlement, and record-keeping for securities transactions, making them systemically important for the country’s financial development.
MIIs operate akin to public utilities providing the foundation for a level playing field, facilitating the smooth operation of financial markets and boosting investor confidence. Even minor disruptions can lead to market instability and a loss of investor trust. They act as first-level regulators, overseeing key participants and ensuring compliance with applicable laws.
Q2. What is the performance evaluation of MIIs and why is it needed?
MIIs function as both commercial entities with profit motives and regulatory bodies overseeing securities and capital markets. This dual role can lead to conflicts, as their commercial interests may sometimes clash with their responsibility to safeguard market integrity and protect investors. To address these concerns, the governance of MIIs has been periodically reviewed.
The circular emphasises the importance of fundamental standards and principles, along with weightages to ensure uniformity and consistency in evaluations by external agencies. The SEBI mandates independent external assessments to enhance transparency and accountability.
Q3. What are the recently released parameters and their significance?
The circular provides a detailed framework for evaluating the performance of MIIs and focus on critical areas in key parameters:
- Resilience in technology and processes – 40%
- Investor education and protection – 17%
- Efficient discharge of regulatory role – 15%
- Compliance with regulatory norms – 10%
- Evaluation of governance practices – 8%
- Adequacy of resources – 5%
- Fair access and treatment to all stakeholders – 5%
Performance evaluations occur once every three years, with the initial evaluation covering the 2024-2025 financial year. The initial evaluation report must be submitted to the governing board by 30 September 2025. All subsequent evaluations must be submitted to the governing board and the SEBI within six months of the third financial year’s end.
Q4. Before the recent MII parameters, how was performance evaluated?
The previous evaluation process was less structured, lacked formal consistency and was not uniformly applied across all MIIs. However, performance monitoring did occur under earlier regulations and governance guidelines, although not with the same depth as in the new framework. Previously, MIIs were simply required to maintain good governance, manage risks and adhere to regulatory norms. There was no formal or regular external evaluation process.
Q5. What are the possible challenges with the recent parameters?
The circular brings much-needed clarity and uniformity in assessing the performance of MIIs, however, its practical implementation and effectiveness could be challenging.
Complex weightage
The high weightage given to technology resilience may lead MIIs to prioritise technological improvements at the expense of other critical areas such as governance and regulatory compliance, which also play a significant role in maintaining market integrity.
Conflict of interest
Despite SEBI guidelines to prevent conflicts of interest, ensuring total independence of the external evaluator remains a challenge. MIIs may still influence the selection, potentially leading to agencies that are more lenient or favourable in their evaluations.
Rating framework and subjectivity
The final rating still depends heavily on the evaluator’s judgement. The broad categories provided in the rating system may not offer detailed insights into specific areas of improvement for MIIs.
Timeline
The three-year cycle may be too long to capture emerging risks or inefficiencies within MIIs, particularly in areas such as technology resilience and cybersecurity. The long cycle may also delay improvements until the next evaluation leading to inefficiencies or risks being left unaddressed.
Resource adequacy
The modest 5% weightage may not reflect the critical importance of having sufficient resources and lead to under-investment in human resources, both equally crucial for oversight functions, risk management and compliance.
