Market Infrastructure Institutions: Top 5 Suggestions By SEBI Panel To Boost Governance
Board changes and revised net worth criteria are some key changes that Market Infrastructure Institutions should prepare for.
Functional classification, board independence, widening the definition of key managerial person and capping their compensation, and tightening the net worth criteria are some of the key proposals put forth by the 13-member committee formed by SEBI.
The panel was tasked with proposing governance norms at Market Infrastructure Institutions such as stock exchanges, depositories and clearing houses.
Chaired by G Mahalingam, former whole-time member at the Securities and Exchange Board of India, the committee has articulated its approach saying MIIs are uniquely placed—they have a regulatory responsibility even as they pursue commercial interests.
Policymakers would need to ponder over the appropriateness of this model and perhaps look for alternatives, which would ensure a clean separation of the two roles now vested with the MIIs.G Mahalingam Committee
Several recent incidents of lapses at MIIs require amendments to the existing regulations for stock exchanges and clearing corporations, as well as depositories and participants, the committee has said in its reports.
To that end, it has made five key recommendations:
Functional Classification
Organisational classification at MIIs should be based on functions and categorised into three verticals—critical operations; regulatory, compliance and risk management; and other functions including business development.
MIIs should give higher priority in terms of resource allocation and utilisation to the first two functions.
Resource deployment for each of the core functions under different verticals should be quantified and disclosed in the annual report of the MIIs.
Each core function should be headed by a designated KMP, the committee has suggested.
"KMPs heading the functions under the first two verticals should be at least at par in hierarchy with the KMPs heading functions under the third vertical."
Board Independence
At least two-third members of the board of the MII shall comprise public interest directors.
Further, the existing process of appointment of PIDs, non-independent directors and managing director should be rationalised by mapping certain skill-sets/expertise to PIDs, while maintaining an overall balance of expertise required in the board.
Regulations should incorporate a provision to "enable SEBI to appoint PIDs on the Board of the MII. The current norms should also cover additional areas of expertise for PIDs, such as technology and risk management".
Broader Definition Of KMP
The committee has highlighted governance lapses in designating certain employees as KMP, which resulted in non-application of the prescribed requirements to those individuals.
Also, the MDs and KMPs of subsidiaries of MIIs have also not been considered under the existing definition of KMP, even if some of these subsidiaries performed important functions for the relevant MII.
To remedy this, the definition of KMPs should be changed to cover employees based on importance of activities carried out by them and their relative hierarchy within the MII, the committee has suggested.
Its view is that to "designate a person as a KMP, the test should be role-based rather than level-based".
Also, the definition should cover members of the core management team, including persons handling core and critical activities of the MII, as well as any other personnel involved in important decision-making roles as determined by the MD or the Nomination and Remuneration Committee.
KMP Compensation
Currently, for KMPs, there is a cap on the variable pay. It cannot exceed one-third of the total pay. But there is no minimum amount required to be paid to a KMP as variable pay.
This anomaly may result in ineffectiveness of the current clauses relating to deferred payment, the committee has pointed out.
The regulations should be amended to provide for a minimum (25%) as well as maximum (50%) amount as variable component of the KMPs’ compensation, it has said.
For each KMP, due weightage should be provided to the regulatory, risk management and compliance-related aspects including Code of Conduct/Ethics for determining variable pay.
ESOPs, as part of compensation to KMPs, is important to attract and retain talent, the committee has said.
ESOP-related compensation should be permitted in MIIs and should be included as part of the variable pay component.G Mahalingam Committee
Net Worth Criteria
Currently, MIIs are required to have a minimum net worth of not less than Rs 100 crore on a continuous basis.
Highlighting the phenomenal growth in the market capitalisation, trading volumes, investor base and the number of market intermediaries linked to MIIs, the net worth criteria should also include a variable component to cover various risks associated with an MII's operations and level of activity, it said.
So, the regulator could consider including unencumbered liquid assets and activity-based risk factors for computing the net worth of MIIs, the committee has said.
It has suggested that the net worth requirement of MIIs should include a variable component—over and above the minimum net worth requirement—based on the following:
Level of activity of the MIIs.
Adequacy of net worth to cover various risks, such as the operational risk, legal risk, credit risk, and cybersecurity/technology risk.
The market regulator has sought comments from stakeholders on the committee's report by Nov. 30.