SEBI Overhaul of MIIs, Reform or Regulatory Overreach?

SEBI Overhaul of MIIs, Reform or Regulatory Overreach?

Why in News?

The Securities and Exchange Board of India (SEBI) recently released a consultation paper on June 24, 2025, proposing major reforms in the governance of Market Infrastructure Institutions (MIIs), such as stock exchanges, clearing corporations, and depositories. The proposal, however, has sparked significant debate, with critics arguing it amounts to regulatory overreach and risks undermining the very goals SEBI aims to strengthen: transparency, accountability, and operational efficiency.

Introduction

Market Infrastructure Institutions (MIIs) form the backbone of India’s financial markets. They are vital in ensuring secure, transparent, and efficient trading and settlement of financial instruments. Over the years, their governance has evolved through multiple committees and reforms. Yet, the latest proposal by SEBI aims to further tighten control, particularly by detailing the responsibilities of top officials, increasing external involvement in appointments, and prescribing new oversight mechanisms. While the intent may be to improve resilience and transparency, many believe the proposal risks micromanaging the institutions and diluting their autonomy.

Key Issues/Background

1. Historic Evolution of Governance in MIIs:

   • Governance reforms began with the Kania Committee (2002), followed by recommendations from the Bimal Jalan (2010) and R Gandhi (2017) Committees.

   • The latest comprehensive review was undertaken by the Madhabi Puri Buch-led Ahluwalia Committee in 2022.

   • SEBI’s stance has been to push for self-regulation, tech-driven compliance, and a balance between public interest and institutional autonomy.

2. The New Consultation Paper:

   • Proposes mandatory approval of MII board members and top management personnel (KMPs) through a SEBI-led process.

   • Seeks to categorize board responsibilities between verticals (regulatory, business, investor grievance) and horizontals (technology, risk, compliance).

   • Imposes direct involvement in hiring and firing of MDs, EDs, and specific KMPs like CFO, CRO, and CIO.

3. Micromanagement and Governance Clarity:

   • Critics argue that such detailed governance intrusions dilute internal authority, especially that of the Managing Director (MD).

   • The idea of separating authority into rigid categories may result in inefficiency and overlapping roles, leading to delays in critical decisions.

   • The foundational concept of proportional regulation—based on risk and outcomes—is being sidelined.

4. Codification of Audit and Oversight:

   • SEBI proposes standardizing roles that are typically context-based, such as internal audit, inspection, and technology oversight.

   • These are already governed by well-defined protocols under IOSCO and the Principles for Financial Market Infrastructures (PFMI).

   • By making them prescriptive and uniform, the paper ignores flexibility needed in dynamic situations.

5. Global Benchmarks and Flexibility:

   • Global standards emphasize principles-based governance—clarity in goals but flexibility in execution.

   • SEBI’s rigid proposal appears at odds with these norms, raising questions on India’s alignment with international regulatory frameworks.

Five Key Observations/Takeaways

1. Regulatory Overreach Concerns:
   The proposal risks eroding the autonomy of MIIs by replacing principle-based frameworks with prescriptive, one-size-fits-all templates. By getting deeply involved in operational matters, SEBI may be assuming an executive function rather than a regulatory one.

2. Impact on Efficiency and Talent:
   If experienced leadership is disempowered through excessive oversight, MIIs may struggle to attract and retain top talent. Uncertainty in governance could also lead to decision paralysis, especially in high-pressure market scenarios.

3. Contradictions in SEBI’s Own Philosophy:
   While SEBI has long championed tech-first and agile frameworks, its latest proposal introduces rigid bureaucratic structures, limiting MIIs’ ability to adapt quickly to market shifts.

4. Lack of Evidence for Overhaul:
   There is no strong evidence that current governance structures have failed or been compromised. Hence, the justification for a total overhaul appears weak and more speculative than fact-based.

5. Governance Reform Must Be Evidence-Based:
   As highlighted in the article, reforms should be based on proportionality, trust, and factual evidence, not on an assumption that micro-management ensures better governance.

Challenges and the Way Forward

1. Balance Between Autonomy and Oversight:

Reforming governance without disempowering executive leadership is a delicate balance. SEBI must ensure MIIs retain decision-making flexibility while adhering to public interest.

2. Embrace Principles, Not Prescriptions:

Instead of creating rigid templates, SEBI should encourage outcome-based regulation. MIIs should be accountable for goals—efficiency, transparency, investor protection—but free to choose their internal pathways.

3. Reduce Structural Complexity:

The proposed categorization into verticals and horizontals can add unnecessary confusion. A streamlined governance model with clear but flexible responsibilities would be more effective.

4. Consult Stakeholders Widely:

MIIs, industry experts, international observers, and market participants should all be involved in the consultation process to ensure the reforms are grounded in real-world complexities.

5. Preserve India’s Global Alignment:

India’s regulatory approach should align with international norms such as PFMI and IOSCO principles, ensuring its MIIs remain competitive and respected globally.

Conclusion

SEBI’s intent to safeguard public interest and market integrity is commendable. However, in trying to do so through excessive structural control and micromanagement, it risks creating bottlenecks, diluting institutional autonomy, and undermining trust. As the financial ecosystem becomes more dynamic and digital, governance frameworks must prioritize flexibility, agility, and accountability—not bureaucracy. The key lies not in who sits where, but in whether institutions are able to deliver efficiently, transparently, and securely.

5 Q&A Based on the Article

1. What are Market Infrastructure Institutions (MIIs) and why are they important?

MIIs include stock exchanges, clearing corporations, and depositories. They are crucial for maintaining the stability, transparency, and efficiency of financial markets by providing platforms for trading, clearing, and settlement.

2. What has SEBI proposed in its June 2025 consultation paper?

SEBI proposed a new governance framework that includes detailed prescriptions about the roles of top executives (MD, ED, KMPs), direct SEBI involvement in hiring and firing, and mandatory board role classifications into verticals (like regulation or risk) and horizontals (like technology or compliance).

3. Why are experts concerned about SEBI’s proposals?

Experts believe the proposals reflect regulatory overreach, weaken internal authority, risk micromanagement, and reduce MIIs’ flexibility. They argue this could harm operational efficiency, talent retention, and the global competitiveness of Indian markets.

4. What is the core suggestion to improve governance, as per the article?

Governance reform should be based on proportionality, trust, and evidence. Rather than assuming micro-management leads to better outcomes, reforms should enable MIIs to function independently while ensuring accountability through performance-based standards.

5. What can SEBI do differently to ensure effective reforms?

SEBI should adopt a principles-based approach, consult stakeholders extensively, simplify structures, preserve MII autonomy, and align with international standards like PFMI and IOSCO to maintain India’s global market credibility.