Sebi to overhaul governance norms for stock exchanges

Mumbai: The Securities and Exchange Board of India (Sebi) is looking to increase its oversight of the boards of stock exchanges by having a greater say in the appointment of public interest directors, said three people aware of the matter, including an official with the regulator.

To this end, the Sebi board, when it meets on Saturday, will propose amendments to the Stock Exchange and Clearing Corporation (SECC) regulations pertaining to appointment and remuneration of these directors and also ownership and governance norms, these people said.

“This is in the wake of exchanges getting listed and certain governance lapses that have come to notice,” one of the three said on condition of anonymity.

Currently, SECC rules mandate the boards of exchanges and clearing corporations to appoint public interest directors and fix their fees in line with the Companies Act.

To be sure, the regulator played an active role in appointment of the chairman and public interest directors at the National Stock Exchange of India (NSE) last year.

Bloomberg Quint reported on 4 January that five public interest directors on the board of NSE—Ashok Chawla, former chairman, Competition Commission of India (CCI); Dinesh Kanabar, founder of Dhruva Advisors Llp, former Infosys Ltd director Mohandas Pai; Dharmishta Raval, former executive director, Sebi; and Naved Masood, former secretary at ministry of corporate affairs—were Sebi appointees and entrusted with the task of improving governance standards at India’s largest stock exchange, where some officials allegedly allowed unfair algorithmic trading access to some entities.

Now, the regulator is looking to institutionalize its oversight.

“Sebi has always been on top of vetting independent directors at exchanges though it may not choose them from the start,” said Raval. “The issue currently important for stock exchanges is on governance front to address conflict of interest when they (exchanges) are getting listed.”

Secondly, Sebi is considering setting up a panel to comprehensively review SECC norms, especially those related to ownership and governance, said the regulatory official cited earlier. This person didn’t reveal details of what the review will cover.

“The accountability of exchanges needs a massive overhaul. Currently, the exchanges accountability is limited and that doesn't bode well for governance. Regulator should also consider removing the 5% investor cap to increase competition in exchange space,” said Sandeep Parekh, founder, Finsec Law Advisors.

Sebi’s review comes at a time when the BSE has listed on its rival NSE. The latter filed a share sale prospectus with the regulator.

The Sebi board will also discuss reforms in the commodity derivatives market such as finalizing price settlement for commodity options, guidelines for warehouses and so on.

Separately, the board of the market regulator will meet with finance minister Arun Jaitley to implement announcements in the Union budget such as a proposal to integrate the commodity spot and derivatives markets.

“Sebi will initiate consultation with various stakeholders—spot market participants, commodity derivatives exchanges and electronic national agriculture market (e-NAM) platform,” said the second person cited earlier.

The government will form an expert panel to draft a bill to integrate the two markets and Sebi will offer its comments on the bill, this person added.

Sebi will also create a framework to list security receipts created from the stressed assets. “For selling stressed assets on stock exchanges, Sebi will create a framework where these would be sold as receipts on stock exchange’s debt platform with a high ticket size of Rs25 lakh,” said the first person.

In the Union budget, the government announced that securities receipts issued by asset reconstruction firms would be allowed on exchange platforms to help resolve the bad loans and increase capital flows to this sector.

Indian banks were sitting on a Rs6.7 trillion bad loan pile at the end of September.

Additionally, in its meeting with the finance minister, Sebi is going to clarify its position on the Rs5,548-crore National Spot Exchange Ltd (NSEL) payments crisis and what actions it has taken on NSE giving unfair trading access to some brokers.