Sebi strengthened MII rules after Chitra Ramkrishna blowback

The Securities and Exchange Board of India (Sebi) tightened rules governing market infrastructure institutions (MIIs) in the aftermath of the Chitra Ramkrishna scandal. In less than two months of Ramkrishna’s resignation as managing director (MD) and chief executive officer (CEO) of National Stock Exchange (NSE) in December 2016, the markets regulator decided to undertake a comprehensive review of MII regulations.

MIIs are systemically important institutions, such as stock exchanges, clearing corporations, and depositories. They are the backbone of the capital markets.

In this regard, Sebi set up an expert group under the chairmanship of former Reserve Bank of India deputy governor R Gandhi, which held its first meeting on October 9, 2017. The committee submitted its report in two parts on March 26, 2018, and April 25, 2018. Sebi then invited public feedback on the proposals mooted by the panel, and at its board meeting held on June 21, 2018, approved changes to the relevant circulars governing MIIs. The key changes enacted were aimed at greater oversight of MIIs and filling up lacunae that allowed misgovernance at NSE. For instance, Anand Subramanian wasn’t categorised a key management personnel (KMP), even though he was second-in-command at NSE. Ravi Narain had rem­ai­ned MD and CEO of NSE for nearly 13 years.

Here are some of the changes undertaken by Sebi:

MD tenure capped

The MD of an exchange allowed a maximum of two terms of five years each. Further, after the first term, the appointment process required to be conducted afresh.

Comment: Earlier, the tenure was extended by the MII board without a formal appointment process. Under the new system, the extension will require performance review, Sebi’s approval, and invitation of fresh applications.

KMP rules made stringent

The definition of KMP modified to include any person who directly reports to the CEO or who is two rungs below the CEO. Further, the ratio of compensation paid to KMPs vis-à-vis median of compensation of all employees required to be disclosed.

Comment: Subramanian was made NSE’s group operating officer, given compensation that was higher than several vertical heads, and yet wasn’t categorised KMP. The new rules will help avoid such a situation.

Tenure of public interest directors (PIDs) capped

PIDs allowed a maximum of three terms of three years each and not more than two terms with one MII. Also, the first term will be extended only after a performance review. PIDs asked to report any conflict of interest, such as their association with any listed company. Three-year cooling-off period for PIDs to become shareholder directors.

Comment: The Ramkrishna episode has therefore, put more focus on the role and fiduciary duties of PIDs.

On internal committees

Internal committees merged and reduced from 15 to seven to bring greater efficiency and reduce overlap. 

MII governing bodies and regulatory committees are required to have at least an equal number of PIDs and shareholder directors. In case of a voting clash, chairperson (who is a PID) allowed a second vote.

Comment: It is alleged that Subramanian’s appointment and compensation didn’t get proper approval of the Nomination and Remuneration Committee (NRC). Having more or equal number of PIDs will help reduce the influence of the management in the internal committees, such as the NRC.

Regulatory compliance

MIIs asked to disclose resources committed towards regulatory functions.

Comment:  Will help segregate the commercial and regulatory obligations of an MII.