Sebi mulls automatic approval for investments, activities by exchanges

Sebi has proposed an automatic approval route for certain activities and investments by market infrastructure institutions, subject to financial limits and governance safeguards.

Markets regulator Sebi has proposed allowing stock and depositories to deploy funds and undertake activities related to their core functions without its prior approval, a move aimed at reducing regulatory burden and improving ease of doing business.

 In its consultation paper, the Securities and Exchange Board of India (Sebi) has proposed an automatic approval route for activities related or incidental to the core functions of exchanges and depositories, subject to specified financial limits and governance safeguards.

 The proposal covers market infrastructure institutions (MIIs), which currently require prior Sebi approval for activities involving fund deployment or otherwise, except for treasury investments made under a board-approved investment policy.

 "The MIIs (excluding the recognized clearing corporations) may engage in activities whether involving deployment of funds or otherwise, without prior approval of Sebi (herein after referred to as the "automatic route"), in the following routes (A&B) and subject to the financial limits ... and the governance conditions," Sebi said.

 Under the proposed framework, the automatic Route A would cover activities undertaken pursuant to Sebi directions, certain transfers of shares within an MII group, and deployment of funds by an operating subsidiary exclusively from its own operational earnings.

 The Route B would cover activities similar in function to those carried out by an MII through an entity regulated by another financial sector regulator in India, provided Sebi has previously approved such activity and its nature remains unchanged.

 Also, Sebi has proposed capping aggregate fund deployment under the automatic route in a financial year at the lower of 5 per cent of the MII's net worth as of March 31 of the preceding financial year or the regulatory minimum net worth requirement.

Further, the MII's net worth after the proposed deployment should not fall below 1.5 times the minimum net worth prescribed by the regulator.

 The proposed framework also mandates governance safeguards, including prior approval of each new activity or fund deployment by the MII's governing board, measures to prevent conflicts of interest, and compliance with fit-and-proper criteria by investee companies, their directors and shareholders.

 MIIs would also be required to put in place board-approved standard operating procedures and submit half-yearly reports to Sebi detailing activities undertaken under the automatic route within 30 days of the end of each half-year.

 The regulator said the existing framework imposes the same approval requirement on activities irrespective of their size, nature or risk, creating an additional compliance burden even for small investments that directly support market operations.

 It also noted that separate approvals could lead to duplication of regulatory scrutiny in cases where activities are already directed by Sebi or involve entities regulated by other financial sector regulators.

 The Securities and Exchange Board of India (Sebi) has sought public comments till November 12 on the proposals.