While having a first-level regulatory body, supervised and regulated by the Securities and Exchange Board of India (Sebi), is a pragmatic necessity, considering the large number of regulated market intermediaries, of various categories, it is time to take a relook at the structure and functioning of MIIs in the context of them playing the role of public institutions while simultaneously engaging in commercial activities. This column focuses on SEs.
SEs’ proximity to trading enables real-time monitoring, enforcing listing standards, and maintaining orderly markets. Chapter V goes significantly further. It vests SEs with the authority to frame binding bylaws, conduct inspection, initiate investigation, and impose sanctions. More notably, these powers extend beyond members to market participants at large. What were once limited, delegated functions are now core statutory powers, effectively embedding quasi-regulatory authority within commercial entities.
SEs are for-profit organisations and privately owned. They are commercial enterprises with shareholders, revenue imperatives, and competitive strategies. Their business models depend on trading volumes, listing, data monetisation, and ancillary services. They compete with one another for order flow, issuers, and intermediaries. Two SEs are listed, and some others are planning to list.
When such entities are simultaneously empowered to act as rule-makers, market operators, investigators, and enforcers, structural tension is unavoidable. Even the perception of uneven treatment can erode confidence in the neutrality of the system. Any amount of supervision and regulatory prescription by Sebi is not likely to be able to credibly address these concerns.
The lack of competition among SEs is yet another issue. This is not only due to legacy reasons but also on account of barriers to entry for new aspirants. According to the prescribed ownership structure, no single person or entity (other than specified exemptions) may hold more than 5 per cent of the equity of a recognised SE; certain categories such as public financial institutions, banks, insurance companies, and stock exchanges/clearing corporations may hold up to 15 per cent, with Sebi approval.
While a diversified ownership concept is fully justified, prescribing it from day one of setting up an exchange makes it virtually impossible for a new entrant to join the exclusive club.
This then leads to an absurd situation, that is, the system protecting the existing institutions from competition, thereby encouraging oligopolistic behaviour and simultaneously entrusting them with statutory powers!
This column is not about comparing the performance of the existing exchanges. Nor is the intention to comment on the functioning of any particular exchange. However, to get a sense of the issue involved, let’s take the case of the National Stock Exchange. It had about 94 per cent market share in the cash equity segment, about 87 per cent in equity options, and almost 100 per cent in equity futures in FY25 among all exchanges. As for its financials, earnings before interest, tax, depreciation, and amortisation (Ebitda), and profit after tax (PAT) for FY25 were about 73 per cent and 57 per cent of revenue, respectively. It virtually faces no threat of any competition. Can one imagine any other business that enjoys such an enviable position?
International experience across major jurisdictions shows separation of regulatory authorities and commercial operations as the norm. The underlying logic is consistent: Regulatory legitimacy depends not merely on legal authority but on institutional independence. Where enforcement power intersects with commercial interests, confidence erodes even in the absence of misconduct.
For instance, in the United States, exchanges operate as for-profit entities, but frontline regulation is vested in FINRA, a non-profit organisation under the Securities and Exchange Commission’s oversight.
Establishing a genuinely independent frontline regulatory body in India, accountable to Sebi but institutionally separate from exchanges, would preserve enforcement credibility while freeing market institutions to focus on their core economic functions.
Such separation would also unlock possibilities. Treated unambiguously as platform businesses, exchanges could be governed by normal competition and corporate-governance norms. This would allow opening the door to fintechs, technology firms, and long-term strategic investors. The future of market deepening lies in enabling competitive, technology-driven platforms to flourish under clear and neutral oversight.
The Securities Market Code Bill provides an opportunity, for the government and regulator, to recalibrate the framework for the first-level regulator and MIIs, in a way that preserves enforcement effectiveness and institutional trust, while encouraging innovation and competition among commercial entities, with a fair and level playing field.
The author is former chairman, Securities and Exchange Board of India
 "BSE, STOCK MARKETS")