SEBI directs MIIs to prepare SOPs for disciplinary action against KMPs

The Securities and Exchange Board of India (Sebi) has issued new guidelines for market infrastructure institutions (MIIs) to develop internal standard operating procedures (SOPs) for disciplinary action against key management personnel (KMPs) in case of non-compliance with regulatory requirements and internal guidelines.

The SOPs must be approved by the Nomination and Remuneration Committee (NRC) and the board of directors of MII.

These procedures should outline possible actions against KMPs, including advisory warnings, impact on annual raises or promotions, suspension or even termination.

In serious cases, invoking malus clawback provisions may also be considered to reduce or cancel an executive’s compensation.

If repeated or serious non-compliance is identified, strict measures may be imposed, such as dismissal or financial sanctions. The scenarios for invoking malus clawback provisions must be explicitly described in the SOPs.

Sebi regulations stipulate that all MIIs must adhere to the same corporate governance standards and disclosure requirements as those for listed companies.

To further strengthen regulatory oversight, MIIs are encouraged to integrate advanced technologies such as Regulatory Technology (RegTech) and Supervisory Technology (SupTech). These systems should streamline the filing process for members, such as brokers and clearing members, by enabling online filings and reducing the need for physical documentation.

Alerts and reports generated from these submissions will enhance the MII’s ability to meet its regulatory and supervisory objectives. In addition, MIIs must disclose all material information about their members on their websites.

To ensure secure handling of sensitive information, MIIs are also required to establish internal policies for sharing confidential data, in accordance with the Stock Exchanges and Clearing Corporations and Depositories & Participants Regulations.

The policy should address both online and offline methods of data sharing, including emails and social media, with appropriate delegation of authority. It should also include monitoring mechanisms through technology and conduct periodic audits to ensure compliance. Any data breaches must be reported to SEBI within 15 days, with details of remediation measures.

On the governance front, Sebi mandates that MIIs forward at least two candidate profiles such as Compliance Officer (CO) and Chief Risk Officer (CRiO) for certain positions. To facilitate ease of doing business, a two-stage process has been introduced: first, MIIs will submit short profiles for shortlisting, and second, complete documents for final approval from SEBI.

The regulations also specify reporting structures for KMPs to maintain their independence, allowing them to report directly to committees without the involvement of the chief executive or other executives.

These provisions will come into effect from April 1, 2025 and aim to strengthen the governance framework within MIIs.

Sebi’s move comes in the wake of several regulatory circulars applicable to stockbrokers and MIIs to provide effective supervision.

In June, Sebi announced a framework for financial disincentives for MIIs, including stock exchanges, clearinghouses and depositories, for any lapse in detecting abnormal or suspicious trading activities.

A month later, Sebi directed stockbrokers to set up an institutional mechanism to detect and prevent fraud or market abuse.

These circulars indicate that the regulator is pushing for self-regulation by market intermediaries in addition to its own supervision.