SEBI Tightens Oversight To Rein In Managements Of Stock Exchanges.
To improve governance and oversight over stock exchanges, the Securities and Exchange Board of India has been strictly enforcing regulations pertaining to nomination of public interest directors on the boards of such exchanges. Breaking away from the earlier practice, the capital markets regulator first nominated public interest directors on the board of the National Stock Exchange of India Ltd. in April last year.
The move came after a probe by a SEBI-appointed technical advisory committee revealed in March 2016 that the National Stock Exchange had allegedly allowed a few brokers unfair access through its co-location facility.
Co-location allows high frequency traders, or HFTs, faster access to information by placing their servers on the exchange building.
SEBI governs exchanges through the Stock Exchanges Clearing Corporation (SECC) Regulations, which the capital markets regulator had notified in 2012. It used the powers under the SECC regulations to replace most of the public interest directors at the three stock exchanges — National Stock Exchange of India, Bombay Stock Exchange Ltd., and Metropolitan Stock Exchange of India Ltd.
The SECC regulations allow governance of the stock exchanges through the appointment of public interest directors, shareholder directors and managing directors. The chairman of an exchange is appointed from among the public interest directors and, at no point, the number of the public interest directors can be lower than shareholder directors. The regulations also require presence of at least one public interest directors in any board meeting to constitute a quorum.
The public interest directors are appointed as per regulations and their role is defined under the SECC regulations.
SEBI allowed the existing public interest directors to complete their tenure before placing its own nominees on the board of the stock exchanges.
Prior to March 2016, the markets regulator would approve public interest directors recommended by stock exchanges. But after the NSE co-location probe, the regulator felt the need to enhance governance standards and increase its oversight over the exchanges.
“They (public interest directors) are appointed by SEBI as public representatives, they have a duty of care to SEBI, the regulator, the market and the shareholders. While other shareholder directors have a duty of care first to the shareholders, the public interest director will have a duty of care to the larger market, especially the regulatory aspect and the internal governance structure of the stock exchange,” said TV Mohandas Pai, a public interest director on the board of NSE, and chairman of Manipal Global Education Services Ltd. SEBI appointed Pai on the NSE board in July.
The NSE Case
SEBI has appointed five public interest directors on the board of NSE since April 2016 after the stock exchange’s management failed to cooperate with the technical advisory committee in the co-location probe. The regulator first named career bureaucrat Ashok Chawla on the board of the exchange as a public interest director, along with former SEBI executive director Dharmishta Raval. Chawla took charge as the non-executive chairman of the exchange on May 3 after SB Mathur completed his tenure as a public interest director.
In July, SEBI further strengthened the NSE board by appointing three more public interest directors — Naved Masood, former secretary at ministry of corporate affairs; Dinesh Kanabar, chief executive officer of Dhruva Advisors LLP; and Pai, former chief financial officer of Infosys Ltd.
The appointment of public interest directors also led to reconstitution of the key oversight committees of the NSE and other exchanges.
Under the SECC regulations, every exchange is required to constitute oversight committees of the governing board. These include the nominations and remuneration committee (NRC) and the audit committee, each chaired by a public interest director in order to “address the conflicts of interest in respect of member regulations, listing functions, trading and surveillance functions”.
Together, the five public interest directors on the board of NSE were entrusted to bring better governance and compliance standards in the NSE. Dinesh Kanabar was asked to head the NRC and the audit committee. The public interest directors also ensured the process of preparing for the initial public offer is fast-tracked.
With both the BSE and the NSE expected to come out with initial public offers in 2017, the regulator wanted to ensure that there is no conflict between the bourses’ responsibility towards the regulator and the shareholders.
Since the exchanges are going to list, the role of the public interest directors becomes that much more important. Because between regulations and the internal shareholders, where do you draw a line? And as a public interest director, I would draw the line in favour of regulations because these are regulated entities. That is a sine qua non, condition precedent for their listing… So I think there is a difference in circumstances so I think that must be engaging SEBI’s mind.
Mohandas Pai, Chairman, Manipal Global Education Services
The BSE, which received SEBI’s approval for its IPO on Tuesday, is expected to launch its offering later in the month. The NSE too is expected get approval for its initial public offering in January. Pai said the regulator has made it clear that regulations will continue and there will be no relaxation in oversight. The stock exchange exists for the orderly development of the market, listing is a secondary issue, he said.
SEBI has the power under the law to regulate the market. They can issue regulations, and the regulated entity has to obey. The regulated entity cannot defy the regulator, it cannot be done. And if they defy the regulator can replace them. It’s a law and everybody has to obey the law.
Mohandas Pai, Chairman, Manipal Global Education Services