The story so far: The National Stock Exchange (NSE), the country's largest equities and derivatives exchange, was earlier this month fined for laxity in governance pertaining to actions taken during the tenure of its former MD and CEO Chitra Ramkrishna. Markets regulator SEBI (Securities and Exchange Board of India) passed a 190-page order sanctioning the NSE, Ms. Ramkrishna, her predecessor Ravi Narain and a former Group Operating Officer Anand Subramanian, whose appointment by Ms. Ramkrishna was the primary matter under investigation, and levied financial penalties on each of them. However, the regulator too has come under a cloud for not acting quickly enough on the complaints it had received against the NSE management and on forensic audit reports that had shown irregularities in Ms. Ramkrishna’s discharge of her professional duties. In setting the context for its order, SEBI noted that the NSE was a systemically important market infrastructure institution (MII).
What are MIIs?
Stock exchanges, depositories and clearing houses are all Market Infrastructure Institutions and constitute a key part of the nation's vital economic infrastructure. A panel set up under the chairmanship of former RBI Governor Bimal Jalan — to examine issues arising from the ownership and governance of MIIs — in its 2010 report said: “The term ‘infrastructure’ would mean the basic, underlying framework or features of a system; and the term ‘market infrastructure’ denotes such fundamental facilities and systems serving this market. The primary purpose of securities /capital market is to enable allocation/reallocation of capital/financial resources.” Such movement, it pointed out, helped optimal use of money in the economy and fostered economic development. Well-functioning MIIs, constitute “the nucleus of (the) capital allocation system”, are indispensable for economic growth and have a net positive effect on society like any other infrastructure institution, the panel noted.
Why are they considered to be systemically important?
That MIIs are systemically important in India is clear from the phenomenal growth of these institutions in terms of market capitalisation of listed companies, capital raised and the number of investor accounts with brokers and depositories and the value of assets held in the depositories’ account, as highlighted by the Jalan committee.
Unlike typical financial institutions, the number of stock exchanges, depositories and clearing corporations in an economy is limited due to the nature of its business, although they cater to the entire marketplace, the panel pointed out. “Any failure of such an MII could lead to even bigger cataclysmic collapses that may result in an overall economic downfall that could potentially extend beyond the boundaries of the securities market and the country,” it observed.
Why are governance norms critical in the regulation of MIIs?
Given the potential for a domino effect that a failure of an MII could have on the wider market and economy, governance and oversight are absolutely critical and need to be of the highest standards. Take the example of a technical glitch at the NSE early last year. Investors were not able to trade for about four hours. It prompted the Finance Minister to later state that the loss for the country had been ‘immense’ due to the delay in resumption of trading on the platform and that switching over to another platform should have been seamless. Markets regulator SEBI later set out norms stipulating timelines within which an exchange has to take action if its technology fails, including rules for switchover to backup servers as part of the disaster recovery in an institution that enables transactions running into thousands of crores of rupees daily. For context, the average daily turnover at the NSE in January this year was ₹64,178 crore.
What are the specific institutions in India that qualify as MIIs?
Among stock exchanges, the SEBI lists seven, including the BSE, the NSE, the Multi Commodity Exchange of India and the Metropolitan Stock Exchange of India. There are two depositories — charged with the safekeeping of securities and enabling their trading and transfer — that are tagged MIIs: the Central Depository Services Ltd. and the National Securities Depository Ltd.
The regulator also lists seven clearing houses including the Multi Commodity Exchange Clearing Corporation. Clearing houses, for their part, help validate and finalise securities trades and ensure that both buyers and sellers honour their obligations.