SEBI Unveils New Standards for Evaluating Market Infrastructure Institutions (MIIs)

Introduction:

On September 24, 2024, the Securities and Exchange Board of India (SEBI) issued a critical circular titled "Parameters for Performance Evaluation of Market Infrastructure Institutions (MIIs)". This circular outlines the criteria for evaluating the performance of key entities in India’s securities market, including recognized stock exchanges, clearing corporations, and depositories.

Key Highlights:

1. Mandatory External Evaluation: Under the SEBI (Securities Contracts Regulation) and SEBI (Depositories and Participants) Regulations, 2018, all MIIs are required to appoint an independent external agency to evaluate their performance and that of their statutory committees. The objective is to ensure a thorough, unbiased assessment at periodic intervals.

2. Establishment of Performance Criteria: SEBI has set out minimum criteria for evaluation, each assigned a specific weightage to ensure balanced assessments. The criteria and their respective weightages include:

• Resilience in technology and processes: 40%
• Investor education and protection: 17%
• Efficient regulatory role discharge: 15%
• Compliance with regulatory norms: 10%
• Governance practices: 8%
• Adequacy of resources: 5%
• Fair access to stakeholders and information disclosure: 5%

The overarching focus is on the stability, efficiency, and fairness of MIIs in serving the securities market.

3. Rating Framework: SEBI has introduced a rating framework for uniformity in evaluation across MIIs. This rating, assigned by external evaluators, will measure MIIs’ adherence to expected outcomes, allowing SEBI to compare performance and monitor trends over time.

4. Appointment of Independent External Agencies: MIIs must select independent external agencies with SEBI's No Objection Certificate (NOC). The agencies should have adequate expertise and no conflicts of interest. The first evaluations are scheduled for the financial year 2024-2025, with reports due by September 2025.

5. Performance Evaluation of Key Management Personnel (KMPs): The circular emphasizes the importance of well-defined Key Performance Indicators (KPIs) for KMPs, including the Managing Director (MD). At least 50% of the MD’s evaluation must focus on regulatory, compliance, and risk management outcomes. This aims to ensure that leadership is directly accountable for the institution's operational and regulatory success.

Impact on MIIs:

This new framework ensures consistency, transparency, and accountability across MIIs.The evaluation process aligns the MIIs with global best practices, focusing on core functions such as risk management, regulatory compliance, investor protection, and governance.

Furthermore, the independent evaluation offers MIIs an opportunity to identify areas of improvement while ensuring their operations are aligned with regulatory expectations.

Conclusion:

SEBI’s circular is a step towards strengthening India’s securities market infrastructure by ensuring MIIs operate at optimal efficiency, remain resilient, and safeguard investor interests. The introduction of a structured performance evaluation mechanism not only enhances transparency but also reinforces the importance of good governance in market institutions. MIIs now have clear guidelines and are expected to implement robust systems to meet SEBI’s criteria, driving continuous improvement in their performance and regulatory compliance. This is a significant move that will likely impact the overall trust and efficiency of India’s capital markets.