[By Anenya & Yash Sharan]
The authors are students of Hidayatullah National Law University, Raipur.
Introduction
On 26 May 2025, the Securities and Exchange Board of India (“SEBI”) issued a circular (“the Circular”) outlining the regulatory framework for the appointment and transition of Key Managerial Personnel (“KMPs”) within Market Infrastructure Institutions (“MIIs”), such as stock exchanges, clearing corporations, and depositories. The Circular aims to develop and enforce a better process for the appointment, re-appointment, termination, and resignation of certain KMPs in MIIs and add a cooling-off period for these KMPs so they cannot work for competing MIIs shortly afterward. It also tries to maintain consistency, transparency, and autonomy in managing MIIs using a defined process, even for Public Interest Directors (“PIDs”). Thus, it becomes imperative to analyse this circular and highlight SEBI’s reforms that seek to overhaul the framework and align India with global standards.
Through this article, the author delves into the intricacies of the circular in three parts. Firstly, it discusses the major terms and tenets of the Circular and the changes it aims to bring. Secondly, it underscores the shortcomings and hurdles of the Circular. Thirdly, it also puts forth authors’ suggestions to resolve these roadblocks. Lastly, the article concludes with a summary and a way forward for moving upward and ahead.
From Mandates to Monitoring: Unpacking SEBI’s Circular on MIIs
Firstly, the Circular to oversee how KMPs transfer from one company to another, especially when the new institution is a competitor. With increased focus on monitoring how MIIs are run, it becomes important to enforce a sharper separation of interests and strengthen accountability in MIIs’ procedures. The Circular asks MII boards to go through formal stages with the , the main board and also seek SEBI’s approval ahead of any KMP transition. Using this system, unnecessary influence from board politics would be removed when decisions about appointments and resignations are made. KMPs within the scope of the Circular include Managing Director, Chief Regulatory Officer, Chief Technology Officer, Chief Operating Officer, and Chief Risk Officer among others, though the list may vary depending on the nature of the MII
The aim is to safeguard confidential details or working methods from a person’s earlier job. In contrast to common practice, SEBI has decided that the burden of enforcing non-compete clauses belongs to the institution instead of any one individual. Hence, each MII must set up internal rules to define what counts as a ‘competing MII’ and ensure they deal with it according to relevant contractual commitments. With this regulation, SEBI is continuing to prevent a small group of individuals from gaining too much power and control in the market ecosystem.
Secondly, another notable part of the Circular relates to the renewal of PIDs. PIDs are supposed to act as guardians of neutrality in MIIs’ governance. However, concerns have been increasing over their continued re-appointments which prompt questions about the independence of the institution. Now, SEBI has required that when an extension is granted, there needs to be a detailed evaluation of performance and a new approval from the regulator involved. The aim is to maintain a good mix of what was learned before and new ideas brought in. It demonstrates SEBI’s desire to ensure that public interest roles are active and not just a comfortable job for some people. Even though the initiative aims to improve accountability, some practical issues exist. For instance, SEBI has not prescribed a uniform duration for the cooling-off period. Such flexibility gives MIIs the float to select different standardisation schedules which could weaken the goal of being consistent. In addition, having the Circular go through many internal and external approvals can result in decision delays that limit the ability to respond to needs as they arise.
Lastly, the scope of the term ‘key managerial personnel’ remains restricted to specific functions. In today’s digitised and risk-sensitive market environment, roles such as Chief Information Security Officer, Head of Surveillance, or Legal Compliance Officer are equally crucial. Hence, it becomes essential to assess whether SEBI’s substantial progress will effectively preserve the structural integrity of MIIs and to identify what further reforms may be necessary to ensure long-term stability and growth.
Cracks in the Code: The Hidden Gaps in SEBI’s MII Overhaul and Plausible Solutions
While the Circular is a watershed reform and has profound implications on the financial landscape, concerns persist over potential risks that could challenge its effectiveness. The Circular, while enhancing transparency, poses risks which this section elucidates on.
Firstly, the Circular does not take into account the regulatory difference between publicly-held and privately-controlled MIIs. The Circular ensures that the selection, re-selection and cooling-off periods for KMPs are identical in all MIIs, regardless of who owns them. Such oversight matters significantly, now that private MIIs are often run by conglomerates, since this may increase the risk of conflicts, excessive regulation and policy changes. Instead of treating all situations equally such as SEBI does, the law, as interpreted in Swiss Ribbons Pvt. Ltd. v. Union of India, requires that all situations should be judged differently. The Financial Sector Legislative Reforms Commission in the financial sector also advised that the amount of regulatory oversight should depend on the ownership, size, and how connected market intermediaries are. Thus, the Circular does not take these systemic indicators into account.
A plausible solution is to create a “Risk-Tiered KMP Transition Framework” that is based on how many shares are owned and the company’s history with regulators. So, when a single promoter group owns more than 25% of the MII or when the MII is a part of a financial conglomerate, as with the NSE co-location scandal, such MII should be obliged to disclose more, have longer cooling-off periods, and be audited for board independence. The Systemically Important Financial Institutions approach under Basel III and the IOSCO Principles 2 and 22 are both consistent with this method. A framework such as this would strengthen the rules that govern the markets and reassure investors about the security of India’s capital markets.
Secondly, there is a major lacuna in the Circular because it sets out fresh governance rules for MIIs, which does not have a clear legal basis in the SEBI Act. Since the circular has binding power over employment rights, company operations, and KMP movements, it brings up important questions about the legality of executive actions. SEBI and other regulatory bodies can only use the powers given to them in the parent statute. The Supreme Court (“SC”) ruled in Uco Bank v. Rajinder Lal Capoor, that circulars that are not backed by proper legal authority are only executive instructions and cannot make laws binding on people. In this situation, the SEBI Regulations do not have specific rules that cover the detailed guidelines on KMP transitions found in the Circular. Using its general powers from Section 11(1) or 11(2)(j) does not give SEBI the authority to produce enforceable legal principles of this kind.
A plausible solution to this quandary is to either issue a new rule based on its authority under Section 30 or directly adding the needed sections to the MII Guidelines, 2023 after an amendment is announced in the Official Gazette. Making the Circular into subordinate legislation would guarantee its legality and enforceability in court.
Thirdly, the Circular does not address or regulate the group of individuals known as “Shadow Key Managerial Personnel” (“Shadow KMPs”) in MIIs. The Circular states which individuals are the KMPs and overlooks those who, though not officially appointed, actually impact key areas of management or governance. As a result of this, companies can avoid following certain rules and policies when making important choices, mainly in MIIs that are part of large conglomerates.
In the United Kingdom (“UK”), the Companies Act, 2006 uses a similar term, “shadow director,” which refers to those whose directives or instructions direct the actions of the company’s directors [Section 251]. In addition, the FCA and the UK Company Directors Disqualification Act, 1986 offer means to hold these actors responsible. In contrast, Indian law is still mainly formal in nature. The Circular deepens this chasm which goes against the principle of substance-over-form proffered by the SC in the Vodafone International Holdings v. Union of India, and thus, it was established that piercing the corporate veil is acceptable when exploring hidden control.
Indicators such as attending meetings on risk or compliance committees guiding IT governance or being connected to the supervisory boards of the parent companies can be used. With this new doctrine, Indian financial governance would meet recognised global standards which would additionally improve transparency and accountability in the way MIIs are run.
Conclusion and Way Forward
All in all, the Circular is a praiseworthy step in making governance at MIIs more effective. However, for this to really make a difference, it cannot stay at only changing rules and processes. Not making a difference between public and private MIIs, lacking statutory authority and ignoring Shadow KMPs highlight many important lacunae. SEBI should put in place a risk-based plan for phasing in the new rules, build the framework on strong delegated laws, and make sure indirect managerial control is covered. With these changes based on constitutional equality, administrative legality, and the use of global best practices, India’s capital market structure would match global standards. Since the financial system has become more advanced, it requires a strict, well-founded, and performance-based governance code to maintain support from investors, accountability of institutions, and the stability of the market over the long run.