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India's market regulator, the Securities and Exchange Board of India (Sebi), has proposed allowing stock exchanges and depositories to use funds and carry out activities related to their main work without getting its approval first. The aim is to reduce regulatory work and make it easier to do business.
In a consultation paper, Sebi proposed an automatic approval system for activities linked to or supporting the main work of stock exchanges and depositories. This would apply only within set financial limits and under rules designed to ensure good management.
The proposal covers market infrastructure institutions (MIIs). These institutions currently need Sebi's approval before using funds or carrying out activities, except for treasury investments made under an investment policy approved by their boards.
Sebi said: "The MIIs (excluding the recognized clearing corporations) may engage in activities whether involving deployment of funds or otherwise, without prior approval of Sebi (herein after referred to as the "automatic route"), in the following routes (A&B) and subject to the financial limits ... and the governance conditions,"
Under the proposed rules, Automatic Route A would cover activities carried out under Sebi's directions, certain transfers of shares within a group of MII companies, and the use of funds by an operating subsidiary using only the money it earns from its own operations.
Route B would cover activities similar to those an MII carries out through an entity regulated by another financial sector regulator in India. This would be allowed only if Sebi had already approved the activity and its nature had not changed.
Sebi has also proposed a limit on the total funds that can be used under the automatic route in one financial year. The limit would be whichever is lower: 5 per cent of the MII's net worth as of March 31 of the previous financial year, or the minimum net worth required by the regulator.
After using the funds, the MII's net worth must remain at least 1.5 times the minimum net worth set by the regulator.
The proposed rules also include safeguards for good management. The MII's governing board must approve each new activity or use of funds in advance. The institution must take steps to prevent conflicts of interest. Companies receiving investments, their directors and their shareholders must also meet the required fit-and-proper standards.
MIIs would also need to create standard operating procedures approved by their boards. They would have to send Sebi reports every six months about activities carried out under the automatic route. Each report must be submitted within 30 days after the end of the six-month period.
Sebi said the current rules require the same approval process for activities regardless of their size, type or risk. This creates extra work even for small investments that directly support the operation of the market.
The regulator also said that requiring separate approvals could lead to the same checks being carried out more than once when Sebi has already directed an activity or when another financial sector regulator oversees the entity involved.
Sebi has invited the public to comment on the proposals until November 12.
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