In a bid to streamline the monitoring of shareholding norms for Market Infrastructure Institutions (MIIs) and ensure effective compliance with regulatory standards, the Securities and Exchange Board of India (SEBI) issued Circulardated October 14, 2024. This new circular outlines a robust framework aimed at enhancing the oversight of shareholding patterns within MIIs, which include Stock Exchanges, Clearing Corporations, and Depositories. The circular has introduced several key amendments to the previous regulatory framework and has extended compliance requirements to all MIIs, both listed and unlisted.
Key Objectives of the Circular
The primary objective of this circular is to ensure that MIIs comply with shareholding norms, such as the minimum public shareholding, individual shareholding limits, and fit and proper criteria, as prescribed under the SEBI (Stock Exchanges and Clearing Corporations) Regulations, 2018 (SECC Regulations) and SEBI (Depositories and Participants) Regulations, 2018 (D&P Regulations). This effort is aimed at fostering transparency, accountability, and good governance practices within these institutions, which play a critical role in the functioning of financial markets.
Applicability of Shareholding Monitoring Framework
SEBI’s new framework for monitoring and ensuring compliance with shareholding norms that previously applied only to listed Stock Exchanges and Depositories is now extended to all MIIs. This includes both listed and unlisted entities. Under the circular, MIIs are required to disclose their shareholding pattern on a quarterly basis in the same format as listed companies under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). This information must be prominently displayed on their websites. In the case of listed MIIs, the stock exchanges where their shares are listed must also display this information.
Designated Depository (DD) Mechanism
A key aspect of the circular is the appointment of a “Designated Depository (DD)” by each MII to monitor its shareholding limits as per SECC and D&P regulations. The DD is responsible for ensuring that shareholding limits, including thresholds of 5%, 15%, and 49% for persons resident outside India, are not breached. The DD must also ensure that shareholdings of trading members (TMs), their associates, and agents in stock exchanges do not exceed 49% of the total paid-up equity capital.
For Clearing Corporations (CCs), the DD must ensure that at least 51% of their paid-up equity capital is held by recognized stock exchanges. In case any thresholds are breached, the DD is responsible for informing the respective MII, stock exchange, and Registrar & Transfer Agent (RTA) and initiating the necessary actions.
Fit and Proper Criteria
The circular emphasizes the importance of the fit and proper criteria for shareholders. MIIs are mandated to ensure that any shareholder holding 2% or more of their equity shares or voting rights complies with these criteria. The circular also requires MIIs to make all shareholders aware of the fit and proper requirements and to submit quarterly reports to SEBI regarding any shareholders who do not meet these standards.
Freezing of Voting Rights and Corporate Benefits
If there is a breach of the shareholding or fit and proper criteria, SEBI’s circular mandates the freezing of voting rights and corporate benefits for excess shareholdings. The DD is tasked with applying an ISIN-level freeze on the demat account of the relevant shareholder and disabling e-voting for shares exceeding the regulatory limit. Any dividends from excess shares will be transferred to the Investor Protection Fund (IPF) or Settlement Guarantee Fund (SGF), depending on the type of MII.
