SEBI Proposes Automatic Approval Route for Market Infrastructure Institutions' Investments

The Securities and Exchange Board of India (SEBI) has proposed allowing stock exchanges and depositories to undertake certain related activities and deploy funds without seeking prior approval from the regulator, subject to specified financial limits and governance safeguards.

The proposal seeks to reduce the regulatory burden on market infrastructure institutions (MIIs). Currently, MIIs require SEBI's approval for activities involving the deployment of funds or other operations, except for treasury investments made under a board-approved investment policy.

Under the proposed framework, stock exchanges and depositories can utilize an automatic approval route for two specific categories of activities. The first category includes activities related or incidental to their core functions in the securities market, such as those undertaken at SEBI's direction, share transfers between an MII and its subsidiaries, and investments by operating subsidiaries using funds generated from their own operations.

The second category covers activities similar to those performed by an MII but undertaken through an investee company regulated by another Indian financial sector regulator. These activities must have been previously approved by SEBI and remain unchanged.

To manage risk, the aggregate deployment of funds under the automatic route in a financial year is capped at the lower of 5 percent of the MII's net worth as of March 31 of the preceding financial year or the regulatory minimum net worth. Furthermore, after the proposed deployment, the MII's net worth must remain at least 1.5 times the minimum net worth prescribed by SEBI.

The proposal explicitly excludes recognized clearing corporations from using the automatic route. SEBI has invited public comments on the proposed regulatory amendments and draft circular until November 12.

According to the regulator, the existing framework requires prior approval regardless of the size, nature, or regulatory mandate of an activity, which increases the approval burden on MIIs.

SEBI stated that the proposed framework aims to distinguish between activities related to an MII's core function and unrelated ones, introduce proportionate governance safeguards, and retain mandatory prior approval for unrelated activities. This is intended to align regulatory oversight with actual risk.

As part of the proposed governance safeguards, each activity or deployment of funds will require approval from the MII's governing board. Additionally, MIIs will be required to frame board-approved standard operating procedures, prevent conflicts of interest, and submit half-yearly reports to SEBI on all activities undertaken through the automatic approval route.

"SEBI's proposal to introduce an automatic approval route for stock exchanges and depositories is a progressive step toward streamlining compliance for market infrastructure institutions. By setting clear financial caps, such as the 5 percent net worth limit, and mandating strict board-level governance safeguards, the regulator is effectively reducing operational friction while maintaining necessary risk oversight. This distinction between core and unrelated activities allows MIIs to operate more efficiently without compromising market integrity." — Dr. Shishir Gupta, Founder & CEO, StartupLanes