The International Financial Services Centres Authority (IFSCA) has issued a circular detailing a strengthened governance framework for Market Infrastructure Institutions (MIIs). Building on the governance framework outlined in the IFSCA (Market Infrastructure Institutions) Regulations, 2021 (MII Regulations), which provides for a framework for the MIIs to operate with independence, transparency, accountability, and institutional integrity, this circular provides detailed procedures for implementation. The circular, effective immediately, provides specific guidelines for the composition of the Governing Board and the appointment, reappointment, and performance review of Public Interest Directors (PIDs).
IFSCA (Market Infrastructure Institutions) Regulations, 2021
Under Chapter III: Governance of Market Infrastructure Institutions, the governance norms outline that a recognised market infrastructure institution shall adopt the broader principles of governance prescribed under the Principles for Financial Market Infrastructures by Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO) and such other governance norms as may be specified by the Authority, from time to time.
It establishes the governance framework for Market Infrastructure Institutions (MIIs), mandating adherence to the global CPMI-IOSCO Principles for Financial Market Infrastructures. Each recognised MII shall have a governing board.
Key highlights:
- The governing board must consist of public interest directors, non-independent directors, and a managing director, with the chairperson selected from among public interest directors.
- Broker-dealer and clearing member nominees are barred from board participation of recognised stock exchange or a recognised clearing corporation to prevent conflicts of interest.
- Depository participant nominees are barred from board participation of recognised depository to prevent conflict of interest.
- Public interest directors may serve up to three terms, while managing directors can serve a maximum of ten years, subject to age limits.
- The IFSCA may appoint up to three directors on the board, ensuring regulatory oversight.
- Each governing board must define responsibilities clearly, manage conflicts, and periodically review its performance.
Code of Conduct of the Governing Board
The governing board, directors, committee members, and key management personnel of an MII adhere to a comprehensive Code of Conduct specified in Schedule I. The Code emphasizes integrity, independence, accountability, investor protection, and transparency in decision-making. Directors and executives must avoid conflicts of interest and act in the best interests of investors and the market.
The IFSCA is empowered to remove or terminate any individual for breach of conduct, misconduct, or failure to comply with regulations.
The regulation institutionalizes ethical governance, ensuring MIIs act as fiduciaries of market integrity rather than mere commercial entities.
Regulation 25A – Compensation of Key Management Personnel
Inserted by the IFSCA (Market Infrastructure Institutions) (Amendment) Regulations, 2024 with effect from November 1, 2024.
This newly introduced regulation requires every MII to constitute a Nomination and Remuneration Committee (NRC) as approved by the IFSCA. The NRC determines the compensation structure for key management personnel, guided by a board-approved compensation policy.
The policy must include malus and clawback provisions to recover or withhold remuneration in cases of misconduct or poor performance.
Any change in the managing director’s compensation must be reported to the IFSCA. The framework aligns managerial pay with prudent governance and ensuring decisions are made in the long-term interest of financial market stability.
Formation of Committees
This regulation mandates that MIIs establish functional and oversight committees to ensure effective segregation of powers and internal checks. The IFSCA determines the composition, quorum, and duties of these committees to maintain uniformity and accountability across institutions.
Committees typically oversee areas like risk management, audit, compliance, investor grievances, and regulatory affairs. By requiring formal committee structures, the regulation embeds institutional depth in governance and minimizes concentration of authority. The IFSCA’s power to prescribe and monitor these committees ensures that governance frameworks remain aligned with evolving regulatory standards and international best practices.
Segregation of Functions
MIIs are required to identify and separate their core and critical functions into three operational verticals.
- Vertical 1: Critical Operations
- Vertical 2: Regulatory, Legal, Compliance, Risk Management and Investor Grievances
- Vertical 3: Other functions including business development
Schedule II outlines these functions in detail, emphasizing risk management, surveillance, legal oversight, and investor protection. This segregation of duties institutionalizes functional integrity, prevents commercial influence over regulatory operations, and aligns with global best practices in financial market governance. It represents a decisive step toward operational transparency and resilience within IFSC institutions.
Enhanced Board Composition
To ensure comprehensive expertise, the Governing Board of an MII must now meet specific qualification requirements.
- The board must be composed of directors with requisite experience in capital markets, finance and accountancy, legal and regulatory practice, technology, risk management, or administration.
- Crucially, it is now mandatory for the board to include at least one PID with requisite qualification and experience in each of the following four areas:
- Capital Markets
- Finance and Accountancy
- Legal and Regulatory Practice
- Technology
Structured Appointment Process for PIDs
The circular introduces a robust and transparent process for the appointment of PIDs.
- Shortlisting: The Nomination and Remuneration Committee (NRC) will identify a minimum of two candidates for each PID vacancy.
- Board Assessment: The Governing Board will then conduct its own independent assessment of the NRC’s recommendations.
- IFSCA Approval: The final list of shortlisted candidates will be submitted to IFSCA for approval. IFSCA may either select a candidate from the list or, if unsatisfied, nominate a person directly to the board.
- Timeline: For vacancies arising from term expiry, MIIs must submit the application for a new PID at least two months in advance.
Reappointment and Performance Review
- Reappointment: An application for reappointing an existing PID must be submitted to the Authority at least two months prior to the expiry of their term. This decision must be supported by a performance review and consider the diversity of experience on the board. An existing PID may continue for up to three months post-term expiry if their departure would cause the board’s composition to fall below the mandatory regulatory requirements.
- Performance Review: MIIs are now required to frame and implement a comprehensive policy for the performance review of PIDs, which must be approved by the Governing Board. This evaluation will assess domain expertise, prior responsibilities, and other key competencies.
Knowledge Upgradation for Directors
To ensure PIDs remain updated on key developments, MIIs must organize annual training programs for them in collaboration with reputed institutions. These programs will focus on capital markets, technology, regulatory responsibilities, and other relevant areas.
The full circular can be accessed here.
Disclaimer: The information published in the above newsletter is collected from various sources in electronic medium and analyzed by the firm. The reader is advised to consult the attorney qualified in their jurisdiction, before acting on any information contained in this newsletter. India Juris excepts no liability what so ever in this regard.
