SEBI Mandates Cooling-off Period for MII Directors

• 08 May 2025
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To strengthen governance and protect market integrity, the Securities and Exchange Board of India (SEBI) has instituted a mandatory cooling-off period for non-independent directors serving on the governing boards of Market Infrastructure Institutions (MIIs), which include depositories, clearing corporations, and stock exchanges.

SEBI has modified the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 and Regulation 24 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 to implement this action. The new guidelines state that before a non-independent director's appointment to the board of a MII, SEBI's prior clearance and a cooling-off period is crucial.

Furthermore, public interest directors' appointment can happen for another MII for a three-year term after serving their term at one, subject to SEBI's permission. This action is a regulatory check to avoid conflicts of interest and to support an ecology of fair markets. 

According to Natasha Treasurywala, a partner at Desai & Diwanji, SEBI approval is just a safeguard to ensure that the candidates being chosen are thoroughly vetted and aligned with the goal of promoting market integrity. As long as SEBI is satisfied with the chosen candidate, there is no question of impacting the autonomy of the MII. Treasurywala cautioned, though, that the new regulations might make it more difficult to find qualified directors. 

Sagus Legal Managing Partner Shruti Kanodia Shrivastava emphasized that one should not view regulatory scrutiny as a limitation. She stated that the requirement for prior SEBI approval in board appointments is not new and remains unchanged by the recent SEBI amendment. 

Given that Market Infrastructure Institutions (MIIs) such as stock exchanges, clearing corporations, and depositories saddle with responsibilities that extend beyond their internal operations to encompass the broader market ecosystem. Further, she added, "I am of the view that this requirement does limit their operational autonomy in appointing board members. Rather, it acts as a check and balance to strengthen regulatory oversight by SEBI for safeguarding public interest and upholding the integrity and credibility of the markets." 

Despite these goals, the new regulations' uncertainties have drawn criticism from legal experts. It is unclear whether the outgoing or incoming MII will choose these terms, even though the amendment permits MIIs to choose their own cooling-off periods.

Shrivastava pointed out that the amendment is unclear on a crucial issue: which authority, the current MII or the proposed one, will be responsible for deciding the relevant cooling-off period for such directors. "The amendment lacks clarity on a key point: which governing body, the existing MII or the prospective MII, will determine the applicable cooling-off period for such directors," Shrivastava noted. 

He added that due to lack of clarity, there could be difficulties during implementation. Moreover, the absence of a minimum cooling-off period mandated by SEBI might allow MIIs to effectively bypass the requirement by setting a nil or minimal period. "This ambiguity may create uncertainty in implementation. 

Further, since SEBI has not even prescribed a bare minimum cooling-off period, it could lead to a situation of this requirement completely diluted by MIIs by prescribing nil (or negligible) cooling-off periods." SEBI later clarified that the cooling-off rule is only relevant in case of a director's appointment as a public interest director in a rival MII. 

The action comes after SEBI's board review in March, which emphasized on strengthening guidelines for selecting important MII personnel and avoiding instantaneous lateral transfers between competing organizations.

Source: Economic Times