India’s securities market regulation once rested on a simple principle: authority and accountability must travel together. Exchanges were granted significant powers and were held accountable for failures in surveillance, risk management and investor protection.
That principle is now being tested. Over the years, SEBI has steadily expanded its influence over the governance of exchanges, clearing corporations and depositories. It now plays an increasingly decisive role not only in setting the rules of the game but also in determining who occupies key positions.
Exchanges are systemically important institutions serving millions of investors and forming the backbone of India’s financial markets. Stronger governance and greater oversight are legitimate objectives.
The question, however, is whether greater control is coming at the cost of clear accountability.
Expanding regulatory influence
SEBI recently mandated the appointment of two executive directors in market infrastructure institutions, one overseeing operations and business functions and the other responsible for regulatory functions. Both report to the managing director and form part of the senior leadership. The NSE has recently made these appointments.
Viewed in isolation, this appears sensible. The separation of commercial and regulatory responsibilities is intended to reduce conflicts of interest and strengthen market oversight. Yet, this reform is only one part of a broader trend.
Today, SEBI approves managing directors, exercises significant influence over the appointment of public interest directors and has expanded its scrutiny of key managerial personnel responsible for risk, compliance, technology and information security.
The cumulative effect is unmistakable. Exchanges are becoming progressively less autonomous.
This is not surprising. Exchanges are among the richest and most influential market infrastructure institutions. Their decisions affect listed companies, institutional investors, brokers, mutual funds and millions of retail participants. They wield enormous influence over market access, product approvals, surveillance and listing ecosystems.
It is, therefore, difficult for the regulator to resist exercising tighter and more direct control. The temptation is only human.
The accountability dilemma
And that is where the accountability question arises. Historically, exchanges functioned as frontline regulators. They were to maintain surveillance systems, enforce risk controls and protect investors. In return, exchange management could be held accountable when these functions failed.
In the 1990s, SEBI repeatedly emphasised the need for robust surveillance and risk management systems at exchanges directly under the executive directors. Regulatory thinking reflected a straightforward belief: those entrusted with regulatory powers should bear responsibility for exercising them properly.
Over time, however, the philosophy appears to have shifted from accountability through autonomy to accountability through tighter control. The regulator’s response to governance concerns has increasingly been deeper involvement in the governance process itself. This may make accountability harder to establish.
Consider a major surveillance lapse, technology failure or breakdown in risk management. Who exactly bears responsibility?
The MD may point to a governance structure approved by SEBI. Directors may note that they were appointed through processes subject to regulatory approval. Senior executives may argue that their responsibilities were defined within a framework designed and endorsed by the regulator and that they acted accordingly. The more extensive the regulator’s involvement becomes, the more difficult it is to draw a clear line between institutional responsibility and regulatory responsibility.
India’s capital markets have witnessed major episodes involving exchange governance, technology failures and allegations of regulatory lapses. Yet, personal accountability has often remained elusive.
Significantly, even the action against Chitra Ramakrishna was driven largely by corporate governance concerns and the infamous Himalayan Yogi episode rather than a surveillance or risk management failure.
Growing bureaucratic presence
The growing presence of former bureaucrats within exchange governance further complicates the picture. The current chairperson of the NSE is a former IAS officer serving as a public interest director. The board has also included several individuals drawn from regulatory and governmental backgrounds. More recently, one of the newly appointed executive directors at the NSE came from government.
There is nothing inherently wrong with appointing experienced bureaucrats or former regulators. Their expertise can strengthen governance. The concern lies elsewhere. Bringing bureaucrats deeper into the MII ecosystem risks moving the system away from independent regulation and towards administrative control. Institutions deliberately designed to operate with substantial autonomy under regulatory supervision risk evolving into extensions of the state.
When the same ecosystem increasingly supplies leadership to both the regulator and the regulated institutions, institutional distance narrows. As bureaucratic networks come to dominate both sides of the relationship, meaningful accountability becomes harder to enforce. Questions arise about whether future failures will be examined with sufficient independence and whether responsibility will be fixed with adequate clarity.
Recent episodes, like the HDFC Bank matter, have reinforced concerns about whether regulators dominated by former bureaucrats are always willing to act decisively against institutions led by former bureaucrats. These concerns are amplified by the complete failure of an internal vigilance machinery within SEBI itself, despite the presence of an external CVO. When growing regulatory control is combined with weak vigilance within SEBI, the resulting concentration of authority can become particularly troubling.
Balancing oversight and autonomy
Exchanges are neither government departments nor ordinary private companies. They are institutions exercising delegated regulatory authority under statutory oversight. That hybrid character requires a delicate balance. Too little oversight creates the risk of governance failures. Too much involvement risks transforming exchanges into quasi-extensions of the regulator itself. When that happens, accountability becomes blurred.
As SEBI’s influence over exchanges continues to expand, it is worth asking whether the principle that accountability must accompany authority is being quietly replaced by something far less effective: shared authority, shared responsibility and, ultimately, shared accountability that belongs to no one.
In market regulation, that may be a particularly dangerous situation.
The writer is a retired IRS officer and former Chief of Surveillance at SEBI, and an advisor to corporates, market participants and technology entrepreneurs.
