Stock Exchange Recognition by SEBI
SEBI grants recognition to stock exchanges under Section 4 of the Securities Contracts (Regulation) Act, 1956 (SCRA) after examining the exchange's governance structure, rules, bye-laws, membership criteria, listing conditions, and financial resources, classifying stock exchanges as Market Infrastructure Institutions (MIIs).
Recognition of a stock exchange under the SCRA is a prerequisite for any institution to operate an organised securities trading platform in India. SEBI, as the authority empowered under the SCRA, evaluates applications for recognition against a comprehensive set of criteria spanning governance, technology, capital adequacy, and investor protection mechanisms.
The Market Infrastructure Institution (MII) framework, articulated through SEBI circulars starting from 2012, classifies stock exchanges, clearing corporations, and depositories as systemically important entities requiring enhanced oversight. MIIs are subject to ongoing regulatory supervision including annual reviews, technology audits, governance assessments, and business continuity evaluations.
For a stock exchange to receive recognition, it must demonstrate a minimum net worth as prescribed (currently Rs 100 crore for new exchanges), adequate trading technology with defined uptime standards, a robust settlement guarantee mechanism, a surveillance system meeting SEBI specifications, and governance structures that separate commercial and regulatory functions.
The governance requirement is particularly significant: MIIs must have at least 51% of their board comprising public interest directors (independent directors), and the managing director of an exchange cannot simultaneously hold office in another exchange or clearing corporation. This prevents conflicts of interest in running both trading and clearing for the same exchange.
Existing recognised stock exchanges (NSE, BSE, MSEI in India, and the platforms within GIFT IFSC) undergo periodic reviews. SEBI can impose conditions on recognition, suspend recognition for specific periods, or revoke recognition if the exchange fails to meet its obligations.
The colocation controversy at NSE in 2015-2018, where alleged preferential server access was given to certain algorithmic traders, led to SEBI imposing significant penalties and conditions on NSE's recognition, demonstrating the regulator's authority over MIIs.