RBI Unveils Framework for Recognition of Self-Regulatory Organizations in Financial Markets

On August 19, 2024, the Reserve Bank of India (RBI) introduced the “Framework for Recognition of Self-Regulatory Organizations (SROs) in Financial Markets.” This initiative is designed to enhance the compliance culture within financial markets and provide a consultative platform for effective policy-making.

Building on the “Omnibus Framework for Recognition of Self-Regulatory Organizations for Regulated Entities of the Reserve Bank,” issued on March 21, 2024, this new framework outlines the essential criteria, responsibilities, and governance standards for recognizing SROs in the financial sector.

Application Process and Requirements

Submission Guidelines:
Entities aspiring to be recognized as an SRO in the financial markets are invited by the RBI to submit their applications either via email or directly to the Chief General Manager (CGM) of the Financial Markets Regulation Department, RBI.

Eligibility and Structural Criteria:

1. Establishment as a Non-Profit Entity:
   The SRO must be constituted as a non-profit organization, specifically under Section 8 of the Companies Act, 2013.
2. Financial and Infrastructure Standards:
   Prospective SROs are required to have a minimum net worth of ₹10 crore and demonstrate the capability to establish and maintain the necessary infrastructure to fulfill their regulatory responsibilities.
3. Diversified Shareholding Structure:
   To prevent monopolistic control, the framework mandates that the shareholding of the SRO must be diversified, with no single entity or group permitted to own 10% or more of the paid-up share capital.
4. Voluntary Membership:
   Membership in the SRO should be voluntary, ensuring that entities join without compulsion.
5. Comprehensive Sector Representation:
   The applying entity must represent its sector adequately, with a diverse membership spanning various types and sizes of entities. If current representation is lacking, the applicant must provide a roadmap (not exceeding two years) to achieve comprehensive representation.
6. Professional Integrity and Competence:
   Applicants and their directors must showcase professional competence, along with a reputation for fairness and integrity. Additionally, they must ensure that neither they nor their directors have been convicted of any crimes, including those related to moral turpitude or economic offences.
7. Fit and Proper Status:
   The applicant must satisfy the “fit and proper” criteria for SRO recognition. The RBI retains the authority to impose additional conditions to safeguard public interest when granting recognition.

Core Responsibilities of Recognized SROs

Regulatory Collaboration:
Recognized SROs will be required to collaborate closely with the RBI to enhance compliance with regulatory guidelines, including the early detection of potential risks.

Development of Standards and Best Practices:
The SROs will be tasked with creating and implementing best practices, standards, and codes of conduct within the regulatory framework for the voluntary adoption by their members.

Dispute Resolution Mechanism:
SROs must develop standardized procedures to handle disputes among members, or as directed by the RBI. This includes establishing a transparent and consistent dispute resolution or arbitration process.

This framework represents a significant step forward in promoting self-regulation in India’s financial markets, ensuring that recognized entities operate with integrity, transparency, and in alignment with broader regulatory goals.

About SRO

A Self-Regulatory Organization (SRO) is a non-governmental entity established by members of a specific industry or sector to create and enforce rules and standards that govern the conduct of entities within that industry. The primary purpose of an SRO is to promote ethical practices, equality, and professionalism while safeguarding the interests of customers and maintaining the integrity of the market.

For those preparing for government job exams, particularly the RBI Grade B exam, it is crucial to understand the regulatory and governance frameworks like the one outlined above. The RBI Grade B exam pattern often includes questions on recent regulatory developments. Aspirants should also be familiar with the RBI Grade B syllabus, which includes topics related to financial markets and regulatory bodies. Understanding frameworks like the one for Self-Regulatory Organizations can be beneficial, as they align with the RBI Grade B job responsibilities, which offer an attractive RBI Grade B salary.