RBI announces draft norms for setting up SROs, proposes to audit its books

SRO to inform the central bank on breach of norms by members

The Reserve Bank of India (RBI) on Thursday announced draft omnibus norms for setting up self-regulatory organisations (SROs) by its regulated entities and in those it has proposed to audit the books of such institutions.

The framework prescribes the broad objectives, functions, eligibility criteria, and governance standards, which will be common for all SROs irrespective of sectors they belong to.

The framework lays down the broad membership criteria and other terms and conditions to be followed by SROs for grant of recognition by the regulator.

”Reserve Bank may inspect the books of the SRO or arrange to have the books inspected by an audit firm. The SRO shall be obligated to provide the required information to the inspection team for the purpose of conduct of inspection,” the draft norms said, adding the expenses of such inspection shall be borne by the SRO.

The draft norms said SROs should have strong governance mechanisms, including a focus on an independent board, transparency, and adherence to well-defined processes. The draft norms said the objectives of SROs should be to create a culture of compliance among their members by promoting progressive practices and conventions and there should be special attention to extending guidance and support, particularly to smaller entities within the sector, and sharing best practices aligned with statutory and regulatory policies.

It proposed that SROs devise and implement standardised procedures for handling disputes among members, including processes to resolve these disputes through a transparent and consistent dispute resolution/arbitration mechanism. “The SRO should have suitable surveillance methods for effective monitoring of the sector,” the norms said.

“For this purpose, the SRO should frame and implement a comprehensive code of conduct for its members.”

SROs should monitor adherence to the code by their members.

One of the main objectives of SROs would be to collect and share relevant sectoral information to the RBI to aid in policymaking.
 

The primary responsibility of an SRO towards its members is to promote best business practices, and it should establish minimum benchmarks and conventions for professional market conduct among its members, the regulator said.

An SRO should develop a uniform, reasonable and non-discriminatory membership fee structure, it said.

SROs have also been asked to establish grievance redress and dispute resolution/arbitration frameworks for their members and offer counsel on restrictive, unhealthy and such other practices which may be detrimental to the growth of the sector. 
 

The RBI has said SROs should keep the regulator informed about developments in the sector, and promptly inform it about any violation of norms by a member. “The SRO should submit its Annual Report to the Reserve Bank, within three months of completion of the accounting year,” the norms said.
 

The norms proposed SROs be set up as not-for-profit companies under Section 8 of the Companies Act, 2013. The applicant must have adequate networth and should possess or have the ability to create infrastructure to enable it to discharge responsibilities of an SRO on a continuing basis, it said.
 

“The applicant must represent the sector and have the specified membership or should have submitted roadmap for attaining specified membership within a reasonable timeline,” the draft norms said.
 

SROs must satisfy fit and proper criteria. It is mandated that at least one-third of the members on the board of directors of an SRO, including the chairperson, shall be independent and without any active association with the category/class of regulated entities for which the SRO is established. “Any change in the directorship or any adverse information about any Director, shall be immediately reported to the Reserve Bank,” the norms said.
 

Feedback on the draft omnibus framework can be submitted by January 25 next year. The RBI said it would issue a separate notification inviting applications for SROs for a category/class of its regulated entities, within the broad contours of the final omnibus framework. 

SRO proposals

• Strong governance mechanisms, focus on independent board
• Suitable surveillance methods for effective monitoring of respective sector
• Set up a grievance redress and dispute resolution mechanism
• At least one-third members in the board of directors to be independent