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Omnibus framework for recognising SROs for Regulated Entities

Reserve Bank of India (RBI) has released omnibus framework for recognising Self-Regulatory Organisations for its regulated entities.

What is the need of Self-Regulatory Organisations for Regulated Entities?

With the growth of Regulated Entities (REs) in terms of number as well as scale of operations, increase in adoption of innovative technologies and enhanced customer outreach, a need is felt to develop better industry standards for self-regulation.

Self-Regulatory Organisations (SROs) enhance the effectiveness of regulations by drawing upon the technical expertise of practitioners and also aid in framing / fine-tuning regulatory policies by providing inputs on technical and practical aspects, nuances and trade-offs involved. In deliverance of this role, the SRO shall frame necessary best practices / standards / codes within the regulatory framework prescribed by Reserve Bank of India (RBI) for voluntary adoption by its members and these shall not be a substitute to the prescribed regulatory framework for REs.

To whom shall the omnibus SRO framework be applicable?

The omnibus SRO framework will be common for all SROs, irrespective of the sector.

Existing SROs already recognized by RBI shall continue to be governed by the terms and conditions under which they were recognized, unless the omnibus framework is specifically extended to such SROs.

What shall be the characteristics of SROs for REs?

An SRO is expected to operate under the oversight of the regulator and should have the following characteristics –

  • Sufficient authority which is derived from membership agreements to set ethical, professional and governance standards and enforce these standards on the members. It should have strong governance mechanisms, including focus on independent board, transparency, and adherence to well-defined processes.
  • Objective, well-defined and consultative processes to make rules relating to conduct of its members and shall be able to enforce these rules. SROs should also put in place well-defined and transparent processes and procedures for overseeing activities of their members. It should establish clear standards of conduct and specify consequences for violation of agreed rules / codes, but shall not entail monetary penalties in any manner.
  • Develop standards for improving compliance culture and adherence by its members to the rules and regulations framed by RBI.
  • 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.
  • Suitable surveillance methods for effective monitoring of the sector.
  • Strive to develop the ecosystem of the sector to which it caters, and the standards / best practices developed by SRO shall be in compliance with, and within the applicable statutory / regulatory instructions.

What shall be the objectives of SROs?

An SRO is expected to achieve the following objectives –

  • Promote a culture of compliance among its members. SRO shall extend guidance and support, particularly to smaller entities within the sector, and share best practices aligned with statutory and regulatory policies. For this purpose, the SRO should frame and implement a comprehensive code of conduct for its members.
  • Act as the collective voice of its members in engagements with RBI, government authorities or other regulatory and statutory bodies, in India. It is expected that the SRO functions above the self-interests and addresses larger concerns of the industry and financial system as a whole. While acting as the industry representative, the SRO is expected to ensure equitable and transparent treatment for all its members.
  • Collect and share relevant sectoral information to RBI to aid in policymaking. 
  • Encourage a culture of research and development within the sector to encourage innovation while ensuring highest standards of compliance and self-governance.

What shall be the eligibility criteria for SROs?

  • The applicant shall be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013. 
  • The applicant must have adequate net-worth as specified and should possess or have the ability to create infrastructure to enable it to discharge responsibilities of an SRO on a continuing basis.
  • The shareholding of the SRO should be sufficiently diversified, and no entity shall hold 10% or more of its paid-up share capital, either singly or acting in concert.
  • 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 applicant and its directors must have professional competence and have general reputation of fairness and integrity to be established to the satisfaction of RBI. 
  • The applicant must be fit and proper for the grant of recognition as an SRO, in all other respects. 

What shall be the criteria for membership of SROs?

  • SRO operates as a true representative of the sector and its members and shall have a good mix of members at all levels to represent the sector holistically. 
  • The minimum membership that may be prescribed by RBI shall be attained ideally at the time of making an application or within such a timeline as prescribed by RBI but not exceeding 2 years, from the date of grant of recognition. Failure to achieve specified membership within the timeline could result in revocation of the recognition granted.
  • The membership of SRO shall be voluntary for the members.

What shall be the criteria for the Board of SROs?

At least 1/3rd of members in the Board of Directors including the chairperson shall be independent and without any active association with the category / class of REs for which the SRO is established. 

What shall be the responsibilities of SROs towards RBI?

The SRO shall discharge the following responsibilities towards the Regulator –

  • Keep RBI regularly informed of the developments in the sector. It shall also promptly inform RBI about any violation by its member of the provision of the Acts or the rules / guidelines / regulations / directions issued by RBI, which comes to its notice.
  • Carry out any work assigned to it by RBI and examine the proposal or suggestion referred to it. It shall provide data / information, sought by RBI periodically or as advised.
  • Submit an Annual Report to RBI, within 3 months of completion of the accounting year. The SRO shall also submit the periodic / adhoc returns as may be prescribed by RBI.
  • Engage in periodic interactions with RBI and look at the larger picture of the industry / segment in offering its views / inputs / suggestions.
  • Discharge such other functions and also abide by such other directions as specified by RBI, from time to time.
  • RBI may inspect the books of the SRO or arrange to have the books inspected by an audit firm. The expenses of such inspection shall be borne by the SRO.

How shall the application of SROs be processed?

  • An entity aspiring to function as an SRO shall be required to make an application to RBI for recognition.
  • Where the applicant is deemed suitable, RBI would proceed to issue a “Letter of Recognition” as the SRO.


References

Reserve Bank of India. (2024, March 21). 'Omnibus Framework for recognising Self-Regulatory Organisations (SROs) for Regulated Entities (REs) of the Reserve Bank of India'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12636&Mode=0

Reserve Bank of India. (2024, March 21). 'Omnibus Framework for recognition of Self-Regulatory Organisations for Regulated Entities of the Reserve Bank'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57534


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