Transforming India’s Clearing Corporations: Enhancing Ownership Diversity and Global Integration
The Securities and Exchange Board of India (SEBI) is driving forward a bold vision to make India’s securities markets more globally competitive and technologically advanced. A key part of this vision involves transforming the country’s clearing corporations (CCPs) through diversified ownership and increased global integration. The proposed reforms, which aim to raise ownership limits for both foreign and domestic entities, seek to boost operational independence, encourage innovation, and enhance financial resilience—critical elements for aligning India’s market infrastructure with global standards.
Why Diversified Ownership Matters?
India’s clearing corporations have traditionally been governed by their parent exchanges, a model that has provided stability but also led to some limitations. This structure often restricts operational independence and exposes CCPs to governance risks. A shift toward diversified ownership is vital for fostering better governance, risk mitigation, and financial resilience.
Take, for example, the Clearing Corporation of India Limited (CCIL) during the 2008 global financial crisis. With a diverse ownership structure including banks, financial institutions, and primary dealers, CCIL was able to maintain systemic stability and weather market volatility. This experience proves that a broader ownership base can lead to more effective decision-making and a stronger ability to absorb financial shocks.
A more diversified ownership structure would also enhance capital resilience. By allowing domestic entities like banks, exchanges, and financial institutions to hold up to 25% ownership, clearing corporations can tap into a deeper pool of capital, ensuring they can fund critical technology upgrades and expand operations. This becomes even more important as regulatory changes push for multi-asset clearing frameworks, covering new financial products like REITs, municipal bonds, and more.
The Role of Foreign Ownership in Driving Innovation
While increased domestic ownership strengthens governance, foreign investment is a game-changer when it comes to technological advancements and global integration. Currently, foreign ownership in clearing corporations is capped at 15%, but the proposed reforms to raise this cap to 25% for foreign-regulated entities would open up significant opportunities for technological collaboration. Foreign entities bring with them cutting-edge technologies such as blockchain, AI, and advanced risk management techniques.
For instance, the U.S. Depository Trust & Clearing Corporation (DTCC) has revolutionized settlement processes using blockchain, significantly reducing settlement times and enhancing transparency. Similarly, portfolio margining innovations by LCH in the UK allow for better collateral management, which reduces costs for market participants. With increased foreign ownership, Indian CCPs could quickly adopt these global best practices, improving efficiency and investor protection.
Enhancing Cross-Border Integration
As India attracts a growing number of international investors, effective cross-border clearing and settlement mechanisms are essential. Foreign stakeholders with global expertise can help Indian CCPs create seamless linkages with international markets. A higher foreign ownership limit could pave the way for better integration, much like the global financial infrastructure created by entities such as Euroclear and Clearstream, which facilitate cross-border transactions effortlessly.
Boosting Collateral Efficiency
One of the key challenges facing the Indian clearing ecosystem today is collateral management. As the securities landscape evolves, the complexity of collateral management increases, which could undermine market cost-efficiency. By permitting higher foreign ownership, Indian CCPs would gain access to expertise in collateral optimization techniques such as portfolio margining, which could significantly reduce collateral requirements. This would not only improve liquidity but also lower the costs for participants, enhancing the cost-competitiveness of India’s securities markets.
Addressing Forex Outflow Concerns
A common concern about increasing foreign ownership is the potential for significant forex outflows due to dividend repatriation. However, this concern can be mitigated through strategic safeguards. For example:
- Reinvestment Requirements: Mandating that a portion of foreign profits be reinvested in India’s financial infrastructure and technology would ensure that the benefits of foreign ownership directly contribute to the local market.
- Dividend Caps: Imposing limits on dividend payouts would help retain a substantial portion of earnings within the Indian economy, supporting growth and market resilience.
Singapore’s successful model of balancing foreign ownership with domestic reinvestment provides valuable lessons. The Singapore Exchange (SGX) has leveraged foreign expertise while ensuring that the local market reaps significant benefits from global investments.
Aligning Ownership Structures with SEBI’s Vision
SEBI’s goals go beyond simply ensuring systemic stability; the board aims to create a globally competitive, innovative, and inclusive market infrastructure. Increasing the ownership cap to 25% for both foreign and domestic entities aligns perfectly with these goals. This reform will ensure that Indian CCPs become commercially viable and strategically attractive to a broad array of stakeholders, from domestic exchanges and banks to international financial institutions.
The proposed changes would make clearing corporations more attractive to foreign-regulated entities, bringing advanced technologies and global expertise to the table. Simultaneously, domestic stakeholders would benefit from a stronger alignment with the broader market ecosystem, ensuring that clearing corporations prioritize market efficiency and cost reduction while maintaining their fiduciary duty to settle contracts promptly.
India’s securities markets are primed for exponential growth, but their infrastructure must evolve to meet the demands of technological innovation and global integration. By increasing foreign and domestic ownership limits to 25%, SEBI can encourage collaboration, bolster financial resilience, and position clearing corporations as global leaders in market infrastructure. This strategic shift will ensure that India’s financial markets remain at the forefront of innovation, delivering unmatched efficiency, security, and investor confidence worldwide.
