RBI’s framework for SROs: From minimum net worth to mix of members, key regulations explained

The Reserve Bank of India (RBI) has issued the framework for recognition of self-regulatory organisation (SROs) in financial markets.

This framework released on Monday was done in the aftermath of ‘Omnibus Framework for recognition of SROs’ which were issued early this year in March, 2024.

It is noteworthy that RBI recently invited applications for recognition of SROs for non banking financial corporations (NBFCs) and issued draft norms for fintechs.

Here we explain more on the SROs:

What is an SRO?

An SRO derives sufficient authority from membership agreements to set ethical and professional standards, and enforce them on its members. As mentioned above, the RBI has lately invited applications to oversee the functioning of various sub categories such as fintech firms and NBFCs.

A self-regulatory authority is an institution which has the ability to operate independently and with impartiality, and importantly free from the influence of any single member or group of members.

An SRO is expected to be an ally of the banking regulator in ensuring better compliance with regulatory guidelines, development of the financial markets, protection of stakeholder interests, foster innovation and detection of early warning signals.

Generally speaking, an SRO is expected to adhere to a set of overarching objectives for betterment of the sector it represents, foster advancement and address critical industry concerns within the broader financial system.

Key regulations mentioned in the RBI’s framework:

I. How to submit: The RBI regulation stipulated that the interested parties seeking recognition as a self-regulatory organisation in financial markets may submit their application either through email or to the CGM, Financial Markets Regulation Department, RBI, Central Office, 9th Floor, Shahid Bhagat Singh Marg, Mumbai – 400 001.

II. Eligibility: In order to ensure that the self-regulatory organisation (SRO) delivers on its objectives and responsibilities, it is vital to ensure that its independence is enshrined in its establishment and composition. So, the entities intending to function as an SRO will, therefore, fulfil the following eligibility criteria:

A. Not-for-profit: 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 a minimum net- worth of ₹10 crore and should possess or have the ability to create infrastructure to enable it to discharge responsibilities of an SRO on a continuing basis.

B. Voluntary: The applicant must ensure that the membership of the SRO is voluntary.

C. Mix of members: The applicant must adequately represent the sector / market with a good mix of members across different types and sizes of entities. If representation is inadequate at the time of application, a roadmap, not exceeding two years, should be included for achieving adequate representation within a reasonable timeline.

D. Directors: The applicant and its directors must demonstrate professional competence and a general reputation for fairness and integrity, as assessed to the satisfaction of the Reserve Bank. Neither the applicant nor any of its directors should have been convicted of any offence including moral turpitude/ economic offence in the past.

E. Fit & proper: The applicant must be fit and proper for the grant of recognition as an SRO, in all other respects.

F. Other conditions by regulator: While granting recognition as an SRO, the Reserve Bank may, if deemed necessary, prescribe such other conditions as may be necessary to ensure that functioning of the SRO is not prejudicial to the public interest.