The Securities and Exchange Board of India has directed that the management structure of the subsidiaries floated by stock exchanges need to be restructured in order to enable them to be able to provide a safe and transparent market and effectively discharge their responsibilities towards investor protection.

According to Sebi, which undertook an inspection of the subsidiaries, it has decided that the subsidiary company shall be required to comply with some minimum requirements. A CEO has to be appointed who shall not hold any position concurrently in the parent exchange. The CEO's terms of appointment will be subject to Sebi approval.

The governing Board of the subsidiary will also be reconstituted -- the CEO, who will be a director on its board will not be a sub-broker of the subsidiary company or a broker of the parent exchange.

At least 50 per cent  of directors on the governing board will not be sub-brokers of the subsidiary company or brokers of the parent exchange.

These directors excluding CEO, shall be called the public representatives, will be nominated by the parent exchange.

Public representatives shall be from among the persons of integrity having necessary professional competence and experience in the areas related to securities market. For this purpose the governing body of parent exchange may forward the names of the persons to the Sebi for its approval.

These representatives will hold the office for a period of one year.

There should be a gap of at least one year after a consecutive period of three years before re-nomination of any person for the post of non-member director.

The parent exchange may appoint a maximum of two directors who are officers of the parent exchange. Such directors shall be in addition to public representatives.

The subsidiary company will have its own staff none of whom shall be concurrently working for or holding any position of office in the parent exchange.

The parent exchange will be responsible for all risk management of the subsidiary company and shall set up appropriate mechanism for the supervision of the trading activity of subsidiary company.

Such mechanism should include - verification of compliance of margin payments and other risk management measures applicable to the subsidiary company as a broker member of another exchange, reporting requirements between the subsidiary and exchange, conducting of half-yearly inspections of the subsidiary and 20 per cent of its sub-brokers and placing such reports before the governing board of the exchange, among others.

Sebi has told the exchanges that they have to ensure compliance of these requirements by February 28, this year.