Context:
The Reserve Bank of India (RBI) has introduced a framework for the recognition of self-regulatory organizations (SROs) in financial markets.
More on the news
- It aims to improve compliance among SRO members and offer a platform for discussing policy changes.
- The framework follows the release of the “Omnibus Framework for Recognition of SROs” in March 2024.
- The RBI has also invited applications for recognizing SROs for non-banking financial companies (NBFCs) and has issued draft norms for fintechs.
What is an SRO?
Definition: A self-regulatory organization (SRO) derives authority from membership agreements to set and enforce ethical and professional standards among its members.
- SROs operate independently, without influence from any single member or group, ensuring impartiality.
- Role of SROs: SROs serve as partners to the banking regulator, helping to ensure compliance with regulatory guidelines, fostering market development, protecting stakeholder interests, encouraging innovation, and detecting early warning signals.
- They adhere to objectives that promote sector advancement and address critical industry concerns within the broader financial system.
Financial market
- It is a market where financial products such as stocks, bonds, currencies, derivatives, commodities, and cryptocurrencies are bought and sold. It acts as a platform for sellers and buyers to connect and deal with their desired financial assets at a price determined by market forces.
NBFC (Non-Banking Financial Company)
- It is a financial institute registered under the Companies Act 1956 that provides financial services similar to banks but does not hold a banking license.
Fintech (Financial technology)
- It refers to technology that enables users and businesses to manage finances digitally through mobile apps and software.
Key Regulations in the RBI Framework
- If any organization wants to be recognized as an SRO, they should send their application by email or to the Chief General Manager of the Financial Markets Regulation Department at the RBI.
Eligibility Criteria:
- Not-for-Profit Status: Applicants must be set up as a not-for-profit company under Section 8 of the Companies Act, 2013. They must have a minimum net worth of ₹10 crore.
- Voluntary Membership: Membership in the SRO must be voluntary for entities in the sector.
- Diverse Representation: The applicant must represent a diverse mix of members across different types and sizes of entities. If this representation is inadequate at the time of application, a roadmap must be provided to achieve adequate representation within two years.
- Professional Competence: The applicant and its directors must demonstrate professional competence, fairness, and integrity, as assessed by the RBI. They must not have been convicted of any offense, including those related to moral turpitude or economic crimes.
- Additional Conditions: The RBI may impose additional conditions to ensure the SRO’s functioning is in the public interest.