Governing council

An exchange cannot let its own broker-members run the derivatives segment however they like — that would put the people who profit from trading in charge of policing it.

So every exchange running a derivatives segment must set up a separate governing council for it, distinct from the exchange's ordinary governing body. To keep it from being captured by the industry it oversees, trading and clearing members can hold at most 40% of the seats on this council.

This is one of the eligibility conditions an exchange must satisfy before SEBI will grant it recognition under Section 4 of the SCRA to trade derivatives (Chapter 8, section 8.3): the derivatives exchange or segment "should have a separate governing council," with representation of trading and clearing members limited to a maximum of 40% of the total council. The exchange must also regulate the sales practices of its members and get SEBI's prior approval before it starts trading any new derivative contract — both governance duties that sit with this same council-and-recognition framework.

A derivatives segment sets up a governing council of 10 members in total. Under the 40% cap, at most 4 of those 10 seats can go to trading or clearing members; the remaining 6 or more must come from outside that group — public representatives, SEBI nominees or independent members, for instance.

If the segment instead tried to seat 5 broker-members out of 10, that would put broker representation at 50%, breaching the cap even though it might feel like a "fair" half-and-half split.

Chapter 8, section 8.3 (Regulations in Trading), lists the separate governing council and the 40% member-representation cap as part of the eligibility criteria the L. C. Gupta Committee report set for an exchange seeking derivatives recognition. A workbook sample question directly asks whether broker-members are allowed unlimited representation on this council — they are not.

• The cap is 40%, not 50% or a simple majority — trading and clearing members must always be a minority on the council.
• The governing council is separate from the exchange's general board — it exists specifically for the derivatives exchange or segment.
• Do not confuse this with the Social Stock Exchange Governing Council, an entirely different body under a different regulatory framework for social enterprises, not derivatives.