Bad news

Mumbai, May 8: The Securities and Exchange Board of India (Sebi) has decided to tighten the screws on regional stock exchanges.

The regulator had formed a committee to study the future of these exchanges after demutualisation. The committee has submitted its report and Sebi has sought public comments on the same.

According to the recommendations of the committee, the dying regional stock exchanges will now get a proper exit route. The regulator feels such an action will help streamline the whole process and also reduce regulatory problems.

The report recommends that any exchange, which does not wish to continue as one, may make a specific request or application for withdrawing their recognition. It also suggests compulsory withdrawal of recognition of errant exchanges.

In exact words of the report, “Recognition should be withdrawn compulsorily for such RSEs, which are notorious for their rank indiscipline, besides giving rise to serious regulatory concerns.”

The report, however, suggests a way out for potential and willing exchanges, which can continue to exist by choosing the BSE model or the Inter-Connected Stock Exchange of India (ICSE) model of trading on their national platform.

The committee, however, mentions that in case both these models fail for whatever reasons, there will be no merit in the continuation of the exchanges and the recognition will be compulsorily withdrawn.

The committee also recognised that in the absence of a proper mechanism for the distribution of assets, no exchange shall seek a voluntary exit option. In this regard, the committee has recommended the formation of a task force that will suggest a proper methodology for the valuation of assets and liabilities as well as for determining the apportionment.

The companies, which are exclusively listed on these exchanges and are compliant with the continuous listing requirement, shall be allowed to migrate to an alternative exchange. The committee also recommends that before seeking voluntary withdrawal of recognition, the regional exchanges will have to compulsorily delist all non-compliant companies.

The report further mentions that recognition shall also be withdrawn for exchanges, which have been corporatised but are unable to demutualise within the stipulated time.

In order to increase the public shareholding, as required by the demutualisation scheme, stock exchanges may opt for the initial public offer route. However, the report mentions that since all the exchanges may not wish to adopt the IPO route, it is necessary to allow the exchanges to induct strategic partners to aid development.

While there are 22 recognised stock exchanges in India at present, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) account for almost 100 per cent of the total turnover.

Among the regional stock exchanges, except for the minuscule trading on the Calcutta Stock Exchange (CSE) and the Uttar Pradesh Stock Exchange (UPSE), there is no trading on any other stock exchange. Recently Sebi refused to renew the recognition to Mangalore Stock Exchange.

The committee has, however, put some restrictions on the shareholding pattern based on the investor. In case a strategic partner is an exchange, multilateral agency, insurance company, bank, depository or clearing corporation, it would be allowed to hold up to a maximum of 26 per cent of the share capital and voting rights of the stock exchange either singly or collectively along with persons acting in concert. Any other entity, including foreign investors, can be allowed to hold less than 15 per cent.

In case a stock exchange whose recognition is withdrawn has a subsidiary, such an entity will also have to change its name and style to avoid any representation of any present or past affiliation with an exchange.

It will be up to the subsidiary to carry on broking operations as any other broking entity registered with Sebi.

However, for exchanges whose recognition has not been withdrawn, it should cease to have any shareholding in the subsidiary within a period of three years, though it may be allowed to retain less than 15 per cent of the shareholding in the spun-off entity.