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Shareholder norms may be eased for stock exchanges

After merger with FMC, Sebi likely to bring the regulations in line with those that govern commodity bourses

Securities and Exchange Board of India (Sebi) may have to relax shareholder norms for stock exchanges to bring them in line with those that govern commodity bourses following the capital markets regulator’s merger with its commodity markets counterpart, according to three people, including one who is familiar with Sebi’s policymaking processes.

They requested anonymity because of the confidential nature of these discussions. The commodity markets regulator Forward Markets Commission (FMC) was merged with Sebi last month.

“Sebi is working on ways to harmonize the norms for both classes of exchanges especially in terms of the ‘fit and proper’ criteria laid down by the regulator for securing a licence for running an exchange,” said the person familiar with the regulator’s policymaking processes.

The difference in shareholding norms is a critical issue that needs to be addressed to ensure equitable treatment for all categories of exchanges, said one of the other two people cited earlier.

An email sent to Sebi on Friday did not elicit a response.

The erstwhile Forward Contracts (Regulations) Act, or FCRA, required that shareholders with more than 2% stake in a commodities derivatives exchange be deemed as fit and proper by the regulator. The norms for stock exchanges are tougher. The Securities Contracts (Regulations) Act, or SCRA, norms for stock exchanges and clearing corporations (SECC norms) say that all classes of shareholders in a stock exchange business need to be fit and proper irrespective of their holdings.

The difference in rules gives commodity exchanges an edge over stock exchanges, particularly when it comes to the issue of listing of exchanges, according to a top official at a nationwide exchange, who requested anonymity.

Among the two national commodity exchanges, Multi Commodity Exchange of India Ltd (MCX) and National Commodity and Derivatives Exchange Ltd (NCDEX), MCX is already a listed entity.

While none of the stock exchanges have so far been listed, BSE Ltd has sought permission from the regulator for a listing. Some shareholders of National Stock Exchange of India Ltd (NSE) have also been seeking a listing of the exchange as a way to sell their investments.

A major hindrance to the listing of stock exchanges is the requirement that each and every shareholder must be considered fit and proper.

“The matter has caught Sebi’s immediate attention because MCX got itself listed in 2012 as per the erstwhile FCRA norms that required only those stakeholders to be fit and proper who held 2% or more,” said the stock exchange official cited earlier. “While securing a licence to start an exchange, establishing itself and getting listed, MCX followed all the required norms, but now due to the merger and the new SCRA norms, the entity will be seen as non-compliant.”

He added that it is important for the regulator to look into the issue as stock exchanges have expressed interest in getting listed as well.

An email sent to NSE and MCX last week remained unanswered. A spokesperson for BSE said the exchange “will make further progress on its IPO after receiving appropriate approval from Sebi in this regard. Currently, BSE has not received any approval in this regard.”

According to two of the three people cited initially, the regulator needs to make changes in ownership and governance rules to make it possible for stock exchanges to list.

In the case of MCX, which is already listed, Sebi has given the exchange one year to comply with the SCRA norms. Ensuring compliance with the rules, however, will be challenging.

“On one hand, if MCX is not compliant with the new norms, it may not be able to continue to be listed. On the other hand, Sebi cannot order MCX or any listed company to force its shareholders to sell their stakes without grounds of a legal offence,” said a corporate lawyer working with stock exchanges and one of the three people cited initially.

So, what’s the way out for the regulator? The most likely option is for the regulator to relax rules for stock exchanges and ask them to ensure that shareholders with 2% of more stockholding are fit and proper, said the people cited above.

“Currently, under SECC regulations, every shareholder of a stock exchange is required to meet the fit and proper criteria. Such a requirement will not work on shareholding of a listed company without a materiality threshold, otherwise it will make the whole purpose of listing redundant,” said Pratibha Jain, a partner with legal and tax counselling firm Nishith Desai Associates.

HT Mint, New Delhi, 13th Oct. 2015