Somasekhar Sundaresan: Cruel joke of defunct stock exchanges to end

SEBI plans to remove recognition accorded to exchanges, whose annual trading turnover falls short of Rs 1,000 crore over next two years

At long last the Securities and Exchange Board of India (SEBI) has introduced a policy for shutting down defunct stock exchanges. The sheer number of stock exchanges in India that are not alive even while refusing to die has become a bit of a joke. In recent times, the joke has even taken cruel proportions, which underlines the importance of the policy now introduced to shut them down.

SEBI has now taken a stand that it would remove the recognition accorded to exchanges whose annual trading turnover (the aggregate value of all the securities listed on that exchange) falls short of Rs 1,000 crore over the next two years. SEBI has also enabled the voluntary surrender and exit by any such stock exchange.

Historically, before the onset of electronic trading platforms that created nationwide exchanges, every state in India had a “regional stock exchange”, on which a company incorporated in that state would have to list when making a public offering of securities. Therefore, the sheer requirement of statute gave business to the regional stock exchange.

There were also instances of multiple exchanges within a state – Gujarat had a stock exchange at Ahmedabad, Baroda and Saurashtra-Kutch. However, when the National Stock Exchange (NSE) was introduced in 1993, and more so, after the Bombay Stock Exchange (BSE) went national with the introduction of electronic trading around 1996, the regional stock exchanges lost a statutory reason to exist.

Ever since, any company of consequence has listed either on the NSE or the BSE, while securities that were already listed on these exchanges were also “permitted” by the nationwide stock exchanges to be traded. However, there still is a reasonably large number of companies that are “listed” only on such regional stock exchanges, but obviously, no trades take place in their securities since the stock exchange itself is defunct.

Some of the regional stock exchanges attempted to compete, introducing electronic trading (in fact, in the late 1990s, SEBI introduced regulation to make it mandatory for trading to be in electronic form, abolishing the open outcry system of trading in a ring), but every single one has commercially found it impossible to continue.

Reports of many committees formed by SEBI have commented on the defunct nature of the multiple stock exchanges in India. However, shutting them down was initially considered politically sensitive. Soon, these exchanges became politically so inconsequential that they did not occupy any regulatory mindspace.

SEBI too, introduced half measures such as asking the regional stock exchanges to form subsidiaries that would ostensibly become brokers of the nationwide stock exchanges, with its own brokers becoming deemed sub-brokers of such subsidiary broker. Such an arrangement was sought to be introduced, to enable, by regulatory fiat, an avenue for members of defunct exchanges to continue to trade on the nationwide stock exchanges.

Finally, SEBI now seems to have realised that it is high time some time horizon is provided to phase these exchanges out. Companies that are “listed” only on defunct exchanges (say, the Madras Stock Exchange, where no transaction has taken place for more than ten years), were still forced to meet all requirements of listed companies. The takeover regulations and the delisting regulations were still applicable to securities ostensibly listed on them. Preferential allotments could not be effected for want of market price to compute the statutory floor price.

Now, with the exit policy, in two years, this cruel joke will stop. Any company whose securities are listed on any other active stock exchange would not be affected, and would continue as a listed company on the surviving exchange.

However, for companies that are exclusively listed only on a defunct stock exchange, SEBI has directed that the nationwide exchanges to introduce a new platform called the “dissemination board” where buy or sale offers may be disseminated. The companies themselves would cease to be regarded as listed companies, and even if a trade does get executed, it would not be regarded as a stock market trade, and not even a contract note would need to be issued.

The defunct exchanges that would now exit the stock exchange business would have to pay a one-time fee to the nationwide exchange for setting up the dissemination board. In addition, it is highly likely that some of these exchanges would have no funds to incur any reasonable expense, leave alone pay a reasonable fee for creation of a platform.

One can only hope that this does not become a ground for SEBI to have a change of heart after two years, and yet again procrastinate conclusively shutting down the defunct stock exchanges.

 

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.) somasekhar@jsalaw.com