As Sebi-FMC merger looms, bourse-listing system amiss

After combined entity is formed, MCX to be first listed exchange, but without an enabling framework

The Securities and Exchange Board of India (Sebi) will soon have to put in place a framework for listing of stock exchanges, an idea that has been awaiting final approval of the market regulator for the past three years.

This is because the country’s only listed bourse, the Multi-Commodity Exchange (MCX), will de facto be listed under Sebi regulations, once the merger between the market regulator and commodity market regulator gets consummated on September 28.

According to sources, Sebi is likely to put in place an enabling framework for listing of stock exchanges, a move that will pave the way for listing of the BSE, Asia’s oldest bourse.

“We will consider the listing proposal of stock exchanges after the merger with FMC. Currently, the securities law is undergoing many amendments. Once the transition of commodities market is complete, we would be in a better position to examine the BSE’s listing plans,” said a regulatory official on the condition of anonymity.

The market regulator has maintained that corporate interests and regulatory functions need to be separated before exchanges are allowed to list. BSE, which has been wanting to list since 2012, couldn’t implement its plan essentially due to this reason.

The BSE has not yet given up on its listing plans. According to sources, Sebi and BSE officials recently met to discuss exchange’s initial public offer (IPO) plans.

An email query sent to Sebi on this subject remained unanswered. BSE declined to comment on the issue.

In 2012, BSE had appointed 14 investment banks for its IPO. The exchange’s listing plans, however, had hit hurdles on several counts under the Securities Exchange and Clearing Corporations (SECC) Act. Under the SECC, board members of an exchange were not allowed to hold a board position on any other listed entity, to avoid conflict of interest.

In January 2013, BSE had asked the regulator to exempt it from the clause that stock exchange should ensure every shareholder is "fit and proper". BSE has cited that once it is listed, ensuring only fit and proper investors buy shares from the secondary market would be difficult.

BSE had also sought a waiver of the mandatory one-year lock-in for existing shareholders, an exemption from having to reduce its stake in depository firm CDSL.

A clarification from Sebi on the definition of trading members is also needed that's because when the exchanges were first corporatised, trading members were only allowed a 49 per cent stake, with the balance 51 per cent meant for public shareholders.

In the current SECC guidelines, public shareholders cannot include trading members, clearing houses and associates. This could pose problems for BSE whose majority of shareholders are trading members.

So far the regulator has not amended the SECC regulations to accommodate the requests set forth by BSE. Even in this round of amendments in SECC for the merger of FMC, the regulator hasn’t proposed any change that would make listing easier.

Given that MCX would be a listed exchange under the securities law, the regulator will have to do a fine balancing act.