'Fit and proper' dilution takes load off exchanges

According to Sebi regulations, a 'fit & proper' entity is defined as someone with financial integrity

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The Securities and Exchange Board of India (Sebi) has diluted the provisions of 'Fit & Proper' and laid onus to examine the criteria for small shareholders on the stock exchanges. This decision was made in the quarterly Sebi board meeting held on November 30 in Mumbai.

This was one of the stringent regulatory road blocks preventing the listing of stock exchanges.

Sebi has now specified that upto 2 per cent determination of the 'fit & proper' would lie with the stock exchanges.

"If an entity wants to acquire shares upto 2 per cent then the stock exchange can grant the approval and exchange will be required to monitor their fit person criteria based on the declaration made by the acquirer," said a source involved in the process.

As per sources, if an entity acquires stake between 2 per cent and 5 per cent then the exchange would be required to seek approval from Sebi after the stake has been acquired and monitoring of fit & proper criteria. Above 5 per cent Sebi would clear all the stake holders and prior approval would be needed.

Interestingly, this is the norm that was followed by the erstwhile commodities regulator, Forward Markets Commission (FMC).

This assumes importance as the only listed bourse Multi Commodity Exchange (MCX) is still operating under the FMC regulations. This move by Sebi effectively allows MCX operations to continue without any amendments.

India's leading stock exchanges, BSE ltd and National Stock Exchange (NSE) found it hard to maneuver around the clause in Securities and Exchange Clearing Corporations (SECC) regulations which had required every shareholder to be listed.

As per Sebi regulations a fit & proper person is defined as someone with financial integrity, good reputation and has not faced any criminal or winding up regulatory orders.

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.

"Sebi press release suggests that every shareholder of a stock exchange should be fit and proper, a provision which also exists under the current Sebi regulations. It was expected that Sebi will suggest necessary amendments to such a requirement since monitoring fit and proper compliance for retail and small investors may become a difficult task for a listed company, however the same didn't happen," said Tejesh Chitlangi, Founder, IC Legal.

He adds that the Sebi should have spelt out similar threshold for fit person as present for acquiring stake.

"Since the existing regulations require a post facto Sebi approval for a shareholder to acquire stake beyond 2 per cent (and obtain prior Sebi approval for acquisition beyond 5 per cent), the similar 2 per cent criteria could have been expressly prescribed towards meeting the fit and proper requirement as well," said Tejesh.

Another clause that is still likely to pose a hurdle for listing of stock exchange is the cross listing clause. As per the SECC regulations a stock exchange cannot list on its own platform.

The exchanges were lobbying against the clause due to the fear of loss of trade secrets and corporate practices that could breed unhealthy competitive practices.

Sebi has decided not to do allow self listing as in its opinion it could lead to conflict of interest.

"Corporate interests and regulatory functions need to be separated before exchanges are allowed to list. There should be arms length between these two functions," said another source privy to the developments.