Regional bourses to take Sebi to court

Shareholders and members of regional stock exchanges (RSEs) are preparing for a legal battle against the Securities and Exchange Board of India (Sebi). They plan to drag the capital markets regulator to court for stipulating stringent norms for RSEs after the de-mutualisation process, which they say is akin to a retrospective amendment and may lead to complete closure and winding up of operations.

Most RSEs are citing the Securities Contract and Regulation Act, according to which an RSE can be closed only if it is found acting against public or trade interest. Also, discussions between exchanges and the regulator are required in this context.

There are 16 RSEs in India. Though most are defunct, these are gearing up for revival.

Among the criteria these exchanges disapprove of are the Rs 100-crore net worth requirement, the Rs 1,000-crore trading turnover and the five per cent cap on shareholding, except for a select category of shareholders.

While the brokers’ association of the Uttar Pradesh Stock Exchange has written a letter to the finance minister, claiming Sebi’s norms to be favourable for the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), members of eight exchanges met in Ahmedabad on Sunday to chalk out their course of action through a legal tussle.

An official from a Gujarat-based exchange said shareholders had reached consensus to approach the court for relief. The stock exchanges at Baroda, Ahmedabad and Rajkot would approach the Gujarat High Court in a couple of months, the official added.

According to a senior official from one of the RSEs, at the meeting on Sunday, most RSE shareholders said they felt Sebi’s new norms were similar to money grab. “Why was the de-mutualisation process carried out before bringing in the new guidelines?” asked a member broker, at the meeting. In 2007, stock exchanges were de-mutualised and new shareholders were lured in to invest in these, with many a promise by the finance ministry.

The brokers association of the Uttar Pradesh Stock Exchange, in its letter, stated Sebi had ignored all the rules and regulations.

“There is a difference between national stock exchanges like the BSE and the NSE, and yet the same criteria for these were not acceptable,” said a Uttar Pradesh Stock Exchange shareholder. These 949 suspended companies on the BSE, with 8,978 crore of shares ranging from Rs 20 to Rs 500 (a total of about Rs 1.8 lakh crore) lost for investors. Investors have not been compensated from those investors’ protection and education funds.

The letter adds Sebi did not give enough support to RSEs; its move to grant permissions to both NSE and BSE to work in the region of RSEs, as well as its approval to brokers of these exchanges to establish/maintain their terminals, has hit the working of RSEs to a large extent. And, it also led to brokers of RSEs being forced to work on BSE and NSE terminals. UP brokers say Sebi was interested in suspended companies in which small investors had lost about Rs 1 lakh crore, but was keen on closing down RSEs which could favor national level exchanges.

The Uttar Pradesh Stock Exchange says it was due to this discrimination that it found difficulty in carrying out operations, though its turnover had crossed Rs 1,000 crore.

The five per cent cap on shareholding is another major roadblock for RSEs, say experts. According to former Sebi official Sandeep Parekh, who now runs FinSec Law Advisors, there are institutions that want to revive these exchanges. However, putting 100 per cent effort for a stake of only five per is not enough motivation.

“Currently, the cash market turnover is at its lowest in five years; Sebi is just not concerned about that. The regulator concerned about southern and western India and does not want to deal with northern or eastern India,” the letter by the brokers’ association adds.

Sebi has given three years to stock exchanges to meet the norm of at least Rs 100-crore net worth. Except the one at Kolkata, no other RSE has seen any trading on its platform for many years now.