Sebi brings in caveat on stock exchange listing

Entities with 15% stake in an exchange can't list on it; those with such stakes to be referred to as associates

The recently amended regulations for listing of stock exchanges will bar an entity from trading and being listed on a stock exchange if it holds a 15 per cent stake in it.

According to board minutes released by the Securities and Exchange Board of India (Sebi), the entity with such a substantial stake would be considered an associate of the exchange.  

“Companies which share common directors with that of a stock exchange or any of its subsidiaries, or who hold 15 per cent of the equity share capital of a stock exchange would not be permitted to list on the same stock exchange,” said Sebi in the board note.

This means that if any board member of the listed exchange is also on the board of a listed entity then the entity would not be able to trade on it. Else, the board member would have to give up his/her position on the board of the company or exchange.

This was a part of the initial Securities Exchange and Clearing Corporations (SECC) regulations because of which Keki Mistry of HDFC Securities had to give up his position on the board of BSE ltd.

Another important criterion that was making it difficult for stock exchanges to list was the examination of the ‘fit and proper’ criteria of shareholders. Sebi has allowed shareholders to issue a self declaration of their fitness status.

“During the allotment process, each applicant would be required to provide self declaration…In the post listing scenario, each shareholder shall submit quarterly an undertaking to confirm that they are fit and proper,” said Sebi.

For instance, if a shareholder is found not to be ‘fit and proper’ as per the regulations then the shareholder would be asked to divest its stake within a time period. In the interim the shareholding of the holder would be frozen.

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

"Ensuring that every shareholder of a stock exchange is fit and proper is to avoid any systemic risk. However, any such risk would arise if a shareholder with substantial shareholding is found to be not 'fit'. It would have served better if Sebi had provided a threshold for examination of shareholders. Examining every retail shareholder with small holding would be a compliance hurdle and lead to unnecessary paper work," said Tejesh Chitlangi, Partner, IC Legal.

An email sent to BSE and MSEI remained unanswered till the time of going to print.

NSE in a specific query by Business Standard  stated that it was too early to comment, but they would adhere to the regulations.  

If an entity acquires between two and five per cent stake, then the exchange would be required to seek approval from Sebi. Above five per cent, Sebi would clear all stakeholders and prior approval would be needed. If any entity ends up taking above the limit cleared by the regulator, then the additional shareholding, voting rights will be capped.

In spite of requests from interested parties, Sebi has stuck to the original plan of not allowing self-listing.