Sebi wants PSBs as 'public' shareholders in stock exchanges

Market regulator is of the view that any restrictions on shareholding of banks and financial institutions will hamper their participation in the development of the market

Capital markets regulator Sebi has suggested that banks and financial institutions from public sector be considered as 'public shareholders' in stock exchanges, but the view has been rejected by Finance Ministry.

The issue is likely to be discussed tomorrow at a meeting of Sebi's board, which would also be apprised of the impact of the Finance Ministry's decision for not agreeing to such a proposal from the capital markets regulator, sources said.

If the current stalemate continues, three national stock exchanges -- MCX-SX, United Stock Exchange and BSE -- would have to increase their public shareholding by 25.66%, 1.72% and 0.845% respectively by April 2015.

At NSE, the public shareholding is at 57.48%, which

is well above the required level of 51%.

Sebi is of the view that any restrictions on shareholding of banks and financial institutions by allowing them to hold shares in stock exchanges only as 'public shareholders' would hamper their participation in the development of the market.

However, Finance Ministry has rejected any relaxation in the public shareholding norms for stock exchanges, saying it would violate the statutory provisions of relevant Acts, sources said.

The Securities Contracts Regulation Act (SCRA) provides for at least 51% stake in a stock exchange to be held by the public shareholders, which can not include those having trading rights on the bourse.

Earlier, banks were allowed to be classified as 'public shareholders', provided they do not become trading members in the stock exchanges. However, after introduction of currency derivatives segment, it came to light that trading members would necessarily have to be banks and therefore the rules do not allow them to be included in public category.

Subsequently, the matter was discussed by Sebi board and was taken up with RBI and the Finance Ministry. As an interim measure, Sebi had decided in April 2012 that the existing position would continue for a period of three years or till the time necessary amendments are made in the regulations.

However, the Finance Ministry has now opined that inclusion of shareholders with trading rights in the 'public' category would violate statutory provisions of relevant norms.

Besides, a Bimal Jalan Committee on 'Review of Ownership and Governance of Market Infrastructure Institutions' also recommended that no trading or clearing member be allowed on the board of any exchange.

Subsequently, Sebi has told the Ministry that the regulations are primarily aimed at segregating ownership and management of the exchange from trading members to avoid any conflict and the intention was not to "keep the institutional investors especially banks and financial institutions away from the management of the exchange".

"The intention was to keep the trading members, who were individuals, family houses, corporates etc away from the management of the exchange to bring more transparency," Sebi has told the Finance Ministry.