BSE wants Sebi to raise ceiling on depository holding

BSE wants regulator Securities and Exchange Board of India (Sebi) to increase investment ceiling for stock exchanges in depositories. The move comes less than a month ahead of the deadline for the exchange to divest its holding in Central Depository Services Ltd (CDSL) from 50 per cent at present to 24 per cent, the maximum permissible limit.

BSE was in the process of selling its 26 per cent stake in CDSL's initial public offering (IPO) of shares, for which it has obtained Sebi approval. Meanwhile, rules for market infrastructure institutions (MIIs) such as stock exchanges, clearing corporations, and depositories have come under review by Sebi after five years.

Sources say BSE wants market regulator to consider allowing higher shareholding in depositories and extend the deadline till the review is complete. 

"We want Sebi to review shareholding in depositories. The ownership should be increased to 50 per cent. Our internal committee is working on a detailed presentation in this regard and will soon submit it, along with other recommendations, to Sebi," said an exchange official.

BSE declined comment on the issue. "BSE has made representation before Sebi and is believed to have sought some extension to decide on the issue," said a CDSL spokesperson. The deadline for Sebi to divest its holding in CDSL is March 31. BSE's stake in CDSL is worth Rs 600 crore to Rs 750 crore. Sources say depending on Sebi's view on the issue, CDSL and BSE will decide on the timing of the IPO.

"Under current regulations, BSE will have to divest its holding in CDSL. The law has not changed yet. The exchange can't pre-judge what is going to happen. BSE runs the risk of default unless Sebi gives it a relaxation," said J N Gupta, former executive director, Sebi, and founder of proxy advisory firm SES. Gupta was part of the Bimal Jalan committee, set up to review ownership and governance norms for MIIs.

Last month, the Sebi board had approved the review of rules for MIIs in line with the Jalan committee recommendation that the workings of the MII should be reviewed every five years to keep up with evolving markets.

On February 22, the market regulator issued an open-ended discussion paper inviting public comments till March 31 for the review.

"The current regulation needs an overhaul. In my perspective, there should not be any investment ceiling on shareholding depositories or clearing corporations. Such caps and limits are anti-competitive in nature. Sebi should have a re-look at these issues with the objective of creating world-leading MII ecosystem which balances efficiency with tightly controlled risk," said Sandeep Parekh, founder, Finsec Law Advisors.

Market players say the shareholding caps in depositories are to de-risk the institution by promoting diversified shareholding. "A diversified ownership helps de-risk the business and address the issue of conflict of interest. However, the investment ceiling of exchanges in depositories can be raised to up to 49 per cent," said Rajnikant Patel, former managing director and chief executive officer, BSE.

Caught in a bind

• An exchange cannot own more than 24% in a depository 
• BSE owns 50% in depository arm CDSL
• Deadline to bring down stake to 24% is Mar 31
• BSE was to divest stake through CDSL IPO
• IPO was to hit the market before Mar 31
• Sebi decides to review rules for depositories
• BSE wants Sebi to up investment ceiling in depositories