The high court in Kolkata has ruled in favour of market regulator Securities and Exchange Board of India (Sebi) in the matter of de-recognition and exit of the Calcutta Stock Exchange (CSE).
The decision, unless challenged, could mark the beginning of the end of the 186-year bourse, once the country's second largest, with about 2,200 companies listed.
In a judgment dated Wednesday, judge Debangsu Basak disposed of two petitions filed by the exchange, in 2014 and 2015. These challenged Sebi’s power to move for compulsory exit and derecognition if an exchange did not fulfil minimum trading turnover and other criteria mentioned in the policy. The exchange had argued the regulator had to first form an opinion that it was in the ‘public interest’ to shut it down and allow the exchange an opportunity to be heard before taking such a call.
Another issue under contention was Sebi’s shutting down of a clearing house operated by the exchange, which brought the latter to a standstill.
According to the judgement, the court had four broad questions before it. These were “One, whether the Exit Policy of Sebi promulgated by a circular dated May 30, 2012, was in consonance with Section 5 of the SCR Act, 1956? Two, if CSE was obliged to apply for continuance of its clearing house business in terms of the SECC Regulations, 2012? Three, was the procedure undertaken by Sebi to close down the clearing house business of CSE vitiated by a breach of the principles of natural justice? Four, in the facts of this case, was Sebi justified in taking steps to make CSE exit the market compulsorily?”
The bench concluded “the first and the second issues are answered in the affirmative. The third issue is answered in the negative. The fourth issue is answered in the affirmative, in favour of Sebi and against the CSE.”
B Madhav Reddy, president of CSE, told this newspaper the board of directors would be meeting shortly to decide the course of action. “Our lawyers are studying the order. They will advise the board. We strongly believe there is a place for an exchange like us, where small companies can raise capital at reasonable costs. It would be unfortunate (if we are forced to exit),” he said.
He added that the exchange was not compliant with the Rs 1,000 crore minimum annual turnover requirement fixed by Sebi for allowing regional exchanges to continue. “But, this was due to the technical reason that the clearing house was not operational.”
Between 2013 and 2015, Sebi granted exits to 17 regional exchanges, which became redundant after electronic national exchanges such as the National Stock Exchange and BSE had cornered most of the trading. CSE, among the bigger of the regional exchanges, did not apply for voluntary surrender of recognition and exit.
According to the 2012 exit policy, regional exchanges with own trading platform, with an annual trading of not less than Rs 1,000 crore and a minimum net worth Rs 100 crore, were allowed to continue. CSE was the only regional one to conform to the norms on trading platform and net worth, which impelled other such bourses to seek a tie-up with it. The exchange has its own trading platform, C-Star.
In June 2012, Sebi tightened the norms on clearing corporations, notifying the Stock Exchanges and Clearing Corporations Regulations, 2012.
Under these, bourses should either have their own Sebi-recognised clearing corporation or tie-up with one. Till then, CSE was putting through trade through an in-house clearing mechanism. In April 2013, CSE had to suspend trading, as it failed to comply with the clearing corporation norm.
According to the latest shareholding pattern filed by the exchange, about 26.5 per cent is held by trading members, public individuals hold 23.16 per cent, 93 corporations (including Kesoram, WBIDC and BSE) own 47 per cent, with banks and financial institutions owning the rest.