SEBI allows stock exchanges to list, but with riders

Mumbai: Stock exchanges and depositories will be allowed to list, the Securities and Exchange Board of India decided on Monday. The Board's decision has more or less overturned the recommendations of the Bimal Jalan Committee on listing of exchanges.

Listing will be restricted to those stock exchanges that address the conflict of interest between business expansion and their role as a frontline regulator.

The Jalan Committee had recommended that exchanges, depositories and clearing corporations should not be allowed to list because of their frontline regulatory role.

SEBI has implemented the Jalan committee's recommendation only for clearing corporations, barring them from listing.

“The decisions taken by the SEBI board are likely to ensure greater transparency and accountability. SEBI, while not accepting some of the recommendations (such as cap on profits earned by the stock exchange) of the Dr Jalan Committee Report, is likely to promote competition in the exchange space,” said Mr Tejesh Chitlangi, Senior Associate, Finsec Law Advisors.

However, SEBI has not allowed exchanges to list on themselves. Also, they have to operational for at least three years to list. This is because clearing corporations (CCs) bear the risk of guaranteeing that securities and funds change hands between the buyer and the seller without any glitches on the exchanges.

Net worth and ownership
The minimum net worth for exchanges and depositories should be Rs 100 crore, said SEBI. For clearing corporations, the requirement is Rs 300 crore.

SEBI has said that no single investor can hold more than five per cent in exchanges. However, the exchange, depositories, insurance companies, banks and public financial institutions themselves are allowed to hold up to 15 per cent stake.

The public shall hold 51 per cent in exchanges.

SEBI has allowed stock exchanges to hold at least 51 per cent in CCs. An exchange holding 51per cent in a CC cannot hold more than 15 per cent in any other CC.

For depositories, sponsors should have a minimum stake of 51 per cent. The prescribed shareholding limits includes all on and off-balance-sheet instruments (such as options).

Governance
SEBI also directed stock exchange boards to have 50 per cent public interest directors. Two-thirds of CC boards must consist of such directors.

It also prescribed compensation practices (for key management personnel) curbing incentives that encourage excessive risk taking.

Exchanges have to transfer one-fourth of their profits to the clearing house's settlement guarantee fund.

Depositories have to transfer one-fourth of their profits to their investor protection fund. SEBI also prescribed voluntarily exit for non-operational stock exchanges and introduced Alternative Investment Funds (AIF) regulations.

AIF has been classified into three categories — the minimum corpus of an AIF is Rs 20 crore and it can have a maximum of 1,000 investors.

However, the AIF sponsor should have an investment equal to the lower of 2.5 per cent of initial corpus or Rs 5 crore.