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SEBI move to revive regional exchanges

An attractive proposal permits RSE members to trade on BSE like any member of the latter

THE EXISTENCE of regional stock exchanges is a subject of intense debate today. While many argue for the closure of these exchanges, as part of a major cleansing process, the capital market regulator, the Securities and Exchange Board of India, is still toying with several options. Among these are an exit route for some, and a revival package for others who are compliant.

A SEBI-appointed committee, headed by its whole-time member, G. Anantharaman, recently came out with a comprehensive report — The future of RSEs: Post-demutualisation — for public discussion. Among the many proposals submitted by nation-wide stock exchanges, the suggestion made by the Bombay Stock Exchange, is likely to offer some life-saving experiments for RSEs.

"The key proposal that has attracted RSEs is the one that permits RSE members to trade on the BSE like any member of the BSE," said C. J. George, Managing Director, Geojit Securities. However, he said, this proposal might not lead to a revival of any RSE and might only help individual members of RSEs.

All existing members of the BSE will be treated on a par with RSE members for trading and settlement, which is unfair for the existing members unless the new admissions are in line with BSE admission norms. This is unlikely due to the lower net worth of RSE members.

Maintain RSEs' identity

"The BSE's proposal offers continuance of the identity of RSEs as well as the identity of the brokers of RSEs," said Rajanikant Patel, Managing Director and Chief Executive Officer of BSE, adding that "We will also allow a national trading platform for the compliant listed companies of RSEs."

Now many brokers of RSEs are functioning as sub-brokers of BSE through the subsidiaries formed by the RSEs. However, this is not an attractive option for them.

If accepted, the BSE's proposal will certainly create a liquid capital market for small and medium enterprises due to listing on the BSE, Mr. George felt. However, what may plague the system will be the absence of a close monitoring system for such listed SMEs in terms of compliance. If RSEs are only authorised to ensure compliance there is likely to be a repeat of what happened in the past due to the weak regulatory infrastructure available with RSEs.

With the advent of modern telecommunication and information technology and the symbiotic interaction of technology and markets, which facilitated a fundamental transformation of the market microstructure, the scope for RSEs became limited till they virtually lost their relevance.......In sum, most of the RSEs ceased to be markets where securities of companies listed on them are bought and sold," the committee noted. Although there are over 4,000 companies exclusively listed on these RSEs, there has been no de facto trading in the listed securities of these companies.

Regulator's concerns

Another issue that has plagued the RSEs is the credibility of a large number of members spread over several exchanges. Some exchanges had even colluded with such errant members.

The committee has described this as a case of "deeply embedded behavioural issues" of the RSEs. There have been serious regulatory concerns from time to time on the functioning of some RSEs. These regulatory concerns had led the regulator to even supersede the governing boards of some exchanges and withdraw recognition in the case of one RSE.

The committee feels that it does not serve the interests of either trade or the public, to forcibly retain recognition of an exchange that has no chance of survival, is keen on an exit option or poses a regulatory burden. It has recommended that (a) An RSE that does not want to continue as an exchange, should be given an exit option by withdrawing its recognition upon a specific request or application made by it; (b) recognition should be withdrawn compulsorily for RSEs that are notorious for their rank indiscipline besides causing serious regulatory concerns and (c) recognition of RSEs which have the potential and the willingness to participate in any alternative trading platform may be continued.

While reviving and providing a trading platform for transparent and demutualised RSEs and its members, a concern remains for small companies. SMEs are emerging as an engine of growth in India's economy. However, they need a liquid capital market for accelerated growth, which can be provided by these RSEs through a nation-wide stock exchange.

India should seriously look at the model of Taiwan where SMEs are allowed to be traded in a separate pre-listed segment; during this time, these SMEs will have to gain compliance experience and best practices, Mr. George felt.

At a time when broking services from the nationally known brands are made available in every nook and corner of the country, this proposal will perhaps create a huge regulatory burden on the system, in terms of having to effectively regulate thousands of trading members.

One way to solve this issue could be to have a distinction between clearing members and trading members in the existing system — whereby the RSE members will only get trading membership and the clearing membership will be held by highly capitalised entities of the BSE. This would ensure a liquid market for SMEs, trading rights for RSE members, as well as an effective risk management by the clearing members. A win-win situation.

Oommen A. Ninan

in Mumbai

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