MCA moots non-profit entity for regulation at listed bourses

The ministry of corporate affairs (MCA) plans to recommend listing of stock exchanges to capital markets regulator Sebi. It will also suggest that exchanges hive off their regulatory duties into non-profit entities. The recommendation is significant as the ministry is the nodal entity that will determine how stock exchanges will be registered once they are listed.

The ministry plans to convey its recommendation to the markets regulator and the finance ministry in a week, said sources connected with the developments. The regulatory entity, the ministry feels, should be registered under Section 25 of the Companies Act, i.e., as a non-profit entity.

The MCA suggestion comes in the backdrop of responses from exchanges and industry chambers on how the new stock market architecture should look like. The government is keen to implement the changes soon, as it also impacts the healthy functioning of the over $1.6 trillion (annual market cap) equity market.

The MCA approach implies the government will have to amend the Securities Contract (Regulation) Act, the mother Act under which exchanges function. This could potentially delay the changeover to the new regime. ?It is a paradigm change that has been proposed. Hence, it would require some changes in the Securities Contract Act, which is the parent legislation for stock exchanges. Apart from that, other changes are also required,? Sumant Batra, managing partner at KDB Associates told FE.

The ministry is against any conflict between the two functions of exchanges.

MCA would also suggest that Sebi develop an in-house department to ensure these functions do not overlap, a government official told FE.

But even as the MCA has firmed up its position, the exchanges remain divided on segregation of the two roles.

MCX-SX told the MCA committee studying the Bimal Jalan panel report on market infrastructure institutions that there was no need for such a segregation, whereas NSE felt that exchanges should be asked to separate these two roles before being permitted to list.

? Listing of exchanges is a must and most relevant in the current times. The Justice Kania Committee, which had more neutral members unlike the Jalan Committee, had suggested listing of exchanges in its 1992 report on demutualisation and corporatisation of exchanges. But I don?t see a need to separate regulatory and functions of a stock exchange for listing,? said MCX-SX MD&CEO Joseph Massey.

NSE and BSE did not respond to FE queries.

Industry chambers CII and Assocham have argued that while avoiding the possibility of such a conflict is important, it should not prevent exchanges from listing. They maintained it was possible for exchanges to play both these roles effectively within the existing regulator regime. Ficci has argued that division of these two roles can happen even after the exchanges are listed.

FE has reviewed the inputs submitted by the chambers and exchanges to the government. There is a striking similarity among suggestions of CII, Assocham and MCX-SX.

On the ownership of exchanges, MCX-SX and industry chambers have argued that promoters be allowed to bring in higher equity to start with, which can reduced over the years, in line with the regulation for banks, insurers and commodity exchanges. Sebi rules mandate an Indian or foreign investor to own a maximum of 5% stake in a stock exchange, while stock exchanges, depositories, clearing corporations, banking companies and public financial institutions can own up to 15%.

?If the policy for stock exchanges was similar to the policy of RBI, IRDA and FMC, then a stock exchange could have shareholders with 26-40% shareholding and this shareholding had to be met 5-7 years after starting full operations. MCX-SX was given time to divest but not with full business,? said Massey.

A Sebi-appointed committee headed by former RBI governor Bimal Jalan submitted its report last November on ownership and governance of market infrastructure institutions (MIIs): stock exchanges, depositories and clearing corporations. Many of its suggestions ? prohibiting MIIs to list their own shares, cap on their profits, and fair competition with optimal number or two equity exchanges have been opposed by stakeholders.

Listing is pertinent in order to give a ?transparent exit route? to investors who have pumped in over Rs 10,000 crore in exchanges during the last four years, Ficci said. Foreign and private investors own over 67% stake in NSE, while Indian banks and public finance institutions hold 89% in MCX-SX.

Globally, many exchanges including Nasdaq and CME of the US, LSE of the UK and Singapore Exchange are listed.