Sebi order on clearing corporation structure has exchanges in a bind

A day after the Securities and Exchange Board of India

(Sebi) announced significant changes in the manner stock exchanges and clearing corporations function in the market, bourses appear to be most worried by the regulator’s diktat on the way clearing houses can be structured. According to industry players, while the capital market regulator’s decision of capping the stock exchange stake in a clearing corporation at 51% would lead to diversified ownership, the fragmented structure could hamper the smooth functioning of the entity.

?The fact that there will be many other parties in the picture could disturb the smooth sailing of the clearing houses,? said an exchange official, wishing not to be named. ?The new norms would require every exchange to dilute 49% stake and, with the individual cap on holdings, it will require too many entities. Many of these may not even be directly linked to the capital markets,? he added.

Another exchange official said the net-worth criteria of R100 crore for clearing corporations, along with ownership barriers, is a twin blow with the only consolation being the three-year window given to comply with the new regulations. The reason for exchanges being worried over the new norms is the fact that all the bourses have set up 100% wholly owned subsidiaries for clearing and settlement functions and will have to dilute their stake.

The National Stock Exchange has NSCCL for clearing and settlement services. Similarly, BSE and MCX Stock Exchange (MCX-SX) have formed ICCL and MCX-SX CCL, respectively. The United Stock Exchange (USE) routes its clearing operations through ICCL as BSE holds a 15% stake in USE.

According to market sources, the net worth of NSCCL is R936 crore, while that of ICCL and MCX-SX CCL is R53 crore and R28 crore as on March 31, 2011. Therefore, BSE and MCX-SX will have to increase the net worth of their clearing corporations apart from diluting their stake. While the Bimal Jalan Committee recommended that at least 51% of the paid-up equity capital of the clearing corporation be held by one or more recognised stock exchanges, it also added ?there is no pressing need to alter the exiting market structure of arrangement between stock exchanges, clearing corporation and depository solely to address the issue of competition.?

On Monday, when Sebi gave its final approval to most of the recommendations, it said stock exchanges can hold only 51% in a clearing corporation. Further, no single stock exchange can hold more than 51% in any clearing house and any bourse holding 51% in a clearing corporation cannot hold more than 15% in any other such entity. Interestingly, the regulator has also proposed to form an expert committee to examine the viability of introducing a single clearing corporation or interoperability between different corporations.