A committee headed by former Reserve Bank of India governor Bimal Jalan has recommended sweeping changes in the ownership and governance structure of the country’s stock exchanges. The committee was appointed by market regulator Sebi in December 2009 to review the ownership and working of capital market infrastructure institutions (MIIs).
The report, which was placed in the public domain today, says only banks, insurance companies and domestic financial institutions — which fall under the category of public financial institutions — having a net worth of '1,000 crore can be roped in as anchor investor. They can hold 24 per cent stake in an exchange, with a clause to reduce this to 15 per cent in 10 years. All others can hold a maximum of 5 per cent.
The committee has also suggested keeping the profits made by stock exchanges under strict oversight and has voiced its concern over super-normal profits, although it stopped short of capping profitability.
| CLAUSE & EFFECT |
| * Exchanges should not generate super-normal profits Could force NSE to cut transaction charges and hurt BSE |
| * Include all exposures in shareholding limit Will hurt MCX-SX in its case against market regulator Sebi |
| * Disallow listing of market infrastructure institutions Will hurt BSE’s plans for an initial public offering |
| * Restrict exchanges’ holding in depositories to 24% BSE will have to reduce its stake in CDSL from current 54% |
| * Raise net-worth criteria for clearing corporation to '300 cr BSE, MCX-SX will have to infuse capital in their clearing houses |
| * Fix pay without variable linked to commercial performance NSE brass may lose their fat bonus |
The panel justified the higher entry barriers, saying the concept of regional stock exchanges is no longer relevant due to the wide reach of technology and absence of product differentiation. It wanted Sebi to increase its regulatory role and set a level playing field with regard to fees and entry, among other things.
It opposed listing of stock exchanges on bourses. “Being public institutions, any downward movement in their share prices may lead to a loss of credibility and this may be detrimental to the market as a whole. Therefore, the committee is not in favour of permitting listing of MIIs,” the report stated.
Many foreign investors had picked up equity in India’s oldest stock exchange, Bombay Stock Exchange (BSE), in the hope that its shares would be listed on stock markets. In August, billionaire investor George Soros picked up a 4 per cent stake in BSE for $35 million. Soros’ Quantum hedge fund bought the stake from Dubai Financial, part of state-run Dubai Holdings, for an estimated '380 a share.
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In February-March 2007, Deutsche Börse and Singapore Exchange acquired 4.98 per cent each in BSE when the exchange was demutualised. Foreign investors now hold 30 per cent stake in BSE, lower than the permissible limit of 49 per cent.
The committee further suggested that no exchange hold more than 24 per cent in depositories. Also, the minimum net-worth criteria for clearing corporations, which mainly carry out settlement business for exchanges, has been raised from Rs 25 crore to Rs 300 crore. This will have to be complied with in three years.
The suggestions will impact BSE, which had planned to launch its initial public offering by March 2011. BSE will also have to bring down its holding in the Central Depository Services from the current 54 per cent to 24 per cent in three years. The National Stock Exchange (NSE) has just over 25 per cent stake in National Depository Services.
BSE, which is left with just over 1 per cent marketshare of the total equity trading, was consolidating its depository and clearing business to achieve cost efficiencies and project itself as an end-to-end solution provider to attract traders and investors.
Most top exchanges, including the London Stock Exchange and NYSE, are listed on their own platforms. Globally, listed exchanges account for over 70 per cent of equity turnover, according to a report by Ruben Lee, CEO & founder of Oxford Finance Group.
Both NSE and BSE will have to cut stake in their wholly-owned clearing houses to 51 per cent. However, NSE clearing house NSCCL already has a net worth of over Rs 1,000 crore, while BSE will have to infuse an additional Rs 200 crore in its clearing corporation.
"It is likely that valuations of stock exchanges will fall,” said a BSE shareholder. While the valuation of BSE has risen from around 2,500 crore just a year ago to nearly Rs 3,900 crore, NSE's value has gone up from Rs 10,000 crore to Rs 16,000 crore.
Another key suggestion is that both off- and on-balance sheet exposure of entities should be considered while calculating the shareholding limit in MIIs. "The maximum permissible limit for a shareholder will be computed on the equity share capital. In case the shareholder has any other exposure in the MII in value terms, it will be included while determining the total exposure," stated the report.
This will impact MCX-SX, which is locked in a legal battle with Sebi over equity dilution and the issue of warrants. While the direct exposure of MCX-SX promoters Financial Technologies and MCX is 5 per cent each, their indirect exposure through warrants is 70 per cent. Sebi has refused to allow MCX-SX to operate as a full-fledged stock exchange until shareholding is more diversified.
The committee also said that disclosure and corporate governance norms for market institutions should be the same as that applicable for listed entities. In the case of companies in which stock exchanges hold 24 per cent or more, that entity would have to seek prior Sebi approval.
"Further, if an entity chooses to get itself listed on a stock exchange and is substantially owned (24 per cent or more of equity capital) by that stock exchange or by an MII in which that stock exchange holds shares, then such entity shall seek prior approval from Sebi before listing," it stated.
The report drew sharp criticism from the MCX Stock Exchange. In a statement, Joseph Massey, MD & CEO, MCX Stock Exchange, said the recommendations, if accepted, would continue to protect the “monopolistic market structure and the perverse anti-competitive practices adopted by some”.