Sebi considers NSE, BSE plea on self-trading

Bourses ask for okay in the 'permitted to trade' category; brokers and legal experts speak in favour

The Securities and Exchange Board of India (Sebi) is considering a plea by the stock exchanges to allow trading of their own shares under the ‘permitted-to-trade’ category.

If allowed, shares of BSE will trade on the BSE. Similarly, shares of the National Stock Exchange (NSE) will be allowed to trade on its own platform.

“Sebi and exchange officials met last week to discuss the issue. The regulator is consulting more participants and legal experts,” said a source. Sebi, BSE and NSE declined to comment.

An exchange may allow trading in any company, even if not listed with it, under the permitted to trade mechanism. For instance, the Multi Commodity Exchange of India is exclusively listed on BSE but its shares also trade on the NSE under this segment.

Sebi’s regulations don’t allow exchanges' self-listing and self-trading. “The market regulator has taken a firm stand on not allowing self-listing. However, it is studying the risks in allowing self-trading,” said a regulatory official.

Legal experts are in favour. “Sebi’s primary concern for not allowing self-listing was that a regulated entity cannot regulate itself. However, the exchange can allow trading of its own securities under the ‘permitted to trade’ category, as there is no regulatory burden under this.  It will help in improving liquidity for the shares of the exchange as the same will be available for trading by investors of both the exchanges,” said Sudhir Bassi, executive director, Khaitan and Co.

Adds Sandeep Parekh, managing partner at Finsec Law Advisors, “The regulatory framework is strong, thanks to the new Listing Regulation. By allowing self-trading, exchanges won’t be able to exploit any regulatory arbitrage.”

The permitted to trade segment is different from normal listing, as the issuer or a company doesn’t enter into any agreement with an exchange, say experts.

Brokers say the move will benefit investors. Swatantra Rustagi, president, Association of National Exchanges Members of India, says if self-trading is not allowed, “brokers who are members of only one exchange will have to go through a broker of another exchange” for trading in shares of bourses.

Market players say the permitted to trade option is an age-old practice. When NSE was set up, it relied on this to allow trading in companies that were only listed on BSE. Also, exchanges have often allowed trading of shares listed only on regional stock exchanges on their platform under this mechanism.

Typically, exchanges use their discretion while admitting companies in this segment. The company doesn’t have to pay any listing fee that it would otherwise pays to the exchange it lists on.

BSE’s Rs 1,240-crore initial public offering of equity (IPO) opens for subscription on January 23. The exchange will list on NSE in early February. It remains to be seen if Sebi takes a decision on the issue before that.

“We will use the option of admitting our own shares under the permitted to trade category if and when Sebi allows,” said an official with the BSE during its IPO conference on Tuesday.

Both exchanges have agreed to Sebi’s decision to not allow self-listing. Earlier, NSE was demanding the option to self-list, expressing reservations against being regulated by a competing exchange.

Besides commercial function of providing listing and trading, exchanges have to perform the role of a regulator. The job of an exchange also involves regulating listed entities and intermediaries, such as brokers. The reason for not allowing self-listing was to do away with the inherent conflict of interest of regulating oneself. Self-trading, experts say, won’t result in any conflict of interest as it involves only use of the trading platform.

Globally, most regulators permit self-listing. Some of the self-listed stock exchanges include the Australian Stock Exchange (ASX), Hong Kong Stock Exchange, Singapore Stock Exchange, London Stock Exchange, Euronext, and Nasdaq. To avoid conflict of interest, most of these exchanges and their regulators have put in place mechanisms to ensure integrity and transparency. Most of the arrangements include setting up committees or independent entities to conduct exchange’s regulatory and risk-management functions. NSE, too, had made a similar demand for being regulated or supervised by an independent body instead of a rival exchange. The regulator is said to be looking into the request.

BREAKING DOWN ‘PERMITTED TO TRADE’

What is ‘permitted to trade’ category?

An exchange can allow trading in shares of a company on its platform, even though the company is not listed on it 

Is there any such example?

MCX is exclusively listed on BSE. However, its shares also trade on NSE (National Stock Exchange) under ‘permitted to trade’ segment. Besides, scores of other companies listed on regional stock exchanges trade on NSE and BSE 

Are there any criteria to allow companies to trade under this option?

An exchange can use its discretion. Typically, exchanges look at parameters like size and liquidity, before admitting companies under the ‘permitted to trade’ option 

Can BSE by default trade on BSE under ‘permitted to trade’ segment?

No. Current regulations don’t allow an exchange to list or trade on its own platform. However, the market regulator is considering a plea filed by exchanges on this matter 

How will the move rain benefits?

Both exchanges have different liquidity pools and investors. The move will help brokers or members, exclusively registered only on NSE or BSE, take exposure to shares of exchanges