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In 1992, just before the National Stock Exchange (NSE) was recognised as a stock exchange, there were 24 others in business. Each of the exchanges was required to operate within the limits of the city of its location. Together these regional stock exchanges conducted 70 per cent of the secondary market business. Two decades down the road, all transactions are carried out exclusively via NSE and the Bombay Stock Exchange (BSE) and to some extent through the MCX Stock Exchange. Activity at most of the other stock exchanges has come to a grinding halt.
One reason for their demise is the advent of new technology, which has facilitated trade from any part of the country and done away with paper-based settlements. The other reason is that while many large companies listed on regional stock exchanges have chosen to get themselves listed on the national exchanges, regional stock exchanges members themselves are trading on national exchanges through the subsidiaries of the regional bourses. The Securities and Exchange Board of India, or Sebi, the stock market regulator, is also wary of opaque trading that frequently marks business on regional stock exchanges as it often has the contours of a scam.
On May 30, 2012, long after business at most regional stock exchanges had slumped (Calcutta Stock Exchange, or CSE, was the last active regional exchange; it discontinued trading from April last year), Sebi issued norms for non-operational/non-compliant regional exchanges which warranted their achieving a prescribed turnover of Rs 1,000 crore on a continuous basis, having their own trading platform and a tie-up with the National Clearing Corporation. They were given two years to meet the conditions or apply for a voluntary surrender of recognition and exit the business.
With just days to go for the expiry of the compliance period, and unable to meet the norms, most regional stock exchanges have no option but to look at alternative business prospects. Many of them still feel that there is scope for them to continue business. A broker at CSE quips, "You have national parties, but you need regional parties too." But the mood in the exchanges can be gauged from the grim prognostication of Someswara Rao, managing director of Vadodara Stock Exchange, who says, "We can only hope for a miracle."
The Bangalore Stock Exchange announced its decision to exit last October, while the Mangalore exchange's exit application was notified by Sebi in March. The exchanges in Kochi and Hyderabad too have informed Sebi of their inability to continue. The 77-year-old Madras Stock Exchange in an emergency general meeting on Monday decided to exit from the exchange business. It is expected to communicate its decision to Sebi soon. No fewer than 15 exchanges, plus the Over the Counter Exchange of India (OTCEI) and Interconnected Stock Exchange (ISE) have applied to surrender their licences.
There are a few others that are still mulling their future. An official of the Brokers' Association of the Delhi Stock Exchange says, "There is no official decision yet on the closure of our exchange. We have held meetings to find ways to avoid closure and we will meet again this week." But the exchange, which had even roped in the London Stock Exchange for technological know-how in an effort to remain alive, will in all probability accept the inevitable. Its minority shareholders, mainly the erstwhile brokers, want the exchange to be wound up and its real estate and other assets monetised. It has assets worth Rs 250 crore and reserves of over Rs 70 crore.
CSE is still fighting. With the advantage of being the only regional stock exchanges with a technology platform of its own, C-Star, it has signed a memorandum of understanding with the exchanges at Bangalore, Indore (Madhya Pradesh Stock Exchange) and Ludhiana and with OTCEI. The rationale is to merge the exchange business and infrastructure of the exchanges while remaining separate companies. "We have urged Sebi to give us the permission for business consolidation," says Santosh Muchhal, shareholder director, Madhya Pradesh Stock Exchange. "This way CSE will be able to use its 95-year-old infrastructure and also retain employees, brokers and investors." CSE has now approached MCX-SX for a tie-up, but experts say that will not be easy.
CSE was, till the 1990s, one of the most vibrant bourses after BSE, but its bane was its reputation as an operators' hub. In 2007, BSE picked up 5 per cent stake in the Kolkata bourse, hoping to modernise its technology in order to use it as a training center for other activities, but the plan did not fructify. In its election manifesto for the 2011 West Bengal assembly polls, the Trinamool Congress had promised to revive the exchange, but as yet the government has done nothing of the sort.
Fallback options
Despite NSE and BSE virtually monopolising the securities business, Sebi took no measures against the regional stock exchanges. It felt that they could attract new investors into the capital market because they were present in areas where the investment culture for equities needed to be developed. Such hopes dipped after the 2008 slump in the equities market, leading ultimately to Sebi putting the regional stock exchanges on notice in 2012.
Muchhal says the Madhya Pradesh exchange has sought the help of Kirit Somaiyya, Bharatiya Janata Party's Lok Sabha member from Mumbai and convener of the party Investors'Cell. Somaiyya accordingly met Sebi Chairman U K Sinha on Monday on behalf of the regional stock exchanges.
One option for the outgoing exchanges is to reinvent themselves. As Rajnikant Patel, former managing director of BSE, says, "Subject to Sebi permission, these stock exchanges can survive by converting themselves into SME (small and medium enterprises) exchanges."
But regional stock exchanges are more likely to venture into real estate and financial services. Bangalore will focus on real estate as will Indore, which, according to Muchhal, has a net worth of Rs 25 crore, including reserves, and 5,000 square feet of trading floor and a fully furnished office. Most others too have real estate plans. These are likely to be finalised over the next few days when their general body meetings are held and their prospects after losing their stock exchange licences considered.
Already, Rajkot-based Saurashtra-Kutch Stock Exchange earns rent income from its properties, apart from the income from its stock market subsidiary that trades on the national exchanges. Vadodara has Rs 70 crore worth of real estate and CSE has several properties, including a plot allotted by the government. The 120-year-old Ahmedabad exchange logs a profit of Rs 3-4 crore on revenues of Rs 7-8 crore from rental, listing fee and interest.
Besides real estate, the regional stock exchanges may also venture into financial services. The Gujarat-based exchanges will in all likelihood be converted into financial companies, according to an executive of one of the exchanges. As for the Bangalore Stock Exchange, its executive director, Manjit Singh, says, "Once Sebi approves our exit application, we will convert the company into a non-stock exchange company and continue with other activities." In Chennai, Madras exchange insiders say the body will probably continue to transact business in other financial services, including as a depository participant.
SEBI'S SALVAGE PLAN FOR LOCALLY-LISTED COMPANIES
Now that most regional stock exchanges want to down the shutters on the stock business, the most significant task for Sebi is to provide an exit route to the listed companies and investors in the exchanges. Around 4,000 companies are exclusively listed on these exchanges, with Ahmedabad the biggest with 2,100 companies. Even today, 7-8 per cent each of the total cash segment volumes on national exchanges comes from Kolkata and Ahmedabad.
Sebi has offered incentives to companies exclusively listed on these regional exchanges to move to the main exchanges, including quick and smooth listing and a special cell to take care of procedures. If the companies prefer to delist instead, the national exchanges will facilitate reverse book building for voluntary delisting. As incentive for delisting, companies will be exempted from minimum public shareholding norms and other legal responsibilities.
Sebi has, however, warned that companies whose trading and other details for last three years are unavailable could be investigated for being vanishing companies.
(Namrata Acharya, TE Narasimhan, Mahesh Kulkarni, Vinay Umarji, Sounak Mitra and Shashikant Trivedi contributed to this report)
