Odds rise for small bourses

DEMUTUALISATION DRIVE

With pressure mounting on 18 regional exchanges to demutualise, some bourses have decided to shut shop, while others are going in for demutualisation - leading to an eventual consolidation.

The regional exchanges plea for extending the demutualisation deadline has been rejected, said a source. The Sebi had issued regulations for the demutualisation for 19 stock exchanges in November 2006.

Demutualisation involves bringing down the brokers' stake in exchanges to a minimum of 49 per cent from the existing 100 per cent and the deadline for the regional stock exchanges to complete the process was August-September 2007.

"The process of consolidation looks inevitable. Some of them will be willing to exit from being an exchange, if the government permits, and those which decide to remain will demutualise and consolidate eventually," said V Ramu Sharma, chairman of the Federation of Indian Stock Exchanges.

Last Saturday, representatives from 14 regional exchanges met in Mumbai and decided to meet with the capital markets regulator, the Securities and Exchange Board of India, and the concerned government officials to inform them of the outcome of the meeting.

The exchanges, which are contemplating liquidation, will soon holding a meeting of their respective boards and shareholders for approval before approaching the regulator.

Almost all regional exchanges are battling for survival and this is hindering potential strategic partners or investors.

Recently, the oldest bourse in the country, the Bombay Stock Exchange sold 51 per cent stake to a clutch of investors and to two strategic investors Deutsche Boerse and Singapore Exchange before its demutualisation deadline.

However, the issue of subsidiaries of regional exchanges and how demutualisation should be tackled for them was not much discussed in last Saturday's meeting.

Currently the subsidiary of Pune and Ahmedabad are scouting for financial partners. At present, 14 exchanges have their own subsidiaries. Even if these exchanges liquidate, their subsidiaries can still continue as a limited company, said sources.

As per the Securities Contract (Regulations) Act (SCRA), which was amended in 2004, assets of the exchange cannot be distributed. Although turnover of most regional exchanges is paltry, even if these exchanges are liquidated, they are not allowed to sell their assets (real estate and miscellaneous assets) as per the Act.

Market watchers say, consolidation of regional exchanges will give them the advantage of a large network size and will also enable them to get a good response from foreign entities.

At a recent meeting with the FISE, Sebi officials had categorically cautioned the exchanges against offloading shares of exchanges to fake entities or benami single individual entities.

In the discussion with the Sebi, some exchanges such as Bangalore and Ahmedabad have proposed setting up of a common network.

Earlier, the regional exchanges were exploring a two-pronged method to put together a viable business model. One is the possibility of being the trading arms of BSE and NSE. The other is to come together to form a separate trading platform for small and medium enterprises.