Chennai: The stock-market regulator has asked regional stock exchanges to divest stakes in brokerage subsidiaries, a demand that will likely cut off a key source of income for exchanges that are already struggling to grow.
The Securities and Exchange Board of India (Sebi) is of the opinion that the exchanges cannot also function as a stock broker, according to two South-based senior officials of regional stock exchanges.
The decision would cut off one of the major revenue streams for the small exchanges, many of whom have successfully developed a broking business. These brokerage subsidiaries currently contribute to a tenth of the total trading volumes in bigger national exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The only other significant income the regional bourses have is from listing fees from companies that are listed on them but even that revenue is sharply down as well in recent years as trading on small exchanges diminishes.
Sebi “has asked us to shut down the broking subsidiary,” confirmed a top official at the Madras Stock Exchange, who declined to be named. “We are in the process of disinvesting the stake in the broking subsidiary.”
The Cochin Stock Exchange has also decided to divest its stake in wholly-owned broking subsidiary Cochin Stock Brokers Ltd. “Cochin Stock Exchange will sell its share in the broking subsidiary along with its demutualization plan,” said Mathew Thomas, chief executive officer of Cochin Stock Brokers.
It was not immediately clear what the other regional exchanges were planning to do in order to comply with Sebi’s request.
Regional exchanges were in 1999 permitted to set up wholly-owned broking subsidiaries as a sop to earn additional income and offset loss of business to bigger stock exchanges. Sebi also has been pushing stock exchanges in India to transform themselves into joint stock companies from trusts and societies, or demutualize, and has set a 2007 deadline.
According to a Sebi-appointed committee to look into the future of regional stock exchanges, NSE and BSE account for almost 100% of the total turnover out of the 22 recognised stock exchanges in India. Other than the Delhi and Calcutta stock exchanges, there is no trading in any of the other regional stock exchanges.
“There is no trading taking place in regional stock exchanges,” said M. Amarnath, managing director of Patterson & Co., an MSE member. “There can be a future if they focus on niche products like the electronic exchanges in the US.”
Amarnath, who was once an official of Madras exchange, said his stock brokerage firm had stopped trading on the exchange since 2003 and had obtained membership from BSE. It is only those who cannot afford BSE membership that are still trading through the Madras exchange’s brokerage subsidiary, Amarnath said.
There has been no trading in the Madras exchange for more than a year, so earning from the broking business is the main source of income.
Annual trading from the subsidiary is around Rs1,400 crore and profits from that business are used to cover the operational expenses of the exchange.
The MSE board has approved a plan to divest the stake in the subsidiary and offer it to its members. If members do not subscribe to the offer, the remaining stake in the broking unit will be sold to other investors.
In the case of Cochin Stock Exchange, Mathew said a final decision on the modalities of the sale was not made. At present, the broking subsidiary, which has 120 members, does around Rs22 crore of trade every day and is making profits.
Aparna Harish contributed to this story.