BackListing of stock exchanges: India’s policy stance gets rightly slammed
The government and Sebi should act soon before the chorus gets louder
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It’s over three years since the Securities and Exchange Board of India (Sebi) notified new rules permitting listing of stock exchanges. BSE Ltd has tried its utmost to list since then, but to no avail. It’s natural that its investors are getting impatient.
They have started questioning the government’s policy on the issue, which unfortunately made for poor commentary at a time when finance minister Arun Jaitley was visiting the US to assuage concerns of long-term investors. The government and Sebi should now soon address its concerns about listing of stock exchanges, before further damage is done.
For perspective, two investors, with a cumulative stake of 9% in BSE, wrote to press the issue with the finance minister during his nine-day visit to the US, The Wall Street Journal reported. One of them, Thomas Caldwell of Caldwell Securities Ltd, was quoted in the article saying, “With all due respect, India is a master of obfuscation. My suspicion is that there is a bias against an exchange going public."
It’s hard not to come to that conclusion. Even though on paper exchanges can list, for all practical purposes they can’t. For instance, Sebi’s rules include a lopsided requirement that an exchange must ensure that every investor that buys its shares must be “fit and proper". It’s one thing to ensure this for an unlisted entity, where share transfers are few and far between. For a listed entity, where shares change hands every few seconds, compliance will be impossible.
The Forward Markets Commission (FMC), which will soon be merged with Sebi, is ahead of the curve on the issue. It already regulates a listed company, Multi Commodity Exchange of India Ltd (MCX), which has to worry about the fit and proper status of only those shareholders who own more than 2% in it. Ahead of the merger, Sebi will have to decide whether and how it will bring uniformity between commodity exchanges and stock exchanges. It’ll be odd to have two separate policies under the roof of one regulatory body, and it may have to choose one way or the other. FMC’s solution on the fit and proper issue certainly looks reasonable. In any case, to suddenly pull the plug on MCX’s listing status will be disruptive, and this thankfully doesn’t seem to be on the discussion table.
Another concern some policymakers have had is about the venue of listing. J.R. Varma, a professor at the Indian Institute of Management-Ahmedabad, articulates the problem well in a blog post, “There are stock exchanges elsewhere in the world that are listed on themselves; this appears to me to be as absurd as a snake swallowing its own tail. Of course, the alternative of a stock exchange listing on a rival exchange is only slightly less laughable. Some countries have shifted the listing function into an arm of the regulator itself and I think there is much to commend such a move."
But it seems that the shifting of the listing function to the regulator is nowhere on the cards. Should this mean that Sebi’s decision on listing gets further prolonged? The regulator can offer to oversee compliance of listing guidelines for only listed exchanges, rather than taking on this compliance function of all listed companies.
There are some other roadblocks, such as a requirement that directors on the board of a stock exchange cannot be directors on the boards of other companies listed on this exchange. The idea is to prevent any conflict of interest. Similarly, there are concerns that listing can lead to increased pressures on the exchange’s management to focus on growing revenues and profit. But there are ways to address such conflicts. One way, for instance, is to separate the regulatory role of exchanges and place it with either the regulator or a non-profit organization. To indefinitely postpone listing of exchanges citing such concerns reflects poorly on India’s policy making prowess.
About 10 years ago, when BSE’s demutualization scheme was notified by Sebi, it was made clear that its shares will eventually be listed. Later, when shares in National Stock Exchange of India Ltd changed hands, and some global private equity investors came in, the assumption was that the shares would eventually list.
The fact that there have been roadblocks since is, in effect, a huge policy flip-flop. What has made things worse is Sebi’s express approval for listing in 2012, which, as things have turned out, looks good only on paper.
Besides, Sebi’s new rules in 2012 included a cap on an exchange’s profits, with 25% of its profits getting transferred to a separate fund for investor protection. As one expert in market infrastructure put it, this effectively resulted in exchange shares becoming like quasi bonds. Now, with the endless delay in listing, these short-changed investors are pretty much being denied an exit as well.
As pointed earlier, Caldwell’s ire is understandable. The government and Sebi should act soon before the chorus gets louder.
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