Home / Opinion / Sebi inundated with stock exchange applications

Shareholders of Financial Technologies (India) Ltd or FTIL heaved a sigh of relief after Securities and Exchange Board of India (Sebi) renewed the license of MCX Stock Exchange (MCX-SX) for the fifth time last week. The exchange is yet to meet the regulator’s shareholding guidelines because of which it only gets conditional approval for one year at a time. This time around, because of a large default in National Spot Exchange Ltd (NSEL), an exchange promoted by FTIL, an investors’ forum had asked Sebi to deny MCX-SX an extension.

Sebi’s measured response in the matter has now raised the hopes of a number of aspirants who have always wanted to launch stock exchanges, but had found Sebi’s guidelines restrictive.

The following is a letter from one such applicant.


The Securities and Exchange Board of India

Subject: Letter seeking clarifications on Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012


Sebi’s recent actions clearly display its resolve to foster the growth of India’s stock markets on the back of strong competition. We are a candidate for running a Sebi-approved stock exchange and enhance the competition in the market.

While we have been advised that existing rules are restrictive for new applicants, we are encouraged by your pragmatism in the interpretation of these rules. Before we send in our formal application, we will really appreciate some clarity on the matters stated below.

Shareholding restrictions: We are neither a public financial institution, nor do we have any such entity as an investor in our proposed venture. According to the stated rules, this leaves us only with the option of finding 19 other investors who will buy a 5% stake each in our venture. As you will appreciate, this is nearly impossible. Hence, we propose to start with a 100% stake at launch; of course, with the condition that we will dilute our stake to 5% within a year.

Our underlying assumption here is that even if we fail to do so, Sebi will act in all fairness when our license comes up for renewal. We also understand that there has to be some reasonable limit for license extensions. Therefore, whenever Sebi reaches the end of this limit, will we be permitted to convert our shares into warrants or some such derivative to meet the shareholding norms? Sebi can be assured that we will make our best efforts to dilute our shareholding; although the regulator will also appreciate that the task can be difficult, given the vagaries of the market.

Fraud at one of our group companies: Needless to say, we’ll be the last ones to wish an NSEL-type situation at one of our group companies. However, despite our best attempts to avoid or conceal such a situation, how will our shareholding rights in the exchange be protected, if such an event were to come to light? We do appreciate Sebi’s concerns about abruptly shutting down an exchange, and trust that Sebi can think of a mutually beneficial solution for such an eventuality.

Chinese walls: We are highly impressed by Sebi’s solution to the inherent governance problem of stock exchanges. Resorting to Chinese walls between various teams and committees in an organization is a time-tested and fool-proof mechanism to deal with this problem. Jokes such as ‘there are many chinks in Chinese walls’ are merely that—jokes.

Having said that, we just wanted clarity whether we can expect Sebi to continue its current policy of allowing the exchange discretion to form all such committees and teams.

We trust that Sebi will treat this letter and our future application with the same adventurous spirit it has employed in the recent past. As pointed earlier, we are in complete agreement on the desperate need for competition in the stock exchange segment. An unhealthy focus on other factors will hurt the growth of our markets.


The management team of a now defunct exchange.

Your comments are welcome at inthemoney@livemint.com

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