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Home >Opinion >For 2015, BSE’s wish remains the same as last year

We may be in a new year, but are discussing the same old issues. BSE Ltd has reportedly sought exemptions from the government to smoothen out its listing process, an issue that was last heard over a year ago.

In December 2013, this column had discussed (http://bit.ly/1Keb7wu) some of the reasons behind the delay in BSE’s proposed initial public offering (IPO). It had seemed strange back then that the planned IPO was facing regulatory hurdles, despite Securities and Exchange Board of India’s (Sebi’s) apparent support for the listing of stock exchanges. Soon, it’ll be three years since the capital market regulator changed rules to permit listing of exchanges, but there’s still no clarity whether Indian policymakers are comfortable with the idea.

One of the reasons for the delay in BSE’s listing was a bizarre requirement that an exchange must ensure every investor that buys its shares meets the regulator’s “fit and proper" guidelines. It’s one thing to provide such assurances when you are a private company, and the number of investors that need to be vetted are few and far between, but quite another to expect a company to issue fit and proper certificates to all the investors that will be allotted shares in its IPO. And considering that the shares would quickly change hands post listing, the “fit and proper" requirement is essentially one that is designed to make it impossible for an exchange to list. Some of the other exemptions sought by BSE are listed in this story (http://bit.ly/1tCQNKA) by CNBC-TV18.

One of the main reasons for policymakers’ aversion to the listing of stock exchanges is that it will cause profit maximization to come to the forefront of the exchange management’s objectives, which can consequently result in the regulatory role taking a backseat. Some market microstructure experts have argued, on the contrary, that the increased scrutiny that comes by being a publicly listed company will result in better corporate governance at exchanges.

Be that as it may, listing of exchanges poses another challenge in the current regulatory environment. As things stand, if BSE lists, it is likely to list on its rival National Stock Exchange Ltd, which will act as its listing regulator. While this is better than being listed on its own platform, it is far from being desirable, especially in the backdrop of an acrimonious relationship between the two exchanges.

The best scenario will be where the listing regulation role is taken out of stock exchanges and placed with either the market regulator, as is the case is some developed markets, or with an independent entity.

Similarly, as has been pointed out in this column on various occasions, it is high time Sebi started work on moving other regulatory functions such as market surveillance out of stock exchanges. It had spoken of this in mid-2012, but there’s been no mention of this since. Once the regulatory roles of stock exchanges are hived out, there will be little or no reason for any concerns if exchanges chase profits. In fact, they will be free to do so with gusto.

One may argue that expecting such a utopian state is unreasonable and may result in endless delays in BSE’s listing process. But consider that there has already been an unusually long delay, with no sight yet of a resolution.

The regulator hasn’t yet amended its rules, or provided any of the exemptions that BSE has sought for over a year. It’s not surprising that BSE has repeated its wishlist at the dawn of the new year. Also, as pointed out in this column earlier, while Sebi may well be open to the idea of exchanges listing, the ministry of finance seemed to still have apprehensions. According to a Press Trust of India report, BSE has approached the government to consider giving the exemptions as part of its budget making exercise.

Interestingly, the report suggests that BSE has now asked for exemptions from tougher regulations applicable to companies going public, since functions of exchanges are different from those of companies. While exemptions from bizarre requirements such as the “fit and proper" clause make sense, it doesn’t make sense to exempt exchanges from any of the normal requirements for listing. On the contrary, exchanges should ideally provide more information than others, considering the fact that they are ones who are the regulatory authority for listing.

The report adds that BSE has suggested a change in ownership rules, allowing a 15% ownership for international exchanges, just like domestic banks and financial institutions. Since these exchanges are widely held institutions themselves, there’s no reason why they can’t be allowed a higher shareholding, even under the prevailing market structure. It must be noted after having entered India with much fanfare in 2007, NYSE Group exited its investment in NSE after only about three years. A higher stake will act as an incentive in attracting quality investment in the exchange space.

All told, the government and Sebi must act on these issues soon, rather than leave them unresolved for another year.

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