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Home / Market / Stock-market-news /  Exit plan of regional stock exchanges may drag on

Mumbai: The process of shutting defunct regional stock exchanges (RSEs) is expected to drag on for months as brokers affiliated to such exchanges owe nearly 100-120 crore in unpaid registration and annual fees to the capital markets regulator.

An exchange has to pay the Securities and Exchange Board of India (Sebi) in case of a default by a trading member, a rule that many regional stock exchanges are reluctant to accept.

The outstanding dues are likely to become a contentious issue between the RSEs and the regulator, as the bourses will not readily accept the entire liability of the brokers, and will demand certain relaxations, said three people familiar with the ongoing process of derecognition of RSEs. All three declined to be identified.

A final approval from Sebi, allowing regional exchanges to shut, will be subject to the payment of all the outstanding dues, they said.

According to the Sebi circular issued in May 2012, “the exchange will be liable to make good any shortfall in collection of dues of the brokers to Sebi".

“The exit procedure is much easier said than done as Sebi cannot waive the dues. There are instances where broker members have challenged Sebi on this count and Sebi has opposed any kind of waiver. Some cases have gone all the way up to the Supreme Court," said one of the people cited above.

It is not possible for Sebi to waive the dues, said the second person cited above, adding that most exchanges have enough land bank to meet such liabilities.

On 20 May, Mint had reported that 15 RSEs have opted to exit after failing to meet the net worth and trading norms as laid down by the regulator. While 11 have already submitted their exit applications to Sebi, the boards of four other exchanges will be meeting later this month to consider the resolutions related to closure of business.

“If an exchange wants to wind up all businesses, naturally it has to first pay off all the dues and liabilities like any other company. Once an exchange gets derecognized, till the time all its dues and liabilities are paid off, it can continue as a normal company with other businesses such as DP (depository participant) or broking, but cannot act as a stock exchange," said the second person cited above, who is familiar with Sebi’s stance on the matter.

Ramanatha Kotagal, managing director of Madras Stock Exchange, declined to comment.

Email queries sent to other regional exchanges remained unanswered.

According to Sebi data, barring Calcutta Stock Exchange, none of the RSEs clocked any turnover in the last four financial years, starting 2010-11. Even CSE has seen its turnover drop to zero from financial year 2012-13 onwards, according to the Sebi bulletin.

Meanwhile, the dues in many cases have been accumulating ever since the exchanges were created as many members did not pay the required fees because of the absence of any sizeable business.

“The huge outstanding has been accumulated as many broker members did not pay the required fees for many years as there was hardly any business that was conducted on the exchanges. The rules, however, are clear that fees have to be paid irrespective of the business," said the third person.

It is difficult for Sebi to give any kind of relief as it will set a dangerous precedent, which could be exploited by other entities in the future, according to J.N. Gupta, managing director of SES Governance, a corporate governance advisory.

“Sebi will not relent as it has made a law and the regional exchanges have to abide by that. The exchanges can challenge it if they want but the regulator will not blink its eye," said Gupta.

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