Home / Opinion / Will BSE Ltd get listed?

BSE Ltd, India’s oldest stock exchange, is eager to list its shares. Its regulator, Securities and Exchange Board of India (Sebi), has made it clear that it supports the listing of stock exchanges. Still, the proposed listing of BSE is taking longer than expected. What gives? Interestingly, recent news reports and discussions on the matter suggest that listing of stock exchanges can’t yet be taken as a given.

The Financial Chronicle newspaper first reported about a bizarre requirement that BSE must ensure every investor that buys its shares must be fit and proper. CNBC TV-18 then listed six reasons why BSE’s initial public offering is getting delayed.

It’s difficult to believe that Sebi is putting up all these barriers. Only 18 months ago it issued the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012, which expressly provided for listing of stock exchanges. It’s important to note here that while Sebi had accepted most of the recommendations of the Bimal Jalan committee on ownership and governance of market infrastructure institutions, it overruled the suggestion on disallowing listing of an exchange’s shares.

Not only that, less than a month ago, Sebi chairman U.K. Sinha stated at a conference that he believes that the diversification of shareholding that comes from listing will lead to better checks and balances and better corporate governance. He was responding to an article by Vijay Kelkar, chairman of the 13th Finance Commission, which said that listing will aggravate the conflict of interest between an exchange’s regulatory and business roles.

The conference was held to discuss a book titled An Agenda for India’s Growth: Essays in Honour of P. Chidambaram. It’s interesting to note that Kelkar thought it appropriate to elaborate his thoughts on the listing of stock exchanges (among other things) in his contribution to the book; and that Sinha chose to provide a counter view on the occasion. Clearly, even though it seemed like Sebi had sealed the decision with the SECC 2012 regulations, it looks like the last word on the issue has not been said.

There is still discomfort in some quarters of the finance ministry about the idea of having a stock exchange list its shares, according to a person who declined to be named. The National Spot Exchange Ltd fiasco as well as discoveries of trading by group firms on Multi Commodity Exchange of India Ltd has only increased the concerns of some policymakers. In this backdrop, it’s quite likely that Sebi will tread with caution. In fact, Sinha said he fully endorses Kelkar’s view that, given the fear of unknown unknowns so far as listing of stock exchanges goes, it makes sense to proceed with caution.

Needless to say, the prolonged wait for BSE’s shareholders has become painful. The exchange got demutualized six-and-a-half years ago, and back then the demutualization scheme had envisaged listing of its shares. Since then the exchange has sold shares to financial investors as well as some overseas exchanges. To go back on the listing decision will be a huge policy flip-flop.

Instead, policymakers should work swiftly to address concerns about conflicts of interest. It’s recognized world-over that there are inherent conflicts of interest between the regulatory and business roles of exchanges, and one of the best ways to address this is to hive regulatory roles of an exchange to a non-profit organization. One option, of course, is to hive some of these roles to the regulator itself.

In fact, Sebi has envisaged that the listing regulator for a stock exchange will be the competing stock exchange on which it decides to list. But this can also result in problems. As Andreas M. Fleckner of the Max Planck Institute for Comparative and International Private Law says in a paper titled Stock Exchanges at the Crossroads: “To the well-known principle ‘No one shall judge his own cause’, we might add another idea, ‘No one shall judge a competitor’s cause’. The reasoning: If one passes judgement on a competitor, it will affect her own position in the competition and therefore bias her judgement."

Sebi’s current policy of addressing these conflicts by applying Chinese walls between the regulatory and business departments is woefully inadequate. Also, Sinha’s statement at the conference, that listing leads to better corporate governance, is true for all companies except stock exchanges. Market infrastructure institutions are different animals and must be treated differently. Listing can lead to increased pressures on the exchange’s management to focus on growing revenues and profit. One can argue that these pressures already exist because of the presence of financial investors, and that it is also evidenced by the intense battle for market share by exchanges. But needless to say, listing results in an increased focus on financial performance.

There’s no reason why Sebi can’t work towards the separation of regulatory roles either to itself or to a non-profit organization whose creation is initiated by the regulator. Once this structure is in place, exchanges can be free to chase profit maximization and keep its shareholders happy. The current regulations even have a requirement to transfer a large part of an exchange’s profit to a fund, resulting in an artificial cap on profit. Each of these issues can get addressed with the above-mentioned solution.

Your comments are welcome at inthemoney@livemint.com

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