De-recognition of Stock Exchanges

Published on Mon, Jul 30,2012 | 12:20, Updated at Mon, Jul 30 at 12:26Source : Moneycontrol.com

By: Rushab Dhandokia, 3rd Year Student, Institute of Law, Nirma University

A "speaking" circular issued by the capital market regulator; SEBI on 30th May, 2012 has arose tremendous negative sentiments amongst the stakeholders of regional non-operational Stock Exchanges.

The circular titled- Exit Policy for De-recognized/ Non-operational Stock Exchanges in particular provides the process for a de-recognized or Non-operational stock exchange to Exit from its operations.

Prima Facie what appears is that the market watchdog is keen to provide a robust and an expeditious process to dilute the existence of non-operational Stock Exchanges in the country.

This write-up aims at briefing basically on the following-

a) The Exit route, for exchanges as prescribed by SEBI
b) The road forward for those companies exclusively listed on such exchanges
c) Fate of the members trading on an exiting exchange
d) Treatment of the assets of the de-recognized stock exchange

a) The Exit route, for exchanges as prescribed by SEBI

SEBI through this circular has provided for 2 ways on how an exchange can get itself de-recognized and exit from its operations.

i) Voluntarily and ii) Compulsory de-recognition
The benchmark that the regulator has set is that an exchange should have an annual trading turnover of Rs. 1,000 crores in a given year, on its own platform.

This means that an exchange having turnover less than the prescribed amount will either have to voluntarily shut down its operations or else SEBI would compulsory proceed to close such exchange if it does not apply for getting itself de-recognized and close down within 2 years from the date this circular was issued.

And for already de-recognized stock exchanges, time period to apply for exit is 2 months from the date of this circular or else it too shall be subject to compulsory exit process.

b) The road forward for companies exclusively listed on such exchanges

The regulator has precisely provided the process to be carried for companies exclusively listed on such exchange wanting to get itself de-recognized or shut down.

The process is as follows:-
Exclusively listed companies shall get itself listed on any other recognized stock exchange. So much so in order to protect the interest of the investors of such companies, it has asked the recognized stock exchanges to carry out changes to their listing agreement criteria.

The question that arises at this point is that- what in case of the company fails to get itself listed on another recognized stock exchange?

The regulator has provided complete clarity on this point saying that- "The exclusively listed companies, which fail to obtain listing on any other stock exchange, will cease to be a listed company and will be moved to the dissemination board by the exiting stock exchange. Therefore, in the interest of investors of exclusively listed companies, a mechanism of dissemination board will be set-up by stock exchanges having nationwide trading terminals."

The circular has in detail laid down the features of the dissemination board.

c) Fate of the members trading on an exiting exchange

In case of de-recognition of a stock exchange, the exchange may provide trading opportunity to their trading members to trade on stock exchanges having nationwide terminals through their subsidiary company, which will function as normal broking entity in terms of SEBI circular dated December 29, 2008.

In case of de-recognition, subsidiary company shall continue to function as broking entities in compliance of, inter alia, the provisions of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.

In case of de-recognition, the MoU mechanism, if any, between a stock exchange not having nationwide trading terminal and a stock exchange having nationwide trading terminal, shall be discontinued and in such cases the trading members of erstwhile stock exchanges will gain access to exchanges having nationwide terminals through membership of the existing subsidiary company.

d) Valuation and Treatment of the assets of a de-recognized stock exchange

It has been stated that SEBI shall appoint a valuation agency exclusively for the purpose of valuing the assets of the exchange.

The circular has listed down few conditions before the quantum of the assets are distributed, namely-

1) The exchange should have paid the statutory dues.

2) Up to 20% of its assets after paying tax (depending upon the governance standards of the stock exchange and estimation of future liabilities) shall be contributed towards SEBI Investor Protection and Education Fund (IPEF) for investor protection and in order to cover future liabilities.

3) The exchange shall transfer Investor Protection Fund, Investor Services Fund, 1% security deposit available with them to the SEBI IPEF. The 1% security deposit shall subsequently be returned to the issuer company in due course on satisfying the prescribed conditions.

It should be noted that this circular is in addition to the circular that was issued by the regulator on- December 29, 2008. Therefore apart from the above mentioned conditions other conditions too would be applicable.

Conclusion
Well, this may be an important step taken by the regulator to streamline and put in order the number of exchanges operating in the country; however it has generated a cloud of negative sentiments amongst the stakeholders of such exchanges. It has been stated in the press quoting Gaurang Dalal, public investor and member broker of Ahmedabad Stock Exchange that- "This is backstabbing the investors. Five years back, before de-mutualisation of stock exchanges, the regulator had promised us that the regional stock exchange will get listed in future and we will get our money back. So we had invested in it. Now the exchanges have no option but to close and we will lose our money. This is nothing abut SEBI backstabbing public investors of regional stock exchanges,"