India now has some 18 stock exchanges which remain recognised as exchanges by the regulator even though only 2 (NSE and BSE) have operational activity, of which the BSE has been in a steady state of decline for the past decade. With 16 defunct exchanges, someone should have answered the question why do they still exist as legally recognised entities? The answer is broadly political and partly economic.
Many of the exchanges have subsidiaries which act as brokers on the main exchange (BSE/NSE), with its brokers acting as sub-brokers of the main exchange. These are in fact doing very well - last known statistics, if I recall right, 17% of the total national turnover came from these sub-brokers. With such success it will of course be wrong headed to close these centres of commerce down - however, one must recognize that these are functioning as brokers and not as exchanges. While the right to create broking subsidiaries, was a special regulatory dispensation, there have also been some regulatory bottlemecks to closing down the main exchange while allowing the subsidiaries to continue, as the existence of the parent was a condition precedent to operating these subsidiaries. Thus SEBI needs to tweak its regulations to allow closure of the parent without affecting the business of the subsidiary.
The political problem is more serious and is connected to the right of the government to extract revenue from the exchanges. Here there are two issues, one relating to properties (specially land and building) of the exchanges, many of which are worth astronomical amounts at today's prices, and the other relating to tax ememption status of several of the exchanges. A few of these properties were given at subsidised prices by the government, though a vast majority were acquired at market price. The resolution of the issue is simple in the latter case, where properties were acquired at market prices by the exchanges, the members should be given the right to sell the property or use it in the manner they choose, after the exchange is de-recognised (it continues as a limited company). Where the property is given at subsidised rates, the market price minus purchase price should be divided equally between the exchange and the government - it is a small price to pay for derecognition. Particularly, the mischief which occurs on several of the exchanges because of the benefits of capital gains exemption to name but one. Also tens of millions of rupees were lost on corporatisation and demutualisation of these defunct exchanges.
Any tax breaks and exemptions need to be ignored and the members of the present exchanges should be permitted to keep the properties and run the business as a limited company (derecognised as an exchange) so long as they don't misrepresent their former exchange status for their benefit. This will clearly have to be a decisive governmental decision and is the only right thing to do.
See a copy of the SEBI Report of the Committee to Study The Future of Regional Stock Exchanges (RSEs) – Post Demutualisation of which I was a part.
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