30 December 2008

Exit opportunities for regional exchanges

Finally, SEBI has given regional stock exchanges (RSEs) who don't have a business model to de-recognise themselves as exchanges. The exchange would continue as companies and can be engaged in any business they like. The circular is nearly comprehensive and handles all the important issues and does an excellent job in terms of covering some of the grey areas in an equitable manner and also a practical manner.

The most important part of this circular is the opening line which says "As per the said guidelines, such RSEs (or their successor entities) may be permitted to retain movable and immovable assets and to deal with such assets as they deem fit subject to compliance with the following conditions:" It then sets aside certain sums on an equitable basis like the Investor Protection Fund. Most importantly, it permits the exchange to continue to act as brokers of NSE and BSE and gives certain regulatory comfort that the brokerages (which are in fact doing very well) can continue even after the exchanges are derecognised as exchanges. Companies exclusively listed on such exchange must either move to another exchange or take steps to delist.

The most contentious part of the condition is the distribution of assets of the exchange. Many exchanges wanted special dispensations like income tax exemption, stamp duty exemption on voluntary withdrawal of recognition and subsequent distribution of assets to its members. On the other hand, many in policy making thought of derecognition in the other extreme - of extracting a special tax since many exchanges have enjoyed tax breaks and some have enjoyed purchase of concessional lease/land rights. The current circular is a good middle path, neither giving a special dispensation, nor making it monetarily unattractive to derecognise as an exchange. I have always thought, that giving up some of the rights of the government would enable some of the RSEs to derecognise themselves, because many are providing a massive regulatory burden without any benefits to anyone. I am glad a good path has been found and hope many of the RSEs will now take this opportunity to derecognise.

To see the history and issues of regional stock exchanges see my previous posting here.

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