04 August 2009

Is RBI running an illegal exchange?

In a somewhat cryptic Board agenda note of SEBI, the securities regulator seems to be suggesting that the RBI is running an illegal exchange under the Securities Contracts (Regulation) Act 1956"

4.6 The stock exchange under the law is a body corporate under the Companies
Act for the purpose of assisting, regulating or controlling business of buying,
selling or dealing in securities. Thus, all corporate intermediaries in securities
market, all of whom assist in dealing in securities may be termed as stock
exchanges while the Negotiating Dealing System (NDS) which provides
trading platform for Government securities is not. Therefore, it is proposed
that the definition of the ‘stock exchange’ may be amended as –
“ the stock exchange means any arrangement which provides a market place
or facility for trading of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange.”
It may also be clarified that all the new stock exchanges shall be corporatized
and demutualized.

To give the context, RBI has set up the Negotiated Dealing System, which is an electronic exchange with monopoly rights to enable order matching trades in government securities. While the system is conflicted for the RBI which acts as the market player and also the regulator, SEBI seems to be indicating its power to regulate all stock exchanges in the country. As the RBI has not registered the NDS with SEBI as a stock exchange, it could amount to running an illegal stock exchange and SEBI seems to be indirectly asserting that - though it is not directly taking on RBI head on. Technically, it seems the NDS is in fact an illegal exchange. Under the Act, S. 2(h) defines securities and the definition includes government securities. A stock exchange is defined as any body which is formed 'for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities'. S. 19 prohibits the running of a stock exchange without registration and S. 23 provides for penalties for running a stock exchange without recognition.


Sankt Ingen said...

Nice noticing. I just have a little different point of view.

Anonymous said...

Section 28, subsection (a) states that SCRA is not applicable to RBI and other Govt. authorities governed by a separate law

In this case, SEBI can only try and redefine definition of securities in SCRA