Sebi sets high barrier for exchanges wishing to list

Rejecting a significant recommendation of the Jalan Committee report, the Securities and Exchange Board of India (Sebi) has allowed exchanges to list — but made it really tough to do so.

An exchange, it said, can list once it has set up a mechanism to settle conflicts of interest and after three years of Sebi granting an approval to set up the exchange.

However, exchanges can’t list on their own bourses.

Depositories have also been allowed to list themselves, while clearing corporations have not, on account of their risk-bearing role. They bear the risk of payment and delivery by providing a guaranteed settlement of all transactions on the exchange.

The regulator also set minimum net worth at Rs100 crore for stock exchanges and depositories and Rs300 crore for clearing corporations.

Other guidelines include not allowing a single investor to hold more than 5% in these institutions with some exceptions for large financial institutions.

In November 2010, a committee headed by former Reserve Bank of India governor Bimal Jalan recommended that such institutions should neither list nor make super-normal profits.
The latest release asks exchanges to transfer 25% of their profits to the Settlement Guarantee Fund of the Clearing Corporations where their trades are settled. Depositories would also have to transfer a fourth of their profits, this time to their Investor Protection Fund.

Various exchange officials that DNA Money spoke with reacted to the rules with disappointment.

“The transfer of profits is set at a pretty steep figure. This will make exchanges unattractive as investments,” said one person.

The regulator has said that it would form a Conflict Resolution Committee consisting majorly of external and independent members to deal with all issues of conflict of interest, a key point raised against listing by the Jalan committee.

However, exchange officials said the conflict of interest would still exist.

“This process of creating Chinese walls has seldom worked elsewhere in the world,” said one person.

Departments in charge of trading, listing and member regulation would follow a dual reporting structure where they would report to an independent committee of the board of the stock exchange as well as to managing director or chief executive officer.

Both clearing corporations and exchanges would not have trading or clearing members on their boards. They can, however, form an advisory committee whose recommendations would be considered by the Board.

Sebi has also curbed the compensation of exchange heads.

The variable pay component, such as a performance bonus, will not exceed one-third of total pay. Of the variable pay, 50% will be paid on a deferred basis after three years.

Employee stock option scheme and other schemes which would include an equity component cannot form a part of the packages of key management.

Ravi Narain is the highest paid exchange head with a salary pacakage in excess of Rs6 crore, including a portion based on the exchange's profits.

Madhu Kannan of the BSE and Joseph Massey of MCX-SX get around Rs2 crore each. Joseph Massey also has an equity component as part of his compensation.

Sebi would need to approve pay packages which are to be based on the principles of sound compensation practices issued by international fora like Financial Stability Board.

Additionally, the compensation policy may have ‘clawback’ arrangements, which would allow exchanges  to ask for it to be paid back in special circumstances.

The limits on compensation would affect exchanges’ ability to attract talent, according to industry officials.

“It will become like a PSU (public sector undertaking). Who will want to come to such an organisation where pay would be limited?” said one person.

The regulator also clarified on the exit policy for stock exchanges where trading is limited or non-existent.

Those where the annual trading is less than a Rs1,000 crore can voluntarily exit. Those that are unable to do so within two years will face compulsory de-recognition.