India: SEBI Nudges Stock Exchanges For Listing

Last Updated: 14 January 2016
Article by Prashant Prakhar, M.S. Ananth and Pratibha Jain
  • SEBI issues clarifications to facilitate Listing of Stock Exchanges in India.
  • SEBI's Circular provides for modalities for monitoring shareholding limits and compliance with 'fit and proper' criteria for all shareholders.
  • Listed Stock Exchanges to ensure that 51% of its paid up equity shares are held by public at all times with the help of necessary systems put in place by the depositories.
  • In relation to the fit and proper criteria, clear distinctions have been made between pre-listing and post-listing scenarios.
  • Necessary mechanisms to be put in place by the Stock Exchanges and the depositories latest by March 31, 2016.

Introduction

Listing of Stock Exchanges1 ("Listing") has garnered considerable media attention.2 To assuage investors apprehensions on being able to exit their positions in Stock Exchanges and to enable listing of Stock Exchanges, Securities and Exchange Board of India ("SEBI") started the New Year with a bang and issued circular dated January 1, 2016 on procedure for ensuring compliances by Listed Stock Exchanges ("2016 Circular"). The 2016 Circular appears to be an effort to smoothen compliances with and to make the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 ("SECC Regulations") more robust. The 2016 Circular prescribes certain additional modalities to be fulfilled to ensure compliance with the provisions of SECC Regulations relating to public shareholding limits, fit and proper criteria for the shareholders and strict adherence to shareholding thresholds.

Issuance of the 2016 Circular is a welcome measure in ensuring transparency and accountability in ownership of Stock Exchanges and should help Stock Exchanges expedite the process for Listing. Listing of Stock Exchanges will help give fillip to the capital market. As per the reports, NSE and BSE have a market capitalization of INR 18,000 Crores (approximately)3 and INR 3,800 Crores (approximately)4 respectively, which is expected to increase manifolds upon listing.

Background

As a result of the compulsory corporatisation and demutualisation ("Demutualisation") of Stock Exchanges mandated by SEBI in 20045 under Section 4A of Securities Contract (Regulation) Act, 1956, Stock Exchanges converted themselves to a demutualised set up in India. Subsequently, in 2006, SEBI issued Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchange) Regulations, 2006 ("MIMPS Regulations") which prescribed regulations pertaining to the manner of increasing and maintaining public shareholding with a minimum of 51% in Stock Exchanges. It further restricted any person from, directly or indirectly, acquiring or holding more than 5% in the paid-up equity capital of a Stock Exchange or from holding more than 1% of the paid up equity capital of a Stock Exchange without SEBI's approval, as a result of which the shareholding patterns of the Stock Exchanges had to be changed accordingly.

MIMPS Regulations enabled Stock Exchanges to raise their public holding either by fresh issue of equity shares to the public through issue of prospectus or through offer for sale or private placements of shares held by shareholders having trading rights. It also provided that where any fresh issue of equity shares or offer for sale to the public was made, an application for Listing thereof shall be made to the same or any other Stock Exchange as per the applicable regulations in compliance with such conditions as may be specified by SEBI.6

Subsequently, in 2012, SEBI issued the SECC Regulations which repealed7 the MIMPS Regulations and put a restriction on the self-listing regime by allowing Stock Exchanges to list only on exchanges other than itself and its associated Stock Exchange subject to prescribed conditions.8 SECC Regulations further allows SEBI to specify such conditions as it may deem fit in the interest of the securities market including those in relation to the transfer of shares held by any person9 and it is in exercise of these powers and to achieve these objectives that 2016 Circular has been issued.

Key Points of the 2016 Circular

a) Public shareholding of 51 % at all times by the Listed Stock Exchange

As per Regulation 17 of SECC Regulations, Stock Exchanges are required to maintain a public shareholding of at least 51% of its paid up equity share capital with individual limit being 5%. Domestic Stock Exchanges, Depositories, Banking Companies, Insurance Companies and Public Financial Institutions are excluded and can hold up to 15% of the paid up equity share capital. SEBI in an earlier circular on Procedural norms on Recognitions, Ownership and Governance for Stock Exchanges and Clearing Corporation dated December 13, 2012, ("2012 Circular") had prescribed certain guidelines with respect to monitoring of such shareholding limits. It required the Stock Exchanges to put in place a monitoring mechanism to ensure compliance with the shareholding restrictions and instructed them or the Stock Exchange on which the shares may be listed, to disseminate on its website, the shareholdings of shareholders belonging to non-public, Foreign Institutional Investor and Foreign Direct Investor category. Upon breach of shareholding limits, they were to intimate the same to SEBI within 7 days.

In light of recent discussions in press surrounding the difficulties that may arise in monitoring the shareholding limits upon the Stock Exchanges getting listed10, SEBI has instructed the depositories to put in place a necessary system to ensure that the shareholding of trading members or their associates and agents ("Non-Public") do not exceed 49%.

Non-Public shareholders shall obtain prior approval of the listed Stock Exchange for further acquisition of shares, once the aggregate shareholding of such shareholders exceed the limit of 45%. In the event of Non-Public shareholders making purchases without the requisite approval, depositories shall have the power to freeze their voting rights and all corporate benefits in respect of such shareholding till the time the same is divested.

b) All shareholders to be 'fit and proper'

Regulation 19 of SECC Regulations states that no person shall 'directly or indirectly, acquire or hold equity shares of a recognised Stock Exchange unless he is a fit and proper person'. In the 2012 Circular SEBI had prescribed that the Stock Exchanges may also lay down any fit and proper criteria without diluting and limiting the principles and criteria laid down in Regulation 2011 of SECC Regulations to ensure that all their shareholders are fit and proper. The 2016 Circular, in an attempt to put an end to the concerns surrounding fit and proper criteria post-listing of Stock Exchanges, has prescribed distinct provisions for pre-listing and post-listing scenario. It states that that Stock Exchanges making public offering before Listing shall include a declaration in the application form for allocation of shares stating that the applicant is fit and proper in terms of Regulation 19 and 20 of SECC Regulations. In the post-listing scenario, the text of the applicable regulation with regard to fit and proper shall be made part of the contract note.

SEBI has also instructed the concerned Stock Exchange and the Stock Exchange where its shares are listed, to undertake all measure to make its investors aware of the requirement of fit and proper criteria and shall notify on their websites that shares of the listed Stock Exchange shall only be dealt by fit and proper persons.

In the event acquisition of share by a person who is found to be not fit and proper, the depositories shall have the power to freeze their voting rights and all corporate benefits in respect of such shareholding till the time the same is divested through a special window.

c) Fit and proper criteria for shareholders holding shares above 2%

Shareholder acquiring paid up equity shares in a Stock Exchange above the limit of 2% or 5% (subject to their eligibility) will have to comply with the aforementioned conditions in addition to the substantive standards set out in Regulation 19(2) and 19(3) of SECC Regulations that provides for SEBI's approval within 15 days of the acquisition above 2% and prior approval of SEBI for acquiring more than 5% of the paid up equity shares. Regulation 19(6) of SECC Regulations requires the shareholders holding more than 2% of shares in a Stock Exchange to file a declaration to the Stock Exchange within 15 days from the end of every financial year that they comply with the fit and proper criteria requirements provided in these regulations.

d) Monitoring of shareholding threshold of 5% or 15% in terms of SECC Regulations

The 2016 Circular provides that depositories shall put in place a mechanism that would ensure that no shareholder of a listed Stock Exchange gets credit of shares beyond 5% or 15%, as applicable. The depositories shall generate an alert when such holdings exceed 2% and monitor the same under intimation to SEBI. Depositories are obligated to inform the Listed Stock Exchange as and when the threshold limits are breached and take consequential action of freezing the voting rights and all corporate benefits in respect of such shareholding till the time the same is divested through a special window.

SEBI, encouraging Stock Exchanges for Listing, has directed that Stock Exchanges submitting an application to SEBI for Listing shall ensure strict compliance with Chapter VII (i.e. Listing of Securities) of SECC Regulations and 2016 Circular. Listed Stock Exchanges, the Stock Exchange where such Stock Exchange is listed and depositories are to ensure that the requirements of 2016 Circular and SECC Regulations are in place by March 31, 2016. Lastly, it has advised Stock Exchanges to make necessary amendments to its bye-laws, rules or regulations, for immediate incorporation of the above compliance mechanism and communicate to SEBI the status of implementation of the 2016 Circular in the Monthly Development Reports to SEBI.

Conclusion

Kania Committee suggested Listing as the next big step after demutualisation and this was reflected in the MIMPS Regulations. However, due to lack of clarity in the regulations and certain concerns raised by the Jalan Committee Listing has not seen light of the day.

SECC Regulations issued by SEBI subsequent to Jalan Committee Report brought out certain key modifications to the regulatory regime. The 2016 Circular has gone further to make the Regulations more comprehensive with substantive and procedural compliances. The 2016 Circular is a clear indication that Stock Exchanges may take advantage of Listing and that SEBI has reiterated its acknowledgement of the benefits of Listing.

The 2016 Circular is also an attempt to strike a balance between operational convenience and compliance with the law in spirit. The modalities provided in the 2016 Circular should go a long way in securing compliance and should also dispel any concerns about how the Regulations will be enforced and pave way for BSE and NSE to apply for Listing.

Footnotes

1 Regulation 2(j) of Securities Contracts (Regulation) Act, 1956

"stock exchange" means—

a) any body of individuals, whether incorporated or not, constituted before corporatisation and demutualisation under sections 4A and 4B, or

b) a body corporate incorporated under the Companies Act, 1956 whether under a scheme of corporatisation and demutualisation or otherwise,

for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

2 http://www.thehindubusinessline.com/portfolio/macro-view/the-exchangelisting-impasse/article7983496.ece; see also http://www.business-standard.com/article/markets/sebi-brings-in-caveat-on-stock-exchange-listing-115122200788_1.html; see also http://www.livemint.com/Home-Page/Z1ppPpjdalX1KM6fA825IP/Sebi-spells-out-compliance-norms-for-investors-of-listed-exc.html

3 http://www.dealstreetasia.com/stories/india-nse-tells-shareholders-it-has-submitted-restructuring-proposal-to-sebi-12915/

4 http://thefirm.moneycontrol.com/story_page.php?autono=4267601

5 based on the recommendations of a committee headed by Justice M.H. Kania ("Kania Committee")

6 Regulation 5 of MIMPS Regulations.

7 Regulation 52 of SECC Regulations.

8 Regulation 45 of SECC Regulations.

9 Regulation 45(2) of SECC Regulations.

10 Supra 2

11 Regulation 20 of SECC Regulations: Fit and proper criteria.

"(1) For the purposes of these regulations, a person shall be deemed to be a fit and proper person if—

a) such person has a general reputation and record of fairness and integrity, including but not limited to—

(i) financial integrity;

(ii) good reputation and character; and

(iii) honesty;

b) such person has not incurred any of the following disqualifications—

(i) the person, or any of its whole time directors or managing partners, has been convicted by a court for any offence involving moral turpitude or any economic offence or any offence against the securities laws;

(ii) an order for winding up has been passed against the person;

(iii) the person, or any of its whole time directors or managing partners, has been declared insolvent and has not been discharged;

(iv) an order, restraining, prohibiting or debarring the person, or any of its whole time directors or managing partners, from dealing in securities or from accessing the securities market, has been passed by the Board or any other regulatory authority, and a period of three years from the date of the expiry of the period specified in the order has not elapsed;

(v) any other order against the person, or any of its whole time directors or managing partners, which has a bearing on the securities market, has been passed by the Board or any other regulatory authority, and a period of three years from the date of the order has not elapsed;

(vi) the person has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force; and

(vii) the person is financially not sound.

(2) If any question arises as to whether a person is a fit and proper person, the Board's decision on such question shall be final."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Prashant Prakhar
Pratibha Jain
Similar Articles
Relevancy Powered by MondaqAI
Nishith Desai Associates
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Nishith Desai Associates
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions