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Jun 25, 2012

Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2012

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Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2012
SEBI vide notification dated 20.06.2012 and in exercise of powers conferred by Section 4, 8A and 31 of the Securities Contracts (Regulations) 1956 read with sections 11 and 30 of the SEBI Act, 1992 has notified new Regulations The Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2012.
With the notification of these Regulations, The Securities Contracts (Regulations) (Manner of Increasing and Maintaining Public shareholding in recognized Stock Exchanges) Regulations, 2006, which dealt only with the Stock Exchanges stand repealed.
The new Regulations provides for recognition, ownership, governance and listing provisions with respect to Stock Exchanges as well as Clearing Corporations. The important provisions of the new Regulations are discussed here under:
1. Recognition of Stock Exchanges and Clearing Corporations:

As per the provisions of these Regulations, all Stock Exchanges and Clearing Corporations are required to apply for recognition by the SEBI. The Stock Exchanges which have been recognized under the Act as on the date of commencement of these Regulations shall be deemed to have been recognized under these Regulations and all the provisions shall be applicable on them. The existing Clearing Corporations will continue for a period of 3 months from the date of applicability of these Regulations until an application made for the recognitions is disposed of.

The Regulations provides for manner of making application, fees, documents required and consideration for grant of recognition by SEBI. The regulations also provides for the period of recognition, regulatory fees as well as provisions with respect to renewal and withdrawal of recognition.
2. Networth Requirements:

Stock Exchanges and Clearing Corporations are required to maintain minimum networth requirements of Rs. 100 crores at all times. The existing recognized Stock Exchanges and Clearing Corporations are required to fulfill the networth requirement within a maximum period of 3 years from the date of commencement of these Regulations. The limit is not to apply to an applicant performing clearing functions of a recognized stock exchange on the date of commencement of these regulations. It is further provided that the recognized Stock Exchange or the recognized Clearing Corporation shall not distribute profit in manner to its shareholders until specified networth limit is met. The manner of calculation of networth is also prescribed which vary in case of Stock Exchange and Clearing Corporations.
3. Ownership of Stock Exchanges:

As per the provisions of the Regulations, the shareholding or ownership of a stock exchange shall be as following:
 
Shareholder Equity share holding limit
Equity Share Capital to be held by Public Atleast 51% total
Individual resident in India (either directly or indirectly and either individually or with person acting in concert (PAC)) Not more than 5% individually
Further

  • Stock exchange
  • Depository
  • Banking company
  • Insurance company
  • Public financial Institution

(either directly or indirectly and either individually or with PAC)

Not more than 15% individually
All the residents outside India taken together Not more than 49% total
An Individual resident outside India (either directly or indirectly and either individually or with PAC) Not more than 5% individually
Total holding of residents outside India through FDI route Not to exceed 26% in total
Total holding of Foreign Institutional Investors (no shares to be acquired other than through secondary market) Not to exceed 23% in total
No Clearing Corporation shall hold any right, stake or interest in any recognized Stock Exchange.
Any person who directly or indirectly and either individually or with PAC acquires 2% or more in equity capital would require to apply for approval of SEBI within 15 days of such acquisition. If the approval is not granted the shares so acquired shall be forthwith divested. Shareholders of existing recognized Exchange holding more than 2% equity may apply for approval within 90 days of commencement of these Regulations.
Stock exchange, Depository, Banking company, Insurance company, Public financial Institution allowed to hold upto 15% equity capital, cannot acquire either directly or indirectly and either individually or with PAC any holding over and above 5% without the prior approval from SEBI.
Every shareholder of the recognized Stock Exchange is required to be a Fit & Proper person.
4. Ownership of Clearing Corporations:

The provisions with respect to ownership and shareholding of recognized Clearing Corporations as similar to the aforesaid provisions as applicable to recognized Stock Exchanges except for as following:

  • 51% or more equity share capital to be held by one or more recognized Stock Exchanges.
  • A single Stock Exchange cannot hold more than 15% of equity share capital in one Clearing Corporation
5. Governance of Stock exchanges and clearing corporations:

The provisions with respect to management and governance of recognized Stock Exchanges as well as Clearing Corporations are also provided in the Regulation broadly covering the following:

  • Composition of Governance Board
  • Guidelines for election of chairperson as well as number of public interest directors, appointment of Shareholder director, etc on the Governing Board.
  • Conditions for appointment of Directors and the Managing director.
  • Code of conduct for Directors and Key Managerial Personnel.
  • Compensation and Tenure for Key Managerial Personnel.
  • Segregation of regulatory department from other departments.
  • Constitution of Oversight committee: To address conflicts of interest in respect of member regulation, listing functions and trading and surveillance function.
  • Constitution of Advisory Committee: To advice governing board on non regulatory and operational matters including product design, technology, charges and levies.
  • Constitution of Risk Management committee (in case of clearing corporations): To formulate and implement a comprehensive detail risk management policy.
  • Appointment of compliance officer
  • Transfer of Profits
  • Transfer of penalties
  • Disclosure and Corporate Governance norms.
6. Listing of securities:

As per the provisions of the Regulations, a recognized stock exchange can apply for the listing of its securities on any recognized stock exchange other than itself if:

  • It complies with the provisions of these regulations
  • It has completed 3 years of continuous trading operations immediately preceding the date of application of listing.
  • It has the approval of the board

Though as per the provisions of these Regulations, the securities of a recognized Clearing Corporation shall not be listed on a stock exchange.

The Regulations also requires securities of both the recognized Stock Exchanges as well as Clearing Corporations to be held in dematerialized form.
CP Comments:
The new Regulation are in conformity of the decisions taken by the SEBI in its Board Meeting held in April 2012 and relaxes norms and bring clarity with respect to ownerships of Market Infrastructure Institutions thereby paving way for setting up of more Stock Exchanges and increasing liquidity in the capital markets. The provisions like holding of maximum 15% shareholding by a stock exchange in a Clearing Corporation intend to give independence to the workings of the clearing corporations. As on date the two national bourses NSE and BSE have their own clearing corporations resulting in higher settlement cost to investors. With clearing corporation becoming independent bodies, the interest of the investors would be secured not only by way of reduced cost but also with better governance in the form of independent governance board with representation of public interest directors. Also setting up of oversight committee is a initiative to minimize conflicts of interest in respect of member regulation, listing functions and trading and surveillance function. Allowing listing for shares of stock exchanges is a much awaited respite for the investors who had invested in the exchanges at the time of demutualization though further provision are yet to be provided by SEBI in this regard.


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