Sebi says norms for stock exchanges poised for an overhaul

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Mumbai: The Securities and Exchange Board of India (Sebi) on Saturday announced that it is going to undertake a comprehensive review of the Stock Exchange and Clearing Corporation (SECC) regulations to increase its oversight of stock exchanges and their boards.

“After deliberation, the Board approved the proposal for comprehensive review of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 and SEBI (Depositories and Participants) Regulations, 1996 and to seek public comments on the same,” said Sebi in a press statement.

It is in line with the Bimal Jalan Committee recommendation to working of Market Infrastructure Institutions (MIIs) after five years. The committee report was tabled in 2012.

Mint had reported on 8 February that Sebi board would consider this review in the wake of exchanges getting listed and certain governance lapses that have come to notice.

The proposed review of the Sebi regulations pertains to appointment and remuneration of independent directors, and also ownership and governance norms for exchanges. Also a makeover for stock trading rules.

A Mint report on 18 January said that Sebi is planning to change some of the key norms governing stock exchanges, clearing corporations and market intermediaries such as brokers and depository participants (DPs). This is to strengthen its scrutiny of defaulters, enhance transparency in dealings between market participants.

In the case of stock exchanges, the surveillance mechanism and the checks and balances carried out need to be changed along with other aspects of risk management.

“The Regulator in the review should consider removing the 5% and 15% investor cap to increase competition in exchange space. In every organization shareholder is supreme and that should be the case in exchanges too. More power to shareholders would increase exchanges accountability and governance,” said Sandeep Parekh, founder, Finsec Law Advisors.

Sebi’s review comes at a time when the Bombay Stock Exchange (BSE) has listed on its rival National Stock Exchange (NSE). The latter filed a share sale prospectus with the regulator.

In a departure from the regular practice and norms, the regulator also spoke of two ongoing investigations in the matter of NSE and Rs5,548-crore National Spot Exchange Ltd (NSEL) scam .

“It has been a general practice of not to speak about on-going investigations till enforcement action is initiated. As during investigation it is fact finding exercise and if the entity is found to be innocent of any wrong doing then, it can lead to damage to the entities reputation,” said R.S. Loona

Sebi has so far sent showcause notices to some of the brokers on the basis of examination of allegations received with respect to their role in NSEL matters.

In the case of NSE, Sebi said that it is examining the matter of unfair access to certain brokers while using NSE’s algorithmic trading platform. Sebi outlined that the issue has been examined by Sebi’s Technical Advisory Committee and also NSE has conducted a forensic audit of its systems.

”The concerns related to systems and processes at the exchange arising out of examinations are being addressed in consultation with TAC and NSE’s Board,” said the Sebi press release.

A disclosure of the ongoing examination by Sebi comes at a stage when NSE is chosen its new head, Vikram Limaye and when the exchange is shortly expected to start road shows for its proposed Initial Public Offer (IPO).

The Sebi board also discussed reforms in the commodity derivatives market such as allowing newer participants in the commodities market in a phased manner.

Separately, the board of the market regulator meet with finance minister Arun Jaitley outline to implementation of announcements in the Union budget such as a proposal to integrate the commodity spot and derivatives markets.

“Sebi will initiate consultation with various stakeholders,” said the Sebi press release. The government will form an expert panel to draft a bill to integrate the two markets and Sebi is expected to offer its comments on the bill.

Sebi will also create a framework to list security receipts created from the stressed assets. In the Union budget, the government announced that securities receipts issued by asset reconstruction firms would be allowed on exchange platforms to help resolve the bad loans and increase capital flows to this sector. Indian banks were sitting on a Rs6.7 trillion bad loan pile at the end of September.

The market regulator would also set up a cybersecurity lab to tackle potential cyber security threats to exchanges and trading members.

Saturday’s was the last board meeting of outgoing Sebi chief U.K. Sinha who is set to demit office at the end of February. Sinha would be succeeded by senior Indian Administrative Service (IAS) officer Ajay Tyagi, who is currently a part of department of economic affairs, capital market division.