Sebi likely to revamp shareholding, net worth norms for exchanges

India’s market regulator is likely to tighten net worth norms, introduce new shareholding rules and ease directorship conditions for stock exchanges, depositories and clearing corporations, according to three people aware of the matter.

A five-member panel headed by R. Gandhi, a former deputy governor of the Reserve Bank of India (RBI), is considering these proposals. The Securities and Exchange Board of India (Sebi) had set up this panel in October.

The panel is considering doubling the net worth requirement for stock exchanges and clearing corporations because of a rise in trading turnover, and with a view to strengthen infrastructure for dealing with crises such as the Rs5,500 crore settlement issue at National Spot Exchange Ltd, said one of the people cited earlier.

Currently, stock exchanges are required to have a net worth of at least Rs100 crore and clearing corporations of Rs300 crore. These numbers were last reviewed in 2012, when the Bimal Jalan panel reviewed norms for market infrastructure institutions.

Sebi may also introduce a formula-based net worth criteria, under which exchanges and clearing corporations may be required to maintain a certain net-worth calculated on the basis of the size of business, so that there is a cushion for potential exigencies, said the first person. Spokespersons for BSE Ltd and the National Stock Exchange declined to comment.

“Having a flat Rs300 or Rs500 crore net worth for a clearing corporation is way too low,” said Sandeep Parekh, founder and CEO of Finsec Law Advisors, a law firm. “The real risk management, securities exchanged, managing the money and handling the potential problems happen at the clearing corporation. Thus a net worth in the clearing corporation does make sense, but a sum of Rs300 crore is just way too small to make any impact on safety.”

The Sebi panel is likely to ask exchanges and other institutions to trim their holdings in depositories and clearing corporations as these entities expand their business and look to list. The existing norms allow exchanges to hold up to 24% in depositories. They have to hold at least 51% in clearing corporations. The panel may cap stock exchange holding in depositories at 10%.

Since depositories mostly open and manage investor accounts irrespective of the stock exchange on which the investor trades, the influence of one single exchange on a depository by virtue of its shareholding is not desired, said the first of the three people cited earlier.

Additionally, a key proposal is to relax the lock-in requirements for sponsors in depositories. While Central Depository Services Ltd has around 12 sponsors, National Securities Depository Ltd has at least six sponsors. At present, sponsors in a depository are required to collectively hold at least 51%. If any sponsor exits, it has to be replaced so that the holding of sponsors remains at least 51%.

“This is a restrictive clause for any potential new entrant because it discourages investors from participating in the depository business. Under the new plan, the collective holding percentage requirement by sponsors may be specified according to the number of years of the depository’s operations or the net worth of the depository,” said the first person cited above.

Under the new norms being planned by the Sebi panel, the appointment terms for public interest directors (those appointed by Sebi) on the boards of exchanges and other market infrastructure institutions may be aligned with the Companies Act.

Public interest directors are now nominated for a three-year term and such directors can serve up to two terms. Also, a public interest director may be re-nominated only after a cooling-off period of one year.

“The committee may allow a term of five years for such directors, keeping the maximum instances of appointment at two terms. The cooling-off period of one year could be relaxed to six to nine months,” said the second of the three people cited earlier.

“Exchanges, depositories and clearing corporations are institutions that have systemic impact across the country. A robust balance sheet and net worth would obviously give comfort to the regulator and in turn to the market participants,” said Yogesh Chande, a partner at law firm Shardul Amarchand Mangaldas.