Sebi rules soon on ‘fitness’ of shareholders buying into exchanges

Mumbai: India’s market regulator will in a few days release detailed rules under which investors are deemed fit to buy shares in exchanges, Securities and Exchange Board of India (Sebi) chairman U.K. Sinha said on Wednesday.

Sinha was speaking on the sidelines of a conference organized by Bandhan Bank on the inauguration of its 600th branch in India.

At present, under the rules covering stock exchanges and clearing corporations, every shareholder in an exchange is required to be fit and proper. Additionally, for holding more than 2% in an exchange, an investor needs to take an approval from Sebi within 15 days. The investor requires a prior Sebi approval to hold over 5% in an exchange.

Sebi, in a board meeting a few weeks ago, allowed exchanges to list their shares on another exchange through an initial public offering. Subsequently, a week ago, in a board note, Sebi mentioned that every exchange on which another exchange gets listed needs to submit a report to Sebi every quarter on the fit and proper compliance status of every investor in the listed exchange.

In case the investor is found unfit at a later stage, his shares will be frozen and liquidated.

However, it is unclear how every investor below a 2% holding will ensure that he is fit and proper, as per Sebi norms, every time he transacts in the stock of a listed exchange.

Sebi is planning to tackle this supervision issue through the depository mechanism, Mint reported last week. Every time an investor trades in a share of an exchange, he will be provided a declaration form along with the contract note generated from the depository while execution of the trade, according to the proposed plan.

The form will require every investor to declare upfront to the depository that he is aware of the new rules and is fit and proper to be a shareholder of an exchange. However, this plan is yet to be formalized by Sebi.

Several experts were critical about Sebi’s view on this and said the process will be cumbersome if the exchanges and Sebi have to verify the fitness of each and every investor, even those holding just one share in a listed exchange.

Sinha said Sebi will be strict about compliance of the fit and proper criteria for investors and has found out a way to resolve the issue. He did not elaborate.