Sebi, BSE at odds over CDSL board seats

The Securities and Exchange Board of India (Sebi) is at odds with the BSE stock exchange over board representation in Central Depository Services (CDSL).

BSE owns around 50 per cent in CDSL and has to bring this down to 24 per cent, to comply with Sebi norms. According to sources, BSE wants at least two seats on the CDSL board of directors, even after bringing down its stake to 24 per cent through an initial public offer (IPO) of equity.

BSE asked the markets regulator to agree but Sebi is not willing to give any such assurance. It wants the exchange to obtain board seats through the shareholder approval process, said a source in the know. The exchange is worried that it might not be able to get the desired representation once it dilutes stake in the depository.

By virtue of its high shareholding, BSE currently has special rights to appoint four representatives on the CDSL board. The issue over board representation is delaying the proposed IPO of CDSL, sources add. BSE declined to comment on the issue. The objective behind the 24 per cent shareholding cap in depositories is to ensure these institutions remain independent, to avoid conflict of interest.

A legal expert says Sebi intervening in board affairs could be against corporate governance norms. “BSE should be entitled to get board positions on the merits of its shareholding. BSE will have substantial stake even after dilution of stake. The regulator cannot go beyond the prescribed rule,” said Sandeep Parekh, founder, Finsec law Advisors.

He further said Sebi had the right to decide on public interest directors, 50 per cent in the case of depositories.

“Sebi’s ICDR (Issue of Capital and Disclosure Requirements) rule requires shares issued in an IPO to rank pari passu (at par and on equal footing) with existing shares in all respects. Accordingly, Sebi may ask promoters to give up preferential rights held by them with respect to their shareholding, prior to the IPO,” said Tejesh Chitlangi, partner, IC Legal.

The deadline for BSE to divest its holding in CDSL from 50 per cent at present to 24 per cent ends the coming Friday. The exchange has sought an extension.

Beside the board issue, BSE also wants Sebi to extend the deadline till it completes the review process of the Stock Exchange and Clearing Corporation regulations.