Shareholding cap for new bourses may be scrapped

Sebi board set to revise share buy back, takeover rules

The Securities and Exchange Board of India (Sebi) is considering liberalising rules for starting stock exchanges and depositories. According to sources, the market regulator is likely to propose removal of the shareholding cap for setting up stock exchanges and other market infrastructure intermediaries such as depositories.

At present, other stock exchanges, depositories and banks are permitted to hold up to 15 per cent of the share capital in stock exchanges and depositories. Other investors are only allowed to hold up to 5 per cent. Sebi is now looking at flexibility in these ownership norms under two regulations — the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, and the Sebi (Depositories and Participants) Regulations. The new norms will permit higher shareholding limits and also allow new categories of investors to set up market infrastructure intermediaries (MIIs).

The regulator is likely to take a decision to this effect at its board meeting on June 21.

The rules are being considered for new MIIs. “It is felt that the regulatory framework relating to MIIs should also dynamically evolve to foster innovation and development, including by way of entry of new MIIs and to remove impediments,” as per the note to the finance ministry. Sebi added that such evolution and regulatory provisions could be with regard to flexibility in ownership norms such as permitting new categories of investors or higher shareholding limits in the formative years of setting up new MIIs.

The regulator may also seek public comments on the proposals. Sebi has observed that in each of the market functions there has been an increasing tendency for a “natural monopoly” to develop and, therefore, there is a need to promote healthy competition among market infrastructure intermediaries.

According to Sebi’s note, “it is perceived that the cap of 15 per cent on shareholding and the limited category of investors allowed to hold such shareholding may act as a disincentive for any person to set up new MIIs, thereby constraining the concomitant benefits — of product innovation and rationalisation of cost structures — arising out of competition.”

The note added the regulatory framework relating to market infrastructure intermediaries should evolve to remove impediments and foster innovation and development, including

through entry of new intermediaries.

This follows recommendations by various Sebi committees appointed to review regulations for market infrastructure intermediaries. These committees have observed that while the concept of dispersed ownership is to be favoured for the functioning of an market infrastructure intermediary, certain other entities fulfilling the eligibility criteria could be permitted to hold a higher shareholding in them and subsequently bring it within a prescribed period.

The committees had observed the emergence of new players had affected the financial market through various means, including technologydriven, financial market platforms for fund-raising and online access to investment products. It was further felt that the entry of new players had benefited investors in terms of better product choices and effective cost structures, and had encouraged participation of new investors by expanding the reach of the product offering. It also encouraged existing players to innovate and streamline their cost structure.

“Caps on shareholding, both for domestic and international investors, have acted as a deterrent for serious investors. Doing away with such criteria will bring the environment in line with the global market,” said Siddharth Shah, partner, Khaitan & Co. He added such a rule would provide more say to investors and increase competitiveness.

Among other items on the Sebi board meeting’s agenda is the regulator’s plan to revise the share buyback and takeover rules for listed companies. Sebi proposes to increase the maximum limit of any buyback to 25 per cent or less of the aggregate of paid-up capital and free reserves of a company from 15 per cent at present.

Sebi has further proposed that a company should not buy back its shares in order to delist.

“A company shall not make any offer of buyback within a period of one year reckoned from the date of closure of the preceding offer of buyback,” Sebi had said in a consultation paper floated in March. It also said the company might not be allowed to purchase its own shares through any subsidiary or investment company.

Taking a cue from various instances where an entity is not complying with Sebi’s direction to disgorge ill-gotten gains, the regulator is also considering extending its power to liquidate assets of these entities and initiate recovery proceedings. At present, Sebi has been authorised to appoint an administrator for liquidation of assets in case of unregistered collective investment schemes and deemed public issue cases.

Sebi will also revise its takeover regulations to provide companies more time to raise their open offer price. Sources said the Sebi board would also be apprised of ongoing adjudication proceedings against ICICI Bank and its MD and CEO Chanda Kochhar for allegedly violating the code of conduct and disclosure norms.