Exchanges for overhaul of ‘fit and proper’ rules

Market infrastructure institutions send their wish list to Sebi, which is reviewing SECC regulations after five years

Stock exchanges have sought an overhaul of the ‘fit and proper’ norms applicable to their shareholders.

And, have requested the Securities and Exchange Board of India (Sebi) for changes to the rules on appointment and remuneration of directors, shareholding structure and on corporate governance norms.

Sebi, the markets regulator, is currently reviewing the regulations for exchanges and other market infrastructure institutions (MIIs), five years after an earlier such exercise.

The current rules don’t allow an entity to directly or indirectly own shares in an exchange, unless declared 'fit and proper'. Sebi has listed different scenarios for monitoring and complying with the norm, based on shareholding thresholds of two per cent, five per cent and 15 per cent. Sources say the exchanges have asked Sebi to remove the fit and proper requirement for shareholders owning up to two per cent.

“Monitoring each and every shareholder irrespective of holding can be cumbersome, especially as the exchanges have now got (or are going to get) listed,” said a source.

The bourses have also asked Sebi to streamline the process for declaring an entity not fit and proper. And, that the criteria be expanded to include entities convicted by courts for economic offenses or those against which winding-up orders have been passed.

Further, they want Sebi to allow listing of associate companies on their own platforms. Such a move would enable Central Depository Services and National Depository Services to list on their parent exchange, respectively the BSE and the National Stock Exchange.

Beside, the exchanges have sought realigning of some norms in line with those in the Companies Act and uniformity in the regulatory framework applicable to them. Sources say they want independent directors to be appointed for two tenures of five years each — the current regulation prescribes a fixed term of three years.

To ensure parity, the exchanges have proposed a uniform shareholding criterion for all MIIs. At present, the maximum for an exchange is restricted to 24 per cent in depositories and 51 per cent in clearing corporations. Exchanges want the ceiling to be brought at par to 51 per cent.

They also want the easing of profit transfer norms in investor protection funds. Also, that trading or clearing members not be permitted on the board of a stock exchange. Background Sebi had floated a discussion paper to review the Stock Exchanges and Clearing Corporations rules, which govern stock exchanges, clearing corporations and depositories. The last date for comment was March 31.

In December 2009, the Sebi board had constituted a committee under the chairmanship of Bimal Jalan, former Reserve Bank governor, to examine issues arising from the ownership and governance of MIIs. The committee had recommended that the working of MIIs be reviewed by Sebi every five years, as the stock market is evolving and a review might be needed in the light of technological developments, new products, growth of financial markets, trade and capital flows, and global integration. The period of five years from the date of the earlier notification will get over this June.