Sucheta Dalal :RSEs: better dead or alive?
Sucheta Dalal

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RSEs: better dead or alive?  

Nov 15, 2004

It’s best for everybody to recognise that they are obsolete and redundant

After the recent ordinance to hasten the demutualisation of stock exchanges, the Securities and Exchange Board of India (Sebi) held a meeting last week to take the process forward. As anticipated, 18-odd stock exchanges — that will be affected by the ordinance as well as another Sebi regulation banning sub-brokers from issuing contract notes — made a strong pitch to say that the regulator must find a way to allow them to survive.

Among other things, they repeated the decade-old argument about how they fulfil ‘regional aspirations’ and claimed a role in ensuring the geographical spread of the equity cult. But anyone who has followed the capital market knows that many of these claims are vastly exaggerated. It is the nationwide spread of the NSE and the BSE that extended the geographical reach of the capital market. In fact, most regional bourses have been under investigation for a variety of regulatory and surveillance-related lapses and it is difficult for Sebi to establish a clear audit trail of transactions when they are routed through multiple entities. Sebi’s recent regulatory actions against a string of regional brokers only seem to confirm this.

In the circumstances, Sebi should not be faulted for wanting to improve market safety by banning sub-brokers from issuing contract notes; and it must not be pressured to dilute its decision or make exceptions. In fact, it may be helpful to remember that Sebi is far less suspicious about the broker community than the RBI, whose proposed negotiated dealing system for government securities wants to eliminate brokers from its closed market for institutional investors.

What is perplexing, however, is that the pressure to ‘give RSEs one more chance’ to survive isn’t coming from the bourses alone. At a time when the government is pushing privatisation of public sector entities; when thousands of public sector bank employees have been opting for voluntary retirement; and when the dotcom bust of the year 2000 has led to a matter-of-fact acceptance of job losses, the arguments that are trotted out to save redundant bourses are indeed astonishing.

The general call to save RSEs overlooks many details. The argument that Sebi must relax its contract-note rules to allow RSEs to survive through their subsidiary entities (which are trading members of the NSE or BSE) ignores the lack of surveillance staff and effective supervision at regional bourses.

• Claims that RSEs fulfil regional aspirations etc are vastly exaggerated

• Most regional bourses have been under investigation for regulatory lapses

It also disregards the fact that some bourses themselves are quite happy to shut down. We learn that the Delhi Stock Exchange is willing to wind up its operations. The only issue is over its surpluses of Rs 80 crore that the brokers would like to share among themselves. The government is unlikely to allow it, since these surpluses have been generated because of tax concessions enjoyed by all bourses (except the NSE) over decades. While it has openly expressed its readiness to close shop, a few other bourses are waiting to see if the government throws them a lifeline, before making a final decision.

One lifeline that is under discussion is Indonext, the trading platform for Small and Medium Enterprises (SMEs) that has been promised by FM P Chidambaram in his budget speech. Indonext itself is a curious creature. Everybody agrees that India needs a separate trading platform for SMEs in order to help them raise capital and also to encourage venture capital investment by providing financiers a viable exit route.

Under current regulations, companies with post-issue listed capital of under Rs 10 crore cannot be listed on BSE and NSE, and even if they meet these criteria they would be drowned out by larger companies and would find it almost impossible to attract investor interest. An SME market can only work with highly innovative marketing and much greater involvement by the bourses in market making, supervision and checking the background and business model of companies listed in this segment. This makes Indonext a high-risk experiment. The thrill of a new market experiment cannot be at the cost of investor safety.

Indonext will need a bold new approach that is entirely focussed on creating a new marketplace, rather than ensuring the survival of stale old bourses that have outlived their utility. Despite the FM’s keenness to launch an SME market segment, the government must ensure that Indonext is not structurally handicapped by burdening it with the task of keeping RSEs alive. It is best for everybody to recognise that RSEs are obsolete and redundant and any decision about their future must be arrived at independently and dispassionately.


-- Sucheta Dalal