MUMBAI: Markets regulator Sebi on Wednesday proposed radical changes to ownership of entities like stocks exchanges (SEs) and depositories, collectively called Market Infrastructure Institutions (MIIs). The changes could allow 100% holding for a single, domestic entity in a new SE, depository and other MIIs. Currently, a 15% holding limit is set for institutions and 5% for individuals.
Sebi also proposed to allow a single foreign entity to hold up to 49% in an MII in India. Under current rules, an institutional foreign entity can hold up to 15%, while the total foreign holding could go up to 49%. The proposed rule also allows up to 25% holding by a single individual after the 10th year of setting up an MII, compared to 5% now.
Under the proposed rules, holdings by institutions should be brought down to about 26% within 10 years. For individuals, this limit is set at 25%. Sebi published these proposals in a discussion paper and requested the public to send in their comments by February 4.
The proposed new rules also allows for acquisition of stakes in existing SEs and other MIIs, while any merger & acquisition in such an entity should be with prior Sebi nod, the paper said.
According to J Sagar Associates partner Anand Lakra, the proposal permits any person to start a business of an SE or a depository with 100% ownership or even acquire 100% of an existing SE or a depository. “This is a welcome proposal — it encourages competition in duopolistic markets by lowering the entry barriers.”
But while the discussion paper mentioned about holding structure in SEs, it does not mention the same in a commodities exchange. Second, the paper also mentions that if an entity acquires 25% or more in an MII, then it will have to go for an open offer. The question that market players are asking is how the entity will go for an open offer if the MII is an unlisted one.
A “curious proposal is the requirement to comply with the Takeover Regulations even for unlisted entities. Given the obvious differences between listed and unlisted companies, it would do well for Sebi to provide clarity on this,” Lakra said.
The reasons behind the move by Sebi were twofold. For one, it believes that the Indian securities market has witnessed dominance in trading and depository space, “raising concerns on possibility of excessive concentration and institutional tardiness in quickly responding to the changing market dynamics, which may have an adverse bearing on efficiency in trading, record-keeping, supervision and risk management practices”.
Currently there are just two exchanges — NSE and BSE — which together account for nearly all of the stock and derivatives trading. In the depository space too there is duopoly, of NSDL and CDSL.
Second, the emergence of new technologies such as distributed ledger, artificial intelligence and machine learning have brought in several tech-driven entities in the trading space. These entities, armed with these disruptive tech, are challenging the traditional stock exchanges and depositories. The new proposals, if made into rules, “could forge a competitive landscape in the MII space by facilitating new players, who may like to challenge other MIIs in their already established domain”.