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Plans to rejuvenate regional exchanges

When stock exchanges from different countries can merge, there is no reason why the numerous exchanges in India cannot be unified under one all India Stock Exchange.

THE REGIONAL stock exchanges (RSEs) in India have mooted proposals to rejuvenate them which include consolidation and mergers. The moves borrow heavily from experience abroad where exchanges have consolidated or developed niche markets. Such consolidation measures club the assets and liabilities of the exchanges involved along with their personnel, in order to generate synergy in operations and attract volume.

Where an RSE is not willing to join a consortium or merge with the common exchange, its resources can be diverted for some other productive use. It can, for instance, become a capital market intermediary or develop expertise to work in a niche area of an exchange such as the Canadian Venture Exchange.

G. N. Bajpai, Chairman, Securities and Exchange Board of India (SEBI), has also recently stated that the regional stock exchanges (RSEs) in the country would be rejuvenated and they would not be wound up. If this is to become a reality, the RSEs will have to consolidate into a single Indonext Exchange with a common trading platform and settlement system. The RSEs can merge with an existing stock exchange or create a new entity. As creating a new entity will involve varius formalities the exchange that is agreeable to most others can be chosen and converted into an Indonext Exchange.

The Indonext model can be on the lines of the trans-European bourse, the Euronext, formed as a result of mergers of the bourses of Paris, Amsterdam and Brussels in 1999.

When stock exchanges from different countries can merge, there is no reason why the numerous exchanges in India cannot be unified under one all India Stock Exchange.

Members of the existing stock exchanges can automatically become members of the unified institution subject to certain norms and standards. It is only proper that the old regional stock exchanges which were responsible for capital formation for several decades should have their rightful place in this scheme.

There are more than 9000 companies listed on various exchanges. When these exchanges merge and a common trading platform is put in place, more volume of business can be generated. With sufficient volume of business, companies themselves will list on the Indonext Exchange. When this happens, there will be no need for asking the regulator for exclusive rights to trade in companies whose capital is below specified limits.

A niche area of operation can be created so that many investors will be prepared to trade in the exchange.

The trader workstation order book does not allow participants to evaluate the counter party risk. It is therefore, clear that the merged RSEs will create a clearing corporation to provide novation and guarantee the settlement of trades done. The present system followed by RSEs in having their own clearing and settlement will give place to a single clearing corporation. This will facilitate the clearing corporation to have an overall view of the gross exposure of members across the merged stock exchanges and enable it to handle risk management and surveillance. Even from the regulation point of view, it will be easy to initiate controls and take corrective action.

When the Indonext model is planned, there must be a provision for transferring the security deposit to the new exchange. This will enable members to use the deposit for doing business and satisfy gross exposure norms.

The new exchange can provide both order-driven and quote-driven systems. This will lead to more liquidity as there will be more participants/clients to trade. There will be better price discovery for shares and more activity on the market. An existing listed company on an RSE can transfer its listing to the Indonext Exchange. The compliance requirements of listing can be handled by a branch office of the exchange where the registered office of the company is situated. This will help both companies and the branch office of the exchange concerned for post compliance of listing since the initial listing will be carried out by the Centralised Listing Authority. The branch office of the proposed exchange can be made responsible for redressal of investors' grievances and disputes, if any. Investors can access the branch offices of the amalgamated exchange members. Even arbitration referred by investors can be heard and settled at the local centre itself.

The RSEs can provide the same service provided earlier even after merging with the Indonext exchange by acting as the regional office of the exchange. Of course these services will be in the name of the new exchange.

It is learnt that the SAARC nations have decided to allow their corporates to get their shares listed in the exchange of any of the member countries. The Indonext Exchange can help such companies to mobilise capital and list their shares. It can provide specialised services for these entrepreneurs.

There should be an intensive educational programme for investors about the new avenues available and new areas of trading. Similarly research centres can be established wherein issues relating to the capital market can be analysed. This will benefit entrepreneurs, intermediaries and the public at large.

Regional stock exchanges have contributed enormously for the growth of the capital market and a huge infrastructure has been created by them. They have created various intermediaries. Hence, every effort must be made to utilise this opportunity to put them to the best use.

R. Pattabiraman

(Head (Operations and Surveillance), e-commodities limited)

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