Published On: Thu, Mar 22nd, 2012

MCX-SX Should Be Allowed to Offer Competition in The Exchange Space

The Bombay High Court has set aside the Sebi order denying MCX-SX permission to conduct any business of a stock exchange other than trade in currency derivatives and directed Sebi to consider MCXSX’s application afresh.

This is a welcome development and Sebi should now move expeditiously to let the new exchange start operations in all segments of securities trading: in equities, bonds and their derivatives. The court has deemed unsound the various grounds on which Sebi had disqualified MCX-SX.

The court found unacceptable MCX-SX’s contention that its failure to disclose to Sebi buyback arrangements for shares sold to third parties was irrelevant.

The court has also obtained an undertaking by two of the exchange’s promoters, MCX and Financial Technologies, to bring their combined holding in the exchange below 5%.

In these, and in determining to be perfectly legal the manner in which the promoters had reduced their shareholding, which Sebi had objected to, the court was seeking compliance with the MIMPS (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations issued by Sebi.

It was not the court’s business in hearing MCX-SX’s petition to examine the validity or desirability of these regulations: it just took them as given. But these regulations are intrinsically anti-competitive.

Even if shareholding in exchanges has to be widespread and not exceeding 5% for any entity, no exchange can come up like this. That should be the goal to be attained over a reasonable period, say, 10 years, as in insurance.

To mandate dispersed shareholding from the word go is to favour incumbents in the stock exchange space, to whose limited club MCX-SX now stands to gain admittance. To boost efficiency through competition, entry must be made free, subject to meeting regulatory standards. And that calls for drastically amending the MIMPS regulations.

India needs to develop its bond market and spread the equity culture. The Budget’s initiatives in this regard need exchanges to play a proactive, complementary role. Sebi should let competition work the needed magic.

Source: The Economic Times

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