Published On: Fri, Feb 3rd, 2012

Sebi Turns Heat on USE

After locking horns with the MCX Stock Exchange over violation of regulations regarding the shareholding pattern, the market regulator has now turned focus on the United Stock Exchange (USE), the newest one.

The Securities and Exchange Board of India (Sebi) has asked USE to bring down the representation of trading members on its board, issuing a showcause notice. USE will eventually also have to ask some shareholders to give up trading membership of the bourse, Sebi officials said.

While USE declined to comment on the notice or any other query on the subject, the Sebi move brings the issue of dominance of trading members back on the agenda, four years after stock exchanges in the country were de-mutualised.

The Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges (MIMPS) Regulations require trading members, including their associates, to cumulatively hold less than or equal to 49 per cent stake in a stock exchange. Also, the governing boards of these exchanges should not have more than 25 per cent representation of trading members. Both are principals of the MIMPS regulations, which if not adhered to all the time may defeat the purpose of de-mutualisation, experts said.

By Section 11 of MIMPS, at least 51 per cent of the equity share capital of an exchange should be continuously held by the public. The latter is defined as any member or section of the public other than shareholder of the recognised stock exchange having trading rights or any associates of such shareholders.

Present cases
Of the seven sub-sections defining associates in the MIMPS regulations, two key points apply in the USE case, since the shareholding is dominated by banks. They include all those entities which are either a holding company or subsidiary company of such shareholder (in the stock exchange) or a company under the same management. Or all those entities, over which such shareholder (of the stock exchange) directly or indirectly, by itself or in combination with other persons, exercises control.

The USE shareholders include 21 state-owned banks, six private banks and one foreign bank. Either the associates of these banks or they themselves are trading members of the exchange. Add another trading member-shareholder, Jaypee Capital. Thus, the stake of trading members in the USE is more than 49 per cent. The two trading members on the USE board are representatives from Jaypee Capital and Federal Bank.

A stock exchange official said USE had already started the process of reducing trading member representation on its board and the issue of higher trading member stake was being addressed.

While the representation of trading members on the National Stock Exchange (NSE), MCX-SX and the Bombay Stock Exchange (BSE) does not exceed the prescribed limit, shareholding patterns show the trading members collectively have more than 49 per cent stake in MCX-SX. Of the 23 shareholders of MCX-SX, 17, either themselves or their associates, are trading members of the currency segment and collectively hold 83.92 per cent stake. This is because most MCX-SX stake is divided only between banks and financial institutions.

Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Corporation Bank, Indian Bank, Indian Overseas Bank and Oriental Bank of Commerce each holds 4.6 per cent. Other shareholders are Axis Bank (1.84 per cent), HDFC (2.21 per cent), IFCI (13.23 per cent), IL&FS (5 per cent), State Bank of Indore (1.84 per per cent), Syndicate Bank (2.3 per cent), UCO Bank (0.46 per cent), Union Bank of India (11.5 per cent), United Bank of India and Vijaya Bank holding 1.84 per cent each.

MCX-SX has challenged the Sebi order in the high court here, for not allowing it to operate as a full scale stock exchange due to alleged violations of MIMPS regulations. The court has reserved its order after hearing arguments and the verdict is expected soon.

In the NSE, the stake of such trading members is around 46 per cent. Among the major shareholders whose associates are also trading members are State Bank of India (10.44 per cent), IDFC (7.88 per cent), IFCI (5.55), SBI Capital Markets (4.33 per cent), Goldman Sachs Strategic Investments Mauritius (five per cent). Citi Group (two per cent) and Morgan Stanley Mauritius (three per cent), among others. In the BSE, too, trading members and their associates are holding around 43 per cent stake.

Source: Business Standard

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