Sebi to amend rules to pave way for BSE IPO

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The initial share sale by BSE, formerly Bombay Stock Exchange, is set to get regulatory nod after the Securities and Exchange Board of India (Sebi) decided to amend a key clause that required each and every investor holding shares of a stock exchange to be ‘fit and proper’.

As per the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012, “no person shall, directly or indirectly, acquire or hold equity shares of a recognised stock exchange or recognised clearing corporation unless he is a fit and proper person.” This clause will be amended or even waived to make way for IPOs of stock exchanges.

BSE, which has been planning an initial public offering (IPO) for seven years now, had approached Sebi, pointing out the impracticability of the clause, and sought clarifications.

“We need to do something like the RBI (Reserve Bank of India) regulations for share ownership in banks,” said a former Sebi official. RBI rules stipulate that a person should be ‘fit and proper’ if he/she owns 5 per cent or more stake in banks.

A similar rule may be applied to IPOs of stock exchanges – in this case BSE. (Rival NSE may also be looking at an IPO at some stage in the future to provide an exit route to its stakeholders, such as private equity funds.)

The ‘fit and proper’ ceiling in stock exchanges and clearing corporations can be as liberal as 5 per cent or maybe stricter at 1 per cent for individuals. Sebi will take the final call on the ceiling of share ownership for ‘fit and proper’ persons.

In addition to the above-mentioned rule, there are other stiff stipulations too. For instance, the rule says any person who, directly or indirectly, either individually or together with persons acting in concert, acquires equity shares such that the shareholding exceeds two per cent of the paid-up equity capital, should seek Sebi approval within 15 days of the share acquisition.

“Screening all investors in an IPO for the fit and proper criteria is simply impractical,” said a broker, adding that the rules have to be amended to clear the way for the BSE IPO.

As reported earlier by FC, BSE would consolidate the face value of its share from Re 1 to Rs 2 ahead of its IPO. This is because shares that are priced above Rs 500 apiece could list on exchanges by offering just 10 per cent of share capital. If a stock is priced below Rs 500 apiece, the company will have to offload 25 per cent of the share capital, which officials reckon would be a difficult task for BSE.

In off-market deals, BSE’s Re 1 face value shares are transacted in the Rs 150/160 range, which is expected to rise once the IPO gets Sebi clearance. “These are distress sales. Some people are selling part of their shares to meet urgent requirement of funds. We should not take this as correct valuation,” said the broker.

BSE’s book value is around Rs 228-230 a share. “If you add BSE’s 50 per cent stake in depository CDSL, 100 per cent in the clearing corporation and the iconic BSE Tower, the shares will be valued much higher. We believe sum of parts should also be taken into consideration,” said a banker, declining to be identified.

Hundreds of BSE brokers owned shares in the exchange after its demutualisation in 2005. Under the demutualisation and corporatisation, BSE brokers’ stakes came down from 100 per cent to 49 per cent. The majority stake is now held by LIC, SBI and Aditya Birla Group, among others. Deu­tsche Borse and Singapore Exchange (SGX) own nearly 5 per cent each in BSE.

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