SECURITIES AND EXCHANGE BOARD OF INDIA. Exit of De-recognised/Non-Operational Stock Exchanges

of 10 SECURITIES AND EXCHANGE BOARD OF INDIA Exit of De-recognised/Non-Operational Stock Exchanges 1. Objective: This memorandum contains status on exit of de-recognised/nonoperational stock exchanges and a proposal specifying timeline for listing of exclusively listed companies of such stock exchanges in the nation-wide stock exchanges. 2. Background 2.1. Historically, Central Government/SEBI under section 4(1) of the Securities Contracts (Regulations) Act, 1956, had granted recognition to 25 stock exchanges. 2.2. After the emergence of nationwide trading terminals, developments in technology and abolition of compulsory listing in regional stock exchanges, trading in equity and equity derivative segments was concentrated in two exchanges namely, Bombay Stock Exchange Ltd (BSE) and National Stock Exchange of India Ltd (NSE). The smaller/regional stock exchanges which did not have trading in their own platform became defunct due to lack of sustainable operations and the shareholders of companies listed in these stock exchanges did not have an exit option, as these companies were not listed in stock exchanges having nationwide trading terminal. The continued existence of defunct stock exchanges requires SEBI to carry out various regulatory, supervisory and administrative activities which is an unproductive and a regulatory burden the resources of SEBI. 2.3. Upon deliberation of the issue in various meetings of the Board, SEBI vide circular dated December 29, 2008 formulated an exit policy for stock exchanges which permitted the exchanges to exit from functioning as a stock exchange while retaining their movable and immovable assets, subject to compliance with certain conditions as mentioned in the said circular. 2.4. Subsequent to issuance of the above circular, certain issues arose in this regard, primarily on exit option to shareholders of exclusively listed companies and utilization of assets by de-recognized stock exchanges. This exit policy was subsequently reviewed by the SEBI Board in its meeting held on April 02, 2012 and the revised policy for exit of derecognised/non-

of 10 operational stock exchanges has dealt with the interest of a) shareholders of exclusively listed companies by providing an exit option, b) trading members by providing trading opportunity through subsidiary route and c) shareholders of stock exchanges by allowing them to deal with assets of stock exchanges after payment of all dues. The same was implemented vide circular dated May 30, 2012 ("Exit Circular"). 2.5. The Exit Circular states, inter-alia, that the stock exchanges having annual trading turnover on its own platform of less than Rs 1000 Crore can apply to SEBI for voluntary surrender of recognition and exit at any time before the expiry of two years from the date of issuance of the circular, i.e., latest by May 29, 2014, failing which SEBI may proceed with compulsory exit of such stock exchanges. Therefore, all the de-recognised/non-operational stock exchanges voluntarily or compulsorily have to exit from the business of a stock exchange. 2.6. Further, in terms of the Exit Circular, the following conditions, inter alia, are required to be complied with by the de-recognised/non-operational stock exchanges while seeking exit: a) Permission to distribute its assets subject to certain conditions as laid down in the circular as well as the other guidelines that may be issued by SEBI, Governments or any other statutory body from time to time. b) For the purpose of valuation of the assets of the stock exchange, a valuation agency appointed by SEBI shall submit its report. c) The quantum of assets for distribution will be available after payment of the following by the stock exchange: (i) Statutory dues including Income Tax; (ii) Transfer of Investor Protection Fund, Investor Services Fund, 1% security deposit available with the Exchange to SEBI Investor Protection and Education Fund (hereinafter referred to as the 'IPEF'); (iii) The exiting exchange shall pay the following dues to SEBI:- Dues outstanding to SEBI including 10% of the listing fee and the annual regulatory fee; The outstanding registration fees of brokers/trading members of such de-recognised stock exchanges as specified in the SEBI

of 10 (Stock Brokers and Sub Brokers) Regulations, 1992, till the date of such de-recognition; In case of any shortfall in collection of dues of the brokers to SEBI, the exiting Stock Exchange will make good the shortfall. (iv) Refund of deposit (refundable) to the stock brokers including their initial contribution/deposit to Settlement Guarantee Fund/Trade Guarantee Fund (SGF/ TGF). d) Contribution of up to 20% of its assets (after tax) towards IPEF taking into account, inter alia, the governance standards of the stock exchange and estimation of future liabilities. e) The companies exclusively listed on the stock exchange seeking exit shall list their securities on any other recognised stock exchange. If such exclusively listed companies fail to obtain listing on any other recognised stock exchange, they will cease to be listed companies and will be moved to the dissemination board by the exiting stock exchange. Such dissemination board would be provided by a Stock Exchange with nationwide trading terminals. The exiting stock exchange as well as exchange providing dissemination board will give wide publicity about the dissemination board in one leading national daily and one local daily. f) The exiting stock exchange shall set aside sufficient funds in order to provide for settlement of any claims, pertaining to pending arbitration cases, arbitration awards, not implemented, if any, liabilities/claims of contingent nature, if any, and unresolved investor complaints/grievances lying with it. g) The exiting exchange may provide trading opportunity to their trading members to trade on stock exchanges having nationwide terminals through their subsidiary company, which will function as a normal broking entity. 2.7. Subsequent to issuance of the Exit Circular, SEBI has been in receipt of applications from 18 de-recognised/ non-operational stock exchanges seeking voluntary exit as a stock exchange. Some of the difficulties/challenges faced during the process and the policy initiatives taken by SEBI to address the same have been detailed in the following paragraphs.

of 10 3. Difficulties in dealing with exit of stock exchanges The following challenges were faced during the process of exit of stock exchanges:- 3.1. Litigation in Hon ble Allahabad High Court and Hon ble Ahmedabad High Court The Brokers' association of UP Stock Exchange, brokers of Vadodara Stock Exchange and a member of an investor association based out of Ahmedabad Stock Exchange had filed petitions before the Hon ble Allahabad High Court and Hon ble Ahmedabad High Court, challenging the SCR (Stock Exchanges and Clearing Corporations) Regulations, 2012, and the Exit Circular. However, both the Hon ble Courts have dismissed the petitions. 3.2. Non co-operation by certain stakeholders of stock exchanges Despite the approval of shareholders, certain sections of stakeholders of the stock exchanges (brokers, management, etc.) have not been co-operating with SEBI to the required extent which has hampered the exit process. 3.3. Litigation/RTI applications from the employees of non-operational stock exchanges The employees of one of the stock exchanges that had applied for exit took to legal recourse and filed litigation against SEBI on the regulatory framework for Exit which is currently pending before the Hon'ble Allahabad High Court. 3.4. Tax issues on Investor/Customer Protection Fund ("IPF"/"CPF") of the nonoperational stock exchanges In case of few stock exchanges, Income Tax assessment orders in respect of IPF/CPF have been received due to which the corpus of IPF/CPF could not be transferred to SEBI-Investor Protection and Education Fund ("SEBI- IPEF"). 3.5. Unsettled issues relating to brokers fees (pending litigation cases, defaulted brokers) The trading members/sub-brokers of some of the exiting stock exchanges had outstanding dues to SEBI which had to be computed/reconciled and settled before the completion of the exit process.

of 10 3.6. Dominance/Interference of Public Interest Directors in the exit process Certain behavioural issues were faced as regards the Public Interest Directors in some of the exiting stock exchanges which caused a delay in the exit process. 3.7. Pending regulatory proceedings/investigations SEBI had initiated regulatory proceedings against some of the exchanges that had applied for exit and the same were yet to be concluded. In such cases, issues arose as to whether the exit process can be delinked from such proceedings. 3.8. Issues relating to the Memorandum of Understanding ("MoU") between certain exiting stock exchanges and nation-wide stock exchanges The members of some of the exiting stock exchanges have been trading on the platforms of the nation-wide stock exchanges in terms of the MoU arrangement permitted under Section 13 of the SCRA, 1956. In such cases, in terms of Para 4.2 of the Exit Circular, since the MoU with the nation-wide stock exchanges had to be discontinued upon exit of such non-operational stock exchanges, there were issues relating to business continuity and transferring the broking business to a subsidiary of the stock exchange. 4. Initiatives taken to facilitate the smooth exit of the Stock Exchanges In order to facilitate the exit process and expedite the smooth completion of the same, SEBI initiated the following initiatives/ policy decisions:- 4.1. Meetings with representatives of the non-operational stock exchanges Several meetings were held with all the stakeholders, i.e., Public Interest Directors, shareholders and brokers of the non-operational stock exchanges wherein the need to comply with the Exit Circular was re-iterated. Further, officials of SEBI had visited many of the stock exchanges for this purpose. 4.2. Issues relating to exclusively listed companies SEBI vide circular dated May 22, 2014 advised the non-operational stock exchanges/exclusively listed companies of such stock exchanges to comply with the following:- a. exclusively listed companies of non-operational stock exchanges may opt for listing in nation-wide exchanges.

of 10 b. exclusively listed companies of non-operational stock exchanges may opt for voluntary delisting from such stock exchanges. For this purpose, SEBI has waived off the requirements of Minimum Public Shareholding requirements. Further, nation-wide stock exchanges were advised to provide for a platform to facilitate reverse book building for voluntary delisting. c. non-operational stock exchanges to include non-traceable companies in the list of vanishing companies (referred to the Ministry of Corporate Affairs). d. non-operational stock exchanges to shift those companies that have not opted to list in nation-wide stock exchanges or voluntarily delist from the non-operational stock exchanges, to the Dissemination Boards of the nation-wide stock exchanges. For this purpose, NSE and BSE have been advised to facilitate shifting of such companies to the Dissemination Board for a one-time fee of Rs. 5000/- per company. Further, since the discussions between the nation-wide exchanges and the exiting stock exchanges regarding shifting of exclusively listed companies to the Dissemination Board were not getting concluded expeditiously, SEBI intervened in the matter and allocated the exclusively listed companies of the stock exchanges to BSE and NSE respectively. e. Also, nation-wide stock exchanges have been advised to create a dedicated cell to deal/facilitate with the requests for listing from such companies. 4.3. Tax issues on Investor/Customer Protection Fund ("IPF"/"CPF") of the nonoperational stock exchanges The issue mentioned at Para 2.4 above as regards Tax assessment orders on the IPF/CPF has been resolved by creation of an escrow account for the amount lying in the CPF/IPF trust till the tax litigation is resolved. Upon conclusion of the said litigation, the corpus in the CPF/IPF Trusts of the said exchanges shall be transferred to SEBI-IPEF.

of 10 4.4. Unsettled issues relating to brokers fees (pending litigation cases, defaulted brokers) As approved by the Board in the meeting held on June 19, 2014, the quantum of dues owed to SEBI by the brokers/sub-brokers of the nonoperational stock exchanges has been rationalised, taking into account various developments like demised brokers, expelled brokers, etc. This initiative has brought down the liabilities of such brokers/sub-brokers which has helped in expediting the exit process. 5. Present status The present status of exit of de-recognised/ non-operational stock exchanges is as follows: 5.1. Stock Exchanges which have already exited (as on January 6, 2015): S.No. Name of Stock Exchange Date of Exit Order 1 Hyderabad Stock Exchange Ltd (HySE) January 25,2013 2 Coimbatore Stock Exchange Ltd (CSX) April 03, 2013 3 Saurashtra Kutch Stock Exchange Ltd (SKSE) April 05, 2013 4 Mangalore Stock Exchange Ltd (MgSE) March 03, 2014 5 Inter-Connected Stock Exchange of India Ltd (ISE) December 08,2014 6 Cochin Stock Exchange Ltd (CoSE) December 23,2014 7 Bangalore Stock Exchange Ltd (BgSE) December 26,2014 8 Ludhiana Stock exchange Ltd (LSE) December 30,2014 5.2. Stock Exchanges which have applied for exit and the process of exit underway(as on January 6, 2015): S.No. Name of Stock Exchange 1 Gauhati Stock Exchange Ltd (GSE)

of 10 2 Bhubaneswar Stock Exchange Ltd (BhSE) 3 Madras Stock Exchange Ltd (MSE) 4 Jaipur Stock Exchange Ltd (JSE) 5 Pune Stock Exchange Ltd (PSE) 6 OTC Exchange of India (OTCEI) 7 Madhya Pradesh Stock Exchange Ltd (MPSE) 8 U.P. Stock Exchange Ltd (UPSE) 9 Ahmedabad Stock Exchange Ltd (ASE) 10 Delhi Stock Exchange Ltd (DSE)* * DSE de-recognised on November 19, 2014 5.3. Compulsory exit process has been initiated in the case of Magadh Stock Exchange Ltd. and Vadodara Stock Exchange Ltd. Further, valuation agencies have been appointed in these cases for verification and valuation of the assets and liabilities of the stock exchanges. (This portion has been excised for reasons of confidentiality) 5.4. Transfer of funds to SEBI In terms of the Exit Circular, those stock exchanges that have exited from the business of functioning as a stock exchange have transferred the following amount to SEBI: Amount as per S. No. Exchange IPF/CPF Investor Services Fund 1% Security deposit para 5.4 of Exit Circular # Brokers dues 1 Hyderaba d 3,09,97,440 2,83,60,000 8,27,61,6 66 1,00,00,0 00 17,28,600 2 Coimbator e 51,27,493 32,41,994 20,73,890 15,00,000 2,28,36,2 51 3 Saurashtr a Kutch 69,08,125 87,33,503 17,13,000 15,00,000 84,20,194 4 Mangalor 20,24,448 11,59,357 1,54,671 10,00,000 32,07,085

of 10 S. No. Exchange IPF/CPF Investor Services Fund 1% Security deposit Amount as per para 5.4 of Exit Circular # Brokers dues e 5 Interconn ected 21,78,029 25,64,697 NIL 15,00,000 56,82,778 6 Cochin 1,57,90,258 18,23,127 3,94,960 10,00,000 38,61,924 7 Bangalore * 8,14,47,191 13,12,598 6,18,000 15,00,000 18,34,732 8 Ludhiana* 2,57,88,950 1,75,51,303 1,02,77,2 75 20,00,000 38,75,151 Total 17,02,61,934 6,47,46,579 9,79,93,4 62 2,00,00,0 00 5,14,46,7 15 * - IPF/CPF amount has been kept under an escrow account. # - Contribution up to 20% of its assets (after tax) towards SEBI IPEF for investor protection and in order to cover future liabilities, if any. 6. Our Proposal: Para 3.1 of SEBI's Exit Circular provides, inter-alia, that exclusively listed companies shall list on any other recognised stock exchange and that such other recognised stock exchanges may facilitate the listing of exclusively listed companies. Further, in terms of Para 3.2 of the Exit Circular, the exclusively listed companies which failed to obtain listing on any other stock exchange will cease to be a listed company and will be moved to the dissemination board by the exiting stock exchange. SEBI has also received representations from the exclusively listed companies of the nonoperational stock exchanges that pursuant to de-recognition/exit of such stock exchanges, they are unable to list on nationwide stock exchanges due to shortage of time. It may be placed on record that the Exit Circular has also not specified any time limit within which such companies need to obtain listing at the nation-wide stock exchanges. However, failing listing on nationwide stock exchanges, these companies are moved to dissemination board in terms of Exit Circular. It is also indicated by such companies that they may

of 10 be provided adequate time for listing on nationwide stock exchanges for complying with the conditions of listing on nationwide stock exchanges. Therefore, considering the concerns expressed by exclusively listed companies and in the interest of investors in such companies, it is proposed to specify a time line of eighteen months, within which such companies shall obtain listing subject to compliance with the listing requirements of the nationwide stock exchange. Until such listing, these companies shall continue to remain in the Dissemination Board. 7. Proposal to the Board: The Board is requested to take note of status of exit of de-recognised/non-operational stock exchanges and consider and approve the proposal submitted at Para 6 of this Memorandum. The Board is also requested to authorise the Chairman to take necessary steps to implement the above proposal.