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Sebi nod to SE demutualisation, more stock derivatives

Securities and Exchange Board of India, on Friday, cleared the uniform model of corporatisation and demutualisation of stock exchanges and also gave freedom to bourses to select the scrips for derivative trading subject to conditions laid down by J R Verma panel.

The Sebi board has approved the Justice Kania Committee recommendation to demutualise bourses by converting them into a company and changing their character to a "for-profit" entity, Sebi chairman G N Bajpai told reporters after the board meeting in Mumbai.

"We have requested the government to amend the Income Tax Act for exempting accumulated profit of the exchanges from taxation when they change their form to a "for-profit" company. However, future profits will be taxed," Bajpai said.

The bourses should present their demutualisation scheme within six months from the date of issuing instructions, he said, adding broking members would be entitled to hold shares of the corporate body but Sebi would have to consult the government on granting voting rights to brokers.

On expanding the current list of stocks for derivatives trading, he said bourses would now have the freedom to choose the stocks from the top 500 scrips (based on market capitalisation) and the list should be forwarded to Sebi for approval.

"The physical settlement for derivatives will have to wait till scheme for margins trading is put in place", Bajpai said, adding Sebi would write to the government seeking reduction in contract size for each transaction from the current Rs 200,000 to Rs 100,000.

Bajpai said freedom to select scrips for derivatives trading would result in product differentiation while addressing the risks of market manipulation.

The trading member position limit at Rs 50 crore (Rs 500 million) would be linked to the overall market wide limit and at maximum of 20 per cent of the market wide ceiling for stocks with a cap of upto Rs 250 crore (Rs 2.5 billion) and upto Rs 50 crore (Rs 500 million) for stocks with a cap beyond Rs 250 crore (Rs 2.5 billion), he said.

Such a measure would help in linking the trading member position to overall liquidity of the underlying stock and also reduce the present member position limit from a uniform level of Rs 50 crore (Rs 500 million), he said.

Sebi would have to satisfy itself that proper risk management systems are in place before allowing the expansion of listing of eligible securities for derivatives trading, he added.

According to Verma panel, bourses would have a freedom to select an underlying security for derivative and along with it they would have to adopt risk containment measures, including gross margining and cross collateralisation.

The exchanges should have an integrated surveillance for cash and derivatives market, the panel said.

Sub-brokers could be assimilated into the market structure as long as they meet the twin requirements of client level gross margins and regulations of sales practices at client levels, Verma panel had said.

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