The Hindu Business Line : Deciding exit routes vital before closing Regional Stock Exchanges

The vexed issue of the future of Regional Stock Exchanges (RSEs) — debated time and again — could be one of the likely subjects at the next board meeting of SEBI.

As the RSEs have not gained from the various lifelines provided for their revival, but rather have become a regulatory burden, they should be allowed to exit, subject to payment of statutory liabilities, said a source close to the RSEs.

Subsidiary income

With trading drastically declining at the RSEs, their subsidiaries (around 15) became their main breadwinners in their status of broking houses with access to national exchanges at concessional rates, while the RSEs’ investments in these subsidiaries were given incentives for tax purposes.

But RSEs continue to languish. There is no trading on any of the RSEs with the exception of the Calcutta Stock Exchange and Uttar Pradesh Stock Exchange, where too business is down to a trickle, noted a SEBI committee report of 2006.

Exit route

Although about four RSEs have been derecognised on account of defaults, the exit route for the rest would facilitate them to chalk out their future.

So, whenever the SEBI board takes up the issue the most important question would be the exit route for the RSEs.

SEBI’s committee report says that there is an urgent need to formulate a permanent and appropriate scheme for distribution of assets in any exit scheme.

The core concern for RSEs would be the valuation of their assets — chiefly land — and the distribution of proceeds from the exit route that would be decided upon by SEBI.

No to splitting proceeds

At one point of time the official view was that the exchanges should be directed to part with at least 30 per cent of their exit proceeds to Government (because of the concessions provided to them), and 70 per cent to members, but the RSEs are not inclined to accept this, said sources. The investor protection fund and the settlement guarantee fund, which the RSEs maintain, would anyway have to be handed over to SEBI, they said.

RSEs feel they have incurred expenditure on demutualisation and technology upgradation which did not pay, and don’t want to share any exit proceeds. “None of the members of the RSEs received any concessions from the Government when they were buying land etc at the time of the conception of the RSE,” said an official associated with them. Members had brought in around Rs 10-15 lakh each of their own money to set up the RSEs, they claimed.

“The exit route should be optional and incentive based, much like a voluntary retirement scheme,” according to Mr V. Nagappan, Chairman, Federation of Indian Stock Exchanges.

Another exit issue to be addressed is the status of the RSE subsidiaries. The SEBI report suggests that it would be up to the subsidiaries to carry on broking operations as any other broking entity registered with SEBI.

The worth of RSEs' assets

Any exit option for the RSEs will serve to unlock their assets. Most RSE offices are in State capitals or in prominent cities, which would fetch their real estate assets substantial valuation.

Of the 24 recognised stock exchanges, 15 (not including MCX, NSE, BSE, OTCE, Magadh, Hyderabad, Mangalore, Coimbatore and Rajkot) can be valued in terms of their demutualisation valuation at around Rs 400-500 crore, according to RSE sources.

The Delhi stock exchange would be worth R 200-250 crore, Bangalore valued close to Rs 100 crore, and Ahmedabad close to Rs 70 crore, they said. Trading at most of these exchanges is at a standstill and the assets are idle.

Bangalore Stock Exchange (BgSE) had set up a subsidiary in 1999. BgSE Financials, a full-fledged financial services company, is a profitable enterprise, providing securities trading, depository participant services, and distribution of mutual funds. Hence BgSE does not want any exit option, said an official with the company. "Though a subsidiary, BgSE is vibrant like a full-fledged enterprise."

He declined to specify the value of assets owned by the stock exchange, which earns rental income from its building in a prime area.

The derecognised Hyderabad Stock Exchange (HSE) will discuss the exit route at its AGM on November 22. "As of now, we do not have any concrete plans," Mr K. Pandu Ranga Reddy, Director, HSE, told Business Line.

HSE has a prime but "unvalued" property of 17,000 square yards in the heart of the city of which 4.5 lakh sqft is constructed area. Efforts to sell some of the land were not successful due to litigation.

Cochin Stock Exchange functions out of its own office space of approximately 11,000 sq ft in the heart of the city. Office space in the vicinity would be Rs 4,500 to Rs 5,500 a sq ft, sources said.

Calcutta Stock Exchange is a heritage building in the heart of the city. Mr Udayan Bose, Chairman of the CSE board, said: "We do not have any intention to develop it. As it is a heritage asset, we would maintain it as it is."

CSE has recently bought five acres at Rajarhat and plans to more to develop a financial centre.

Earlier, CSE had bought 10 acres at a prime location for Rs 8.4 crore. But the civic authority has bought back half that land for a trade fair complex. The rest would be auctioned and 60 per cent of the proceeds would go to CSE. However, depressed market valuations have delayed the auction.

(With bureau inputs from Kochi, Bangalore, Hyderabad and Kolkata)