With Madras, Bangalore, Delhi, Ahmedabad and 13 other stock exchanges set to shut operations in compliance with a Securities and Exchange Board of India (SEBI) order, lakhs of investors will be left in the lurch.

Investors holding shares in more than 3,000 companies, with market capitalisation running into thousands of crores, are likely to be affected as a result of the market regulator’s move to shut down non-operational stock exchanges.

SEBI has directed all exchanges that do not possess a trading platform with an annual turnover of at least ₹1,000 crore and a net worth of ₹100 crore, and that do not have a tie-up with a clearing corporation, to exit. The Calcutta Stock Exchange is complaint on the first two counts and is trying to strike a deal with a clearing corporation. But the others, including 14 regional exchanges, the Over the Counter Exchange of India and the Inter-connected Stock Exchange, will have to wind up operations.

Uncertainty for investors

The question that arises is: What happens to the shares that are listed only on these exchanges? “Such (regional) stock exchanges should have been derecognised only after ensuring protection of investors,” says Virendra Jain, President of Midas Touch Investor Association. “Companies not migrating to a nationwide stock exchange should be compulsorily de-listed and the shareholders given an exit price in accordance with SEBI’s delisting rules.”

According to SEBI, in March 1997, there were 7,995 companies listed on regional stock exchanges across the country. Of these, the Calcutta Stock Exchange accounted for 1,800 companies while the Delhi Stock Exchange came a close second with almost as many. The market capitalisation of these companies was around ₹2-lakh crore in March 1997. “There weren’t too many companies that listed on regional stock exchanges after 1997,” says V Nagappan, member of the advisory committee of the Madras Stock Exchange.

Large sum at stake

But many companies that listed during the IPO boom in 1994-95 are likely to have vanished since then. Assuming that only a third of these companies are still operational, investor money stuck in these companies can still be in the region of ₹70,000 crore.

Since many of the regional stock exchanges are already non-operational, the dealing in most of these stocks was happening through off-market trades. With the latest diktat, there is a lot of confusion among investors holding these shares, says Nagappan. There are some who have been making use of this chaos to approach investors, coaxing them to sell their holdings at extremely low value.

Exit routes

SEBI has prescribed that companies listed only on regional stock exchanges can either seek listing on a national stock exchange, opt for de-listing, or be classified as vanishing companies (if no information is available on them).

Companies that do not fall under any of the above categories have to be moved to a dissemination board to be set up on any nationwide stock exchange. The dissemination board is akin to a notice board where buyers and sellers have to find each other.

But exit through this route is not going to be easy. For one, there is no guarantee that investors will be able to find buyers willing to pay the price they want to make an exit. “There are no contract notes, no trade guarantees.” says S Venkateswaran of Madras Stock Exchange. Some stocks could be in demat form and this will cause additional difficulty.” “This form of exit is a huge injustice to shareholders,” says B Madhav Reddy, MD and CEO of Calcutta Stock Exchange.

“The way out will be to migrate the companies to the BSE or NSE or any other functional stock exchange under a Section 13 arrangement,” he adds.