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Dilution of the ‘fit and proper’ criterion for investors in stock exchanges to allow their listing should be done “very carefully”, say market experts. Exchanges are frontline regulators that do not fall under the category of common businesses and need only long-term investors, they add.
According to the current Securities Contract (Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012, which specify the ownership and governance norms of stock exchanges, only a ‘fit and proper person’ can acquire or hold equity shares of a stock exchange.
A ‘fit and proper’ person is one who has a general reputation and record of fairness and integrity, including but not limited to — financial integrity; good reputation and character; and honesty. Besides, such a person should not have been convicted by a court or by any regulator or be of unsound mind or unsound financial standing.
Role modelAccording to Arun Kejriwal, Founder, KRIS Research, “An exchange is a frontline regulator and should, therefore, set an example for all its stakeholders — members, shareholders and companies.
Applying a yardstick that every member/shareholder should be a fit and proper person as being mandatory goes without saying simply because it is an exchange and there could be a contagion effect if a person who is not fit and proper is a shareholder or member. The regulator should, therefore, ensure a threshold regulation for every stakeholder — be it a member, trader, shareholder or asset class.
Norm for comexSome feel the norms for listing stock exchanges should not be the same as that of commodity exchanges.
Says Tejesh Chitlangi, Partner, IC Legal, “the stock exchanges and commodity exchanges cannot be treated on par when it comes to meeting the ‘fit and proper’ criteria for its shareholders, as stock exchanges from a systemic risk as well as operational perspective are more sensitive and sophisticated.
“Hence, in case of stock exchanges, a materiality threshold of, say one per cent, may be prescribed (unlike the 2 per cent earlier prescribed for commodity exchanges), above which a shareholder will have to meet the ‘fit and proper’ criteria, which will also avoid hardship for non-institutional investors on listing.”
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