A few years ago, we had discussed possible issues that arise out of the commercial operations of a stock exchange. While an exchange is a profit-making institution and is required to act in the interests of its shareholders, it also carries out a regulatory role in selecting companies that are to be listed on it and thereafter in overseeing their compliance with the listing requirements. These issues have been addressed in various jurisdictions through different mechanisms as previously discussed. These questions (and more) have recently come to the fore in India with the listing processes of two leading stock exchanges, BSE and NSE, underway.
For instance, the red herring prospectus of BSE expressly recognises this as a risk factor as follows (at page 23):
8. Our duties as a stock exchange may conflict with our Shareholders' interests.
In discharging our obligations to ensure an orderly and fair market and/or to ensure that risks are managed prudently, we are required to act in the interests of the public, having particular regard to the interests of the investing public, and to ensure that where such interests conflict with any other interests, the former will prevail. There is no assurance, therefore, that our results will not be materially adversely affected through placing public interest ahead of our own interests, including the interests of our shareholders.
Similarly, the draft offer document of NSE too contains language to a similar effect (on page 27.
Apart from these usual conflicts duties and obligations of stock exchanges, there arises another question, which pertains to where stock exchanges can be listed. This is a common question as several leading stock exchanges around the world are listed, as this Economist report suggests. Interestingly, a few of those leading exchanges (examples being the Hong Kong and Singapore exchanges) have listed their securities on themselves, thereby imposing considerable onus on their regulatory mechanisms to be robust enough to address significant conflict issues that arise in the process.
When it comes to the venue for listing, the Indian legal position is somewhat stricter. For instance, regulation 45 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 provides that “a recognised stock exchange may apply for listing of its securities on any recognised stock exchange, other than itself and its associated stock exchange”. Hence, a stock exchange in India is prohibited from listing on itself or an associated stock exchange, while partially seeks to address the conflict problems that arise when an exchange lists on itself. Hence, interestingly enough, in the current context, the BSE is listing on the NSE and vice versa.
However, such a listing of one exchange on another is itself likely to give rise to issues pertaining to conflicts of interest. Hence, the Securities and Exchange Board of India (SEBI) has sought to establish a mechanism to deal with potential issues that may arise from this dispensation. In a circular issued on 27 January 2017, SEBI has set out a three-part process for dealing with conflicts:
1. The Listing Department of the listing stock exchange (i.e. a stock exchange on which the listing is done) shall be responsible for monitoring the compliance of the listed stock exchange (i.e. a stock exchange which is getting listed) as in the case of listed companies. This is similar to the usual duties carried out by the listing stock exchange in respect of any company.
2. The Independent Oversight Committee of the listing stock exchange shall exercise oversight at the second level to deal with any conflicts. This also provides for a redressal mechanism whereby the listed stock exchange may appeal to the Independent Oversight Committee of the listing stock exchange, if aggrieved, with a decision of the listing stock exchange as specified under the previous paragraph.
3. While the above two mechanisms are dealt with at the stock exchange level, SEBI has sought to add another layer whereby an independent Conflict Resolution Committee (CRC) constituted by SEBI, with an objective for independent oversight and review, shall monitor potential conflicts between listed and listing stock exchange on a regular basis. The listed stock exchange aggrieved by the decision of the Independent Oversight Committee of the listing exchange may appeal to the CRC. The CRC would effectively act as an arbiter of any conflicts between the two exchanges.
With the impending listing of both BSE and NSE, these issues are likely to become a reality in the near future. Hence, SEBI’s actions in attempting to forestall any problems are welcome. However, the circular contains only the barebones of the mechanism and lacks the precise details on how any conflicts will be resolved. Much will be left to be determined by the actions of these various committees which, unless supplied with the requisite guidance, might not be able to function effectively.