Listing of Stock Exchanges and Addressing Conflicts of Interests

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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Pertinent post, Umakanth. One has to also juxtapose this with the statutory right to appeal, within a statutory time limit of 45 days, to the Securities Appellate Tribunal, by a listed company aggrieved by a decision of the stock exchange on which it is listed. The actions of these committees would have to be executed within these time limits.

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