DISSEMINATION BOARD OR DISASTER BOARD ? – THE FLIPKART OF STOCK MARKET ( OR OLX ) ?

“Betrayal of trusting small investors” was the words used by a long term investor in Chettinad, commenting on the exit of RSEs and as a fall-out, shifting of RSE listed companes unwilling to delist or get themselves listed in National level stock exchanges, to the “Dissemination Board”. This is something akin to the “pink slips” or Bullettin Board” in USA.

Origin of this problem dates back to 2012; SEBI circular No: CIR/MRD/DSA/14/2012 dtd.30.05.12 for Exit Policy for non-operational stock exchanges spells out that the stock exchanges who are not able to fulfil the prescribed requirements like achieving a networth of Rs. 100 or Rs. 1,000 Crore Annual Turnover, etc.within the prescribed time limit may apply for voluntary surrender of recognition and in case if they don’t, SEBI shall proceed with compulsory derecognition & exit of such exchanges as per terms & conditions specified by SEBI.

Most of the smaller RSEs ( Regional Stock Exchanges ) who could not meet these requirements have opted for voulntary exit and the shareholders who invested in the shares of these stocks exchanges during demutualisation in 2007 seems to be in a hurry to get back their money. In this process, the long term shareholders of the companies listed in these exchanges for decades, are left in lurch.  

Many of these investors were holding on to these stocks not only because they are excellent investments, paying handsome dividends reguarly & bonus at frequent intervals, but also because of the expectation and hope that one day or other, these stocks will be traded once again either in these RSEs or in one of the national level stock exchange, as many of them are compliant companies, paying their listing fees and filing all relevant documenst regularly on time.

Unlike the SME Exchnages, there is no regulatory arbitarage between RSEs and national level exchanges when it comes to listing as all the exchanges have the same listing agreement and similar clauses. The listing agreement is equally strict and not lenient like that of the SME Exchanges.

The problem gets more complicated with NSE & BSE permitting trading of many RSE listed companies under section 13 of SCRA from 2009. The annual turnover of these companies are estimated to be around Rs. 10,000 Crores per annum in NSE/BSE. This was an excellent arrangment resulting in a win-win-win situation for the investors, RSE listed companies – most of them being SMEs and as well as the RSEs.

Investors in these companies benefitted immensly, as it enabled proper price discovery and ensured better liquidity; for the SME Companies, it enabled them to raise more resources for development, expansion & diversification of their business; it also in turn benefitted the SMBs – small & medium brokers who are membersof these RSEs and RSEs themselves were benefitted by this arrangement.

The challenge now, is the fact that, in the last few years, thousands of investors have invested in these RSE listed companies as they were traded on national level exchanges, bringing in good amount of liquidity. Once the RSEs are derecognised, the trading in these companies might stop if they don’t choose to list theselves in national level exchanges.    

Today the option before these companies are:

1.       Get themselves listed in national level stock exchanges

2.       Delist their securities as per the SEBI”s Delisting Regulations of 2009

3.       If they fail to do either of the above then they will cease to be a listed company and will be moved to the Dissemination Board (DB) run by NSE/BSE/MCX-Sx.

The danger lies in the fact that no contract note is required to be issued for such transactions routed through the DB.

·         The rules, bye-laws and regulations of the respective exchanges may not apply to such trades emanating from bids/orders placed by buyers and sellers on these DBs.

·         These trades resulting out of bids/offers posted on theses DBs will be cleared and settled outside their respective clearing corporations as they will not guarantee the clearing and settlement of such trades.

·         The arbiteration mechanism, IPF – Investor Protection Fund and TGF – Trade Guarantee Fund are not available for the transactions done through the DB as they are not listed with these exchanges and there will be no monitoring of any compliance with respect to filings made by these companies.

·         The buyers and sellers on these DBs will not have any recourse to the investor grievance redressal mechanism, including arbitration and IPF, for trades executed on DBs.

·         Thereis no surveillance oversight on the bids and offers placed on DBs.

Therefore, the Dissemination Board or DB may not give safety and comfort to the small investor with all this drawbacks. Bangalore Stock Exchange has transferred 9 of its listed companies to the DB run by BSE. Hardly any trades takes place in this DB. No proper information available about the total trades over a period of time. Its like the auction platform e-bay or olx with no guarantees!

Will these companies list themselves in NSE or BSE? Listing at national level stock exchanges is not made compulsry; Now this paves a confortable way out for the promoters to exit with ease. The signs are already there for us to see in the markets. The long term investors who are holding on to these shares for generations together are flooded with “offer letters” from allies of some of those claiming to be SEBI registered/unregistered entities, offering them pittance for buying those shares.

Investors also lose the tax benefits associated with the investment through Stock Exchange platform resulting in further loss!

In a few cases, the prices offerred are way below the book value calculated based on the cash deposits available with the companies! Infact, SEBI tightened to 2003 Regulations in 2009 to prevent these kind of things happening and now these promoters are most likely to get away easily at the cost of the small investors invested in these shares several decades ago. This will lead to long term investors loosing faith in the system and they will move away from the market which as such lacks depth and breadth!

DB in many ways, resembeles the e-bay or the “no guarantee” old moore market or Bhendi Bazaar and it may not be a fair solution to the problem on hand. The way forward may be compulsorily listing or permitting these compliant companies to be traded  in national level exchanges as long as they are operational or till they go through the proper delisting process. The immediate cost may be met out of the IPF and ISF money transferred by these exiting stock exchanges and later recovered from these companies.

In short, among all the stake holders of these RSEs including its Share Holders, Trading Members and  Employees, the interest of the minority shareholders & long term shareholders of operational companies in RSEs should be the top priority in this entire exit process. The promoters should never be allowed to have an easy exit at the cost of these retail investors. That will be the betrayal of their trust and will cause irrepairable damage to the capital markets in India in the times to come.

(Disclaimer: it may be safer to presume that the Author &his immediate family may be holding shares in the companies listed in RSEs !)