Sucheta Dalal :Making The CLA Meaningful (5 May 2003)
Sucheta Dalal

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Making The CLA Meaningful (5 May 2003)  



Companies planning to tap the capital market have Maruti Udyog Ltd (MUL) to thank for a lot of action on the primary market front. With investors completely disinterested in the Initial Public Offerings (IPO) market, the regulator also seems rather relaxed about implementing important structural changes in the new issue market. For instance, ever since the Central Listing Authority (CLA) rules were notified by the Securities and Exchange Board of India (Sebi) on February 13 this year, sporadic new issue applications had been piling up at various stock exchanges. The bourses were in a quandary. They had assumed that after the notification of regulations, IPOs could only be cleared by the CLA, which has not yet been set up and operationalised. At the same time, companies based outside Mumbai, which did not want to list on the smaller regional stock exchanges (many of which had no trading whatsoever) were also in a fix. Although the CLA rules had been notified, an old regulation that mandated compulsory listing on the regional bourse (and kept those exchanges alive) had not been withdrawn.

All that changed when Maruti’s draft prospectus for a Rs 830 crore issue was finalised. Since the issue is part of the disinvestment process, all that Maruti had to do was to inform the government that it had no intention of listing on the Delhi Stock Exchange (its regional bourse) and the rule on mandatory regional listing was finally scrapped.

Similarly, when Maruti inquired about the listing clearances from the two main bourses, Sebi was alerted to the fact that stock exchanges had not been clearing IPOs. Last week it sent out a clarification saying that listing formalities should not cease until the CLA was formally constituted. The question is, if the CLA was such a priority with Sebi around a year ago, why has it lost its momentum along the way? And having structured the CLA based on a committee report, why is Sebi blundering over its activation?

The CLA regulations notified by the gazette in February 2003 have clearly stated “no President or Member shall hold office after he has attained the age of sixty-five years”. Yet, two of the ten members that it appointed were over 65 years old, including the President. So, Sebi delayed the constitution of the CLA while it quietly changed the rules and removed the age limit. Although newspapers have recently reported the change, it is not clear if Sebi has formally amended its gazette notification. A senior Sebi executive told me that the rules had been changed even before they were taken to its own board, but that obviously cannot be the case. A lot else has changed in the interregnum between Sebi proposing and constituting the CLA and it raises several questions that need to be addressed before it gets off the ground.

Most of India’s 20 plus regional stock exchanges have no trading to report. With companies using the opportunity to delist from these bourses after last week’s notification, their listing income will cease and they will finally shut down. Some exchanges have already drawn up plans to change their business and trade in commodities. When the number of stock exchanges dwindle from 23 to three, or four –– won’t the CLA lose much of its relevance?

With just three remaining bourses in the country –– of which two are national exchanges, is there a need for listing to go through a CLA, which would only add to the administrative cost of clearing IPOs? Also, are the 10 CLA members actually competent to vet and clear IPO prospectuses? Won’t the main job of screening applications remain with Sebi’s primary market division? Also, if all listing applications to the CLA have to be cleared within 30 days, how often will the CLA meet and will its work be a labour of love for the capital market, or will the members be adequately compensated for their effort? After all, members of the CLA seem to have as much or more responsibility than independent directors of companies.

These and other issues were to be thrashed out at the first CLA meeting this week, but that too has been postponed.

In the meanwhile, there are more questions. For instance, although the CLA comprises some renowned personalities such as former Chief Justice of India MN Venkatachelliah, an appeal against the CLA’s rejection of listing permission lies both with the Sebi board and individual stock exchanges. The CLA will issue only a letter of “recommendation” for listing, and although stock exchanges have to consider the recommendation, they are not bound to follow it. They can “proceed with it (the application) as provided in the Securities Contracts (Regulation) Act of 1956 (SCRA) and the rules and byelaws made there under”. An appeal against a stock exchange rejecting listing lies with the Securities Appellate Tribunal.

If we agree that most new listings will be only on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) and both these bourses are represented on the CLA, can they still have the power to reject listing after a CLA recommendation? Technically, they can. But it is bound to cause enormous embarrassment to the CLA and to Sebi. On the other hand, Sebi cannot take away the bourses’ powers to reject listing under the SCRA. One solution would be for the CLA to share listing details with those bourses on which a company plans to list so that it begins to process the listing application before the CLA makes its recommendation. That way, most discrepancies and issues will be detected and resolved at the CLA and not cause embarrassment later.

These issues suggest that what started out as an apex listing authority is turning out to be no more than a central processing house for new issue applications. Such a CLA does not need people of the stature of a former Chief Justice of India and a former Sebi chairman. What it needs is competent people of integrity who have a thorough knowledge of the capital market and can catch flaws in the offer documents. Also, unless Sebi compensates them for their effort, vetting documents will be a thankless chore rather than a prestigious assignment. Maybe Sebi and the newly appointed members of the CLA need to sit together and decide whether the CLA should be a permanent listing authority or just an interim solution. Making The CLA Meaningful

Companies planning to tap the capital market have Maruti Udyog Ltd (MUL) to thank for a lot of action on the primary market front. With investors completely disinterested in the Initial Public Offerings (IPO) market, the regulator also seems rather relaxed about implementing important structural changes in the new issue market. For instance, ever since the Central Listing Authority (CLA) rules were notified by the Securities and Exchange Board of India (Sebi) on February 13 this year, sporadic new issue applications had been piling up at various stock exchanges. The bourses were in a quandary. They had assumed that after the notification of regulations, IPOs could only be cleared by the CLA, which has not yet been set up and operationalised. At the same time, companies based outside Mumbai, which did not want to list on the smaller regional stock exchanges (many of which had no trading whatsoever) were also in a fix. Although the CLA rules had been notified, an old regulation that mandated compulsory listing on the regional bourse (and kept those exchanges alive) had not been withdrawn.

All that changed when Maruti’s draft prospectus for a Rs 830 crore issue was finalised. Since the issue is part of the disinvestment process, all that Maruti had to do was to inform the government that it had no intention of listing on the Delhi Stock Exchange (its regional bourse) and the rule on mandatory regional listing was finally scrapped.

Similarly, when Maruti inquired about the listing clearances from the two main bourses, Sebi was alerted to the fact that stock exchanges had not been clearing IPOs. Last week it sent out a clarification saying that listing formalities should not cease until the CLA was formally constituted. The question is, if the CLA was such a priority with Sebi around a year ago, why has it lost its momentum along the way? And having structured the CLA based on a committee report, why is Sebi blundering over its activation?

The CLA regulations notified by the gazette in February 2003 have clearly stated “no President or Member shall hold office after he has attained the age of sixty-five years”. Yet, two of the ten members that it appointed were over 65 years old, including the President. So, Sebi delayed the constitution of the CLA while it quietly changed the rules and removed the age limit. Although newspapers have recently reported the change, it is not clear if Sebi has formally amended its gazette notification. A senior Sebi executive told me that the rules had been changed even before they were taken to its own board, but that obviously cannot be the case. A lot else has changed in the interregnum between Sebi proposing and constituting the CLA and it raises several questions that need to be addressed before it gets off the ground.

Most of India’s 20 plus regional stock exchanges have no trading to report. With companies using the opportunity to delist from these bourses after last week’s notification, their listing income will cease and they will finally shut down. Some exchanges have already drawn up plans to change their business and trade in commodities. When the number of stock exchanges dwindle from 23 to three, or four –– won’t the CLA lose much of its relevance?

With just three remaining bourses in the country –– of which two are national exchanges, is there a need for listing to go through a CLA, which would only add to the administrative cost of clearing IPOs? Also, are the 10 CLA members actually competent to vet and clear IPO prospectuses? Won’t the main job of screening applications remain with Sebi’s primary market division? Also, if all listing applications to the CLA have to be cleared within 30 days, how often will the CLA meet and will its work be a labour of love for the capital market, or will the members be adequately compensated for their effort? After all, members of the CLA seem to have as much or more responsibility than independent directors of companies.

These and other issues were to be thrashed out at the first CLA meeting this week, but that too has been postponed.

In the meanwhile, there are more questions. For instance, although the CLA comprises some renowned personalities such as former Chief Justice of India MN Venkatachelliah, an appeal against the CLA’s rejection of listing permission lies both with the Sebi board and individual stock exchanges. The CLA will issue only a letter of “recommendation” for listing, and although stock exchanges have to consider the recommendation, they are not bound to follow it. They can “proceed with it (the application) as provided in the Securities Contracts (Regulation) Act of 1956 (SCRA) and the rules and byelaws made there under”. An appeal against a stock exchange rejecting listing lies with the Securities Appellate Tribunal.

If we agree that most new listings will be only on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) and both these bourses are represented on the CLA, can they still have the power to reject listing after a CLA recommendation? Technically, they can. But it is bound to cause enormous embarrassment to the CLA and to Sebi. On the other hand, Sebi cannot take away the bourses’ powers to reject listing under the SCRA. One solution would be for the CLA to share listing details with those bourses on which a company plans to list so that it begins to process the listing application before the CLA makes its recommendation. That way, most discrepancies and issues will be detected and resolved at the CLA and not cause embarrassment later.

These issues suggest that what started out as an apex listing authority is turning out to be no more than a central processing house for new issue applications. Such a CLA does not need people of the stature of a former Chief Justice of India and a former Sebi chairman. What it needs is competent people of integrity who have a thorough knowledge of the capital market and can catch flaws in the offer documents. Also, unless Sebi compensates them for their effort, vetting documents will be a thankless chore rather than a prestigious assignment. Maybe Sebi and the newly appointed members of the CLA need to sit together and decide whether the CLA should be a permanent listing authority or just an interim solution.


-- Sucheta Dalal



 



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