Dissemination board: Liquidity at all costs!

The Securities and Exchange Board of India (SEBI) in 2008 issued guidelines for regional stock exchanges (RSEs) whose recognition it withdraws or refuses, and RSEs that seek to surrender their recognition. In all such cases, SEBI passes an appropriate order containing conditions, one of them being that companies which are exclusively listed on de-recognized exchanges have to either seek listing on other stock exchanges or provide an exit option to shareholders as per SEBI’s delisting guidelines and regulations after obtaining shareholder approval for the option, within a time frame specified by SEBI, failing which the companies stand delisted through operation of law.

By a circular dated 30 May 2012, SEBI modified the process for stock exchanges seeking voluntary surrender of recognition. Under the revised guidelines, if the stock exchange was not able to maintain the prescribed turnover or did not apply for voluntary surrender of recognition and exit within two years from the date of the circular, SEBI would proceed with compulsory de-recognition and exit of the exchange. SEBI further directed that companies which were exclusively listed on de-recognized exchanges and which failed to obtain listing on another stock exchange would cease to be listed companies and would be moved to the dissemination board (DB) by the exiting stock exchange.

Therefore, in the interest of investors of exclusively listed companies, stock exchanges with nationwide trading terminals (NTTs), such as the BSE, National Stock Exchange and MCX-SX, have set up a DB mechanism.

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Through the DB mechanism, a willing buyer and seller are given an opportunity to disseminate their offers using the services of brokers of stock exchanges hosting DB. Exiting stock exchanges have to enter into an agreement with at least one stock exchange with NTTs providing DB. The exiting stock exchange is required to pay a one-time fee for the arrangement, based on the number of companies moving on to the DB, number of public shareholders in those companies, their paid-up capital, etc.

Exchanges having NTTs need not enter into a listing agreement with such companies. However, information received from them is disseminated.

The buyers and sellers are required to register with a broker of the exchange where the DB is set up. Brokers are not required to issue a contract note for such transactions.

As the matched trades are not settled through the stock exchange/clearing corporation mechanism, there is no recourse to the settlement/trade guarantee fund and investor protection fund of the exchange with NTTs for the trades on DB.

Recent developments

On 22 May 2014, SEBI issued the following directions to stock exchanges to deal with companies exclusively listed on non-operational stock exchanges:

(1) Companies exclusively listed on non-compliant stock exchanges have an option of listing in exchanges having NTTs after complying with main board or any diluted listing norms on or before the exit of the exchange, either on a voluntary or compulsory basis.

(2) Stock exchanges with NTTs have to facilitate the listing of these companies on priority basis in a time-bound manner.

(3) Exclusively listed companies also have an option of voluntary delisting before the de-recognition of the stock exchange by following the SEBI (Delisting of Equity Shares) Regulations, 2009, using the platform provided by stock exchanges with NTTs for reverse book building. To facilitate such voluntary delisting the minimum public shareholding requirements prescribed in rules 19(2) (b) and 19A of the Securities Contracts (Regulation) Rules, 1957, and clause 40A of the Equity Listing Agreement are not applicable.

(4) Where companies exclusively listed on non-operational stock exchanges are not traceable or where the data available are more than three years old, the stock exchanges have been directed to follow a process for inclusion in the list of “vanishing” companies maintained by the Ministry of Corporate Affairs.

(5) Exchanges which are being de-recognized on either a voluntary or compulsory basis are responsible for placing their exclusively listed companies on DB. These exchanges have to ensure that the database of an exclusively listed company is transferred to SEBI and to those stock exchanges on whose DB the shares of these companies are available.

By a circular dated 17 April 2015, SEBI has allowed an 18-month time line within which companies exclusively listed on de-recognized/non-operational stock exchanges are obliged to obtain listing on compliance with the listing requirements of exchanges with NTTs, subject to fulfilment of conditions prescribed in the circular. Until such listing, these companies will remain in the DBs of the nationwide stock exchanges.

SEBI has granted exit to 13 stock exchanges so far. The DB is a welcome move to protect the interest of shareholders of companies which are listed exclusively on RSEs by providing liquidity in the equity shares of such companies.

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Suhail Nathani is a partner and Yogesh Chande is an associate partner at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.