The article is written by Anumeha Agrawal pursuing BA.LLB (Hons.) from Symbiosis Law School, Pune. This article explains the emergence, functioning advantages, decline and current position of the Regional Stock Exchanges.
In the year 1957, there were 8 Regional Stock Exchange (“RSE”) registered under Securities Contracts (Regulations ) Act, 1956 and by the 1980s, 13 stock exchanges were further added, thus making it a total of 21. However, currently, there is only one RSE recognised and registered with SEBI, Calcutta stock exchange. What was the reason for such an extreme downfall? To know the answer, continue reading.
What are Regional Stock Exchanges
Regional Stock Exchanges (“RSE”) are stock exchanges operating in a specific geographical location. They provide a platform to trade securities and other capital instruments for a limited area. However, the definition also differs in different jurisdictions. In the United States of America, the RSEs are stock exchanges not located in the country’s financial centre, i.e. New York.
History of Regional Stock Exchanges
In the United Kingdom, the London Stock Exchange was established in the 1609s which was the key stock exchange for almost a century and a half. There was a rise in RSEs subsequently due to the “funding gap” for the smaller firms located outside London. In the year 1799, a stock exchange came up in Dublin and 1836, two more stock exchanges were established in Liverpool and Manchester after the first Railway promotion boom. Subsequent to the second rail promotion boom new stock exchanges like Glasgow, Edinburgh, Aberdeen and 12 other English towns were set up.
The reason for the emergence of these stock exchanges was the industrialisation north of England and Scotland but many new investors arose who were located in towns and cities. Railways and joint-stock banks were also located in these provisional towns.
The emergence of RSEs in America can be traced to the 1790s by the founding of the Philadelphia Stock Exchange. In 1934 when the Securities Exchange Commission was established and 24 exchanges were registered with it. These included major RSEs operating in America namely the Boston Stock Exchange, Philadelphia Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange. Each of these RSEs had a specialized market on its own, Pacific Stock exchange focused on derivatives trading whereas Philadelphia stock exchange dealt with currency transactions.
In India, originally stock exchanges were regional stock exchanges only, due to the limitations of times physical trading was practised by an open outcry model. The investors preferred to operate in the companies conducting operations in their vicinity and even the companies were listed in the stock exchanges where they operated.
The business of RSEs was materially increased after the Ministry of Finance issued a circular mandating the listing of a company on a stock exchange located in the state where their registered office is established. This step was taken in the year 1985 when there was little to no online trading thus the RSEs were the best alternative to meet the investment needs of the local investors.
Benefits of Regional Stock Exchanges
The smaller companies which are not large enough or do not have operations at a national level voluntarily opt to get registered on RSE instead of national stock exchanges. The decentralised system of stock exchanges in a country favours the smaller firms by providing larger access to the equity capital.
Another reason for RSE’s popularity was the less stringent requirements for listing in these exchanges, companies who are not eligible to get listed on national stock exchanges get listed in RSEs to enable trading of their securities.
It also adds to the overall liquidity of the financial market, it also increases the efficiency by providing an alternative platform to trade.
The decline of regional listing
Slowly but steadily, the popular phenomena of regional listing declined throughout the globe. The traders started preferring to trade on national stock exchanges as on the same platform they could access securities listing across the nation, sometimes even international securities. Even the companies started opting to get listed on national stock exchanges to have larger visibility. The development of technology played a vital role in the decline of the popularity of regional listing and trading. In India, the share of RSE’s was 45.6% of the total all Indian market turnover in 1995-96 which continuously declined ever since to 8.4% in 2001-02.
Causes for the decline of RSE
Online trading on national stock exchanges
The primary reason for the decline of RSEs has been the growth of stock exchanges operating on national levels. These integrated stock exchanges enable the investors to have access to the issuers and invest options countrywide and not only throughout the country but also the investment options at an international level.
Abolition of Badla trading
Another reason for such a decline was the abolition of the Badla system. This system played an imperative role in the business of regional exchanges like Ahmedabad Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange and Ludhiana Stock Exchange because badla trading was mostly done via RSEs.
Badla trading system refers to a system which was a combination of cash and future settlements enabling investors to have long settlement periods. Under this system, the investors buy shares without taking delivery and the transaction is carried forward to the next settlement date by paying interest on the outstanding amount. This interest and the operational charges of the exchanges is called Badla.
The brokers bridge the gap between the margin and the full value of the shares by utilising the lending mechanism of the exchange, however, certain eligibility criteria were to be met before such facility could be extended. Thus for the investors who didn’t meet such criteria individuals also lent, this was known as Vyaj Badla.
Badla financing is profitable for the investor as the Investor lends money to buy overnight shares which gives an estimated return of 4 to 5 % and similar to ‘buy’ they also have a ‘sell’ contract for the next day. It had three benefits- quasi-hedging, stock lending and financing mechanism.
The Securities Exchange Board of India first banned badla in 1992 but was revived in 1995 and finally it was banned in the year 2001 with effect from July 2, 2001.
Uniform trade and settlement cycles
Uniform trading cycles were introduced by SEBI via its circular dated June 21, 2001, for all the stock exchanges in the country with effect from July 2, 2001. As these uniform trade cycles further reduced the trading opportunities on the RSEs by reducing the arbitrage transactions.
The same circular also provided for the adoption of rolling settlement instead of the account period settlement with different settlement cycles on a T+5 w.e.f December 21, 2001, T+3 w.e.f from April 1, 2002, and T+2 w.e.f April 1, 2003. Rolling settlement refers to the feature of stock exchanges ensuring the settlement of the trading transactions within the specified period, here T means the trading day and T+n means the trade has to be settled within n days from the day of the transaction. The account period settlement used to be much longer thus incentivising the traders to trade on RSEs.
Ceasing mandatory registration
During 2001-02, there was no trading in 7 out of 21 RSEs due to the nationwide trading service available on NSE and BSE covering approximately 400 cities. The absence of trading and the mandatory registration on RSEs increased the operational costs of the companies thus SEBI issued its (Delisting of Securities) Guidelines, 2003 and Ministry of Finance issued its circular ceasing the requirement to be mandatorily registered with the RSE in the area of the company’s registered office instead they could be registered with either of the two national stock exchanges. Thus the last source of income for the RSEs, the annual listing fees also stopped.
Failed attempts of revival
There were several attempts of the revival of RSEs and other smaller stock exchanges. One such attempt was the integration of 14 RSEs, all these exchanges formed Inter-Connected Stock Exchange of India Ltd. It was incorporated in January 1998 under SCRA with the aim to convert all small isolated markets into one integrated large market with much higher liquidity and automated trading.
Initially, the daily turnover increased but it soon reduced as the participating RSEs did not shut down their regional operations and the bigger investor still preferred the national stock exchanges over ICSE.
Another step to revive smaller stock exchanges was taken by SEBI by permitting stock exchanges to float its subsidiaries to acquire membership rights of other exchanges to provide the members access to a wider market by improving the trade volume. The attempt was not a complete failure but it is still unable to generate an appreciable volume of trading. The minimum base capital and stringent regulatory compliances like the appointment of a minimum 50% of Public Representatives as Directors with SEBI’s approval has proved another challenge to these barely commercially afloat RSE’s subsidiaries.
Currently functioning Regional exchanges
Currently, 9 stock exchanges are operating in India, out of which only one is an RSE. However, until recently, a total of 23 exchanges were registered in India out of which only 2 were operating at a national level and rest 21 were of regional level. SEBI issued stringent criteria of minimum net worth 100 crore and minimum annual trading 1000 crores in the form of Securities Contracts (Stock Exchanges and Clearing Corporations) Regulations, 2012, to be listed and as a result, 20 regional stock exchanges opted to exit the business.
SEBI issued a circular with an exit policy for all the regional stock exchanges which voluntarily wanted to exit the market and not allow regional stock exchanges with little business to be listed. The committee headed by G. Anantharaman recommended that regional stock exchanges should be allowed to be self listed or to bring a strategic partnership with national stock exchanges. Calcutta Stock Exchange tied up with BSE and Madras Stock Exchange with NSE.
The said phenomena were said to be inevitable due to increased reach of countrywide stock exchanges due to online trading and other technological aids, thus their operations’ commercial relevance has subsided.
RSEs currently registered with the SEC
Regional exchanges currently registered with the SEC include the following:
- BOX Options Exchange LLC
- Cboe BYX Exchange, Inc.
- Cboe BZX Exchange, Inc.
- Cboe C2 Exchange, Inc.
- Cboe EDGA Exchange, Inc.
- Cboe EDGX Exchange, Inc.
- Cboe Exchange, Inc.
- Chicago Stock Exchange, Inc.
- The Investors Exchange LLC
- Miami International Securities Exchange
- MIAX PEARL, LLC
Most of the RSEs were absorbed in other national stock exchanges like NASDAQ acquired the Philadelphia Stock Exchange and Boston exchange. And New York Stock Exchange acquired Pacific Stock Exchange.
Regional Stock Exchanges Overseas
Similarly, other RSEs are present in other countries as well. The United Kingdom had several RSEs but all of them were absorbed by the London Stock Exchange in 1973. However, there still exists one major RSE functioning in several Caribbean nations named Eastern Caribbean Securities Exchange. The exchange was established in 2001 with the aim to finance the regional investors.
The RSEs decline not only affected the regional brokers, companies but also the investors, particularly shareholders who realised due to the delisting of several regional companies there was no existing market for their holdings. The RSEs as a concept was still viable for increasing the liquidity of the market and enabling small firms to raise capital but their practicality and commercial viability in the era of online national trading systems diminished.
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