The Securities and Exchange Board of India on Thursday proposed consolidation of regional bourses to form a bigger entity 'Indonext' or a merger with either BSE or NSE, as part of the ongoing capital market reforms.

The proposal was placed by Sebi chairman G N Bajpai in a meeting with top officials of the Federation of Indian Stock Exchanges in New Delhi.

"We proposed two options to the regional bourses -- one, combine and form 'Indonext' or two, merger with either BSE or NSE," Bajpai said at the sidelines of a press conference.    

Earlier, the Kania committee on demutualisation of bourses suggested "Euronext" model for the regional stock exchanges.

FISE chairman Vijay Bhushan said its steering committee, comprising of two representatives from all the regional bourses, would meet on June 14 in Mumbai to decide future roadmap.

The proposal comes in the wake of the declining or virtually zero-trading session in most regional bourses in the last few years.

Moreover, the profitability of the bourses have come down as earnings from listing fees declined sharply after many of the companies decided to delist their shares from the regional exchanges.

The proposal of consolidation also comes in the wake of demutualisation of the bourses as envisaged by the regulator after the passage of the Securities Contract Regulation Act.

The government has also amended the Sebi Act to give the regulators more powers. Pursuant to this, Sebi has stepped up efforts to penalise erring companies. "We have already imposed penalties of Rs 100,000 a day or Rs 1 crore (Rs 10 million) to many companies," Bajpai said.

Sebi told to start weekly settlement

The Federation of Indian Stock Exchanges on Thursday proposed a slew of measures including weekly settlement, suspension of book building, hike in the capital base of companies and public holding, for making the sparsely traded stocks more attractive.

In its report submitted to the Securities and Exchange Board of India chairman G N Bajpai, FISE president Vijay Bhushan stressed on the "market making" process to boost trading volumes of stocks whose trading was thin or negligible.

FISE set up a committee headed by M R Mayya, chairman of the Inter-connected Stock Exchange, to suggest ways to to generate liquidity in sparsely traded shares so that it could be forwarded to Sebi for further action.

Mayya recommended that illiquid shares should be closely monitored and in cases of suspected manipulation, proper investigation should be carried out and penal action taken against erring companies.

Bhushan also pitched for consolidation of order books through creation of a nation-wide electronic order book titled 'Indonext'.

"Virtually all the scrips listed on regional bourses, which do not have additional listings at BSE or NSE, are totally illiquid," Bhushan said, adding these illiquid shares were not traded for quite a number of years.

The country's two largest exchanges BSE and NSE account for almost 100 per cent of the aggregate turnover of the capital market.

"Since trading in illiquid scrips alone may not result in the Indonext becoming a financially viable venture, trading in all companies with a paid-up capital of Rs 20 crore (Rs 200 million), which account for about 10 per cent of the volume of trading, should be conducted exclusively on Indonext," Mayya said.

He said it was particularly important since BSE and NSE were loaded with substantial volumes of trading in thickly traded shares.

Integrity of capital market improving

Exuding confidence over the strong fundamentals of the Indian economy and companies, Sebi virtually gave a clean chit to the capital market saying its "integrity" was improving.

Bajpai said the introduction of T+2 (transaction date plus two) settlement of shares and Straight Through Processing systems had ensured that no one was able to build an artificially huge position in the market.

"As a regulator, we have to ensure that no one is allowed to destroy the efficacy of the market," he added.

Although, the regulator does not have powers to recover the funds of investors from promoters of vanishing companies, Bajpai said the regulator will use its powers to penalise the erring companies and its directors.