Defunct Calcutta Stock Exchange Plans Revival After 13 Years, Seeks Sebi Nod

India is witnessing a rise in active investor participation on both the BSE and NSE. As more and more investors participate in the securities market, a third major regional exchange is likely to make a comeback according to reports.

According to a report by the Economic Times, the Calcutta Stock Exchange is seeking Securities and Exchange Board of India's (Sebi) guidance on a revival. Notably it was one of the biggest exchanges in terms of trading volume before eventually becoming defunct.

CSE's Revival Plan

The revival plan is expected to be put in place by presenting a roadmap to the market regulator which resolves past compliance failures and establishes a secure, updated framework for trading. Additionally, CSE officials have sought a meeting with the Sebi next week, the report said, citing people aware of the matter.

Notably, the revival is expected to be taken up either through the interoperability mode or through the establishment of a clearing corporation. In this case, interoperability is a mechanism which allows trades executed on one stock exchange to be seamlessly cleared and settled through the clearing house of another exchange.

On the other hand, the establishment of a clearing corporation would entail that CSE will have to set up an affiliated financial institution that handles the confirmation, settlement, and delivery of transactions while guaranteeing that trades are successfully completed. According to the report which cited West Bengal finance minister Swapan Dasgupta, the government is awaiting the revival roadmap from the CSE management.

Why Did CSE Become Defunct?

In 2001, the CSE witnessed a major blow during the Ketan Parekh stock market scam. This in turn led to a massive payment crisis and eroded market confidence in the exchange. The infamous broker had used the unofficial forward trading system of the exchange to secure funds and artificially inflate the prices of his preferred stocks. When the stock market crashed globally in March 2001 as the dotcom bubble burst, big margin calls were triggered.

Several prominent Calcutta based brokers who were exposed to Parekh defaulted on their payment obligations. This in turn led to a payment crisis amounting to approximately Rs 120 crore, which depleted the Settlement Guarantee Fund of the exchange and shattered investor confidence.

Following the 2001 dot-com bust, the regional bourse found itself unable to keep up with the rapid technological advancements that were transforming the Indian capital markets. While national exchanges like the Bombay Stock Exchange and National Stock Exchange modernised their trading platforms and expanded their reach across the country, the Calcutta Stock Exchange saw its trading volumes completely dry up as brokers and retail investors migrated to more secure digital platforms.

In April 2013, Sebi introduced stringent guidelines for regional stock exchanges. The market regulator mandated that all exchanges must either maintain a minimum annual trading turnover of Rs 1,000 crore and a net worth of Rs 100 crore, or voluntarily exit the business.

More crucially, exchanges were required to establish their own recognised clearing corporation or tie up with an existing one to guarantee trade settlements safely. When the CSE failed to meet these clearing corporation mandates and failed to upgrade its trading infrastructure, the regulatory body was forced to suspend all active trading operations on the platform.

If the CSE becomes functional again, it  could potentially unlock trapped capital for retail investors holding shares in listed regional companies that have been frozen for more than a decade. Additionally, it could also break the current exchange duopoly, leading to potentially lower transaction fees as competition would increase.