| News reports suggest that two different exchanges have been presented with proposals for private ownership by different corporate groups, and that such developments have led the regulators to consider writing further rules on private ownership of stock exchanges. |
| At the core of the various demutualisation orders passed by the Sebi in respect of various exchanges is the requirement that at least 51 per cent of the capital of the stock exchanges is owned at all times by persons other than those having trading rights in the exchange. |
| Moreover, the total shareholding of any person having trading rights, taken together with holdings of persons acting in concert, should not exceed 5 per cent. The Sebi has not retained any discretion to grant approval for exceeding such limits. |
| This two-fold approach will ensure that stock exchanges are primarily owned and controlled by persons other than stock brokers. This was a long-overdue measure that took 10 years to come, after India's first professionally-managed and institutionally- owned stock exchange, the National Stock Exchange, came into being. |
| However, for now, the regulators need to do nothing more to further regulate private ownership. They would do well to observe how the market develops before regulating demutualised private ownership any further. Demutualisation essentially means the removal of conflicts of interest between those who are members of the exchange and those who own the exchanges and manage them. |
| The restriction of 49 per cent on ownership by trading members and the individual ceiling of 5 per cent on any single broking shareholder (crucially, this includes holdings of persons in concert) take care of the objective of demutualisation. |
| The Sebi and the government ought not to regulate, at this stage, the pattern of holding by non-broking shareholders of the controlling interest of 51 per cent. |
| In any case, the Sebi has widespread powers under the Sebi Act, 1992 and the Securities Contracts (Regulation) Act, 1956 to issue directions and take measures that are in the interests of the securities market. |
| Should anything untoward or undesirable occur, the Sebi can always step in, blow the whistle, and bring the game to order. |
| Even if the 51 per cent shareholder in turn does not have a widely-held shareholder base, the objective of demutualisation having been met, it is important to study how the new owners run the game. It is highly likely that propensity to regulate could even lead to the government imposing conditions and restrictions on foreign ownership in stock exchanges, citing "national interest" or "market security". This too should be avoided at this stage, and a free play of the market should be allowed. |
| The Sebi's powers over stock exchanges are similar to the RBI's powers over banks. Both have powers to supersede the boards of directors, take over management, induct nominees on the boards, call for information, suspend and cancel licenses, and of course, inspect the books and operations at will. |
| The 5 per cent cap on individual brokers' holdings imposed in the case of stock exchanges is akin to the 5 per cent cap imposed by the RBI on ownership in banks. The Sebi has adopted the wider concept of "persons acting in concert" for computing such 5 per cent holding, while the RBI has adopted the transfer-pricing concept of "associated persons" from the tax rules for computing such 5 per cent holding. |
| Nothing further need be done at this stage. It would be interesting to see how the market evolves and what value-addition is created in the system. After all, if the 212-year-old New York Stock Exchange could merge into upstart 8-year-old Archipelago Exchange, to create value, India should not get into regulating ownership of stock exchanges any further. Not as yet. |
| The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own. somasekhar@jsalaw.com |
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