Truth lies between disclosure, disclaimer

WITHOUT CONTEMPT

This column is about conflict of interest. At the outset, notwithstanding the disclaimer at the bottom of this column, this column will make an additional special disclosure - that it makes reference to a commodity exchange company which is a client of the law firm of which the author is a partner.

A new debate on conflict of interest has emerged with filing of the first-ever draft red herring prospectus of a commodity exchange with the Securities and Exchange Board of India (Sebi) and the National Stock Exchange (NSE).

The NSE, the most professionally managed stock exchange in India, has 2 per cent stake in the commodity exchange company, which plans to come out with an initial public offering (IPO) and then list on the NSE.

To many, this presents a potential conflict of interest and unless Sebi issues guidelines for listing of stock/commodity exchange companies on one another, one should apply emergency brakes on such issuances and listings.

Others have clamoured for reviving the badly-conceptualised Central Listing Authority.

As India's economy grows at its current pace, with unprecedented concepts becoming reality, the ecosystem, too, needs to evolve at a hitherto unprecedented pace.

Stock or commodity exchanges have performed best when they are not fettered by having to refrain from aiming for profits. Not-for-profit stock exchanges such as the Over the Counter Exchange of India and a range of regional exchanges have been consigned to the rubble of the Indian capital market's history.

Against this backdrop, it would but be normal for exchanges to create shareholder value and list their shares on other exchanges or perhaps even on themselves.

For instance, the NSE hived off its sophisticated information technology operations into a company called NSE.IT Ltd to create shareholder value. Such corporate actions are not the sole prerogative of private sector companies. Should the NSE list itself, it would be one of the most sought-after stocks in India.

As exchanges get demutualised in line with Sebi's vision (which is turning into reality as the Bombay Stock Exchange, perhaps the country's largest-ever association of persons, is now a company without any broker owning more than a minuscule equity), it is natural that Indian exchanges, too, will want to perform as well as other companies and list their own securities.

Some day, takeover offers such as the ones seen for exchanges in London, Frankfurt and New York, would become reality in India too. But it would imprudent to believe that unless one writes a law that regulates everything right down to how to handle a takeover of a listed stock exchange, no stock exchange ought to get listed.

A good law is not prescriptive about human/corporate conduct but enables and facilitates good conduct, and for that, law, too, evolves with the ecosystem it governs.

In any walk of life, there could be conflicts. The answer lies not in making life come to a standstill but in dealing with the conflicts. A lawyer's interest in protecting his client in a court could conflict with his duty to facilitate the court reach the correct verdict. A news magazine's pursuit of truth could conflict with its pursuit of advertising revenue. A stock exchange's pursuit of higher market volumes and listings could conflict with its role as a regulator of its members. A regulator's role as a law-maker could conflict with its role as a law administrator.

No fine-printed and detailed rules and regulations can be written for every potential type of conflict. The capital market has in place a robust statutory framework and a regulator with powers to play an objective referee.

About listing of an exchange company on another exchange that is also its shareholder, one could always provide for a disclosure where such holding is above a material threshold. Any approval of an IPO, be it by the stock exchanges or by Sebi, comes with a disclaimer about how it is not an endorsement of the issuance.

The truth, as the Sebi chairman has often said, lies somewhere between disclosure and disclaimer. Any conflict, whether real or perceived, has to be addressed only in adherence to the spirit of fairness and equity. Neither would plain disclaimers nor antiseptic disclosures address the issue. Meanwhile, life cannot come to a standstill.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own)

somasekhar@jsalaw.com