The road to corporatisation and demutualisation of stock exchanges seems to have run into road blocks with the central government and the Securities and Exchange Board of India (Sebi) at loggerheads over their corporate structure.
The issue will come up for another round of discussion at the forthcoming Sebi board meeting on December 24. But sources familiar with the development said even this meeting may not resolve this contentious issue.
The government is learnt to be favouring the corporate model of the National Stock Exchange (NSE), while the markets regulator feels that it is not a feasible proposition. In the NSE model, the brokers do not own the shares and the brokers do not have representation in its management.
The board solely consists of professionals and the right to trade is completely divorced from ownership and management.
In exchanges such as the Bombay Stock Exchange (BSE), membership and ownership of the exchange is overlapping since the brokers -- who are the members -- are also the owners of the exchange and the management also consists of the broker members.
NSE, which was the first corporatised exchange to be set up, has a board which includes representatives of financial institutions and banks which own shares in it and professionals such as chartered accountants. However, decisions relating to market operations are delegated by the board to an executive committee which includes representatives from the trading members, the public and the management. This effectively ensures participation by all segments.
The Sebi is believed to be favouring a model which is more or less along the lines of the recommendations made by the M R Maiyya committee. The committee had recommended a 60:40 pattern of shareholding -- that is, 40 per cent of the stake will be vested with the insiders of the exchange (the brokers) and 60 per cent with outsiders or institutions.
The chief executive of the exchange will also be an outsider -- a professional. The Sebi is pitching for dividing the representation on the board equally between the insiders and outsiders so that no one group can dominate.
The BSE has already submitted its corporatisation plan to the Sebi. It is based on the Nasdaq model and includes brokers on its board. The surveillance and risk management functions will be hived off into a separate company under the proposed model and will be managed by a separate board of directors.
Corporatisation of exchanges would bring them under the ambit of the Companies Act.
Demutualisation will also involve offering shares of the corporatised entity to the public which would include the trading members (brokers). This may end up defeating the purpose of demutualisation.
The Securities Contract Regulations Act (SCRA) would have to be suitably altered to specify that brokers would not be allowed on the board of exchanges. While the Companies Act confers a right on the shareholder to join the management, the SCRA bars them from doing so. However, the Companies' Act, under its insider trading regulations, prohibits interested directors from deliberating on the affairs of the exchange which means that brokers would automatically be barred from a board berth. However, Sebi is not favouring this. The capital market regulator strongly feels that the brokers must be there as part of the management.
