'Mutual funds' for bourses

Raisina Hill

In a move that is unusual and reveals member-brokers' desperate attempt to do themselves some good, several regional stock exchange boards have attempted to convert part of their reserves into trading rights that can be encashed later. And the entire exercise is being undertaken under the garb of corporatisation and demutualisation of bourses to enforce governance.

The sharp plunge in stock markets days after Budget 2001 had prompted then Finance Minister Yashwant Sinha to take a series of measures to correct stock market behaviour.

Two crucial announcements were made: one, of the government's intention to provide the capital market regulator Securities and Exchange Board of India (Sebi) with more teeth, and two, of corporatisation and demutualisation of the bourses.

Of the 23 stock exchanges in India, only three "" Indore, Ahmedabad and Bombay "" are associations of people and require corporatisation and subsequent demutualisation. The National Stock Exchange and the Over-The-Counter Exchange of India have always been demutualised entities. All the other bourses are already corporatised, though none had initiated the process of demutualisation "" separation of trading, ownership and management "" until recently.

To give effect to Sinha's diktat, the regulator appointed a committee under Justice M H Kania in March 2002 to review the present structure of stock exchanges and examine the legal, financial and fiscal issues involved in corporatising and demutualising them. The committee was also asked to recommend specific steps for implementing the measures, and also advise on the consolidation and merger of the bourses.

The committee submitted its report by end-August 2002. It suggested that all bourses undertake a valuation of their assets and then split them into trading rights and ownership shares.

Essentially, the idea was to convert all these bourses, which had a not-for-profit or charitable institution character, into for-profit organisations. The Kania committee also recommended that the Central Board of Direct Taxes extend a one-time tax exemption to all the bourses on their past profits upon corporatisation.

Subsequently, on January 30 this year, the capital market regulator directed all bourses to submit a demutualisation scheme before the end of July. All the regional stock exchanges, including the Bombay Stock Exchange (BSE), Ahmedabad Stock Exchange and Madhya Pradesh Stock Exchange, have submitted scheme s.

Barring the Ahmedabad and the Calcutta stock exchanges, all the other regional bourses witness almost no trading. Their only source of income is the listing fee that companies shell out.

Realising they had little future, most regional bourses proposed splitting their net worth into two portions among their broker-members: a company deposit that reflects the value of trading rights, and equity shares reflecting the value of ownership.

Some regional bourses like the Delhi Stock Exchange and the Hyderabad Stock Exchange have now proposed to their respective boards, sale of their fixed assets, like old buildings, to add liquid cash to their net worth and ensure that maximum wealth could be distributed among the broker-members.

Some others have added the interest income earned on statutory funds like the Customer Protection Fund and the Investor Services Fund to the bourses' total income, which essentially does not belong to the exchange.

Since the trading right is being converted into a company deposit in the corporatisation and demutualisation plan, the member-brokers have ensured that they are able to withdraw it after a specified period of time.

In a way, this is tantamount to stripping assets of a not-for-profit entity. Such an action "" distributing reserves among members "" could well prompt other charitable institutions like cricket clubs or well-to-do charitable hospitals to convert themselves into corporate entities, claim one-time tax exemption and distribute the accumulated reserves amongst members.

The attempt to demutualise has been followed by the bourses, but only in letter. And it is not that Sebi and the finance ministry are unaware of the action in the stock exchange board-rooms.

But surprisingly, the ministry feels that the interest of the member-brokers should be kept in mind, especially when the reserves are largely on account of listing fee and not from stock market transactions.

Another similar development that has missed the regulator's notice is the joint proposal of the BSE and other regional bourses to create a S category of scrips in the BSE. This category will comprise all the companies that are listed in the regional bourses with BSE bringing companies with under Rs 20-crore paid-up capital to the table.

While the principle is fine the fact that the regional bourses will continue monitoring the listing compliance by all companies despite the companies being listed on BSE, is striking.

None of the bourses have the wherewithal to ensure compliance given the resources at their disposal. The regulator would do well to direct BSE to ensure compliance of the S group scrips too.