Corporatising SEs

Long overdue, the ordinance for the corporatisation of the country's stock exchanges is entirely welcome. It paves the way for the market regulator to approve the demutualisation schemes of stock exchanges. The change is a big positive for investors, as the new corporate structure should ensure that it is shareholders, rather than member-brokers, who call the shots.

After demutualisation, the owners of stock exchanges (or shareholders), the direct customers (brokers), and the management (the day-to-day decision-makers) will be three different groups, although there will obviously be some overlaps as brokers will be major shareholders.

The ordinance restricts broker representation on the governing bodies of stock exchange to 25 per cent, and their shareholding to 49 per cent.

Moreover, their trading rights on the exchanges will be different from their rights as shareholders.

This kind of governance structure should result in better checks and balances in the decision-making process than under the old system, where owners, customers, and directors were often the same people""the members.

Whenever conflicts of interests arose, it was the ultimate customers ""the vast body of investors ""who lost out. The ordinance is also good for the members of these exchanges because it allows them to focus on growing their businesses by serving their customers instead of trying to run the exchanges.

It is this separation of roles that allowed the National Stock Exchange to become the country's largest exchange by far.

As for the exchanges themselves, once they are demutualised they can be run like efficient corporations""raising capital, investing in technology, and providing returns to stakeholders.

In today's volumes-driven marketplace, stock exchanges have to continuously invest in technology and human resources. With derivative volumes rising in leaps and bounds, risk management and surveillance technology will become even more important.

Though money was not a problem for cash-rich exchanges like the BSE, it certainly was for the rest. Corporatisation will, in fact, facilitate consolidation in the industry by allowing the weaker members to amalgamate with the stronger exchanges.

In the old structure, clashing egos and conflicting interests prevented stock exchanges from coming together even to protect their common interests.

To be sure, the ordinance is only an enabling step that will allow the stock exchanges to submit their plans for corporatisation to Sebi. A committee appointed by Sebi has already submitted a report which could act as a roadmap.

More importantly, tax issues need to be clarified so that the change from not-for-profit entities to for-profit corporations does not result in onerous tax burdens, and the conversion of brokers' membership cards into shares is facilitated smoothly.

Among the things, the committee had said that brokers, or other dominant shareholders, should not acquire undue influence over the exchanges.

It recommended a ceiling of 5 per cent on voting rights for any single entity or groups of related entities, irrespective of the extent of actual share ownership.

This, coupled with the 25 per cent limit on governing board representation, should insulate demutualised stock exchanges from having to pander to the narrow vested interests of its main shareholders.

The old mutual structure of exchanges is one of the few relics of a bygone era to have survived the sea change that has taken place in our bourses since liberalisation. It's time for it to fade into history.