Corporatisation and Demutualisation of stock exchanges

Historically, stock exchanges were formed as ˜mutual™ organization i.e formed by trading members themselves for their common benefits. Ownership rights and trading rights are clubbed together in membership. The disadvantage of such organization is that they primarily work towards the interest of members and not those of investors. The office bearers will have access to inside information which can be misused by them. There is clear conflict of interest. There is transparency and no professional approach. Moreover, they cannot raise large funds for modernization or up gradation by offering equity shares to others.

In view of this short comings of such ˜mutual stock exchanges™, a policy decision has been taken by Indian Government for corporatisation of stock exchanges, by which ownership, management and trading memberships of stock exchanges would be separated from each other.

Demutualisation means converting such mutual non-profit body into a corporate body where management and trading activities are separated. This is necessary to ensure that stock brokers do not have access to sensitive information and do not misuse their position. Hence, SEBI had issued directions on 10/1/2002 that no stock broker shall be an office bearer of stock exchange i.e President, Vice-president, Treasure etc. All stock exchanges were asked to amend their rules. Since some stock exchanges did not amend their rules within two months, SEBI issued notification on 17/4/2002 amending their rules.

Corporatisation means stock exchange should be organized as a company. The idea is to separate ownership, management and trading rights from each other. A committee under M.H Kania had recommended corporatisation and demutualisation of stock exchanges. This report was accepted by SEBI, vice circular no SMD/POLICY/CIR3 dated 30/1/2003, SEBI had asked all stock exchanges to submit a scheme within 6 months to implement the scheme. It seems stoke exchanges did not submit any scheme. Hence, SCRA had been amended on 12/10/2004 to compel stock exchanges to corporatize and demutualise.

COMPLUSARY DEMUTUALISATION AND CORPORATISATION OF STOCK EXCHANGES

According to section 4A of the SCRA, 1956 on and from the appointed date all recognized stock exchanges who are not corporatized and demutualised before the appointed date shall be corporatized and demutualised as per the provisions contained in section 4B. Appointed date shall be fixed by the SEBI by issuing a notification in official Gazette and SEBI can fix different appointed date for different recognized stock exchanges.

SEBI can extend the date for corporatisation and demutualisation of an exchange, if a particular stock exchange could not convert on or after the appointed date for sufficient cause.

PROCEDURE FOR CORPORATISATION AND DEMUTUALISATION

According to section 4B(1), all recognized stock exchanges shall submit a scheme for corporatisation and demutualisation to SEBI for its approval within the time specified by SEBI. However, SEBI may, by notification in the official Gazette, specify the names of the stock exchanges, which had already been corporatized and demutualised, and such stock exchanges shall not be required to submit the scheme under this section.

Now, according to section 4B(2), SEBI on receipt of the scheme, may approve the scheme with or without modification if it is satisfied that it would be in the interest of the trade and also in the public interest, after making necessary enquiry and obtaining information.

According to section 4B(4), if the scheme is approved by SEBI, the scheme so approved shall be published immediately in official Gazette and by the recognized stock exchange in two daily newspapers mentioned by SEBI. Upon such publication, the scheme will be binding on all.

Under section 4B(5), SEBI can reject the proposed scheme if SEBI satisfied that it would not be in the interest of the trade and public to approve the scheme. Such order of rejection shall also be published by SEBI in the official Gazette. However, before rejecting the scheme, a reasonable opportunity of being heard will be given to all concerned persons and the recognized stock exchanges.

POWERS OF SEBI

According to section 4B(6), SEBI while approving the scheme may, by an order in writing restrict-

a)      The voting rights of the shareholders who are also stock brokers of the recognized stock exchanges

b)      The rights of shareholders or a stock broker of the recognized stock exchange to appoint the representative on the governing board of the stock exchange.

c)      The maximum number of representative of the stock brokers of the recognized stock exchanges to be appointed on the governing board of the stock exchanges which shall not exceed one fourth of the total strength of the governing board.

Under section 4B(7), such order shall be published in official Gazette and will have full effect on the publication. According to section 4B(8), on receipt of approval of the scheme, stock exchange will issue shares to public within 12 months so that atleast 51% of its equity shares capital is held by public other than shareholders having trading rights. However, SEBI can extend the period up to another 12 months on production of sufficient cause and also in public interest.