Views expressed by BSE, NSE, DSE, FISE, ANMI, BSE Brokers' Forum and CERC through presentations and by various exchanges through written representations.
The Group invited various entities like stock exchanges, viz. BSE, NSE, DSE and FISE; brokers' association, viz. ANMI and BSE Brokers' Forum and investors' association, viz. CERC, Ahmedabad and Investors’ Grievance Forum, Mumbai to express their views before the Group. The Group also received written representations from various entities.
The views of BSE and NSE that were invited to make personal presentations before the Group are summarised in the following paragraphs under separate heads:
The Stock Exchange, Mumbai (BSE)
In the presentation made by BSE, the following issues were highlighted:
Desirability of Demutualisation in the Indian context
The BSE welcomed the idea of demutualisation and mentioned that in December 1999 the Governing Board of BSE suo moto resolves to consider the corporatisation and demutualisation of BSE and for that purpose a committee was also constituted. The proposal was also submitted to SEBI. The proposal was finalised by the BSE after studying large number of documents and international models on this subject. In their presentation, BSE mentioned about the advantages of corporatisation and demutualisation.
Suggested scheme for demutualisation
The BSE was in favor of the demutualisation model, which proposed that a public company limited by shares be constituted and on its incorporation, the newly formed corporate entity will function as the stock exchange in place of BSE. The Board of Director would consist of 18 members including one chairman, one managing director, one whole-time time director, eight independent directors, and seven broker directors. The chairman of the Board and two whole-time directors would not be liable to retire by rotation.
There would be 50 subscribers to the Memorandum and Articles of the new company. These subscribers would be from amongst trading and clearing members of BSE. After incorporation offer for subscription will be made to trading and clearing members of BSE. However, the trading and clearing members of the BSE’s derivatives segment would not be entitled to become shareholders in this way.
Trading and Clearing Members as on the appointed date would be issued 10,000 fully paid equity shares of face value of Re.1/- each. Limitation of 5% would be imposed on acquisition and exercise of shareholding or voting rights of shareholders. Besides, subsidiary of a regional stock exchange, which is member of the BSE, would be eligible to apply for shares, though restriction would be placed in respect of nomination facility and transfer of shares by such subsidiary.
Present ownership of the assets of BSE
The members owned the assets of the exchange, though the character of this holding was similar to that of a Trust. It was also mentioned that the members are the beneficiaries of the Trust. On the question of difference between the ownership of BSE property and a trust registered under the Indian Trusts Act, it was mentioned that although the property is not registered under the Act yet practically and conceptually there is no difference between the two.
Listing of the Shares of BSE Ltd.
The BSE proposed to list the equity shares of BSE Ltd. at BSE Ltd. and such other stock exchanges as decided by the board of directors of BSE Ltd. It was further proposed that public issue or public offer or both may be made within a period of three years of such a number of shares so as to reduce the shareholdings of the brokers to less than 50% of the paid-up equity share capital.
Regulatory Functions
A separate company to take up the regulatory functions like surveillance, clearing and settlement, risk management would be formed. Corporate governance would be exercised by non-representation of broker member on the board of directors of the subsidiary. The Board would consist of seven members and the Board of directors of BSE limited would appoint independent directors. SEBI if it so desires, may nominate its representatives.
The subsidiary company would be regulated strictly as per the guidelines prescribed by SEBI pertaining to the various functions entrusted to the subsidiary. Subsidiary would generate its own source of income. Deficit if any, would be reimbursed by the parent company.
Amendments to other Acts for effecting scheme
A new clause to be inserted either in Securities Contracts (Regulation) Act, 1956 or the Securities and Exchange Board of India Act 1992 for demutualisation and corporatisation process via SEBI through a statutory provision rather than contractually.
Indian Stamps Act, 1899 be amended to provide for exemption from stamp duty on transfer of assets of the existing stock exchange to the new corporate entity.
Amendment to Income Tax Act, 1961 to make the scheme tax neutral and clarification from CBDT regarding tax liability of past assessment years.
SEBI may issue the clarification regarding applicability of turnover fees and obtaining fresh certificate of registration for the reason of corporatisation of stock exchange.
Suitability of one demutualisation model for all the exchanges
A uniform demutualisation model would definitely be desirable though the same would not be practicable.
The question of a feasible valuation option in the case of merger of two or more exchanges in India
In case the merger is undertaken after corporatisation but before demutualisation, then the valuation process had to be similar to that of the other corporates, viz. by an independent valuer appointed under the terms of the merger.
BSE Scheme in light of the International Experience
BSE mentioned that their scheme provides 40% industry representation on the Governing Board against the international norm of 50%. A separate company for critical regulatory function, as suggested by BSE, is not a prevalent practice abroad. Subsidiary company would not have any broker representation on its board against 50 % industry representation on the Board of NASDAQ subsidiary.
International experience regarding chairman of the exchange being independent and a member/ non-member
Internationally in most of the exchanges there is no requirement for the chairman to be a non-member, e.g. LSE and NYSE where the Chairmen primarily had stock broking background.
National Stock Exchange
It was observed that NSE was functioning as the only successful demutualised exchange in India. The Group therefore invited NSE to make a presentation on its management and structure before the Group. The presentation gave valuable insights on the working mechanism and functioning of a demutualised exchange in India. Various facts that were highlighted in the course of the presentation are mentioned below under separate heads:
Legal status of NSE
A Company registered under the Companies Act, 1956, with various Banks and Financial institutions as its shareholders.
Shareholding pattern
The shares are almost equally distributed among all the shareholders and there is no single largest shareholder as such.
The Governing Board
The maximum strength of the Board as per the Articles of the exchange is 22. The present strength is 19 comprising of -
- 2 SEBI nominees
- 4 Public Representatives
- 4 Independent Directors
- 1 Managing Director
- 8 shareholders' representatives.
The day to day operational aspects of the exchange are looked after by the Executive Committee. It is incorporated under the Articles of the exchange, with a maximum strength of 15 members.
Members of the Board on the Executive Committee
It is not constituted from the members of the Governing Board, though some of the Board members like public representatives and SEBI nominees are part of the committee.
Stake of trading members on the exchange
The trading members are not holding any stake in the exchange. Their feedback on operational aspects is recognised by the constitution of two non-statutory committees from amongst the trading members, viz.
- Committee on settlement issues
- Committee on trade issues
A special investor grievance cell has been constituted. The complaints are received in a specific format along with the supporting documents.
Dispute between the regulatory and the profit motive
Proper regulation directly affects the profit making abilities of the exchange since weaker the regulations, more would be the losses. Therefore, the word profit should be incidental and not primary to the larger objectives of the exchange.
Views on an IPO
NSE rarely depends on share capital for its investment requirements. Its main source of funds is the membership fee and security amount. Given the large technology requirements, share capital would never be an adequate source of fund.
Views of DSE, FISE, ANMI, BSE Brokers' Forum and CERC and responses of exchanges to the questionnaire on demutualisation
The views expressed by DSE, FISE, ANMI, BSE Brokers' Forum and CERC by way of presentations and by the exchanges in response to a questionnaire sent for the purpose are summarised below under separate heads in the following paragraphs:
Desirability of demutualisation in the Indian context
DSE was of the view that although demutualisation is desirable, yet the exercise should be conducted only on the exchanges that have some business. For exchanges showing nil or negligible turnover the exercise is not relevant and instead some just and fair exit route should be provided to them. FISE was of the view that although demutualisation is desirable, yet the exercise should be conducted only on the exchanges that have some business. For exchanges showing nil or negligible turnover the exercise is not relevant and instead some just and fair exit route should be provided to them. On the issue, the broker associations were largely in favour of the exercise, subject to an appropriate exit route being provided to the members. CERC also agreed that in lines with the international trend in this regard, the exercise was also desirable in the Indian context. As per the questionnaire response also by and large, most of the exchanges were supportive to the concept. But there was a concern for the smaller exchanges and it was stated that only financially viable exchanges should be demutualised. UPSE supported corporatisation but was against the concept of demutualisation.
Fiscal benefits and legislative changes required for demutualisation
It was mentioned by DSE that if demutualisation is forced then a one-time exemption from payment of capital gains tax on the sale of the shares of the members should be provided. Or else demutualisation should be made optional. It further expressed the need for the Income tax benefits to continue under a specific provision of the Income Tax and such exemption should be provided even to the subsidiaries of the exchanges. Further as per the responses to questionnaire, regarding the necessity of any fiscal benefits or exemptions, mostly the exchanges have sought exemption from the Income Tax and the Capital Gains Tax. Waiver of stamp duty has also been sought. It has also been desired that there should be exemption from the past tax liability as well.
Uniform road map for demutualisation
DSE mentioned that a detailed road map should be first prepared in consultation with the various exchanges, and then the same should be circulated to all the concerned exchanges. In the process, the turnover of the various exchanges should also be addressed and then only the financially viable exchanges should be considered for demutualisation. FISE also reflected the same views as the DSE that the road map should be developed in consultation with and after addressing the concerns of all the exchanges. It also mentioned that demutualisation of exchanges that have nil or negligible turnover would not serve any useful purpose.
Appropriate demutualisation model
DSE preferred the model followed by the Australian Stock Exchange. The broker's associations suggested that any international model may be adopted. However the NASDAQ model was preferable where all the critical functions of the exchange is handled by a separate entity. On the other hand CERC contended that the NSE model was preferable to any of the international models. It was mentioned that the NSE model has worked in India and in the Indian context fairly satisfactorily and therefore it would perhaps be desirable to replicate the same. Further, on the question, the exchanges were divided in their views. Some of the exchanges preferred the NSE model, others suggested that the exchange should be headed by a CEO and professionally managed with independent directors. BSE has suggested its own scheme for demutualisation. Certain exchanges also referred to the Australian Model as ideal. However, as regards the NSE model, the responses were by and large favourable.
Merger of Exchanges
DSE mentioned that a broad map in this regard may first be developed, which may be circulated to all the exchanges. It also emphasized the need for addressing the peculiar problems of each exchange separately. On the issue, the FISE however was in favour of a reverse merger of the stock exchanges with their broking subsidiaries.
As per the responses to the questionnaire, by and large all the exchanges are in favour of merger. Some have however stated that the merger should be with the larger exchanges and that it should be subject to the agreeability of both the concerned exchanges. It is considered by most as the only viable option for the revival of the smaller exchanges.
Relevance of Regional Stock Exchanges
DSE mentioned that the RSEs serve the purpose of small and medium companies of the region. However, it accepted the contention that the investors are actually not using the RSE platform for trading and that more trading was being one through the national exchanges even in the case of regionally listed companies. FISE contended that the members had invested heavily in purchasing the membership rights of the RSEs and therefore due consideration should be given towards providing an exit route to these members. It was also suggested that the RSEs may be revived with the help of some strategic partner. Though some time frame for implementation should be provided. CERC mentioned that in view of the large technological changes during the last decade, India does not needs regional stock exchanges. In any case, the number of such exchanges should not be more than 3-4. It was suggested that perhaps 5 small exchanges may be there at Delhi, Calcutta, Chennai, Ahmedabad and Bangalore. However, it was mentioned that the Investor protection funds maintained by these RSEs should be properly utilised and it should be ensured while implementing the demutualisation process that they are used for the purpose for which they were intended. As per the questionnaire responses, mostly the exchanges consider the concept to be still relevant, though their utility is understood to have diminished. Various measures have been suggested to revive them, e.g. consolidation, help from the Government, SEBI and the national exchanges, survival as merely listing institutions, for investor education, etc.
Feasibility of the Deposit based System or a Card System
On the question, DSE stated that it preferred the Deposit based system being followed by NSE. On the question, the brokers' associations mentioned that the deposit based system followed by NSE offers some distinct advantages over the card system, like easy entry and exit, facilitating the merger of various exchanges, etc. therefore, the deposit based system was preferable to the card system of BSE.
Desirability of an exit route
The brokers associations were of the view that while implementing the process of demutualisation, a just and fair exit route should be provided to the broker members in the very beginning. The major contention of the FISE was also a proper exit route for the existing members.
Broker members continuing on the boards of exchanges
On this issue, it was clearly stated by the broker associations that the Broker members should not be restricted from the membership on the Boards of the exchanges as their presence in the Governing Board shall ensure better working. However, the CERC categorically stated that there should not be any broker representation on the Boards of Exchanges. The brokers will tend to misuse their powers, even if they are present in the minority on the Governing Boards. So this conflict of interest should be avoided at every cost. However, it was suggested that the broker representation may be sought in other ways like by way of Advisory committees.
The valuation exercise for providing the exit route
Regarding this matter, the broker associations contended that internationally experienced merchant bankers may be hired to do a due diligence and to arrive at a fair valuation for the exchange.
Present legal status of the exchanges
On the question, it was seen that already all the exchanges were corporate bodies, i.e. Companies, either limited by shares or by Guarantee, under the Companies Act, 1956 except 3 exchanges, viz. the Stock Exchange Mumbai, the Ahmedabad Stock Exchange and the Madhya Pradesh Stock Exchange. Therefore, it was seen that the exercise of corporatisation would be required only in the case of these three exchanges.
Holding the assets in Trust
On the question, it was observed that in the case of all the exchanges, the assets are owned by the exchange itself and no trust had been created.
Present management structure
As regards the above, it was observed that largely the exchanges are managed by the Governing Boards, comprising of a mix of the Executive Director, elected members, Public Nominees and SEBI Nominees.
Some change in the present structure
Most of the exchanges were in favour of appointing a non-executive chairman. However certain exchanges like UPSE, Bangalore, ICSEI, OTCEI, Mangalore and Jaipur mentioned that no change is required in the present structure.
Going public as a listed company after demutualisation
Most of the exchanges were in favour of the concept. Only Vadodara, UPSE and Jaipur were against the concept.
Legal amendments required
Regarding the above, by and large changes were suggested in the Income Tax Act. However most of the exchanges did not suggest any changes. Bangalore Stock Exchange emphasized the need for change in the Articles for providing distribution of profits to its members.
Conflict between the public interest role and the commercial role of the exchange
On this question, mostly the exchanges did not envisage any conflict as such. Some of the exchanges mentioned that the conflict shall be taken care of by SEBI directives and Regulations.
Restriction on voting rights post demutualisation
Most of the exchanges answered in the affirmative however, no definite figures have been mentioned. However, some of the exchanges, viz. Vadodara, DSE, UPSE, LSE, ICSEI, Mangalore, Bhubaneshwar and Gauhati are against the concept.
Views on public directors
Regarding their views, all the exchanges were in favour of the public directors however a need for transparency in their appointment has been emphasized by some exchanges.
Whether the chairman of the Board and CEO should be different person
On the question, all the exchanges answered in the affirmative.
Chairman being from any particular constituency
The exchanges were divided in their opinion in this regard. Most of the exchanges prefer an independent professional for the job. Others have professed for a person having market experience, while some exchanges want him to be from the elected members of the board. Some have also desired him to be from the Broker constituency.
Limit on the number of stock exchanges
As regards the above, the exchanges are again divided in their replies. Some of them have mentioned that there should be a limit of at the maximum 4 to 6 exchanges in India. On the other hand, certain exchanges say that there should be no limit on this number.
Written Representations
The Group also received written representations from the Cochin Stock Exchange, Coimbatore Stock Exchange and by the Madras Stock Exchange association Employees' and Officers' Joint Committee.
The Cochin Stock Exchange suggested that all Stock Exchanges except NSE should be merged to form a new exchange called the "United Stock Exchange of India" with a corpus of Rs. 600 Crores. For this, Rs. 350 Crores would be a grant from the Government or the Financial Institutions and Rs. 250 Crores would be a loan from SEBI, which may be set aside by the Brokers liability of Service Tax. It was further suggested that if any member wants an exit route, a chance should be given to him. However, a minimum price should be given to all the members of the exchanges and an independent valuer should be appointed for valuing the assets of the exchanges.
The Coimbatore Stock Exchange presented the historical background of the exchange coupled with its importance. It requested the Group to look into a proper exit route for the members of the exchange, who were mainly professionals from different fields but have renounced other lucrative employment options to become members of the exchange. It also suggested that the ownership rights of the Stock Exchange should be taken over by the NSE or any other financial institution and payment to the members should be ensured by SEBI within a stipulated time.
The Madras Stock Exchange association Employees' and Officers' Joint Committee had also sent a suggestion for merging all the regional Stock Exchanges with NSE/BSE, by allotting shares in NSE/BSE at a hefty premium to members of the existing RSEs. It is further proposed that under the system, NSE should go public and get listed on itself to ensure more accountability on its part. Another alternative has been suggested where the RSEs in a particular zone are integrated into zonal exchanges. Thus there would be four zonal exchanges namely at Ahmedabad, Calcutta, Delhi and Chennai, and the rest of the exchanges in the zone would become their branch.