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Shaji Vikraman

More than the suggestion of legislative changes, the issue which is yet to be fully resolved is that of allowing stockbrokers to be represented on the governing board of the demutualised exchange.

NEW DELHI, Nov. 20

THE Government may have to amend the Securities Contracts (Regulation) Act (SCRA) to enable corporatisation and demutualisation of stock exchanges, going by the views submitted to the Finance Ministry by the Law Ministry.

Last year, when the Government first set a deadline for corporatisation and demutualisation of stock exchanges, both the Finance and the Law Ministries had taken the position that this could be carried out without any need for legislative changes. However, this year, a group appointed by the Securities and Exchange Board of India (SEBI) and headed by Mr Justice Kania recommended that the SCRA should be amended to provide that a stock exchange should be a company incorporated under the Companies Act.

The group had said that stock exchanges, which were set up as association of persons or as companies limited by guarantee, may be converted into companies limited by shares.

Subsequent to the group's recommendations, the Finance Ministry referred the issue to the Law Ministry again. The opinion of the Attorney General also was sought and both expressed the view that an amendment to SCRA was needed to ensure conversion of stock exchanges from the existing structure into a corporatised entity, according to officials here.

Demutualisation is the process of separating ownership, trading and management in a stock exchange. After the stock scam of March 2001, the Government had announced that all stock exchanges would have to mandatorily go in for demutualisation within a specified timeframe. This was aimed at preventing conflict of interests, which arise when stockbrokers are involved in the management of the stock exchanges also.

The Indian experience has shown that investors have suffered badly due to the present structure of a mutualised exchange where the interests of investors have not been protected.

However, more than the suggestion of legislative changes, the issue which is yet to be fully resolved is that of allowing stockbrokers to be represented on the governing board of the demutualised exchange. The Kania committee has favoured the inclusion of brokers also as stakeholders in the corporatised entity.

This is at variance with the stand taken by the Government earlier, not to allow any of the existing members of stock exchanges to be part of the ownership structure of the proposed new demutualised entity, unless they forfeit their trading rights. Officials have cited the case of how the scams so far have been mainly linked to stockbrokers.

Even if the stockbrokers are allowed to bid for the shares in the new entity after the process of demutualisation is completed, there could be a cap on their holding to prevent any domination by them, officials had said last year. The restriction on participation by stockbrokers in the ownership of the new entity could well be in the form of a control on voting rights. Such fetters could offer very little room for manipulation, it was suggested last year.

The Kania committee seems to have taken a cue from the stand taken by officials last year. It has also said that at least 51 per cent of the shares would be held by non-trading members of the exchange.

The Finance Ministry and the SEBI have been in talks for sometime on the issue of demutualisation. It was discussed at a board meeting of SEBI a week ago and would now scheduled be taken up again on November 28, officials said.

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