The Hindu Business Line : Now, BSE Limited

WITH THE SECURITIES and Exchange Board of India approving the corporatisation and demutualisation plans of the Stock Exchange, Mumbai (as the Bombay Stock Exchange is now known) the stage is set for the country's oldest and, until the advent of the National Stock Exchange, the No 1 bourse, to emerge in its new incarnation. A quick reading of the Gazette Notification of May 20 shows that the new entity, to be incorporated as a public limited company, `Bombay Stock Exchange Limited,' will be vastly different from the BSE. While the BSE is an association of persons, the reincarnated version will be a `for-profit organisation' that can list its shares in any stock exchange, including itself.

The other changes proposed span all key areas of the stock exchange's constitution and its working. The voting rights of broker-shareholders will be restricted to 5 per cent, and at least 51 per cent of the shares will be held by public other than shareholders having trading rights. The chief executive will be an ex-officio director. The number of trading members in the Governing Board shall not exceed a fourth of the total. SEBI will have overriding powers to nominate directors. The clearing house, now a part of the stock exchange, will in due course be handed over to a clearing corporation with the approval of SEBI.

These and other changes herald a revolution in the history of stock exchanges in India. Almost all bourses were traditionally owned, directly or indirectly, by brokers. The problems of such a model are well documented, but chief among them is the perceived conflict of interest between the ownership and the trading functions. Morever, none of the exchanges was equipped to adapt to the electronic model — pioneered by the NSE — under which traders and investors participate from across the country. Through the 1990s, successive failures of the BSE to rein-in its members, also its owners, emphatically underlined the need to divorce the right to trade from ownership and management.

Demutualising and corporatising the BSE was inevitable and the Government threw its weight behind it. In January, a roadmap was cleared for all stock exchanges to convert into body corporates. The world's biggest bourse, the New York Stock Exchange, is transforming itself on similar lines. However, it has chosen to merge with a smaller electronic exchange, Archipelago, to achieve the same results. However, for all its advantages, the demutualised stock exchange may have problems of its own. A different type of conflict of interest might emerge in a `for-profit organisation'; its commercial role may take precedence over its regulatory one. Experience in Europe has been that listed stock exchanges become takeover targets. There has been an acute shortage of stock market professionals in the country. In India, stockbrokers, as a class, have played a critical, mostly useful, part in the development of stock exchanges. Their role could well be restricted in the new set up, but that would mean the stock exchanges, in their new demutualised form, depriving themselves of some undoubted talent and experience.

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