The Hindu Business Line : Change of avatar

THERE ARE CONSIDERABLE expectations from BSE Ltd, the new incarnation of the 130-year-old Bombay Stock Exchange. The compulsion to reorganise itself came from the regulatory side with the traditional form of running a bourse outliving its utility. Not only in India, where all the regional stock exchanges and the Bombay Stock Exchange have been compelled to change, the world's largest bourse, in terms of market cap, the NYSE, too recently transformed itself. From an association of brokers — working for their mutual benefit — to a `for profit' body corporate having shareholders who are not necessarily brokers is a remarkable transformation whose full import will be felt in the coming months. The first task before the new BSE Ltd. would be to demonstrate that the defining characteristic of the demutualisation exercise — the complete segregation of the right to trade from ownership and management — does not impinge on its ability to combine its traditional regulatory role with its new quest for profitability.

Much, of course, will depend upon the business plan that it will unveil next month. It is hoped that BSE Ltd. becomes a role model for all recently-demutualised exchanges by demonstrating professionalism and, equally important, developing a talent pool. The broker-dominated era did throw up a number of glaring shortcomings, essentially due to the overlap of the trading function with that of ownership and management. However, what is often overlooked is that it is the brokers, more than any other intermediary, who gave the BSE and the older, regional stock exchanges the reputation which stood them in good stead for a century and more. It was the exponential growth in the business, the international benchmarking of governance standards in a rapidly integrating scenario, and the inability of the regional exchanges to check malfeasance that led to the disintegration of the old order.

A corporatised BSE Ltd is in a better position to expand its business, uphold the highest governance standards and compete effectively with the National Stock Exchange, India's first demutualised exchange, for market leadership. But the demutual route has pitfalls of its own. A different type of conflict of interest might arise if its commercial role gets precedence over its regulatory avatar. There can be another type of conflict of interest if shares of BSE Ltd were to be listed with itself. Also, it would be better to discourage brokers from circumventing the spirit of the demutualisation exercise indirectly by accumulating chunks of shares and then getting elected to the board. One of the benefits of the mutual environment was that a variety of people, regulators and public representatives would serve on the governing councils and exercise restraint on the brokers. Experience in the West has shown that publicly-quoted stock exchanges are not immune to the threat of takeover or to the machinations of a few influential shareholders. However, improbable those might seem now, BSE Ltd. would do well to anticipate these contingencies.

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