Financial Daily
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Friday, June 22, 2001



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Market: Stock-broke!

T. Prem Kumar

IT HAS been known for decades that brokers have been influencing the working of stock exchanges for their personal benefit at the expense of investors. Neither the government nor the Securities and Exchange Board of India (SEBI) could remedy the situatio n because of the self-regulatory nature of stock exchanges. The Government has failed to understand that the stock exchanges, though self-regulatory, are public institutions serving the interests of companies and the investing population, and that the st ock brokers are only intermediaries with licences to trade on the exchanges. Hence, the investing public and the issuers of capital, and not the brokers, must have direct or indirect control of the stock exchanges.

Affected by the current market turmoil and crisis, the Government seems to have finally seen the imperative to keep stock brokers away from the management of the exchanges. The Centre has announced this decision by changing the constitution of stock exch anges so that the ownership, management and trading interests is not concentrated in the hands of stock brokers. In making this decision, the Government seems to have been influenced by the National Stock Exchange (NSE) where the stock brokers have only trading rights, but the management is vested with the FIs that are NSE's promoters and shareholders.

Adopting the NSE model to segregate the ownership, management and trading rights for the other stock exchanges will be a long-drawn process requiring many changes in various statues. In the process the Government may lose considerable revenue with the be nefits accruing to the stock brokers. This is because of the diverse nature of the constitutions of various stock exchanges: Two exchanges are associations of persons; three are companies with share capital, and the others companies limited by guarantee without share capital.

Stock brokers are able to subvert the stock market system because under the current regulations and bye-laws of the stock exchanges, they bear offices and wield administrative and executive powers concurrently with the executive directors. These powers h ave been vested with the stock exchange presidents and the councils of management, because in the past many stock exchanges did not have EDs and the government did not bother about the working of stock exchanges. In the socialistic policies that guided t he Government till the mid-1980s, stock exchanges were seen not as public institutions that played a significant role in the economic development, but as self-regulatory organisations that could be allowed to function with some government regulation.

In the current market-driven economy, stock exchanges have to be public institutions and not organisations run by stock brokers for their own benefit. Without losing any time, the Government can keep away stock brokers from managing stock exchanges by am ending the bye-laws and regulations so that the presidents and other office-bearers are not brokers, and do not exercise any powers in the day-to-day administration of the stock exchanges.

The proposal that a stock exchange's office-bearers shall not be brokers was made in 1997 in the deliberations of one of a SEBI committee, but was rejected in the face of strong opposition from the representatives of Bombay Stock Exchange. The Government can keep away stock brokers from the managements even without changing the basic constitutions of stock exchanges by demutualisation; by making public representatives or government nominees the office bearers; and removing the powers of administration a nd management from the office-bearers by amending the bye-laws and regulations.

The Government and SEBI have the powers under the Securities Contracts (Regulation) Act, 1956 to amend the bye-laws and the regulations of stock exchanges to change the bye-laws and regulations governing the election of office-bearers of stock exchanges, and their powers. SEBI exercised these powers in 1993 to change the composition of the councils of management of stock exchanges.

If the Government and SEBI are serious about ending the mismanagement of stock exchanges by brokers, they must exercise their powers to make the necessary amendments immediately, without waiting for the demutulisation of stock exchanges.

(The author is a former president, Madras Stock Exchange.)

Related links:
BSE brokers barred from board position -- SEBI to assess situation in other exchanges
Sinha announces `Operation Clean-up'-- SE corporatisation among steps

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