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Stage set for bourse recast

New Delhi, July 10: The government today approved amendments in two legislations that clear the decks for reordering the way that 21 of the 23 stock exchanges in the country function and help them ratchet up their profitability.

The Union cabinet has cleared the amendments in the Securities Contracts (Regulation) Act framed in 1956 and the Depositories Act, 1996 for corporatisation of these bourses, which operate as “not-for-profit” institutions.

“The draft bills to give effect to the policy of corporatisation and demutualisation of the stock exchanges have been approved by the Cabinet and will be introduced in the monsoon session of Parliament,” minister for parliamentary affairs Sushma Swaraj told reporters after the meeting.

Swaraj said the amendments would also expand the penal provisions to protect investors.

Demutualisation will streamline the decision-making process on bourses through the appointment of a professional management body as it separates ownership and voting rights, and bars the management from trading.

Currently, only NSE and Over The Counter Exchange of India (OTCEI) have a demutualised structure out of the 23 that are in business at present.

“The benefits of demutualisation include streamlining business operations consistent with market needs,” Swaraj said. “Professional management will be able to streamline decisionmaking and also have the capacity to raise capital for acquisition of other markets or improve the technology,” she added.

The move to amend the SCRA of 1956, in line with the report submitted by M. H. Kania Committee and proposed by the finance ministry in the budget for 2002-03, has also been suggested by the Joint Parliamentary Committee, which investigated the stock market scandal of 2001.

The amendments in SCRA would enable existing bourses to transform themselves into a corporate entity run by a professional board — after approval by the Securities and Exchange Board of India (Sebi) — from the present system of broker-run exchanges.

In certain other sections of the SCRA dealing with the process of appeal, penalties also need to be amended in line with the changes carried out in Sebi Act, 2002. The capital market regulator can now impose fines on rogue traders amounting to three times the defalcated amount.

Last year, the government amended the Sebi Act 1992 to arm it with powers that would allow it to search and seize books, registers and documents of intermediaries or any person associated with the securities market.

Analysts said the amendments in the two acts were necessary to incorporate the definitions of new financial instruments like ‘derivatives’, ‘options’ and ‘futures’ since these are traded, but not mentioned in the acts.

They added that amendments in the depositories act were necessary to deal with the problems related to the delisting of shares and rolling settlement of shares. Also, a new clearing house has been set up, they said. Sebi had recently introduced T+2 settlement of shares and would implement the T+1 system in April 2004.

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