The Telegraph
Since 1st March, 1999
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Sebi ends reign of brokers on bourses

Mumbai, Nov. 29: Stock exchanges will run themselves like companies, not charitable trusts, under a raft of new regulations aimed at busting the cosy club of brokers who have been calling the shots for decades.

The Securities and Exchange Board of India (Sebi) board, which cleared the changes, also allowed bourses to select shares for derivative trading, if they meet conditions laid down by the J. R. Varma committee.

“Manipulation as seen in earlier regimes where boards of stock exchanges were dominated by brokers is now a thing of the past. Sebi has put the final seal that will lead to better investor protection,” an analyst said.

Ownership, management and trading membership of exchanges will be segregated, paving the way for them to turn into a profit-making entity, like any other company. Their boards will have equal representation of brokers, shareholders exchange and public as investors. Bourses will be free to go in for public flotation, but their shares will have to be listed elsewhere.

These changes were part of the recommendations of the M. H. Kania Committee, which had earlier defined demutalisation as the transition in the legal structure of an exchange from a mutual form to a business corporation form, to be followed by privatisation.

Exchanges as they exist today can be segregated into two broad groups — 20 set up as companies, either limited by guarantees or by shares, and three which are now functioning as associations of persons (AOP). On this list are BSE, ASE and the Indore Stock Exchange.

Bourses will present their demutualisation scheme in six months from the date of issuing instructions, Sebi chairman G. N. Bajpai told reporters after the board meeting. Broking members will hold shares of the corporate body, but the regulator will consult the Central government before arming them with voting rights.

According to analysts, said that Bombay and Delhi stock exchanges will be the first to get off the block on demutualisation. The expectation is that they will present their schemes to Sebi soon, and many are predicting that smaller exchanges struggling to stay afloat will walk into the arms of their stronger counterparts.

The Kania committee mapped out two stages to demutualisation. One involves the changing the voluntary not-for-profit character of the entity into a for-profit one (in some cases into a corporate body as well). The second is delinking ownership from trading rights.

The panel wanted BSE, ASE and Indore bourse to be corporatised and demutualised. Since NSE and OTCEI are already corporatised, their structure will not change.

Other questions to be addressed include the manner in which assets will be transferred from the existing exchanges to the new corporate entity in cases where demutualisation is accompanied by corporatisation. BSE, ASE and Indore would figure on that list. Allocation of assets to members will also have to be resolved.

Derivatives free-run

Exchanges can now select an underlying security for Sebi-approved derivatives trading if they meet the eligibility criteria listed by the Varma panel. This follows the good response to index-based futures, options in 31 shares.

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