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Betting on a corporate model for BSE

The challenge will be to find the required professionals

THE COUNTRY'S oldest and till recently pre-eminent stock exchange, the BSE (the Stock Exchange, Mumbai) has been asked to transform itself comprehensively. From being an association of persons, with a no profit objective, the BSE will acquire a corporate form of organisation and work towards a "for profit " objective. A gazette notification issued on May 20 gives details of the plan to transform the exchange comprehensively. The role of brokers who have traditionally owned and managed (either directly or indirectly) the stock exchanges in the country will be constrained within certain well-defined limits.

Trading members cannot now have voting rights in excess of 5 per cent. The public will hold at least 51 per cent of the shares. The number of brokers on the governing board will not exceed a quarter of the total strength. The Securities and Exchange Board of India will have overriding powers to appoint directors. The chief executive is expected to be a stock market professional and will be an ex-officio director. The stock exchange's clearing house will be handed over to an independent clearing corporation with the approval of the SEBI. There will, of course, be a change in the nomenclature.

The reincarnated exchange will be called the Bombay Stock Exchange Ltd. to reflect its new status of a "for profit" organisation.

These and other details given in the notification are part of a comprehensive plan to make stock exchanges function as corporate entities. Instead of being an organisation for mutual benefit (of members who are all brokers), the new entities, after converting themselves into "demutualised" entities, will issue share capital to the public. While the BSE is the subject of the current restructuring, the Government has already decided that all the stock exchanges in the country will be corporatised and demutualised.

For regional stock exchanges that are all facing a steep fall in business, the restructuring plan is particularly challenging. But they do not have an option as the Government, having cleared the roadmap for the restructuring exercise, has thrown its weight behind it.

New York Exchange's move

There have been very few debates /discussions on the subject. The days of the traditional exchange, run by brokers, seem to be coming to a close, with not a word said in support of an organisational structure that has overseen the stock exchange business in the country for more than 100 years.

Interestingly, the world's biggest stock exchange, the New York Stock Exchange too, has announced plans to shift to a corporate form. Only, it is transforming itself through a reverse merger with a much smaller electronic exchange called Archipelago.

In both India and the U.S., the changeover to a corporate form was for long discussed but the real impetus has come from one or more shenanigans or failures of governance. In India, it has been the conflict of interest created by a situation where traders also control the management that has necessitated the change. So numerous have been the alleged shenanigans perpetuated by a few stockbrokers through the Nineties that hardly anyone seems concerned at a situation where the combined wisdom of the critical intermediaries will not count for much in the new set up.

This brings to the fore the most critical challenge that the new look exchanges are likely to face: a shortage of stock market professionals is already felt and this will become acute as there will be increasing demands on available talent. When brokers as a community enjoyed the trust of investors, they provided plenty of talent to the stock exchanges.

In India there has been a wide chasm between the world of stock exchanges and the universe of those who use them and regulate them. Failure to bridge the divide, even during the reform era, has caused the stock exchanges dear.

In the final analysis, it is sad but true that the agenda for making stock exchanges less dependent on brokers is rooted in the belief that professionalism is enough to cure all their ills. But genuine talent has to be nurtured .The ingrained antipathy towards one class of intermediaries will not help.

C. R. L. NARASIMHAN

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