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A significant transformation

The change in the name of Asia's oldest stock exchange, from the Stock Exchange, Mumbai to the Bombay Stock Exchange Ltd., (BSE Ltd.) is of more than cosmetic significance. Along with the change in name comes a new perspective, one brought about by a comprehensive change in its ownership and management. Until now, the BSE like most other exchanges in India was owned and managed by brokers, who also had the sole right to trade in the exchanges. Conflicts of interest were bound to arise in such situations. However, for a variety of reasons — the relatively low levels of stock market activity, and the largely unrealised potential of the markets in mobilising capital being the principal ones — stock exchanges could persist with their organisational structure, patterned as an association of persons, with "broker-members" of the exchange owning all its capital. Until the advent of the National Stock Exchange in 1994, the BSE was India's pre-eminent exchange during most of its 130 years, accounting for an overwhelmingly large proportion of the share market transactions of the country. Companies wherever located were advised to seek a listing of their shares on the BSE so that they could have access to its large reservoir of capital and investor base. Legally speaking, it was enough if they listed their shares on any one of the regional stock exchanges, closest to their registered office. This last rule, like so many others connected with the securities market, had to be discarded in the wake of the sweeping changes in the financial markets since the 1990s. Perceptions of both investors and regulators changed dramatically forcing the stock exchanges to overhaul themselves.

A series of securities scams through the 1990s in which brokers were invariably held accountable, the inability of the broker-dominated exchanges to check malfeasance, and a vastly expanding role for the capital market in the national economy necessitated a thorough review of the age-old stock market structure. Global benchmarks in governance came into vogue consequent on the growing integration of the domestic financial markets with the rest of the world. In the new demutualised and corporatised exchanges that came about as part of a major capital market reform — a time-bound programme for 10 other exchanges has since been announced — the right to trade is segregated from the right to own and manage the exchange. The transition is not going to be easy as it involves the imparting of a much greater degree of professionalism. Stock market professionals from outside the broking community are reportedly in short supply. By far the biggest unknown factor relates to the future ownership of the exchange. Brokers will cede control and investors including retail ones will hold a substantial portion of the exchange's equity. Apart from this being totally new to India, it does raise the possibility of other conflicts of interest including the one connected with the listing of its own shares.

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