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Wednesday, Sep 04, 2002

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Panel for representation of brokers on exchanges — Report moots governance norms

Nilanjan Dey

KOLKATA, Sept. 3

THE report by the SEBI-instituted group on corporatisation of stock exchanges has welcomed the representation of brokers on governing boards of the exchanges.

This has been pointed out by brokers operating out of regional stock exchanges, which today feel threatened in the context of falling volumes and the growing opinion that they are becoming irrelevant.

The group, headed by Mr Justice M.H. Kania, is of the view that, in a demutualised scenario, in which the broking community would be among the major stakeholders, the stock exchange concerned would stand to benefit from their experience.

Brokers on the Calcutta Stock Exchange, who view the report as positive, observe that it has spelt out certain caveats as well.

There is, for instance, a case for limiting brokers' representation to one-third. "It is expected that two-thirds of the board being non-brokers should be able to provide the driving force behind the management of the stock exchange,'' the report has stated.

Bourses such as New York Stock Exchange and Nasdaq (both of which are non-demutualised) too have brokers on their governing boards.

In NYSE's case, there is representation from brokers, financial services, investor associations, corporates etc.

According to the Kania group, there are divergent views on the issue. While brokers have argued in favour of their inclusion, investors' organisations have opposed the idea. The latter have contended that brokers' representation is "a conflict of interest''. There is also a possibility of "interference and exercising influence in the functioning of the stock exchange''.

Investors have generally felt that the presence of brokers "affects the independence of the executives'' of the exchanges who may be answerable to the very persons whose actions they are expected to control.

Incidentally, the group has acknowledged that in the demutualised/corporatised context, brokers can continue to be shareholders.

They are also eligible to be elected as directors. Brokers, it is further stated, are one of the three main stakeholders, the other two being the shareholders and the investing public (through the regulatory body).

CSE brokers have pointed out that the group has favoured the idea of setting up management teams and implementing the right systems to end all possible interference.

Among the other recommendations made are:

  • There should be specific vacancies on the board for each class of stakeholders

  • Shareholders' representatives should not be functioning brokers

  • The investing public should be represented by SEBI nominees, chosen from among academics, professionals, investor association, etc

  • There should be adequate disclosures on each board member's background; these should be stated at AGMs and in annual reports

  • Current restrictions on the tenure of broker directors should continue

    Professional CEO

    The Kania group's report has talked about the merits of putting in place an independent management team headed by a professionally-qualified CEO, who may be seconded by a whole-time director. Both should be made permanent members of the board.

    The report has also recommended that the roles of the Chairman (who should not be a practising broker) and CEO should be segregated. A stock exchange may also appoint a CFO (chief financial officer, who need not be a board member), it is felt.

    In a demutualised set-up, an exchange should embrace corporate governance codes that are similar to those applicable to listed companies.

    These should include standards on financial reporting, audit, shareholders' complaints and disclosures. Also, the board should not form a committee whose effect would be dilute the independence of the CEO.

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