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Shaji Vikraman

IN MARCH 2001, when the stock market scam blew up, as part of Operation Cleanup, Mr Yashwant Sinha, who was the Finance Minister then, was to quick to announce demutualisation as one of the major steps.

With the second anniversary of that announcement not too far off, the issue is set to be revisited. For, the SEBI board will first have to consider the recommendations of one of its own committees headed by a former Chief Justice, which handed in a report on demutualisation. The panel's report may not quite be palatable to a few in North Block and perhaps even in SEBI.

In mid-2001, during talks in the Finance Ministry, between the Department of Economic Affairs and the Department of Revenue, both were in agreement on one issue. That, in the process of demutualisation, the reserves and surpluses built up by the stock exchanges should not be divided and distributed among the stock brokers, for which they had staked a claim.

The Government's reasoning is not without logic. After all, bourses like the Bombay Stock Exchange were registered as what is known as Section 25 companies or as not-for-profit organisations.

Thanks to that status and the tax breaks granted by the government for such organisations, the reserves and surplus of the BSE, for instance, have grown steadily.

The minute exchanges undergo a change in such a status or, rather, adopt the demutualisation process where the ownership, management and trading rights are segregated, it would mean functioning like any other commercial entity. In such a scenario, when a not-for-profit organisation makes the transition into a for-profit organisation, the Government has the right to seek the transfer of the surplus built up to the Consolidated Fund of India.

The other option which the Government considered was to allow the new demutalised entity to use such funds only for acquiring capital assets or for development of the market and so on.

Stock brokers, who during their heyday in the late 1980s and the early 1990s could close the market without batting any eyelid, have obviously seen better days. Little wonder, there is resistance to the proposal.

The Kenia Committee has provided them some comfort in terms of identifying them also as part of the ownership structure and recommending liberal tax breaks for the new demutualised entity. The aim of opting for demutualisation was to avoid a conflict of interests between the owners, the members and the management. In the structure which has prevailed for long, the stock brokers have had their way for long.

So if one has to go by the Committee's recommendation and include the stock brokers as shareholder-members, the concept of demutualisation itself would have to redrawn, policy managers in New Delhi reckon.

The Kenia Committee's recommendation that all stock exchanges should follow one model could also spell trouble. Especially, when the National Stock Exchange model has been touted as a successful one.

North Block can draw comfort from the a few court verdicts at least in which it has been said that a membership to a stock exchange is a mere privilege and not just a right.

The Committee's views on the regional stock exchanges also may not please the SEBI Chairman, Mr G. N. Bajpai.

With there being enough backers to sustain the oxygen kits for the regional exchanges including those in the capital market watchdog, the Committee reckoning that the regional exchanges have no place is at variance with the stated position of the regulator.

The SEBI board will have to take a tough call on this when it meets late next week. So will North Block officials, especially those in Revenue, who will have to accede to so many tax sops to ensure professionalisation of the stock exchanges.

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