The Hindu Business Line : Way paved for SEs' demutualisation, corporatisation

THE Lok Sabha on Monday passed without discussion a crucial Securities Laws (Amendment) Bill that would facilitate the structural transformation of stock exchanges from the existing mutual organisational form to a demutualised state.

The Bill seeks to amend the Securities Contracts Regulation Act, 1956 (SCRA), among other things, to limit the organisational form of a stock exchange to a corporate entity.

The process of demutualisation, recommended by the Joint Parliamentary Committee on the stock market scam of 2001, would separate ownership, voting rights and management from the right of access to trading in the stock exchanges.

As of now, only two exchanges (National Stock Exchange and OTCEI) of the 23 stock exchanges in the country have a demutualised structure.

The Cabinet had in the first week of July cleared the Securities Laws (Amendment) Bill 2003.

The Bill, passed by the Lok Sabha, seeks to amend the SCRA to specify the procedure for corporatisation and demutualisation of stock exchanges including the procedure for approval of the scheme by the Securities and Exchange Board of India (SEBI).

Besides defining "corporatisation" and "demutualisation", the Bill seeks to empower SEBI to, while approving the corporatisation and demutualisation scheme of stock exchanges, restrict the voting rights of the shareholders who are also stockbrokers of the recognised stock exchange.

SEBI can also restrict the right of shareholders or a stockbroker of the recognised stock exchange to appoint representatives on the Governing Board.

Further, the capital market regulator can restrict the maximum number of representatives of the broker of the recognised stock exchange to be appointed on the governing board of the stock exchange, which "shall not exceed one-fourth of the total strength of governing board".

The Bill has also stipulated that every stock exchange, whose scheme for corporatisation and demutualisation has been approved by SEBI, should ensure that at least 51 per cent of its equity share capital is held, within 12 months of the SEBI order, by the "public other than shareholders having trading rights".

The stock exchanges would be allowed to meet this norm either through fresh issue of equity shares to the public or in any other manner as may be specified by the regulations made by SEBI.

At present, there are 23 stock exchanges in the country. While three stock exchanges are functioning as association of persons (The Stock Exchange, Mumbai, Ahmedabad Stock Exchange and Indore Stock Exchange), the other 20 have been set up as companies either limited by guarantees or by shares. Apart from the National Stock Exchange (NSE), all other exchanges are functioning as `not-for-profit' stock exchanges.

Through the Securities Laws (Amendment) Bill, amendments have been proposed to the definition of "securities" in SCRA to include therein units or any other such instruments issued to the investor under any mutual fund scheme. Definitions have also been introduced for "derivatives" and "hybrid instruments".

The Bill also seeks to amend the Depositories Act 1996 to provide for appeals from the orders of the Securities Appellate Tribunal under that Act to the Supreme Court on the lines of the Securities and Exchange Board of India Act 1992.

Amendments to SCRA are also being carried out for enhancing penalties under that Act, compounding of offences and crediting of amount of penalties into the consolidated fund of India.

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