The Hindu Business Line : Is listing of exchanges necessary?

Mumbai April 12 Demutualisation and listing of the stock exchanges is seen as a natural process in the evolution of exchanges worldwide and is expected to seamlessly lead towards the next step, the transnational mergers and acquisitions of exchanges.

But the panel discussion in IOSCO 2007, on Securities Exchange Evolution and the Regulation of Transnational Exchanges raised the question whether the demutualisation, listing and formation of transnational exchanges was necessary at all. This discussion gains prominence in the light of the recent demutualisation of the Bombay Stock Exchange and its imminent listing this year.

The voice of dissent was that of Mr Ruben Lee, Managing Director of Oxford Securities. He was of the opinion that the market intermediaries lose out in the process of demutualisation and a feeling of dissatisfaction eventually sets in.

Evolution of exchanges

He also stressed that competition among exchanges is healthy and creation of monopolies might be detrimental to the investors and the market intermediaries.

Mr Jean Francios Theodore, Chairman and CEO of Euronext, was vehement in supporting the evolution of exchanges. He pointed out that the original members of the mutual exchanges who opted for demutualisation have made enormous profit.

The stock prices of all the listed stock exchanges have performed well in giving healthy returns to the shareholders. Demutualisation is, however, not an option that all the countries are exploring. The principal factor that is holding back stock exchanges from converting in to public companies in the much-debated `conflict of interest' factor.

Fear factor

To simplify, there is a fear across the exchanges, both mutual and demutualised, that the exchange would cut back on its regulatory activities prompted by the need to cut down costs as well as to continue to receive the patronage of the companies listed on it. So the desire of the demutualised exchanges to increase its profits is feared to lead to slack surveillance, which in turn would lead to increase in frauds resulting in depletion of investor's wealth.

While speaking to Business Line, Mr Pavel Hollman, Head of Regulation and Supervision of capital market section of Czech Republic, was categorical in stating that they have no plans of converting from their current state.

His argument was, why go for listing when there is no requirement for additional capital as listing brings with it a host of challenges. Conflict of interest was another reason that he cited for avoiding demutualisation and listing.

IOSCO in its final report on regulatory issues arising from exchange evolution said that the regulators can tackle issues arising out of conversion into for-profit exchanges and self-listing by focusing on governance arrangements, separation of regulatory versus commercial functions within an exchange, restriction on ownership and by means of oversight arrangements.

SEBI is expected to be mindful of these factors as it drafts the guidelines for the self-listing of the Bombay Stock Exchange this year.