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There were vociferous protests from stock market participants when the Bimal Jalan committee report on ownership and governance of market infrastructure institutions (MII) was released in November 2010. Many of the proposals were considered detrimental to the development of the equity market. But SEBI has exercised its discretion in accepting only some of the suggested proposals. Here is a brief overview of those that were accepted and those that were not.
Exchange listing
The report drew a lot of flak for prohibiting stock exchanges from listing. The reasons forwarded for this proposal were quite ludicrous, such as exchanges need only long-term investors and not speculative ones, listed exchanges will lose their credibility if their stock price declined sharply and listing the stock exchange stock on their own platform can lead to a conflict of interest.
SEBI has taken the right decision in ignoring this recommendation and giving exchanges the go-ahead to list. This move will give the existing shareholders of exchanges such as BSE an exit route. Large institutional investors, both domestic and foreign, also prefer to invest in listed exchanges where they can divest their stake easily. Future fund raising for deploying in technology or for investor protection will also be easier for listed exchanges. The problem with regard to conflict of interest arising from self-listing is addressed by ruling that no stock exchange can list on its own platform.
Cap on profits
Another controversial suggestion in the report that made market players howl in protest, was that profits of stock exchanges need to be capped. It was argued that since these were public utilities, they should be allowed to earn only reasonable profits on par with other companies. The cap was to be fixed based on the yield on a 10-year GOI bond plus a risk premium.
The above suggestion would have stunted the growth of exchanges and SEBI has done well not to accept it in entirety. The regulator has, instead, suggested that 25 per cent of the profit be transferred to a Settlement Guarantee Fund. This move will give exchanges room to grow while taking care of systemic risk arising from payment defaults.
Ownership norms
The market regulator has accepted most of the suggestions of the Jalan Committee report pertaining to ownership norms. The report had stressed that ownership of stock exchanges needs to be diversified. A cap of 5 per cent is now placed on holdings of individual shareholders in stock exchanges.
Other stock exchanges, depositories, insurance companies, banking companies or public financial institutions are allowed to hold up to 15 per cent stake in an exchange. SEBI has, however, ignored the suggestion that domestic institutions acting as anchor investors can hold up to 24 per cent in a stock exchange.
The noteworthy variance in SEBI's rules relates to allowing exchanges three years, from the time of getting permission to begin operation, to comply with the ownership norms. The Jalan report had specified that ownership norms have to be complied with ‘ab initio' or from the beginning. Such a provision could have arrested competition as promoters would have found it hard to reduce their stake prior to the start of operations.
Networth norms
SEBI has also accepted most of the Jalan committee report's proposals on net worth. Stock exchanges are now required to have minimum networth of Rs 100 crore, clearing corporation and depositories' networths are stipulated at Rs 300 crore and Rs 100 crore, respectively. The only variation is that while the report suggested allowing stock exchanges ten years to comply with the norms, SEBI has reduced this period to three years.
Conflict of interest
Many of Jalan Committee recommendations pertaining to resolving conflicts of interest have been adopted by SEBI. These include formation of an independent committee by exchanges made up of predominantly independent directors to take care of regulatory and surveillance functions, having only non-trading members as board members, establishing Chinese walls between regulatory and commercial departments, and so on.
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