A high level committee that is being headed by former Reserve Bank Governor Bimal Jalan looked into governance and ownership issues relating to market infrastructure institutions (MIIs). Recently the report recommendations and findings were placed on Website for public comment. The prudent recommendations were given on three important components of capital market infrastructure in India — stock exchanges, clearing corporations and depositories. With the possibility of new exchanges coming up, there is a need to prescribe new rules of ownership and governance. Moreover the stock exchanges have undergone a huge transformation in the reform era because of the large increase in the number of investors and share volumes, which in turn required a considerable infusion of both technology and capital. One important change has been the conversion of stock exchanges from mutual entities and associations of brokers into demutualised corporate with shareholders. A distinctive feature of the new set-up is the total separation of trading, management, and ownership rights.
The Committee suggests the raising of entry level barriers for the new exchanges. Only financial institutions and banks with a net worth of Rs.1,000 crore could become anchor investors, owning up to 24 per cent of the capital in the first instance to be reduced to 15 per cent over 10 years. Both on- and off-balance sheet items of an entity are to be considered while calculating the limits of shareholding. This is suggested in attempt to reduce the scope for financial burglary. There will be a cap on the profits that the MFI shareholders can enjoy and on the remuneration of top executives of the exchange. Trading and clearing members will be ineligible to serve on the boards and the number of public interest directors should be at least equal to those representing the shareholders. No stock exchange will be allowed to list, a recommendation that should put an end to a long-standing controversy over conflict of interest. Stock exchanges and other MIIs will have to fulfill the disclosures and corporate governance requirements of the listing agreement applicable to public companies. The Jalan Committee has also noted for the fact that stock exchanges will continue to have regulatory functions. The bar has to be kept high to admit only genuine players.
The recommendation for shares to be listed on stock markets gains significance as many foreign investors have picked up equity in the BSE, India’s oldest stock exchange. It is most likely to impact BSE that planned to launch its initial public offering by March 2011. In addition the stock exchanges will have to bring down its holding in the Central Depository Services from the current 54 per cent to 24 per cent in three years, if the Jalan committee suggestions are implemented. This would also affect the NSE that has just over 25 per cent stake in National Depository Services.