A high level committee headed by former Reserve Bank Governor Bimal Jalan, which looked into governance and ownership issues relating to market infrastructure institutions (MIIs), has come out with prudent recommendations that should reassure investors. The market infrastructure in India has three components — stock exchanges, clearing corporations and depositories. Of these, 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 corporates with shareholders. A distinctive feature of the new set-up is the total separation of trading, management, and ownership rights. The number of stock exchanges has shrunk: there are only two main ones, the BSE and the NSE, both having trading terminals across India. With the possibility of new exchanges coming up, there is a need to prescribe new rules of ownership and governance.
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. Interestingly, both on- and off-balance sheet items of an entity are to be considered while calculating the limits of shareholding. That should reduce the scope for financial engineering. 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 fulfil the disclosures and corporate governance requirements of the listing agreement applicable to public companies. Clearly, the Jalan Committee has taken note of the fact that stock exchanges will continue to have regulatory functions. The bar has to be kept high to admit only genuine players.
