PRESENTATION ON:-

DEMUTUALISATION of INDIAN STOCK EXCHANGE.

SUBMITTED TO:- Dr. SURYA DEV.SUBMITTED BY:- SHANKAR KUMAR SINGH 07F042. SOHINI SAMANTA 07F044. SOUMYA TRIPATHI 07F046. SUBHOJIT DAS 07F048.

Earlier the stock exchanges in India are formed as association of stock brokers. Stock exchanges were mutual organizations that were managed by members in a single city with a huge dealer population. They were registered as what is known as section 25 companies or as not-for-profit organization. Organizational profit making was never the motive; the exchanges required funds only the extent of meeting its expenses. Any surplus made by the exchange resulted in reduced access fees for members.

INTRODUCTION

DRAWBACKS

• The conflict of interests between the owners , the members and the management.

• Brokers were manipulating the market for their advantage

• Scams took place in pre-demutualisation phase

• Lack of strict vigilance on the market

DEMUTUALISATION

• Demutualisation means converting a “not for profit" organization into a “for profit”organization.It implies that a mutually owned association is converted into a company owned by shareholders. BSE is converted into BSE LTD.

• They are clearly separated like a commercial entity.

• The Stockholm Stock Exchange was the first stock exchange to be demutualised. It is an European based stock exchange .

ADVANTAGES OR REASONS FOR DEMUTUALISATION.• Rationalized Governance:-For interest

of customers and transparency.• Investors Participation:- Both

institutional and retail investors. Block trading.

• Competition From ATS’s And Electronic Communication Networks:- Alternate Trading Systems . Provides cheap and efficient access to quoted stocks. To cope up with competition .

Continued……………

• Globalization:-Traditionally exchanges were locally fixed. Through alliances , exchanges seek to attract more investments. Product variety is also available .

• Resources For Capital Investments:- Screen trading replaced floor trading. Customers have direct access to screens. Traders becomes a dominant force in exchange

SEBI’s GUIDELINES.SEBI has issued its guidelines on 13-11-2006 for

investment in stock exchanges in India -

Under the guidelines, shareholding of trading members has to be brought down to 49% which can be done in the following way :-

• Offer for sale by prospectus by existing trading members having ownership shares.

• Placement of shares of shareholders having trading rights to such persons or institutions as may be short listed by the exchange with the approval of SEBI .

• Issue of equity shares on private placement basis by the stock exchange to any person or group of persons not having trading rights subject to approval of SEBI.

LIMITATIONS BY SEBI.

• No person shall directly or indirectly acquire or hold more than 5% in the paid up capital .

• No person shall either individually or together with persons in concert with him acquire and or hold more than 1% of the paid up capital.

• Foreign investment up to 49% will be allowed in stock exchanges with a separate FDI cap of 26% and FII cap of 23%.

• No FII shall seek and get representation on the Board of Directors of stock exchanges. No foreign investor including persons acting in concert will hold more than 5% of the equity in the exchange.

DEMUTUALISATION OF BSE.

• The Bombay stock exchange. Asia’s oldest stock exchange with 131 year old history.

• It was corporatised on 19 May 2005.• Around 51% stake of 790 brokers were

offloaded to 21 investors. Like SBI, LIC, Aditya Birla Group, beside Deutsche Borse and Singapore Exchange.

• 19 investors have picked up 41% stake.• 10% by Deutsche Borse and Singapore

Exchange.• Rs 189 crore.

DEMUTUALISATION OF NSE.

• The National Stock Exchange was formed in November 1992 as a tax paying company.

• Owned by a set of leading financial institutions. Like:-

Industrial Development Bank of India Limited. Industrial Finance Corporation of India Limited.National Insurance Company Limited.Infrastructure Development Finance Company

Ltd.• NSE has spun of its wholly owned

subsidiaries like NSCC & NSE.IT

DEMUTUALISATION OF NCDEX.

• National Commodity & Derivatives Exchange Limited.

• A public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It commenced its operations on December 15, 2003 . NCDEX currently facilitates trading of 57 commodities.

•

COMMITTEE FORMED FOR SUGGESTION.• Under the chairmanship of Justice MH

Kanai a group was constituted by SEBI to advice on the matter of corporatization and demutulisationof exchanges.

• Some suggestions are :- 1) Stock exchanges be converted into

companies limited. 2) Amendments be made to Income

Tax Act 1961.

Continued…

3) Amendments also required in Indian Stamps Act 1899 and Sales Tax law.

4) The current system of permission to trade on the basis of ownership of a trading card be replaced by a system where money is deposited to obtain trading rights.

5) Shareholders, brokers and investors are equally represented.

6) A uniform model to be adopted.7) The merger of stock exchanges is a

commercial decision that would be left to the stock exchanges

DEMUTUALISATION OF REGIONAL STOCK EXCHANGES Government ask for demutualisation of regional

stock exchanges in two way:-1)Either by trading arms of BSE & NSE ,or2)no.of regional stock exchange join hands to make a

separate platform. Nine exchanges recently signed an MOU with the

National Stock Exchange (NSE) to extend its trading platform on the regional stock exchanges. The nine exchanges include Interconnected Stock Exchange of India (ICSE), Ahmedabad Stock Exchange and so on.

Out of 21 stock exchanges till now 17 are demutualised.

The stock exchanges not demutualised are :-

Continued….

1) Coimbatore Stock Exchange.2) Mangalore Stock Exchange .3) Meerut Stock Exchange .4) Uttar Pradesh Stock Exchange.

All the assets are valued by the exchange which include the value of seats .

Then the total value was founded and divided into share.

Those shares were offered to public.The stock exchange list the share the

shares.The members of the exchange will get

there payment of their seat from the funds available through the sale of shares.

Process of Demutualization

Continued

• If any person is admitted as trading member then uniform standards will be followed in terms of capital adequacy deposits fees .

• The public apart from shareholder who have trading right will hold at least 51% of its equity shares.

RESARCH AND METHODOLOGY.

PERFORMANCE OF THE B.S.E INDEX.

B.S.E Indicies

0100020003000400050006000700080009000

10000

Nov- 04

 

Dec- 04

 

Jan-

05 

Feb- 0

5 

Mar

-05

Apr-0

5

May

-05

Jun-

05

Jul-0

5

Aug-0

5

Sep-0

5

Oct-05

Nov- 05

 

B.S.E Indicies

TURNOVER IN THE B.S.E INDEX.

0

10000

20000

30000

40000

50000

60000

BUY

SELLS

Challenges of Demutualization

• No change in the conflict of interest if an exchange is converted from an association of persons into public limited company.

• The same board and the same organization structure is still existing and nothing much is achieved.

• Difficult in part of government also to solve the management problem.

• Many argument also given that demutualization itself cannot achieve improved governance.

Members of BSE and NSE

• BSE:- 1)18 Board members 2)1 Chairman 3) 1 Managing Director 4)8 Independent director 5)7 Broker director

• NSE:- 1) 1 Managing director 2) 2 SEBI nominees 3) 4 Public representatives 4) 4 Independent director 5) 8 Share holder’s

representative

Conclusion

• If the stock exchange are the self regulatory in nature they find ways to profit making.

• The exchange have option of setting up separate entity within stock exchange defining the regulatory power.

• Though demutualization is beneficial man stock exchange is hesitating to adopt because they may loose identity.

• Fear of paying huge tax conversion.

References

• ICFAI Journals of 2005.• Financial market & services, By

Gordan & Natrajan.• Http://www.livemint.com• nseindia.com• Bseindia.com

THANK YOU