s.no summary of responses on ownership norms 1. … summary of public comments page 1 of 190 s.no...

Annexure-B: Summary of Public Comments

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S.No Summary of responses on ownership norms

1. X: As regard ownership pattern on the stock exchange the following is worth considering:

•••• Definition of Anchor Investor should be broadened to include any class/category of

entities as long as they perform in line with the broader parameters set by the SEBI and potential conflicts of interest can be mitigated.

•••• There should be no requirement of Anchor Investors to bring down their stake. •••• Single entity equity stake could go up beyond 5%. •••• Foreign bourses could be allowed more participation with adequate restrictions.

2. X: Given the importance of encouraging and promoting further competition in this

industry, we suggest that insurance companies, which are well capitalised and strictly

regulated, and multilateral financial institutions, could also be allowed to become Anchor

Investors in addition to banks and financial institutions. In any case, we would like to

reiterate the importance of continuing compliance with the fit and proper criteria for all

shareholders including anchor investors. This is of vital importance as “Trustworthiness”

is the foundation of well functioning MII such as a Stock Exchange. Moreover, for the

calculation of the percentage of holding of an anchor investor, all exposures both on and

off the balance sheet which enable current or future voting rights should be included as

suggested by the Committee.

However, while the logic of this recommendation is understandable, such a rule would

prevent a stock exchange from borrowing from a bank or financial institution even for its

genuine business needs. Therefore, we suggest that where a bank or financial

institution in the ordinary course of business lends or provides a non-fund based facility

to a stock exchange in which it has invested, the amount lent or provided by way of non-

fund based facility, be excluded while computing an entity’s shareholding in the stock

exchanges.

3. X: Globally we have seen many different arrangements among exchanges, clearing

corporations and depositories – everything from full vertical integration to complete

mutual ownership (utility models) for both clearing corporations and depositories.

We believe that there should be consistency and Exchanges be allowed to own at least


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51% of the Depositories as prescribed for the Clearing Corporation. SEBI, as the

primary regulator of Exchanges can always invoke its oversight and regulatory power

over Exchange behaviour, if there is a problem, including behavior of an Exchange-

owned MII like a Depository. Moreover, we believe that, once a stock exchange has

complied with the ownership and governance requirements under current SEBI rules (or

future Jalan Committee suggested rules), there should be no further restrictions on that

exchange’s ownership of other MIIs.

We broadly accept the concept of an anchor investor who, in exchange for a longer

lock-in period of 10 years, would be allowed a larger stake in an exchange. However we

believe that this category should be expanded to include potential domestic and

international investors – including foreign stock exchanges -- who would be eager to

bring capital and expertise to this industry to help it develop.

4. X: We think global strategic & financial investors also be treated as “Anchor Investors”

and should be allowed to hold 24% or 26% in an MII. FII may be allowed to purchase

shares of stock Exchanges other than through the secondary market also. FII may be

allowed to buy shares in the Stock Exchanges even through private placements up to

the permitted limits Further, such strategic investors should also be allowed to be on the

Board of an MII, which is similar to global practices.

We recommend that instead of restricting the ‘Anchor Investors’ to only the ‘Institutional’

category of PFI’s & Banks with networth above Rs. 1000/- crs even though their

subsidiaries/associates have trading interest, the definition needs to be broaden to

include all institutions & listed corporate and also that their subsidiaries/associates

should not be having any trading interests. FIIs and Global Exchanges should also be

considered as ‘Anchor Investors’. This is important for Indian Exchanges to become

globally comparable now when India is closed so that once India opens and has

convertibility, Indian exchanges will be able to compete for business in global market.

Additionally, it is the expertise of the promoter that must be considered rather than their

net worth alone to ensure long term serious investors who would actually develop the

market.


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As per the IMRB Survey Findings on ‘Perceptions of stakeholders towards

Recommendations of the Bimal Jalan Committee Report’ –

Further the recommendations of reduction of anchor ownership from 24% to 15% in ten

years is contradictory to the Committee’s own recommendation that shareholders of

exchanges ‘needs to be long term investors who are sufficiently motivated’.

In addition, it is also observed that the BJC report has supported Public financial

institutions and banking companies fulfilling the prescribed conditions as anchor

institutional investors even if their subsidiary / associates have trading interests. This is

completely contrary to the view of Global Institutions like the IOSCO and BJC’s own

view, wherein it has recommended that no trading member can be on the Board of the

Exchange.

It appears that one of the member of the committee was a Banker with business of

trading, merchant banking and mutual fund and therefore, such special dispension has

been made for banks. This shows that the committee was not independent in its view

due to this contradiction.

Considering all the above facts it would be considered as highly misconstrued to

recommend ONLY the public financial institutions & banks as ‘Anchor Investors’ for the

purpose of promoting Exchanges. Thus definition needs to be modified by also

permitting Listed Corporates, FIIs and Global Exchanges as ‘Anchor Investors. Such

entities should not have trading interest.

All exposures to be counted

We recommend that the cap on exposure all the diversified anchor investor as

suggested above, needs to be relaxed to 25% for any shareholder who is ‘fit & proper’

and that the computation of exposure needs to be restricted to equity shareholding only.

The definition of direct & indirect exposures inacceptable as it will curtail the rights of


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stock exchange as a company to raise equity capital or debt and also to do strategic

alliances through host of instruments. Initial capital requirements of an exchange is Rs.

100 crore, whereas their fund requirement is Rs. 1000 crore and therefore it should

flexibility of debt, preference share, optionally convertible preference shares, warrants,

FCCB;s, etc., to fund operatons. These could happen through an IPO, FPO, QIP, etc.

Ownership and control of one MII over another class of MII

We recommend that the Clearing Corporations should be allowed to invest in

Exchanges (as per BJC itself: refer pg 36) and in other related lines of business

including MIIs.

Preventing of shareholding by a clearing corporation or a depository in an exchange or

an MII is also incorrect as Indian Markets are getting poised for greater integration with

global markets.

Preventing MII to invest in related and aligned business will retard growth and

development of capital market.

Ownership norms for all MIIs

We recommend that the policy for ownership of depositories, clearing corporation &

stock exchanges should be similar with a broad range of anchor investors and limit for

all class of shareholders shall be 24%.

Thus, there is no rational justification of suggesting a cap on the holding of the stock

exchanges in depositories and the point stated in the BJC appears to be

unsubstantiated. In fact shareholding in all MIIs should be similar in nature.

Time for compliance with ownership norms

We recommend that for serious & long term investors to actually participate as ‘Anchor

Investors’/promoters of New Stock Exchanges, a reasonable time frame of 5 to 10 years

needs to be carved out and thus this proposal of 3 years is not feasible.


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Further RBI, IRDA & FMC give shareholding relaxation during the first 5 to 10 years and

then ask promoters to meet the shareholding restrictions. Therefore, it is very unrealistic

for SEBI to propose such norms ab intio for new stock exchanges. SEBI should follow

the same norms as those followed by RBI, IRDA and FMC for a new institution.

5. X: If need be, as an additional measure of insurance against abuse or potential

conflicts, SEBI could consider caps on voting rights or board seats, while allowing

ownership to be determined by the shareholders. At present, there is no statutory

direction on ownership of Clearing Corporations and hence, complete flexibility on the

matter prevails. In our view, there is no need to modify the ownership pattern of Clearing

Corporations; rather it may be left to the promoters/ stock exchanges to decide on their

ownership limit in Clearing Corporations as it gives flexibility in the growth of the same

by way of having strategic partners (domestic and foreign) who can provide/ innovate

new technology, products etc.

The Committee also suggested that MIIs such as Clearing Corporations and

Depositories should not hold any equity stake in exchanges. Given the fact that there

can be Clearing Corporations and Depositories independent of the stock exchanges, it

might be advisable to remove such restriction.

6. X: An anchor investor is very much required for a business entity which has profit

maximisation as its major objective but does not have any regulatory responsibility

embed in its business. But the SE does not fall into this category. As the SE is expected

to function in overall public interest it should have broad based shareholding pattern

with no single investor having undue influence either on the board composition or board

decisions. In short, no single shareholder should be in a position to unduly influence

functioning of the SE. Only large institutions that meet stringent eligibility criteria may be

allowed to hold share capital up to 15%. All other shareholders should not own more

than 5% capital and those owning more that 1% of the capital should meet all the

stringent fit and proper criteria. Regulator should ensure that there is no collusive

behaviour on the part of some shareholders to circumvent the logic of broad based


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shareholding.

Clearing corporations and depositories:- These entities do not pose much serious

problems to the regulator as the today’s scramble and heated debate is mostly about

the stock exchanges. The promise of guaranteed settlement of transactions on the

exchanges is, in fact, given by the clearing corporations (CCs). It is the CCs that collect

all the initial and mark to market margins and manage exposure controls on member

positions. Given its crucial importance in the system it would be ideal that a CC is a

wholly owned subsidiary of an exchange. This is a neat solution.

As regards depositories, they do not guarantee settlement but merely carry out credit

and debit entries in ownership records mainly based on the advice given by the CCs.

Depositories are vitally important in the financial system because they maintain

ownership records of market players and investors as also their transaction details.

Since depositories provide services to all the stock exchange it is desirable that their

shareholding is also broad based. No single shareholder including a stock exchange

should hold majority stake in a depository. As noted earlier, IDBI and erstwhile UTI had

to take large stakes in NSDL as getting support for such a measure from other potential

shareholders would have been time consuming, thereby leading to delay in the

implementation of this socially important project, the viability and profitability of which

was not well understood at that time. But in the current context, it should not be difficult

to ensure broad basing of depository shareholding.

7. X: Not only the stock exchanges, the shareholding of each Anchor Investor (Sponsors)

in a depository should be restricted to 24%. It is an important recommendation of the

Jalan Committee that a stock exchange should not have a stake in the depository,

which is higher than 24%. This philosophy has a strong logic because concentrated

shareholding by a stock exchange can create conflicts of interest especially since

depositories facilitate settlement of transactions at various stock exchanges.

Banks/ financial institutions also act as Participants of the depository. Therefore, any

anchor investor (sponsor) should not hold more than 24% stake in a depository, so that

it doesn’t occupy a dominant position enabling it to affect the independent functioning of

the depository in which it might also be a Participant.


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8. X: In our view, the Jalan committee recommendations which lack any reasoning appear

to unnecessarily restrict the freedom of Depositories to develop and innovate their

businesses and to allow their ownership structures to evolve to meet the market

dynamics and demand. This we apprehend will have a negative effect on the

competitive environment with little apparent benefit to the stakeholders and at no clear

risk or cost. In short, we believe there is no compulsion on SEBI to restrict CSDs in how

they choose to evolve their business models and ownership structure. The existing

structure appears to be market savy and requires support.

The report recommends again without any reasoning that exchanges must not own

more than 24% of a depository. We fail to see any logic in this recommendation or find

any convincing argument as to why it is imperative at this moment in the development of

the Indian capital markets for regulators to restrict ownership of CSDs in this manner.

Moreover, we believe that there exists no compelling reason why Clearing Houses

(CCPs) should be treated differently than CSDs, in terms of ownership restrictions. We

also do not believe it is necessary to restrict Depositories from owning stakes in

Exchanges or Clearing Houses. While we do not at the moment have any such stakes,

or intend to acquire them now or in the near future, we believe restricting ownership and

capital structure -- without compelling reasons reflecting some public policy – is only

likely to hurt the competitiveness of Indian MIIs compared to their international peers

who are generally not restricted in this manner. Such developments must follow a

thorough examination of the market forces and requirements.

Currently, exchanges in India are allowed to own up to 100 percent of depositories.

Depending on strategy, capital needs and commercial considerations, we have seen the

ownership stakes of both X and X respectively in X and X vary over time. No great

harm has arisen by allowing exchanges and CSDs this kind of discretion.

Moreover, in the international context we have seen many different arrangements

among exchanges and depositories – everything from full vertical integration to

complete mutual ownership (utility models). Our suggestion is that we should let the

Indian market decide what kind of CSD it prefers to do business with.


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An exchange having a larger stake in a CSD provides a high level of cost sharing

amongst the institutions in practice. This reduces the overall cost on the system and

benefits the users such as retail investors and enhances financial inclusion. Often such

arrangements work to the mutual benefit and tends to keep the cost to the consumers at

competitive levels. As you are aware, X has been using X infrastructure such as

network, premises, experts etc. since its inception. In addition, ability to provide better,

more integrated services makes it beneficial for an MII to have a larger stake in another

MII. Since the parent MII has to adhere to ownership dispersal framework already set up

by SEBI, concentration of economic power affecting decision making in the subsidiary

MII such as CSD does not arise at all. In that context also, the artificial limit of holding to

24% in a CSD by an Exchange is sub-optimal solution and against the principles of

basic economics without adding any benefits on the regulatory side. It becomes all the

more glaring and discriminatory when the Clearing corporations are being allowed 100%

ownership by the exchanges with minimum holding of 51% using the same argument in

the same report.

There is one additional reason why X feels its interests are harmed on the specific

recommendation of the Jalan Committee is that CSDs should only be owned a

maximum of 24% by any exchange. This recommendation imposes a severe cost and

disruption on X and X and almost no cost or disruption on X and X. X’s ownership stake

in X is 54%; X’s ownership stake in X is 25%. We do not see any compelling reason

leading to this conclusion of the committee. The decision prima facie appears

discriminatory.

9. X: The suggestion to induct anchor institutional investors having a networth of Rs.1000

crores or more to hold equity stakes in stock exchanges though intended to be a

beneficial suggestion offers much hassles when viewed in the practical light. If the

profits are sought to be capped and investment would yield no return, it wouldn’t make

any business sense to be investing in the Stock Exchanges . The restrictions limiting the

possibility to banks and public financial institutions, would come in the way of these

stock exchanges raising capital and would also affect the long term business prospects.

The recommendation does not support the Committee’s reason for choosing banks and


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PFIs as anchor investors as those ‘who will take the lead role of setting up a stock

exchange’. Integrity of a company or a stock exchange is determined by the Policies,

sound Risk Management and monitoring systems, robust technology and not by the

Anchor Investors adopted by them.

10. X: The Committee proposes to support the concept of Anchor Institutional Investors, but

restricted to banks and Public Financial Institutions (PFI).

The basic idea of Anchor Investors in Stock Exchanges is to encourage competition,

bring Risk Capital into the Industry, Increasing the Interest of Entrepreneurs and thereby

helping Investors, Capital Markets and Economy. By restricting the Anchor Investors to

include only Domestic Bank and PFIs would defeat the above purpose because

whenever this PFIs and Banks have invested in exchanges, they have always remained

as passive investors. This recommendation does not support the Committee’s reason

for choosing only banks and PFIs as Anchor Investors and not allowing other specified

category like Stock Exchanges, Clearing Corporation, Insurance Companies and PHC

to invest and offer a more healthy competition besides bringing the risk capital.

Therefore, we suggest that the definition of Anchor Investors should get modified to

include the other entities as was permitted earlier and the net worth criteria should be

lowered to Rs.500 crores so as to facilitate the required investment in RSEs like ours

which is comparatively a smaller entity compared to other two prime Exchanges like X

/X.

11. X: Anchor Institutional Investor should not be confined to only Public Financial

Institutions and Banking Companies, entities in other sectors, and, inter alia, others

including NBFCs should be allowed to become Anchor Institutional Investor too.

b. Networth criterion requirement for an Anchor Institutional Investor should be reviewed

and brought down considerably.

12. X: This recommendation does not have any relevance for the operations of smaller

Stock Exchanges considering their size and scope. The X also feels that the Stock

Exchanges and other institutions which have been allowed by SEBI at present to invest


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up to 15% in other Stock Exchanges may also be considered as anchor investors and

allowed to invest up to 24%. In fact this cap may be hiked to 26 % to bring in quality

investors.

Rs. 1,000 Crore Networth requirement for an AII is also very much on the higher side

and might limit / restrict the entry of quality management to certain extent. Prescribing or

giving prominence only to a quantitative restriction like this without adequate /

equivalent importance to qualitative requirements – like, past experience of the AIIs in

Financial Services Industry – might put the system at risk. Hence, apart from Banks,

Institutions like Stock Exchanges – Indian or Foreign, may be given priority as an AII.

13. X: i) Most Banks / Financial Institutions are interested parties as they have broking

subsidiaries. We suggest that Anchor Institutional Investor should not be restricted to

Banks / Financial Institutions but opened up to other corporate bodies in order to

encourage innovation and competition.

ii) Stock Exchanges are not the first line of business for public financial institutions and

banks. Therefore, whenever they have invested in Exchanges, they have always

remained as passive investors. So, it can be assumed that in future too, banks and PFIs

will also not actively partake in this industry as this is not their core line of business.

All existing categories of investors (namely Stock Exchange, Depository, Clearing

corporation, banking company, public financial institution) may be included in the list of

Anchor Investors who shall be eligible to invest in Stock Exchanges. The net worth

requirement of Rs.1000 crore for Anchor Investor be lowered so as to include all the

above entities.

Further, X has suggested that the percentage holding by the above entities may also be

enhanced from 15% to 26%.

• Imposing restrictions on shareholding.

i) Stock Exchanges to hold 24% shares in depository Participants.


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Suggestions of X:

Stock Exchanges may be allowed to hold up to 26% shares in Depository Participants.

ii) Atleast 51% of the paid-up capital of Clearing Corporation should be held by 1

or more recognised Stock Exchange.

X has also suggested that Stock Exchanges may be permitted to hold up to 26%

shareholding in Clearing Corporation.

14. X: i) Most Banks/Financial Institutions have broking arm through subsidiaries, they are

interested parties. We suggest that Anchor Institutional Investor should not be restricted

to Banks/ Financial Institutions but opened up to other corporate bodies in order to

encourage innovation and competition.

ii) There is a strong case in extending the definition of Anchor Investors to include Fit

and Proper Person with approval of SEBI which may include foreign banks and clearing

corporation at par with the domestic investors to increase the competition/innovation

and will effectively reduce the cost of the investors benefiting both capital market and

economy i.e. larger collective social gains.

iii) The percentage holding by the above entities may also be enhanced from 15% to

25%.

iv)The net worth requirement of Rs. 1000 crore for Anchor Investor be lowered so as to

include all the above entities.

v) The Regional Stock Exchanges (RSEs) like X shall be among the worst affected

entities of the proposed recommendation of Dr. BJC as there will be no listing, cap on

profits shall kill the Capital market and it will be a very unfair treatment to RSE as a

whole.

vi) This recommendation regarding Anchor Investors and cap on other Investors will

also discourage competition going against the spirit and principle behind

demutualization as Justice Kania report recognized the need for stock exchanges to cap

with Competion.

vii) This recommendation regarding Anchor Investors and cap on other Investors will


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also discourage competition going against the spirit and principle behind

demutualization as Justice Kania report recognized the need for stock exchanges to cap

with Competion.

viii) Stock exchanges may be permitted to hold up to 26% shareholding in Clearing

Corporation.

15. X: The basic idea of Anchor Investor(s) in SEs is to Encourage Competition, Bring Risk

Capital into the Industry, Increasing the Interest of Entrepreneurs and thereby helping

Investors, Capital Markets and Economy. It defies logic and reasoning why only Banks

and Public Financial Institutions are put on a higher pedestal compared to all other

classes of Investors? It will discourage and possibly kill new competition.

It is extremely difficult to find out 20 Investors to start a new SE who are not a group so

that they are not within the definition of PAC. We have to remember that we have had

two Joint Parliamentary Committees (JPCs) and both the JPCs Reports on Stock

Market scams have clearly implicated Banks and Public Institutions for actively

participating the biggest Financial scams in the history of Independent India.

The depositories are allowed to be formed by various categories of Investors; including

the last described as - Any Fit and Proper Person - with prior approval of SEBI. The

same list could be used to specify the eligible criteria to become Anchor Investor(s) in

SEs.

It is interesting to note that there are contradiction in Dr. BJC Report. Annexure C of the

report states in a column which is titled - Shareholder Ownership Restriction - various

percentages restrictions on ownership of SEs. However, most of them are indicative

percentages for disclosure and / or permission for crossing that limit to ensure fitness of

such shareholders. None of the countries possibly have an ownership or even a voting

cap. Further, we wholeheartedly agree to the right of the Regulator SEBI to decide

about the fitness or otherwise of prospective Anchor Investors or Shareholders. It is

irrational to define the category of Anchor Investors to include only Banks and Public

Financial Institutions.

Even the Banks and Public Financial Institutions are mostly passive investors and

invest for returns rather than for charity. Given the profit cap (and losses to be born by


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Investors), it would take the very charitable institution to invest in a SE. Further, 5% cap

of ownership for others means that there is no interest in setting up a new SE as the

Promoter cannot own over 5% equity in a SE;

it is nearly impossible to find out 95% stakeholders who are not Promoters and also not

PAC. This effectively closes the door on new SEs as well as new investors in existing

SEs.

The Regional Stock Exchanges (RSEs) who are members of X shall be among the

worst affected entities of the proposed recommendations of Dr. BJC. Ownership cap,

definition of Anchor Investors,

No listing and cap on Profits will effectively kill all of them. It will be an enormous loss to

the Capital Markets and a very unfair treatment to RSEs, their investors and others

associated with them.

X believes that there is a strong case in extending the definition of Anchor Investors to

include any Fit and Proper Person with prior approval of SEBI; the list of eligible

Investors for Depositories could be taken as the basis for the same. Further, Foreign

Institutional Investors like SEs Depositories, Foreign Banks and Clearing Corporations

should also be allowed to become Anchor Investors at par with Domestic Investors (of

course within overall FDI, FII limit). It will increase the competition / innovation and will

effectively reduce costs to Investors benefiting both Capital Markets and Economy;

ultimately in larger collective social gains.

The ownership Rules suggested for SEs should be made applicable for Clearing

Corporations too. A subsidiary or a wholly owned subsidiary Clearing Corporation (of a

SE) may amount to encouraging monopoly and may kill competition as the new/ small

SEs may be required to outsource the Clearing Function to existing Clearing

Corporation(s) owned and managed by rival/competing SEs. The new products /

initiatives by the SEs may face delays or denials by the Clearing Corporation whose

services are outsourced. There is a strong case for dilution of Shareholding of a SE

(including PAC / Associates, if any) to 24% within a period of 3 years from the notified

date. The eligible Investors who can become Anchor Investors in a SE could also

become Anchor / Strategic Investors / Promoters in a Clearing Corporation. This, in our


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honest opinion, is in the long term interest of Capital Markets and would encourage

competition / innovation. There is indeed no need to prescribe different ownership Rules

for Clearing Corporations than those prescribed for SEs.

16. X:- I agree with the views of the committee on shareholding of stock exchanges.

17. X:- Stock Exchange ownership matters it should not be totally privatized and permitted

to be listed to become objects of speculation like the shares of private listed companies.

It should have an institutional role in the regulatory framework of the economy. Its

behavior should be identifiable through the characteristics of its ownership, such as in a

trust.

It is only recently that India learnt from its experience of stock exchanges as clubs of

trading members. Rejecting the Bimal Jalan Committee recommendations on ownership

of stock exchanges, and accepting the competitive model being proposed through

media, would amount to permitting clubs of global investors and speculators playing

havoc with the financial and economic system of the country.

18. X: The ownership of exchanges in depositories, clearing corporations and technology

subsidiaries are integral to their basic business and helps deliver more efficient and

integrated solutions to its customers. Hence, exchanges must be allowed to continue to

hold majority (up to 100%) in these businesses. To avoid dominant shareholding in

exchanges upon listing, ownership rules could be similar like for banks or for FIIs in

listed companies.

19. X: Given the importance of anchor investors to the success of MIIs, we recommend that

SEBI distinguish between economic ownership and voting control. We believe that

ownership limits should only apply to voting shares. Exchanges should be free to issue

non-voting shares in proportion that they see fit, so long as voting and board control

remain appropriately dispersed and balanced. The history of global capital markets is

that exchanges are formed when a group of erstwhile competing brokers come together

to create the market out of mutual interest. To impose ownership limits on brokers as a

group is to deny the history of global capital markets. These brokers also have the most


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to lose if the exchange in which they invest, and where they serve on the board, engage

in manipulative trading practices or poor enforcement of listing standards. There is no

other group with a greater vested interest in ensuring that an exchange follows proper

market and listing practices, and that management of the exchange is held accountable.

20. X: Caps on the ownership of banks and financial institutions collectively in a stock

exchange to 49% and individually to 24% where as no relaxation has been

recommended for other categories of individuals or corporate investors keeping the

upper limit to 5%.

21. X:

� Looking to the amount of risk capital one needs to set up exchange, the

shareholding limits are too restrictive for any new entrepreneur or a promoter

who understand the market as well as technology and has relevant experience.

� Whether inclusive of all exposures means inclusive of quasi equity and other

structured funds also. Calculation of the exposure and then transfer into an

ownership equivalent could lead to ambiguity and more than one interpretation.

� There has to be reasonable alignment between investment requirement and

ownership restrictions. One can only encourage competition in letter but not in

spirit, when one restrict the ownership to 5-15 percent in venture that requires

at least �800 - �1000 crore to set up the facilities.

SHAREHOLDING IN CLEARING CORPORATION & IN DEPOSITORIES

� If these institutions are equally sensitive then there is no need to have separate

thresholds.

� Recommendations on ownership limits should be issue or merit based. These

limits are critical structural aspect of the firm that often decides success or

failure of the entity.

•••• In India financial inclusion is still a distant goal and real sector needs more

intense and refined banking services. In this context, the focus of the banks

should primarily be on financing the real economy rather than setting up


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exchanges.

•••• Banks and financial institutions have proved to be most vulnerable to economic

and financial shocks as evidenced from recent global financial crisis. Then, how

do banking institutions become naturally eligible as anchor investors?

•••• Very few banks and financial institutions would have enough bandwidth to set up

stock exchanges as Anchor Investors. Some of the banks’ subsidiaries which had

taken exposure to the market encountered problems that even affected their

parent institutions.

•••• In the past, banks and financial institutions have not been so successful in setting

up exchanges. OTCEI has been a non-starter. Stakes taken by financial

institutions in the formation of NSE were a part of the policy mandate at that time

rather than pure business interests. Later, banks have been taking stakes in

other exchanges as well, including commodity exchanges, more to diversify their

investment rather than to pursue business interests.

•••• Experience suggests that Banks and financial institutions would be passive

investors and would not actively participate in the management of the stock

exchange.

•••• Banks and financial institutions are credit firms or lending institutions. The

Reserve Bank of India has been conservative about their direct participation in

stock markets. While in currency markets, banks are permitted to be a member of

the exchange, in equity markets they have to come through a broker and can

take only limited exposure.

22. X: The report seeks to give a special status to banks and public financial institutions as

anchor investors with around 5 times the shareholding permitted to others despite the

fact that both JPC reports on stock market scams have implicated banks and public

institutions for actively participating in the biggest financial scams in independent India.

In any case banks and FIs are passive investors and given the reports recommendation

of investing without a profit motive would be averse to such acts of charitable kindness

which are against their mandates.


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The cap on ownership means, there is no interest in setting up a new exchange as the

promoter cannot own over 5% equity in an exchange. From the perspective of upper

cap, the concept of ownership has been over stretched to link it to not only equity

shareholding but also holding debt, other value instruments. Our recommendation is to

see that there are o shareholding restrictions and there may be a cap on voting rights so

that control can be effectively regulated.

23. X: Being a commercial bank, this is likely to adversely impact our ability to promote as

well as extend credit to Mils. In any case, the ability of a creditor or lender to control an

institution is far less than that of a shareholder. Therefore, in our opinion, it is not

advisable to club these exposures together for the purpose of shareholding limits.

ANCHOR INSTITUTIONAL INVESTOR’S HOLDING

SEBl's MIMPS Regulations appear to favor a diversified shareholding in a stock

exchange and from the perspective of corporate governance, the existing regulations

have its merits. It is not clear as to why the Committee has proposed this change or how

these figures of 24% and 15% have been arrived at.

24. X: On the issue of ownership norms:

(i) We believe that competition is important in the exchange space to develop a wider

and deeper financial market in India.

(ii) We believe that the current regulations on ownership of exchanges are appropriate

for existing exchanges as they are in keeping with the objective to prevent any one

corporation or institution from gaining control over an exchange. However, the current

regulations make it difficult, if not impossible, for new entrants to set up an exchange

because diffused ownership minimizes the incentive to invest capital and shoulder the

risk involved in starting an exchange. Therefore, we suggest that the same norms

applicable to banks, which are also systemically important institutions and where a

progressive opening up of the sector to new entrants is currently being considered, be

made applicable to MIIs.

(iii) We agree with the Report's recommendation for allowing anchor institutional

investors ("AII") to hold substantial stake in the exchanges; however, an objective test


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should be laid down to determine if institutions are eligible to be an AII, based on criteria

such as net worth, "fit and proper" person and diversified ownership of the entity wishing

to be an AII. We also believe that the eligibility criteria for AII must be expanded to

include entities other than banks and financial institutions which may have the requisite

resources to bear the risks involved in exchanges. As the recent economic crisis has

demonstrated, banks and financial institutions are not infallible; instead, their acts may

have widespread negative repercussions for the entire market. Therefore, in our

opinion, there is no reason for restricting the AII status to banks and financial institutions

alone.

25. X: Networth of Rs. 1,000 crs. for Anchor Investors, this recommendation is inappropriate

in a world which has over the past 2 years reduced the entry barriers in all financial

institutions With capital account convertibility expected in the near for horizon, Rs. 1,000

Crores investor has variety of options and may not find Indian Stock Exchanges

attractive.

26. X: In our view predominantly MIIs are largely public utility institutions and they should be

allowed to regulate their members to keep them disciplined. The authorities concerned

should not encourage them to convert into commercial organizations.

The constitution of these MIIs may be on the following lines;-

1. Owned by anchor/strategic investors without trading interest up to 15%,

2. Owned by members of the said MIIs to own up to 24% share in the ownership

without any say in the day to day management,

3. 61% balance should be widely distributed.

In our opinion there should be 10 years lock- in period. There should be enough

safeguard in case they are permitted as strategic investors so that there is no area left

for the conflict of interest. A detailed guideline can be issued in the matter. An example

could be that a software developer/vendor may not be allowed ownership in the same

exchange.

Anchor investor can be permitted to hold up to 15% of the equity of any stock exchange


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which may include foreign stock exchanges. FIIs can be permitted to apply up to 15% of

the equity of the exchange under anchor investor category. Clearing corporations

should be completely separate entity.

Depository:

We are not comfortable with this concept. The reason is that DP’s who are contributing

there efforts, energy and time in spreading business of the depositories are not getting

any fruits of the growth of the depository. We feel at least 24% of the ownership should

be given to DP’s without any say in the day to day management of the Depository. With

the participation of DP’s in the management of the depository will improve overall

efficiency of the business of the depository.

27. X: International Stock Exchanges and reputed technology companies (Infosys, Wipro,

TCS) should be permitted in the category of 'Anchor Investor's of stock exchanges. Only

one 'Anchor Investor' with 33% stake should be allowed with no compulsion for

reduction after 10 years of MII operations commencement. No restrictions to be placed

on stock exchanges ownership of other MIIs. All equity exposures only to be included.

28. X: ANMI welcomes the concept of Anchor Institutional Investor having minimum Net

worth of Rs.1000 crores, however the definition is quiet narrow as there are hardly any

Public Financial Institution as defined under Section 4A of Companies Act, 1956 save

and except LIC and UTI as others are now Commercial Banks. ANMI submits that

definition of Anchor Institutional Investor may be expanded to include Semi Government

Institutions. Committee may expand the eligibility norms for other large Public Limited

companies, who fulfil net worth requirements, diversified share holding and other norms

as laid down by committee to act as Anchor Investor. It may not be out of place on case

by case basis to keep window open for Leading Stock Exchanges of the world to invest

as Anchor Investor. The investment may be again capped at 15% ab-initio and should

be included within the overall limits stipulated for FDI investment in MII.

29. X: Continuation of ownership cap of 5%, that too including debt or any other instruments

for calculating such ownership limit would make entry for new players extremely difficult

and hamper competition in the exchange segment. World over, such equity


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shareholding cap is unprecedented - thought is common practice to prescribe disclosure

or approval requirements for investing beyond certain limits. Furthermore, allowing only

banks and public financial institutions as anchor investors may not prove to be helpful

either, as they are mostly passive investors and such recommendation also ousts other

competent investors from the opportunity to promote a stock exchange.

30. X: We agree that exchanges should have Anchor Investor so that the development of

business of the exchanges can be ensured the criteria for the Anchor Investor

suggested by the committee may be applicable for the new exchanges. For existing

Exchanges the criteria of Anchor Investors should be modified and any entity, which is

"fit and proper" person and is approved by the Exchange and SEBI should be allowed to

be inducted as Anchor Investor.

In our view the categories of institution to become anchor investor should be modified,

the active trading members or any other entity (who are "fit and proper person" and

actually can manage the growth in the exchange and who can perform the role of

anchor investor truly) should be included in the said category.

31. X: The List of Anchor Investors should be broadened to include Corporates, FII’s, MF’s,

OCB’s and so on . However, no Anchor Investors should be allowed to have their own

Trading Arm in SE’s in India through themselves or any of their Associate in anyway. By

broadening the list of Anchor Investors, MII’s will get better valuations and easy Entry /

Exit options to investors.

32. X: Recommendation of Jalan Committee wants to put cap based on government

security yield on the profit of the exchange. It has also stopped listing of shares which is

the most transparent and scientific exit route for the investors. Under these

circumstances which bank or financial institution will be ready to become anchor

investor?. If investment in these exchanges is going to be eroded by 90% of the amount

originally invested then which bank would like to become anchor investor?. In today’s

world of competition, globalization and strategy of merger and acquisition would it be

correct to restrict anchor investor portfolio to bank and financial institutions only? If we

look at the take over of EURONEXT by New York stock exchange, similarly Australian


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stock exchange by Singapore stock exchange are the better examples of global

financial center’s leadership.

33. X: Rs. 1,000 Crore networth requirement for an AII is very much on the higher side and

might restrict the entry of quality management.

34. X:Expanding the definition of anchor investors with them meeting the "fit and proper"

criterion will ensure investors with i genuine interest and monetary strength to

continuously grow the business will lead to development of the exchange industry.

Exchanges should be allowed to hold stake in depositories to ensure their long- term

development

Clearing Corporations, depositories should be allowed to invest in exchanges to ensure

smooth flow of securities supply chain.

Evaluating debt and equity in the same vein will put fund raising plans of investors into

jeopardy. Exchanges should be allowed meet their fund requirements through:

i) Equity (IPO/FPO, private placement, preference shares, Rights issue, GDRs),

Debt (Bank loans. ECBs, public deposits, loans corporate loans) and Convertible

instruments (Convertible Debentures/warrants/preference shares, FCCBs).

35. X: We agree with the Committee's statement that "On balance, shareholders of an MII

need to be long-term investors who are sufficiently motivated to take a keen interest in

the functioning of the MII. However, we question how the recommendations of limiting

ownership or profitability can provide the motivation. We are also unable to reconcile

certain inconsistencies in recommendations on ownership – a bank may be controlled

by one dominant shareholder (as is the case in India), but the Committee's

recommendations would allow it higher ownership of an MII.

36. X: Anchor Investor: The concept of having banks and public financial investors alone

as 'Anchor Investor' is nothing new as they have always had the right to ownership in

an exchange. The limit for Banks and PFIs of holding 5% in stock exchanges was raised

to 15% by SEBI in December 2008. Besides, regulators such as RBI, IRDA, and FMC

allow almost all categories of investors to be 'Anchor Investors' for Banks, Insurers and

Commodity Exchanges, respectively. Therefore, BJC report appears to be highly


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conservative and inclined.

Shareholding: Treating debt and equity in the same class while calculating

shareholding makes entry into the exchange venture as difficult as the exit for an

investor. Thus, this recommendation is against the objective of promoting healthy

competition and preventing flow of capital to a capital intensive infrastructure company

which will stunt its growth and not provide level playing field to a new exchange vis- a-

vis a large networth existing monopoly.

37. X: Stock exchanges are not the main business activity for Banks/ Public Financial

Institutions. Hence they are most likely to remain investors in Stock Exchanges and may

not have that expertise and appetite to commit large resources and business focus.In

effect, the BJC proposal, shall restrict the etnry of committed promoters who can

organise expertise as well as resource.

38. X:- Any blatant cap on individual ownership at a very low level of 5 per cent in a stock

exchange is highly regressive in nature. The modern day stock exchanges are

exceedingly capital and technology intensive. The capital requirement for investing in

nationwide infrastructure facilities is really enormous. As per the present ownership limit,

one needs to find at least 19 other investors to set up a new stock exchange. This entry

barrier is quite anti-competitive and antithetical to the development of India’s financial

sector.

Stock Exchanges are not the first line of business for PFIs and Banks. Whenever they

have invested in Exchanges, they have always remained as passive investors. Hence, it

can be safely assumed that, Banks and PFIs will not passively partake in this industry

as this is not their core line of business. The integrity of a company or a stock exchange

is determined by the policies, sound risk management strategy and monitoring system

but not solely on the basis of Anchor Investors.

39. X:- The definition of anchor investor appears to be narrow having regard to the nature of

operations of MII. The operations of a MII can be broadly classified in to ‘financial’

aspects and ‘technology’ aspects. Thus the definition of Anchor Investors should be

suitably broadened to include layers in related industries of finance and technology so


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that both these areas of operations are benefited from their expertise.

40. X:- Norms for Stock exchanges

Agree with individual limit of 5%. However the following structure is being proposed:-

� Trading members to the extent of 20%

� Other Market Intermediaries up to 20%

� 40% with PSU Banks/ other PSUs/Central Govt./State Govt.

� Balance 20% with FIs/Banks/investors

� No foreign holding

Anchor investors do not dilute the diversified ownership norms. They should be subject

to no distribution of profits or capital gain similar to Section 25 of the Companies Act,

1956. They should bring down their holding to 10% instead of 15% as suggested by the

Committee.

Norms for Clearing Corporations

Atleast 26% of the paid-up capital of clearing corporations should be held by stock

exchanges instead of 51%. One national exchange can be lead investor with 26%

holding in clearing corporation along with 25% holding with 3 or 4 PSU Banks.

Norms for depositories

We agree with 24% cap. However, it is proposed that another 27% may be held by PSU

banks.

No foreign holding should be permitted in stock exchanges as they are regulatory

bodies and not organisations set up for commercial purposes or gains.

41. X-

Stock Exchanges:- I feel that there is no need to restrict the AII to PFIs and banks. We

should define the criteria and those who fit into the criteria should be allowed rather than

restricting to banks and PFIs. AIIs should be capable of bringing the required

infrastructure and experience rather than just fulfilling the networth criteria and falling

under the category of banks and PFIs. The question of bringing down the investment in


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10 years needs to be examined in the light of need for continued interest of investor to

put in further effort and money to strengthen the MII infrastructure. Further, putting a cap

on the investments need to be revisited as low investments may not enthuse any one

investor to take adequate interest in the stock exchange. This may come in the way of

innovation after the exchange is set up.

Clearing Corporations:- The recommendations of the committee are well thought and

therefore, I support these.

42. X-

Stock Exchanges:- Having banks and PFIs as anchor investor would not bring in

competition and innovation and these always would remain as passive investors. What

about private banks?

Depositories:- Holding by stock exchanges in depositories may be restricted to a

maximum 24% - this will force BSE to reduce its stake in CDSL from current 54%.

CCs and depositories not to be allowed to invest in other class of MIIs – this may

prevent market consolidation and taking advantage of economies of scale and scope.

43. X-

Financial institutions as AIIs:- These institutions core activity is not related to

exchange management so they lack expertise that will hamper the growth of the

exchanges.

Holding of stock exchanges in depositories to be restricted to 24%:- This would

keep the private corporate entities out of the capital market space. This

recommendation will force the BSE to reduce its recently increased stake in CDSL from

54% to 24%. This will again affect BSE’s valuation.

44. X- There has to be stringent norms and controlled participation which needs to be

allowed in the market. Banks and FIs, who have deep pockets and also expertise in

financial markets, are well equipped to handle such institutions. The Committee

recommends allowing anchor investors to invest upto 24%, but the definition of such

investors is so narrow and limited that the opening up is meaningless. It also means the


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Rural Electrification Corporation, with no competence, is eligible to promote a new

exchange but a commodity exchange like MCX cannot invest over 5% and thus promote

an exchange.

45. X-

Banks and FIs as AIIs:- It is reverse of disinvestment process. Anchor needs to have

expertise in anchoring. Simple structure and being in banking and financial lending

business does not make any one anchor. The core strength of banks is lending and

assessment of credit quality rather than providing and managing trading platforms,

processing transactions and clearing and settlement. Banks and FIs are passive

investors and come to invest to diversify and not to manage the business.

Shareholding limits shall include exposures (both on and off balance sheet) of the

shareholder to the MII:- No other industry has such restrictive pattern in current market

scenario. The mandate of a regulator should also be to make exchanges viable to

investors and the regulators have to ensure that all SROs are doing their job.

Prescription on shareholding makes entry into MII difficult. This will affect

entrepreneurship and innovations in financial sector and India might not witness

emergence of new-generation cost effective technologically advanced MII.

Clearing corporations and depositories not to invest in any other class of MIIs:-

What are the apprehensions behind such recommendations? Are those apprehension

well researched and evidenced. Integration of MII will result in integration synergies,

cost reduction, scale economies and serve larger investors and stakeholders base. No

need to create such restrictions without having seen any such instances of failures. This

will further prevent market consolidation.

46. X- While I agree that a stock exchange should be well capitalised with a minimum

networth criteria, what I don’t understand is that why permit only financial institutions to

be anchor investors. I believe a technology solutions provider to exchanges could be an

equally good candidate for being an anchor investor viz. OMX partnering with NASDAQ

and Bourse Dubai to float financial markets across the globe.

47. X- Due to low shareholding limit, the incentive that is available to a single investor may


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not be sufficient. The current ownership norms stipulated by SEBI practically rule out

competition – as no single investor can own over 5 per cent in a new stock exchange.

The study finds that successive panels debating this issue have provided many soft

arguments for the rule (historic practices in other markets, ‘public policy’ and keeping

out ‘vested interest’), but no hard evidence for why five per cent specifically should be

the absolute limit for stock exchange ownership.

Dr. Bhalla’s recommendations are three-fold – consider a 40% ownership limit, the

same as for banks, while requiring the dominant shareholder to reduce his stake over

time. Forget the notion that the stock exchange is a public utility and have a separate

regulator for overseeing it. And finally, list the business on the stock market after a

suitable time and open up the filed to competition.

The committee is favoring Banks and Financial institutions to be anchor investors as the

panacea for sound management. But this should be taken with caution as JPC of 2003

on Stock Market Scam also pulled banks for their role.

The committee should allow an entrepreneur/corporate/institution to be a promoter of an

Exchange for a minimum period of 10 years and allow them to hold at least 26% equity

irrespective of whether they are PFIs, Banks or not. The gestation period will provide the

promoters an incentive to maintain the interest in running the exchange.

Banks, PFIs are busy running their own core business. They may not be interested in

overseeing/ running an Exchange which will be their non core area. If at all Banks, PFIs

were interested in running an exchange their venture “United Stock Exchange” would

not have faltered.

48. X- It is very important that exchanges can be started by any reputable person – the idea

of restricting to only banks or financial institutions is in itself counter-intuitive when

exchanges are businesses that do not use operating leverage. To allow only leveraged

bankers to create exchanges is potentially destabilizing for the system! There is no

reason why a non-financial business, for instance an IT company, or a group of

interested producers cannot create their own exchanges in commodities or other

products for instance. Moreover, I do not follow the concept of share ownership

restrictions in a non-monopoly exchange environment per se, especially not at the


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foundation of a new marketplace. If a single founder wishes to risk their money on a

new exchange business, why is it anybody’s business to stop that person or entity

taking a financial risk and then reaping the rewards without being under duress to scale

down their shareholding? The situation with a monopoly exchange is very different but

the Indian marketplace is far from becoming anything like a monopoly given the current

levels of competition.

49. X-

The concept of ownership has been over stretched to link it to not only equity shares

and voting rights but also holding debt, other instruments. Some of the very basic

concepts of corporate legal scenario would stand changed if recommendation of

equating value in debt and other instruments with equity for computing shareholding

limits. The cap on ownership would curb the interest in setting up a new exchange.

Banks and PFIs generally act as passive investors and this recommendation may

restrict investment by more active and dynamic investors. Further, treating debt and

equity in the same class for calculating the shareholding limits would make entry as

difficult as exit. Additional funds would be as difficult to raise as initial funds as the

investors would be skeptical about their rights post investment. Raising debts would

also be difficult as holding debt would also ensure in ownership.

Clearing Corporations and Depositories should not invest in other forms of MIIs:-

a) Prejudice will be caused to those clearing corporations and depositories which

already have invested in other forms of MII

b) This shall also prevent market consolidation.

50. X- “The Committee is not in favour of a complete separation of the clearing corporation

from the stock exchange.” The whole point of the JCR was to look at ways to

systematically de-risk MIIs. From that standpoint, to completely separate stock

exchanges and clearing corporations would be appropriate. And international best

practice suggests that we can separate these out as stand-alone corporations. The JCR

is concerned that “from a market power perspective, a single clearing corporation may

levy excessive charges on its users”. There are however ways of dealing with this issue


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of market power. For example the settlement fee can be decided by the regulator.

Indeed given the JCR’s view from a systemic view point, clearing and settlement is the

most risky element within MIIs, it might be worthwhile considering that an independent

clearing and settlement corporation be owned by the government or the public sector. If

that is considered infeasible, at least it can be jointly owned by all stock exchanges.

Finally, unlike what the JCR implies, we are of the opinion that the comparative

advantage of stock exchanges are as trading platforms and price discovery

mechanisms. And once systemic stability issues that the JCR has highlighted have

been taken care of, that is what they should allowed to do with minimal restrictions in

terms of entry and exit. Separating trading and clearing is therefore optimal.

51. X- Opening of Mutual funds, Insurance, Banking Sector, highway, ports, Iron & Steel,

Airline Sector, Power, Tele-communication Sector to private sector has brought

investment into these sector of economy. It has brought about infrastructure and

economic development; increased job creation benefited the investor as well as the

increased government tax collections.

In a similar way by allowing the domestic and international companies to set up bourses

would lead another leap into the development of stock exchange related services in

India.

Certain majority at least 24% should be with the public & let the public get the benefits

of the privatization of the bourses. This can be supplemented by the public financial

institutions & banks/Governmental Agencies for another 26%. Upto 24% with the

international agencies & another 26% with the promoters.

It is better to have the limit of investment as a percentage (say, 33%) of total investment

into the bourse subject to a minimum of 25 crores for regional exchange & 50 crores for

a national exchange.

Holding of stock exchanges in depositories may be restricted to a maximum

24%:- In multiple depositories this limit may be revised upwards. For a single depository

may be restricted to a maximum 24%.

Clearing corporations and depositories may not be allowed to invest in other

class of MIIs:- It will affect a limited number of companies but this can be managed by


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providing sufficient time to such companies to come within the investment norms.

52. X-

Anchor Investor:- �Modern markets would need modern investors with strong domain

knowledge and better risk appetite to help India march stronger in its growth path in the

current globalised world. �Integrity and efficiency of a company or a stock exchange is

determined by the strength of its policy on risk management and monitoring systems

backed by robust technology, etc which can be effectively monitored by strong

regulators such as SEBI and does not need to be protected by limiting the scope of

Anchor Investor definition. Anchor investors shall be those who could bring in strategic

benefits, domain knowledge, know-how and expertise rather than limiting it to Banks &

PFIs. This might only contribute in terms of capital infusion but will make anchor

investors remain passive in the actual functioning of the exchanges mainly due to lack

of domain expertise compared with Committees expectations.

All exposures to be counted:- Treatment of debt and equity would help provide

increased initial capital requirements along with debt for their operational requirements.

Holding by clearing corporations and depositories not allowed:- Clearing

corporations should be allowed to invest in other related lines of business. It will help

create vertical integration in the value chain to finally add value to the investors besides

delivering value to its stakeholders. Allowing MIIs to invest in related and aligned

business will foster growth and development of capital markets. It will develop a healthy

symbiotic relationship between the MIIs.

53. X-

Anchor Investors:- Anchor Investors as defined by the committee would lead to

nationalisation and government controls of the exchanges. In other words it is a public

control of MIIs. It would also mean concentrated ownership (through largely sate run

financial institutions) of infrastructure institutions leading to a significant interest on the

part of political actors to capture MIIs and derive rent from them. The concept of Anchor

Investors needs to be thoroughly debated. The definition needs to be broadened but

dubious institutions with poor track record of corporate governance must be kept out of

investing and holding control of MIIs.


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Clearing corporations and depositories not to invest in other class of MIIs:- Since

open listing is the norm worldwide, other related MIIs such as clearing houses and

depositories should be allowed to won stake on the stock exchanges.

Atleast 51% of the paid-up equity capital of the clearing corporation should be

held by one or more recognized stock exchanges:- The vertical silos system

ensures monopoly and lets the exchanges control clearing houses. This is consonance

with exchanges being essential facilities producing public good. Both these arguments

have been falsified by recent court judgments and contemporary analysts. Clearing

corporations must be independent institutions free from ownership control of exchanges

they presently belong to. This would be a boon for setting up new exchanges by small

players.

FII norms:- If listing of MIis is allowed and general public is allowed to invest in them

then it would be unreasonable to deny FIIs from acquiring shares in any of the MIIs.

They are anyhow allowed investment in Indian economy via portfolio route. FII

investments in MIIs same should be allowed in line with prevailing norms for investment

of FIIs in India.

54. X- Most observers of the global financial crisis of 2008 have emphasised the role of high

powered incentives in shaping the behaviour of CEOs of financial firms. In recent

months, a slew of empirical papers has emerged examining the evidence on this

question. An additional important area of concern with high-powered incentives is that of

ethical failures. A management team which faces high powered incentive will balance

the gains from obtaining higher revenue or profit versus the probability of getting caught,

and has a greater chance of undertaking unethical practices.

In the Indian setting, there have long been concerns about State ineffectiveness. While

the main focus in recent corruption scandals has been upon politicians who accepted

bribes, it is equally important to focus upon the incentives which shaped the behaviour

of businessmen who paid bribes.

Even in high governance regimes, the empirical evidence has shown that high powered

incentives are associated with greater ethical failures. In weak governance regimes,

high powered incentives could be associated with even greater ethical failures, given


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the reduced possibility of significant punishment. As a consequence, our thinking about

the optimal incentive arrangements must differ in weak governance settings, when

compared with the best policy advice that might be given in strong governance settings.

This suggests that for certain policy questions in low governance settings, it may be

useful for policy makers to push in favour of the low powered incentives of dispersed

shareholding companies, instead of having firms with strong controlling shareholders.

When governance is weak, this collision between the ‘wrong’ incentives and the efforts

of the State will often yield unpleasant outcomes. A healthy approach for policy is, then,

one in which the very incentives of firms are modified so as to reduce the burden which

would be placed upon regulation and law-enforcement.

With critical financial infrastructure, there is a unique situation where profit making firms

are performing regulatory and supervisory functions. Once again, high-powered

incentives for profit maximisation are likely to generate under-performance on regulatory

and supervisory functions. In India, an additional dimension which needs to be factored

in is the extent to which high-powered incentives can lead to outright abuse with certain

exchanges having an aggressive engagement with the media and politicians, and sub-

verting the supervisory process. The macroeconomic fallout of failures of supervision at

an exchange is even larger than that associated with a bank failure, as was seen with

the 1992 crisis at the BSE, and the 2001 crisis at the Bombay and Calcutta exchanges.

This should encourage greater caution.

Hence, in the fields of banking and in critical financial infrastructure, policy makers

should avoid firms where there is a clear and focused dominant entrepreneur who has

high-powered incentives in maximising his financial return. It would be beneficial to have

coalitions of dispersed shareholders that recruit professional managers who are given

low-powered incentives, where no member of the coalition has a concentrated stake or

control.

As an example, an exchange can either be owned by financial investors demanding a

rapid and high return, or it can be owned by the biggest beneficiaries of a liquid and

efficient equity market: The large institutions who participate in the equity market such

as UTI Mutual Fund or HDFC or ICICI Bank. When shareholding is dominated by such


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users, this is incentive compatible. Such shareholders would exert pressure upon the

management team to find the right combination of cost minimisation, a continuous

process of cutting tariffs, of a high quality regulatory and supervisory process, and of

upholding high ethical standards.

This argument turns the logic of ‘de-mutualisationon’ its head. De-mutualisation was

originally intended to have stock exchanges go public, and have the general public as

shareholders exactly as is the case with other firms. However, as argued above, critical

financial infrastructure, especially in a weak governance setting, requires a special

approach on the questions of ownership and governance.

Some of the new developments in critical financial infrastructure, on an international

scale, have also moved away from this notion of demutualisation, with market users

becoming owners of critical financial infrastructure rather than pure financial investors

seeking a return.

The striking feature of Bats Exchange, Amex Options Exchange, Turquoise and Chi-X is

the commonality of the ownership. The industry is perhaps evolving towards a re-

mutualisation of critical financial infrastructure, where exchanges are not an ordinary

business with shares that traded like any other firm. Instead, exchanges are

spontaneously evolving into a cooperative model, where the large financial firms who

are the biggest beneficiaries of a liquid and efficient market have the incentive to have

multiple management teams competing with each other in running competing exchange

platforms. Under this configuration, the gains to the shareholders are primarily those

from obtaining a liquid and efficient market and not the financial returns of a

shareholder.

Re-mutualisation presents problems when the shareholders are the sell-side firms which

an exchange supervises. But re-mutualisation presents a clean alignment of incentives

when the shareholders are buy-side firms.

Analysis of the proposals of the Bimal Jalan report

The SEBI committee, chaired by Bimal Jalan, has many important new ideas on the

ownership and governance for firms engaged in critical financial infrastructure. In

defining the rules about ownership structure, the committee uses the phrase Public


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Financial Institution denied under section 4A of the Companies Act, 1956. The identity

of firms shortlisted under Section 4A of the Companies Act is somewhat capricious. It

would be useful to replace this by an objective definition of large and listed financial

firms with dispersed shareholding and professional management teams.

The report proposes that Anchor Institutional Investors be permitted to have as much as

24 per cent ownership of critical financial infrastructure. There is merit in moving this

limit to much lower levels, and asking for dispersed shareholding and a professional

management team.

While the report asks that sponsors should be subject to fit and proper approval from

SEBI, there is a possibility that this will generate incentives for interfering in the

appointments process of the SEBI chairman, members and executive directors, by

individuals seeking to achieve approval. A full clarity that only dispersed shareholding

firms, with professional management teams that have no equity interest, would

encourage such would-be entrepreneurs to focus their energies on other areas of

business.

55. X: Anchoring should be merit based and not structure based. Lessons of global crisis

suggests MIIs – Exchanges, Clearing Corporation, and Depositories – are stronger

institutions than banks and financial institutions. In context of this, how one would

suggest anchoring of stronger entities by weaker entities. Test of “fit and proper” person

is sufficient. In automobile industry, telecom industry, mutual funds industry even allows

anchoring by global investors. None of the sectors banks, airlines have such restrictive

ownership and promoters’ restrictions that this report recommends. Once committed to

economic reforms and liberalisation, ownership restrictions except for strategic reasons

(say beyond limit of 24%) become counter-productive.

56. X: It is reverse of disinvestment process. Anchor needs to have expertise in Anchoring.

Simple structure and being in banking and financial lending business does not make

any one Anchor. Banks shall never be able to pursue Anchoring MII as their business

pursuit since their core strength is lending and assessment of credit quality rather than

providing and managing trading platform, processing transactions and clearing and

settlement.


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Banks and FIs are passive investors and come to invest to diversify and not to manage

the business. Prescriptions on shareholding makes entry into MII difficult. This will

affect entrepreneurship and innovations financial sector and India might not witness


57. X: It is reverse of disinvestment process. Anchor needs to have expertise in Anchoring.

Simple structure and being in banking and financial lending business does not make

any one Anchor. Banks shall never be able to pursue Anchoring MII as their business

pursuit since their core strength is lending and assessment of credit quality rather than

providing and managing trading platform, processing transactions and clearing and

settlement.

Banks and FIs are passive investors and come to invest to diversify and not to manage

the business. Prescriptions on shareholding makes entry into MII difficult. This will

affect entrepreneurship and innovations financial sector and India might not witness


58. X:

Stock Exchanges:- Notwithstanding the fact that both JPC reports on stock market

scams have implicated banks and public institutions for actively participating in the

biggest financial scams in independent India, the Report seeks to give special status to

banks and public financial institutions as anchor investors with around 5 times the

shareholding permitted to others. In any case banks and FIs are passive investors and

given the report’s recommendation of investing without a profit motive would be averse

to such acts of charitable kindness which are against their mandates. There is a strong

case in extending the definition of Anchor Investors to also include any entity/ individual

who is a fit and proper person meeting with the criteria prescribed by SEBI.

Because of a cap on ownership, there would not be any interest in setting up a new

exchange as the promoter cannot own over 5% equity in an exchange. Also treating

debt, equity or quasi debt/equity instruments in the same class for calculating the

shareholding limits would make entry for new players extremely difficult and destroy

competition n the segment which will ultimately harm the investors and public in long


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run. Even in there is ownership cap, it should be provided in the manner provided by

other regulators like the RBI which give many years to dilute the stakes of the dominant

shareholder. A 5% cap (or 15% in some cases) ensures that there is no comfort given to

a new exchange. Further, the 5% cap ensures complete segregation of ownership from

management and lets the management unaccountable to its shareholders.

Kania Committee Report had suggested a ceiling on 5% of the voting rights of

shareholders irrespective of the size of ownership of the shares.

Note: The Report contradicts its own Annexure C – which is table taken from OICU –

IOSCO Report on ‘Regulatory issues arising out of Exchange evolution’, November

2006 (by misquoting it) by saying an ownership caps is the international standard. In

fact the annexure shows that India is the only country in the world with an ownership

cap. Other countries in the world only have disclosure standards or permission for

crossing a limit to ensure fitness of such shareholders. In fact none of the countries

listed in the Annexure C to the report even has a voting cap. SEBI may consider making

necessary amendments in the MIMPS to adopt global bets practices and thus further

the cause of competition in the highly monopolized exchange landscape.

Clearing corporations:- Such recommendation conflicts with the philosophy behind

having diversified shareholding in other MII i.e. stock exchanges. If implemented, this

would result in lack of independent clearing corporations. Worldwide, clearing

corporations tend to settle and clear for various organisations, and maintaining a 51%

minimum capital requirement would impede the professionalization of these

organizations as the parent would be loath to allow its clearing subsidiary to clear for its

rival organization. This recommendation would interfere with a competitive market

emerging with lack of clearing bodies agnostic about who they clear for.

Depositories:- There is a contradiction between the Committee recommendation with

respect to permissible shareholding in different MIIs. There should be no minimum

shareholding prescribed in depositories. Depositories worldwide are often combined

with the clearing entity and sometimes (in fact often) a single depository emerges in the

entire country. Market forces would determine an optimal shareholding and there is

need of all MIIs rather than prescribing shareholding limits, which do nothing for better


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regulations.

59. X: Stock exchange is a long gestation business. It takes years to build the confidence of

the corporates and the investors as also to attract sufficient liquidity. Only investors with

deep pockets, high patience and appetite for high risk can sustain this business.

Many are suggesting that the concept of anchor investors would not work as most

banks and FIs would not be interested in the exchange business. This is not true. For

one, banks are not just profit-maximising entities. They perform a much wider social and

economic role, partly also because of the government mandate. Banks are also

interested to become and be seen as institution builders. Banks have also demonstrated

their interest in non-banking financial sectors by setting up enterprises in mutual funds,

insurance, investment banking and the like, where the focus is not just on profits. NSE is

a good example of the foray of the financial institutions into the exchange business.

It is critical to ensure that a promoter of an exchange is a serious entity, with a high

pedigree and with deep enough pockets to inspire the confidence of the market. The

promoter should also understand the financial sector well and have the capacity to

identify, manage and absorb the risks associated with this business. The chances of a

bank doing this better than others are greater.

It is also very important to ensure that an exchange is in the hands of “fit and proper”

persons. In the words of the Supreme Court (as observed in Madhubhai Amthalal

Gandhi V Union of India), ‘If the stock exchange is in the hands of unscrupulous

members, the second and third categories of contracts to buy or sell shares may

degenerate into highly-speculative transactions…. And convert it into a den of gambling

which would ultimately upset the industrial economy of the country.”

60. X: Corporate governance is a major issue and hence dilution of ownership to a large

extent may have an impact on the working of the exchange. Depositories should be

independent of the exchange and exchanges can have minor holding on the depository

company.

61. X: MIIs should never be in the control of any individual group as the experience of

recent financial crisis in USA teaches that ‘too big to fail’ is translated in terms of


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privatization of profits and socialization of the cost of imprudence, greed and

incompetence.

62. X: The SEBI MCX order is a world class one and we need to stick to those principles of

broad based ownership etc.

63. X: The % of population investing in stocks is minimal in India. We need to increase it to

counter the flow of hot money. This can happen only if financial market institutions are

owned by "responsible" owners.

64. X: Welcome recommendation; This may be relaxed upto 26 % or more, in certain

deserving cases like other bigger / national level stock exchanges investing in smaller

exchanges - probably with an idea of M & A at a later date - at the discretion of SEBI..

65. X: Quite simply, I would never want to trade in an exchange company promoted and run

by the ‘private sector’. Not only would I not trust their pricing and their invisible charges,

I would not trust that the confidentiality of trading positions is ever maintained. I have

worked in a senior position with one of the prominent shareholders of these exchanges,

and having seen their ethics from the inside, I have serious reservations about the

thought that “individuals should be assumed to do right, till they are caught doing

something wrong”. The very fact that prominent market participants (traders, jobbers,

‘operators’) are buying big stakes in commodity exchanges, should tell you that trading

on such exchanges could expose the innocent small investor to serious unseen ‘market

risk’. You could call it “Regulator Risk”. I hope to God that the NSE stays ‘public sector’

and is able to provide a counter-balance to the very risky antics of the new private

sector players. I would like to watch from a distance.

66. X: Asking the banks to be the anchor investors, in place of existing private players who

have proved their skills and competence in setting up and successfully running MIIs will

hinder the process of widening the reach and penetration of MIIs.

67. X: There is no evidence to suggest that a particular form of ownership leads to a

particular form of market structure. Since the committee recommends continuation of

the restriction on ownership of stock exchanges, it would indirectly act as a restriction of


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the ownership of clearing corporations leading to investor disinterest. That world over

clearing corporations exist as third party independent entities owned by institutions like

banks and financial institutions rather than stock exchanges and provide their clearing

and settlement services to different trading venues. The recommendation that atleast

51% of the paid-up equity capital of the clearing corporation should be held by one or

more recognized stock exchanges could be restrictive and may hamper competition in

the clearing space, especially in light of new importance being given world over to

central clearing of financial products. A horizontal integration model alongwith

competition could be an ideal solution considering the grown potential of the financial

markets in India.

68. X: Once committed to economic reforms and liberalisation, ownership restrictions

except for strategic reasons (say beyond limit of 24%) become counter-productive.

Apprehensions and suspicion of markets failure should not lead to preservation and

protection monopoly.

69. X: Public ownership through capital market listings will ensure public accountability.

Hence public ownership of upto 25% to 30% a must. The shareholding rights for single

individuals should be extended to 15% and specific classes to 30% and public holding

primary and secondary market at 25% to 30%. The FII must be restricted from taking

more than 10% of control over MII. Dispersed ownership should be norm for all or most

stock exchanges.

70. X: One fails to understand that which anchor investor would be interested in a minority

stake of 5% or for that matter any stake at all if the investment is going to yield the same

return as available by investing in Government Securities ? and if quality investors shun

away from investing into exchanges, how are they going to survive and grow in todays

flat world where exchanges worldwide are more and more technology driven?

71. X: The management & ownership of stock exchange is different so having a 5% cap on

individual is too less. Only 15% for other stock exchanges to hold is also less FDI of

26% is also very small, if a big investor comes they will bring more better tech & our

stock exchanges will be asked for better transparency & governance. I feel atleast 1


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outside INDIA Stock Exchange should be allowed with 35%. Atleast 49% should be

allowed. They will help in developing new products for Indian investors.


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S.No Summary of responses on board composition

1. X: Many bank and institutional shareholders have trading or clearing membership either

directly (currency derivatives segment), or indirectly through associates in other segments in

one or more stock exchanges. Many of them also hold significant stake in one or more

stock exchanges. Hence the restriction imposed on them in governance of the stock

exchange, would be dysfunctional. This is even more relevant if it is envisaged that banks

and institutional shareholders will be Anchor Investors in stock exchanges. Therefore, we

suggest that, as per the current practice, banks, financial institutions and insurance

companies may be exempted from this restriction.

Presently, the sitting fee is capped as per the Companies Act to a maximum of Rs. 20,000/-

per meeting. This could be grossly inadequate, especially in view of the onerous

responsibility which the PIDs are expected to shoulder. For ensuring good governance, it is

absolutely vital to attract outstanding professionals to become PIDs. While the rationale

behind the Committee’s recommendation is understandable, it is important to adequately

compensate the PIDs. Therefore, we suggest that fixed payments besides sitting fee may

be allowed, subject to the requirements under the Companies Act.

2. X: The Board of Directors of the Exchange currently looks at the broad policy aspects of the

Exchange functioning. Day to day operational and regulatory aspects are handled by the

professional management. Chairman of the Board is also a Public Interest Director. In view

of the same, we request that the representation of trading members in the Board of

Directors of the exchange may be continued, at least, till the listing of the Exchange is

completed. If SEBI requires, additional safeguards can be placed on the participation of

these trading member directors in various committees of the Board as well as during the

discussions of sensitive items where decisions relating to members are involved which is of

regulatory nature or can potentially have an effect on the functioning of the exchange from

regulatory perspective.

SEBI currently achieves adequate influence in all MII Boards of Directors by approving

Public Interest Directors (PIDs). This could be further enhanced if required by insisting that

a majority of directors of exchanges are PIDs. SEBI could also continue to exert substantial

oversight of the process by instituting a “fit and proper” requirement on all MII board


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members.

3. X:

Board composition for stock exchanges:

SEBI has already in place norms for composition of the board of stock exchanges. Insider

trading rules applicable to the other Board of Directors are also applicable to the trading

member directors. Criteria for deciding the surveillance matters such as shifting of scrips

from trade for trade to normal segment, relaxation of filters, etc are decided jointly by all the

exchanges in consultation with SEBI and are fairly objective in nature. Thus, the Board of a

single MII has no role to decide such criteria on a standalone basis.

All of this is in place so as to ensure that no critical decisions are unduly influenced and that

adequate measures & safeguards are in place to ensure that the Stock Exchange continues

to fulfill its primary objective.

We recommend that factors such as board composition are already regulated by SEBI and

do not require any further tightening.

The Report seeks to take away a special dispensation granted by the Parliament under the

SCRA w.r.t. having trading members on the board of an Exchange. Implementation of this

recommendation by SEBI would result in over ruling parliamentary law when the parliament

has provided for a maximum cap of 25% representation on the board of the exchange for

trading members.

Board composition for clearing corporation

We recommend that the composition of the Board for the Clearing Corporations must be in

line with our recommendations for the Board of the Exchange. Therefore, the activities

assigned to advisory committee will be seen by the board in order to have a single point of

failure. For all risk management related items the clearing members will be consulted

externally in an advisory capacity.

Board composition for depositories

We disagree with the recommendations and we recommend that the composition of the


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Board for the Depositories must be in line with our recommendations for the Board of the

Exchange including relevant stakeholders.

Disclosures by Board members

We recommend that family needs to be defined and nature of transactions and markets

needs to be defined. Compliance requirement should also be specified and segregated for

Trading members, PID, Shareholder nominee and Exchange officials.

Employee(s) on the board of the MII

We partially agree. We recommend that while the approval for an additional official of the

Exchange on the board needs shareholder & SEBI approval but an official of the MII must

be treated similar to the MD/CEO i.e., in neither of the two categories i.e. public interest

director or shareholder director.

Time for compliance on board composition

We agree with the time for implementation provided the change in board composition is

accepted as suggested by us in the point regarding Board Composition (in response to BJC

Report point number 3.1).

4. X: The Committee recommends that the model similar to stock exchange with regard to

governance structure will also be applicable in Clearing Corporation. This introduces the

concept of Public Interest Directors and Shareholder Directors in Clearing Corporations.

However, as per the Committee recommendations, trading member/ clearing members shall

not be allowed on the Board of Clearing Corporation. At present, there are no clear cut

directives from SEBI for Board composition of Clearing Corporation. Currently, the Board of

Clearing Corporations has sufficient number of Independent Directors to ensure proper

governance.

We have no objections to the Committee’s recommendations and feel flexibility should be

there to the Board of the Clearing Corporation to have different interests represented on

the Board as far as the minimum conditions relating to the Public Interest Directors is met.


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5. X: The availability of directors with the required skill set, to contribute and lead the stock

exchanges is quite challenging. Doing away with trading members on the Board could

therefore have disastrous implications. The present practice of trading members desisting

from participating in agenda items where they are interested parties should be allowed to

continue and this would ensure that the concerns of the committee are adequately

addressed.

6. X: Dr. Bimal Jalan Committee has recommended that no Trading / Clearing member

irrespective of Exchanges where he operates shall be allowed on the Board of any of the

Stock Exchange which appears quite harsh and prejudicial to the broking members who

have been otherwise are pioneers in creating Stock Exchanges and creating a huge

Capital Market since last several years.

Today also, the trading member directors elected by non-trading shareholders do not

interfere with day today management of the Stock Exchange nor they meddle with the

governance of the Stock Exchanges in any manner. Moreover, trading member directors

are prohibited from occupying any position on the Board and thus it would not be otherwise

possible for them to do anything which can be termed as conflicting with the governance of

the Stock Exchanges.

Post-demutualisation they still collectively hold 49% of the shares of the Stock Exchanges.

If the current regulation permits non-trading shareholder director who collectively hold 51%

or more to appoint as many as six directors on the Board, then why trading members

holding 49% of the share capital of the Exchange are not allowed to even represent as

directors on the Board, when their own money is also put at stake in the stock exchange.

The Companies Act favours even minority Shareholder Directors on the Board.

Therefore, we humbly suggest that in view of the safeguards already built in the law for the

appointment of trading member directors on the Board of the Stock Exchanges, the present

composition as specified should not be disturbed.

• Dr. Bimal Jalan Committee Report also recommends the appointment of a Chairman

of MII should be with the prior approval of SEBI which is somewhat surprising.

Currently the Chairman of the Board of Stock Exchanges is elected by the Board

who has to be a non-trading non-executive Director. The Board of Directors appoint


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its Chairman for the term specified by SEBI. To the best of our knowledge nowhere

in the other corporate entities they require the prior approval of any other Regulatory

Authorities except perhaps in Government owned institutions which are governed by

Special Legislations. Therefore, the Stock Exchange should be treated at par with

other corporate entities and the approval of SEBI should not be enforced when the

selection process is done through a democratic selection procedure by Board of

Directors of the Stock Exchange.

• Dr. Bimal Jalan Committee also suggest the disclosure of transactions and

securities by Board members and their family which appears not only too

exhaustive but impractical. This is because the definition of family is very vast and it

could include a number of relations whose business or transactions are many times

not known to the members of the Board of Stock Exchanges. We suggest that the

definition of family be restricted to the dependent spouse and dependant children

and should be confined only to the trades & transactions of securities carried out by

them on the Stock Exchange where he is a sitting director and not that of the trades

or transactions of other stock exchanges.

• Dr. Bimal Jalan Committee has recommended that the outcome of the Committee

Report as may be approved in due course by SEBI should be implemented from the

next AGM which in the instant case would be some time in second half of 2011. This

does not seem practical. Therefore, we humbly suggest that the final outcome of the

Report as may be approved by SEBI in due course should be allowed to be

implemented from the AGM of 2012 and not from 2011. This is because each

exchange shall require to carefully understand and implement various

recommendations that may be coming one after the other and the time limit of 2011

AGM appears too short to implement them.

7. X: After Demutualization upto 49% of the shares of a Stock Exchange can be held by

‘Trading Members and their Associates’. It just does not stand to reason how Dr. Jalan

Committee recommends that these 49% shareholders who are also Trading Members

should be prohibited from being part of the Board of Directors.


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Presently 51% ‘Public Share Holders have 50% seats in the Board as ‘Shareholder

Directors’. Even 25% ‘Public Interest Directors’ approved by SEBI from their Panel are

representatives of ‘Non Trading Members’. In substance not less than 75% of the Directors

represent 51% public shareholders. The representation of Trading Members in the Board

i.e. not more than 25% cannot be called unreasonable. It has been the experience that

Trading Member Directors understand the intricacies of share market and explain these

rules to the Shareholder and Public Interest Directors and help in framing proper Business

Rules. The present rules regarding composition of Board have served well and it is

suggested that same may continue.

Presently, Chairman can be either a ‘Shareholder Director’ or a ‘Public Interest Director’.

This itself is a sufficient safeguard against ‘Trading Members’ taking the command of

administration. The prior approval will infact go against the fundamental rule of election of

Chairman from AGM to AGM. It shall not be possible for a Chairman elected by a newly

constituted Board after AGM to start working immediately. The present practice of election

of Chairman may continue and the recommendation of ‘Prior Approval’ of SEBI should not

be accepted.

8. X: We recommend to maintain status quo with regard to the composition of Board.

In terms of prudent corporate governance practices, all stakeholders should be represented

on the board of a Company and excluding Trading/Clearing Members who are well informed

about the nuances of exchange operations, is not desirable.

While we appreciate the reasons why the Committee has recommended for non inclusion of

Trading/Clearing Members as Directors, we would like to point out that their concerns are

adequately addressed by the extant guidelines of SEBI (through its communications dated

February 17, 2003 and April 21, 2003) to the effect that the Exchanges should constitute a

Surveillance Committee comprising of the Managing Director & CEO and Public Interest

Directors to ensure effective review of the functioning of the Surveillance Department. The

guidelines further lay down that no Director representing Trading / Clearing Members

should be included as a member of the Surveillance Committee. In the light of this safe-

guard already put in place, we do not find any reason why a Trading/Clearing Member

cannot be allowed to be on the Board as a Director.


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9. X: Many of the Trading members are from professional fields such as ACAs, ACS, AICWA,

MBA of reputed institutions, lawyers and engineers having rich experience in capital market

operations. Their professional qualification and in depth exposure to stock market trading

operations provide useful inputs for taking various policy decisions regarding market

operations.

Their holding of more than 40% of the paid-up capital deserves proper Board

representation. Existing MIMPS regulation has permitted the TMs to hold shares of Stock

Exchanges upto 49 % and at the same time it has already clipped their wings by restricting

their genuine representation on the Board by capping it at a maximum 25 %. 49 % of the

shareholders cannot be deprived of their genuine right of representation on the Board. It is a

fundamental right of any shareholder. To address any serious concern, strong restrictions

may be placed on the TMs by way of disclosures.

We strongly feel that the present MIMPS regulations in practice itself takes care of any

abuse or misuse by a TM and hence, the Trading Members’ experience and expertise can

be put to better use by continuing the existing practice of allowing them to be part of the

Board of Directors, statutory and non-statutory Committees etc., as was in force so far, even

if anchor investors make investment up to 49% on the paid-up capital.

• The number of public interest directors shall be equal to at least the number of

shareholder directors without trading / clearing interest.

• In X, as per the SEBI guidelines, the new investors were given to understand in 2007

that their representation in the Board will be to the extent of not less than 50% of the

Board strength and many big corporates and High Networth Investors invested in the

shares of X taking that fact also under consideration. In these circumstances, the

SEBI guidelines already issued on Board composition may be continued.

• Appointment of the Chairman with the prior approval of SEBI: After directing the

Stock Exchanges to convert them into for profit organisations in the recent past, it

would have been ideal if the Stock Exchanges are permitted to choose the ED / MD /

CEO / Chairman of their choice, as per the rules, regulations and guidelines

prescribed by the Regulator. This will enable more accountability and fix

responsibility on the part of the Board, administration and management of the Stock


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Exchanges.

• All transactions in securities by the Board Members (of any MII including any Stock

Exchange) and their family have to be disclosed to the Board of the MII: We welcome

this recommendation and the top management also to be included in the list.

However the definition of family to include only dependent spouse and dependent

children. Any extended definition of family could be impractical as those family

members might refuse to give information about their security dealings.

10. X: Trading Member Directors represent the persons who are directly affected by the Stock

Exchange activities. Also they have the necessary domain knowledge, which helps in the

development of the Exchange, hence, constitution of Directors may continue as per the

present composition i.e. Trading/ Clearing Member Directors up to 25%, Public Interest

Directors not less than 25% and Shareholder Directors up to 50%. However, all Stock

Exchanges shall ensure that Trading Member Directors do not participate in issues which

conflict with their role as Directors.

11. X: Trading Members have adequate practical knowledge in the securities market industry

and their expertise will obviously help the Exchanges. Therefore, the existing structure of

Governing Board may continue.

12. X:

i) Justice Kania Committee report also Recommended participation of trading

member in the Board accordingly proportion fixed at 25%.This recommendation

has found place in SCR Act and relevant rules and Regulation framed there

under. This practice may be continued including the guideline about appointment

not from trading members.

ii) With regard to the recommendation about number of PIDs, 25%, 25%, 50% may

be continued.

iii) Agreeable to the recommendation that the appointment of the Chair Person of the

Board of a Stock Exchange shall be with prior approval of SEBI.

iv) With regard to the recommendation that All transactions in Securities by the


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Board Members of any MII including Stock Exchange and their family have to be

disclosed to the Board of the MII;

X has stated that it is ensured that trading member Directors do not participate in issues

which conflict with their role as Director. Though ‘family’ not defined , there should not be

any objection to it. The implementation time for recommendations should be two years from

the date of notification.

13. X: Presently, effectively SEBI nominated/SEBI approved persons occupy more than 25% in

the Board of Directors of a SE. Further, the Trading Members can come to the Board only if

Shareholders (majority Shareholders belong to non trading members category) elect them.

The prescribed maximum percentage as on date for Trading Members is 25% which could

be effectively less or even zero if the Shareholders decide so.

Trading Members are the talent and no cost volunteers for RSEs and they work because

they natural affinity and loyalty to RSEs. The recommendation of Dr. BJC of no

representation of Trading Members on the Board of SEs shall effectively take away the

talent from RSEs; who possibly as on date cannot compete with Premier SEs like NSE and

BSE at least in terms of networth / talent within the management. X requests not to take

away the talent and some competition tool from RSEs. Trading Members should be allowed

to be on the Board of SEs as per the present norms prescribed.

Dr. BJC report recommends that trading members could become member of only an

advisory committee which shall meet not less than 4 times in a year the Chairman of the

Committee shall be the Chairman of the Board of Directors of SE. This is a relegated

position for Trading Members and it may effectively dilute the interest to Trading Members

to negligible level in the development of RSEs. This could be a severe blow to RSEs in

implementation of their Business Plans.

X believes that the present Board composition prescribed by SEBI and the current Rules

and Regulations are adequate to address the concerns of conflict of interest. The

confidential information normally would not be placed to the Board of Directors; however, in

any such case Trading Member Directors could absent themselves. Further, in this era of

Technology and fast Communication, information and news related to listed companies are

put on the website of the SE before they are put to the Board of Directors in a scheduled


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meeting. Further, the Trading / Clearing Members are not represented on the Board of

Directors of Clearing Corporations who is responsible for Clearing and Settlement of all

trades, margining and monitoring positions of the Members on a real time basis. X honestly

believes that these Rules and Regulations are sufficient enough to address the issues of

conflict of interest as far as Trading Members are concerned.

It is pertinent to note that many Banks and Financial Institutions have subsidiary Broking

Firms. Dr. BJC Report allows these banks and financial institutions even to become Anchor

Investors and even without that these banks and financial institutions can sit on the Board of

Directors of a SE. This also supports our hypothesis that there is, indeed, no need to

eliminate Trading Members from the Board of Directors of the SE.

X requests SEBI to continue the present structure of the Board of Directors in a Recognized

SE including maximum 25% representation of Trading Members. Their talent is too precious

and extremely crucial for RSEs to survive and grow in the present competitive environment.

X also requests that Chairman of the Board of the Directors of a SE should be elected by

the Board itself and not prior approval of SEBI should be required. The present statutory

guideline that the Chairman has to be a Non Trading Non Executive Director should

continue.

All transactions in securities by the Board Members (of any MII including any SE) and their

family have to be disclosed to the Board of the MII as recommended by Dr. BJC Report.

This is a good recommendation and X supports this. However the definition of family to

include only dependent spouse and dependent children. Any extended definition of family

could be impractical as those family members may give refuse to give information about

their security dealings.

14. X: The existing SEBI regulations takes care of this requirements in terms of “Privy to

Information”. As per the existing regulations, the Trading members, who are on the Board of

the Stock exchange are not privy to matters of Risk Management, Surveillance and issues

involving other Trading Members. Further, they are not involved in the day-to-day running

of the exchange. Trading members also bring with them the core competence about the

business. Further, Trading members hold up to 49% of the equity of the Stock Exchanges


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(i.e. voting right), but already their participation in the Board has been reduced to a

maximum of 25% of the total strength. Hence, Trading Member representation in the

Governing Board may be retained at 25%. Trading member representation on various

statutory committees of the Stock Exchange has already been capped at 20%. Thus,

effectively SEBI nominated / SEBI approved persons occupy more than 25% in the Board of

Directors of a Stock Exchange. Further, the Trading Members can be part of the Board only

if Shareholders (majority Shareholders belong to non trading members category) elect

them. The prescribed maximum percentage as on date for Trading Members is 25% which

could be effectively less or even zero if the Shareholders decide so.

It is to be noted that X has, both lower networth and lower management bandwidth in terms

of relevant business knowledge / competence when compared to larger exchanges. Trading

Members are the talent and no cost volunteers for X and they work because of their natural

affinity and loyalty to X. The recommendation of Dr BJC of no representation of Trading

Members on the Board of Stock Exchanges shall effectively take away the talent from X;

who possibly as on date cannot compete with Premier Stock Exchanges like BSE and NSE

at least in terms of networth / talent within the management. X requests not to take away

the talent and some competition tool from RSEs. Trading Members should be allowed to be

on the Board of Stock Exchanges as per the present norms prescribed.

Even, Justice Kania Committee Report recommended and SEBI / GOI and the Parliament

accepted that Trading Members should be represented on the Board of Stock Exchanges

but their proportion should not exceed 25%. This recommendation has found place in SCR

Act and the relevant Rules and Regulations framed thereunder.

X also requests that Chairman of the Board of Directors of a Stock Exchange should be

elected by the Board itself and not prior approval of SEBI should be required. The present

statutory guideline that the Chairman has to be a Non Trading Non Executive Director

should continue. This means that only Public Interest Directors or Shareholder Directors

without trading interest could become Chairman of the Board of Directors of a Stock


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Exchange.

All transactions in securities by the Board Members (of any MII including any Stock

Exchange) and their family have to be disclosed to the Board of the MII as recommended

by DR BJC Report. This is a good recommendation and X supports this. However the

definition of family to include only dependent spouse and dependent children. Any extended

definition of family could be impractical, as those family members may refuse to give

information about their security dealings.

15. X: No Trading Member of any SE in India should be allowed on the Board of SE’s (Not

Even Institutions, etc), otherwise there will be conflict of interest. SRO’s representatives

should be given seat on the Board of SE’s

16. X: Independent Directors should form majority in the exchange. There should be rotation of

directors after two terms. The trading member can be kept in the advisory role in the

committee of exchanges.

17. X: Broker representation in the board is important for the welfare of Stock Exchanges.

18. X: With respect to broker representation on the board of stock exchanges, it was stated that

when the parliament has provided for a maximum cap 25% representation on the board of

the exchange for trading member, it would be odd if not improper for SEBI regulations to

state that it can not exceed 0%. Further Kania Committee Report had recommended that all

the stakeholders must be equally represented on the Governing Board of the demutualised

stock exchange including the broker who can have a 25% representation on the board and

a 49% representation in a shareholders’ meeting.

19. X: Trading members, having domain knowledge, was alllowed on the Board, subject to

ceiling of 25% but the committee recommends preventing any trading member on the Board

of the Stock exchange.

20. X: The regulator should be involved in the appointment of the key personnel in MIIs. An

independent selection committee may be setup which shall be reporting to the board of MIIs

and the regulator. There should also be an independent risk management committee


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reporting to the board of MIIs and the regulator. The other area which needs to be

monitored is margining system which may be reviewed from time to time as per the risk

perception of the market.

SEBI formula of appointing directors needs to be reviewed. There should be 24%

representation to the trading members 25% to be professional independent directors and

balance should be shareholder directors.

21. X: Requirements of Clause 49 may be made applicable to all MIIs. Chairman and MD

appointment should be subject to SEBI approval. Apart from that, the Board composition

should be the prerogative of the shareholders of the MIIs as per the articles of the company

and Clause 49.

We propose that all the three types of MIIs should have uniform Board Composition. The

composition should be as prescribed by Clause 49 of the Listing Agreement as updated

from time to time.

22. X: X submits that many entities that may qualify as an Anchor Institutional Investor, may

also have an arm that holds Trading Membership. Such entities therefore may be

disallowed from continuing their Trading business to ensure that there is absolutely no

conflict of interest and unfair advantage to the Trading member arm of Anchor Investor. X

further submits that being the largest representative body of the Trading Members and

universally accepted body, it should be allowed to be member of such an Advisory Body

instead of individual Trading Member nominated by MII.

23. X:- The restriction to exclude trading members from the Governing Board should be applied

on the directors nominated by institutions also. If the domestic or foreign institution or bank

has an entity as trading/ clearing arm then indirectly its interest is affected and it should also

not be allowed to nominate a director on the board of the exchange as it may influence the

policies of the exchange.

24. X: Currently SEBI has prescribed norms for Composition of Board of Stock Exchange

Subsidiaries. These norms should be in synchronization with the norms prescribed for Stock

Exchanges. Hence,the existing norms for subsidiaries should be reviewed, revised and


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implemented by SEBI in order to fall in line with the norms prescribed by Jalan Committee

for Stock Exchanges. The logic why a trading member should not be there on the Board of

Stock Exchange, equally applies to the Board of the Stock Exchange Subsidiary also.

25. X: The role of the trading member directors are already severely restricted. Their presence

in the board depends on the shareholders (who in majority are not trading members), who

elect them. the trading members are allowed to hold upto 49% equity in the stock exchange,

and it is unfair to eliminate them from representing their interests on the board.

26. X: I am of the view that at least 33% Directors on the Board should be Trading Members.

27. X: Statements such as ".... directors need to be independent both of the market

infrastructure institution on whose board they sit and also of other relevant parties, including

participants using the facilities of the market infrastructure institution and issuers listed or

whose stock is traded on the exchange" reflect, at best, the Committee's lack of

appreciation of the progress in Corporate Governance in India, and at worst, the belief that

everyone is guilty unless proven innocent.

28. X: Present MIMPS regulations takes care of any abuse or misuse by a TM and hence, the

Trading Members' experience and expertise can be put to better use by continuing the

existing practice of allowing them to be part of the Board of Directors. Appointment of

Chairman should be the prerogative of the respective Board.

29. X:- For stock exchanges

� 20% Government nominee/SEBI nominee out of Government officials

� 20% members to represent CII/FICCI/ASSOCHAM

� 20% to represent trading members

� 20% market intermediaries or players say MF/MB/Registrars/Primary dealers/PSU

banks

� 20% public participation

We agree to suggestions about PIDs and shareholder directors but he Government should

retain its right to regulate the affairs in exceptional circumstances. We agree that

chairperson should be appointed with the approval of SEBI. We agree that no remuneration

or commission is to be paid to the directors except sitting fee. We agree to the constitution


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of the Advisory Committee but it should also have management powers subject to policy

level supervision by Board.

For Clearing corporations

� 25% members of lead stock exchanges

� 25% members of PSU bank(s)

� 20% clearing members

� 30% members of public/investors

Chairperson can be appointed with casting vote by lead stock exchange. We agree to the

constitution of the Advisory Committee but it should also have management powers subject

to policy level supervision by Board.

For Depositories

The Board composition must comprise of 20% Government nominees and 20% from PSU

banks.

Disclosure by Board members

All transactions done by board members should be tracked by system automatically based

on unique client code.

30. X:- I feel that there should be a representation of the trading members on the board as they

bring rich experience and practical inputs. We can put a cap on the maximum number of

such representation. TMs on the board need not be mandatory. Although the concept of

advisory committee is well thought out, a member on the board would facilitate the decision

making in a better way than the advisory body. The advisory body can also be set up as

recommended by the committee.

31. X:- The fact that the report seeks to forbid market practitioners and counterparties from the

membership of exchange boards is a uniquely prescriptive position that would place India at

odds with ever other exchange with major achievements or even ambitions.

32. X:- The broking members have a major role to play in the functioning of a stock exchange.


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Their role is not limited to providing advisory functions but must be involved in the decision

making process as well.

33. X:- The structure of the board can be framed which would allow adequate control over the

promoters in the functioning of the bourse.

34. X:- The report seeks to take away a special dispensation granted by the Parliament under

the SCRA, implementation of this recommendation by SEBI would result in overruling

parliamentary law by SEBI regulations. When the parliament has provided for a maximum

cap of 25% representation on the board of the exchange for trading members, it would be

odd if not improper for SEBI to state that there would be a maximum cap of 0%.

Kania Committee Report had recommended that all the stakeholders must be equally

represented on the governing board of the demutualised stock exchange including the

brokers who can have a 25% representation on the board and a 49% representation n a

shareholders’ meeting. This is implemented by an amendment to the SCRA.

35. X: Stock brokers ,who are share holders should find place on the Board otherwise, others

do not understand the business well, and the decisions become unviable.

36. X: No trading member / clearing member on the board of SE : The Committee itself

“feels that Trading Members bring in rich practical experience and the same should be

utilized in a manner which does not conflict with the Governance”. In short, the present

MIMPS Regulation of SEBI takes care of all these concern expressed by the Committee

and as such the status quo may continue as per the SEBI’s MIMPS guidelines itself.

37. X: At present, the Trading Members are permitted to hold upto 49 % of the shares in any

Stock Exchange. It is not a share with Differential Voting Right (DVR) and it ranks paripasu

with other shares issued to non-trading members. And hence, the basic shareholders right

to represent themselves on the Board should not be denied to them. Otherwise, one may

wonder whether there is any point in holding on to these shares, just for the return it

generates, when there is no equity. At present, a Member is not eligible to come to the

Board again, if he has completed 2 consecutive terms either on the Board of the Exchange


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or its subsidiary. This provision also takes care of many concerns. However, the Committee

itself "feels that Trading Members bring in rich practical experience and the same should be

utilized in a manner which does not conflict with the Governance". It should also be

ensured that an AII - Anchor Investor is in place before any such drastic move to ensure

better accountability and fix responsibility.


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S.No Summary of responses on compensation of key management personnel

1. X: For genuine profitability and compensation concerns, SEBI could achieve similar

restraint by delegating the responsibility to monitor profit and compensation issues to the

Board of Directors of the MII. Further compensation of professional management at X is

subject to the supervision by the Board of Directors which needs to be ratified by the

shareholders in the AGM in terms of a resolution.

2. X: We disagree on the attempt to co-relate the functioning of the MII with the incentive

structure of the key management personnel as it appears to be more out of certain

unqualified apprehensions rather than well debated facts.

A small and new Exchange, variable salary is more affordable then a fixed salary to attract

and retain talent where as a large Exchange can afford to pay high fixed salary to their key

staff. Restriction of such nature on variable salary would force smaller and new Exchange

to either get high cost good professionals or compromise on quality and get low cost

professionals.

3. X: We believe that in current fast changing situation, it will be difficult to attract and motivate

a set of talented individuals, if the Clearing Corporation has to follow these

recommendations. As you are aware, risk management is amongst the highest skilled jobs

in the international financial markets. We need to attract the highest caliber talent for the

clearing and settlement from the Indian and international market. Artificial restrictions of the

amount and type of remuneration will create a situation where due to non-competitive

nature of the remuneration and remuneration not linked to performance, severe shortage of

talent will result affecting the stability of the Corporation in the medium to long term. In view

of the above, we suggest that SEBI removes these restrictions on type of remuneration and

amount of remuneration being recommended by the Committee.

4. X: Proposed restrictions on remuneration of key management personnel/senior executives

are impractical. MIIs should be given appropriate freedom to decide about the remuneration


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to be paid to key management personnel in line with the industry standards for financial

services companies considering all factors of compensation such as salary, perquisites etc.

Otherwise, MIIs will not be able to attract and retain best talent.

Proposed restrictions on appointment and compensation of personnel in certain

departments are impractical. Capital Markets are very dynamic in nature requiring

specialised skills and experience which is gained over a period of time. Further, it is not

possible to have different HR policies for different persons. Such a restriction also impacts

transferability of employees between different departments within the organisation.

5. X: X has adopted variable compensation measures based on performance targets to

improve its performance. As in many commercial entities, these targets and bonuses have

been instrumental in improving the competitiveness of X over the years enabling it to serve

the market in an efficient and competitive manner. We believe it would be an

unprecedented regulatory intrusion in the normal operations of a well functioning and well

regulated unit if X were to be subjected to this requirement. Going back on the present

practices, we are afraid, would be a retrograde step in an universal connotation.

6. X: In X, the salary of the top executives at present, are fixed and without variable

component linked to commercial performance and also does not include any form of equity /

equity linked or stock option in the institution.

However, X is of the view that there need not be any restriction on the payment of wages to

Senior Executives of Stock Exchanges and the Stock Exchanges can adopt the wage

structure followed by Public Sector Undertakings (PSUs) where the wages are linked to

performance and a lot of improvement is observed.

Such an incentive based wage structure will make the management more responsible and

accountable to the stake holders and will be helpful for the orderly growth of Stock

Exchanges.

7. X: Any cap on management compensation will deter Exchanges from attracting best and

global talents, which is essential for making India’s Exchanges on par with the world’s best.

It is best that the controls as per Companies Act are sufficient for the remuneration

committee to consider while fixing the management compensations.


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8. X: Any cap on management compensation will restrict exchanges from attracting talents

which is essential for well functioning of the activities of the Exchanges.

9. X: Dr. BJC Report recommends that remuneration of top management of SEs to be a fixed

sum only without any variable component linked to the commercial performance of the SE.

This recommendation effectively puts severe breaks on the new / struggling SEs to attract

talent in the administration because they would not be able to offer performance based

compensation.

10. X: We welcome fixing the compensation for senior management as fixed sum (with annual

increment indexed for inflation) without any variable component linked to the commercial

performance of the MII.

11. X:- We suggest that the pay scales should be as per 6th pay commission and similar to

Chairman and ED of Public sector banks. This requires stricter regulation in public interest.

12. X: These restrictions might result in substantial cost saving and in turn might lead to lower

charges by the Exchanges, thereby, benefiting investors, traders, speculators and Stock

Brokers.

13. X.: India, with its supply of bright technocrats and world savvy business leaders, will

become a net supplier of skilled people to securities exchanges around the world if the

compensation constraints of the Jalan Committee are introduced. India should not become

an exporter of its best and brightest in this key economic sector. If the Report is adopted as

is, the future of India’s economic growth will be traded elsewhere in the world. For example,

Singapore and other exchanges already trade Indian securities and that volume will

increase proportionately, without benefit to India.

14. X: The fair and market competitive compensation attracts the best talent and this subject

should stay outside regulation, especially as the Committee also desires competition to

drive efficiency in exchanges. For a vibrant and dynamic exchange evolving with changes in

time, keeping pace is important and the best way forward is to have the best talent. Once

the exchanges list, the decision would be made by its shareholders in any case and subject

to the government rules and provisions of the Companies Act.


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15. X: The absence of long term equity incentives that align the interests of managers with

owners, means the managers may be under-compensated. This may create an even

greater incentive for managers to seek compensation from ulterior means at the expense of

shareholders. Fixed salaries reduce performance incentives and may be conducive to

cronyism and patronage. As the managers are not long-term owners, they have no

economic downside from malfeasance unless they are exposed, and in a private company,

they are less likely to be exposed.

16. X: The committee no where caps the pay of top management. It only disallows

performance based incentives. This recommendation lays the foundation for destroying

performance in stock exchanges which cannot incentivize their management (especially in a

growing and struggling exchange which need to incentivize performance). Where even the

Govt. of India has a performance management department in the cabinet secretariat to

enhance performance of ministries and departments, it is not clear why performance and

performance incentives are bad idea.

17. X- On the issue of remuneration of senior executives: The present economic conditions

make it imperative for companies to offer competitive remuneration packages in order to

attract the best talent. In such a scenario, restricting exchanges from offering incentives

would have a negative impact on their ability to procure the most qualified or suitable

executives, particularly for new exchanges which are not profitable and do not have

significant cash reserves. Accordingly, we believe that once the regulatory functions are

separated, the boards of the exchanges should be given freedom to fix compensation of

key personnel based on market practice.

18. X: On the issue of remuneration of senior executives: We believe that once the regulatory

functions are separated, the board should be free to fix compensation based on market

practice and in order to incentivize commercial operations.

19. X: In the light of global financial crises and the debate on management compensation there

is a case for enunciating principle for management compensation of MIIs. The fixation of

management compensation should be entrusted to independent appointment committee


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which reports to regulator and the compensation should be based on efficiency @ 60% and

profitability on @ 40%. The efficiency can be measured by

1. Overall performance of the MIIs.

2. Investor education / protection initiative taken by the said MII.

3. Enforcement of systems and procedures.

4. Surveillance and market development activity.

5. Implementation and control of margining system.

6. Impact cost on the transaction executed on the platform of the said MII .

7. Quality and competitiveness of the services rendered by that MII.

8. New product development initiative taken by that MII.

9. Gains and value addition for republic.

10. Whether MII have achieved its goal for which they will setup.

No commercial function should be regulated and it should be left on the market forces to

give rewards to the performers. Charges and fees should be based on quality of service as

well as cost effectiveness. These activities should strictly be allowed for incidental business

only.

20. X: There should not be any restrictions on the remunerations of Executives of MII’s (SE’s).

Higher payments are needed to attract necessary talent in MII’s (SE’s), to have update on

latest developments in technology, innovations, etc. globally in Capital Markets.

21. X: I am of the view that there should not be any restrictions on the remunerations of

persons at the helm of affairs of MII. This should be driven on commercial perspective.

22. X: As far as compensation and governance are concerned, the Committee's

recommendations go squarely against the philosophy and practice that policymakers have

sought to foster in India in matters of corporate governance, and we urge you to ignore

them.

23. X: Market should decide the senior management's compensation. Earlier SEBI used to

have a Director on Board of stock exchanges and SEBI may start the same process again

to be more comfortable with Compliance of stock exchanges. The need for strict


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regulations as has been enforced in the developed financial markets could be the

prudent step.

24. X:- Most observers of the global financial crisis of 2008 have emphasised the role of high

powered incentives in shaping the behaviour of CEOs of financial firms. In recent months, a

slew of empirical papers has emerged examining the evidence on this question. An

additional important area of concern with high-powered incentives is that of ethical failures.

A management team which faces high powered incentive will balance the gains from

obtaining higher revenue or profit versus the probability of getting caught, and has a greater

chance of undertaking unethical practices.

In the Indian setting, there have long been concerns about State ineffectiveness. While the

main focus in recent corruption scandals has been upon politicians who accepted bribes, it

is equally important to focus upon the incentives which shaped the behaviour of

businessmen who paid bribes.

It would be beneficial to have coalitions of dispersed shareholders that recruit professional

managers who are given low-powered incentives, where no member of the coalition has a

concentrated stake or control.

The report proposes that senior executives engaged in supervisory functions should not

have share ownership, stock options, or any equity-linked compensation. On one hand, this

is too narrow in that compensation can be linked to profits. In addition, this is too narrow in

that regulatory and supervisory functions pervade the organisation. A much more

encompassing rule, which proscribes high-powered incentives for all employees, is

desirable.

25. X:- The recommendations that there should not be any variable pay and putting a cap on

the managerial remuneration needs to be examined in the broader context of the prevailing

situation and the need to attract the best talents to MII. Although I share the concern of the

committee that one of the issues that came up in the recent financial crisis is the managerial

remuneration and the greed of the wall street, there is a need to revisit the recommendation

in the light of the fact that these are institutions of greater importance and need the best

talents.


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26. X- Listing actually is expected to bring in transparency as well as accountability with action

of the shareholders and public at large.

27. X- Remuneration should not be subjected to cap but be linked to profit. As this would bring

the best of talent to man these institutions. However, there could be set regulations in line

with the existing practices as emanating in PSU banks. There is not much rationale for not

having variable component in the BJC report.

28. X- Such measures would make it extremely difficult to attract talent at a time when the

exchange industry in India needs to become globally competitive.

29. X- It is difficult to see how the concept of making a simple relatively low salary level

applicable to exchange managements can remotely encourage the best and brightest

candidates to apply for management positions. This proposed cap on remuneration is a

highly regressive concept that is likely to make management incapable of competing

against the much more highly motivated management of overseas exchanges.

30. X- This is against the concept of attracting the best talent and the innovation. At most

companies may be asked to disclose the compensation as applicable to any limited

company.

31. X- �While the Committee recognizes the need to bring in accountability of the senior

management of exchanges, its recommendation against listing seems to self-defeat the

purpose. �Listing does not bring transparency alone but also accountability as every major

financial or structural commitment would require shareholder approval, bringing in more

accountability. �It would hamper the ability of exchanges to obtain the right level of

competent management in the absence of market forces driving management

compensation. High fixed cost will be a constraint on small and medium stock exchanges

whereas they will be successful in attracting good talent based on part fixed cost and part

variable cost or ESOP component.

32. X- The recommendations suggest strangling of the operational freedom of the

management. It is not feasible to impose more regulatory burden on remuneration as it

goes against the very principle of free market for managerial talent and the MIIs would not


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be able to call on board many a great talents. The cap on profitability, the cap on

remuneration of top executives are an indication of an increased interference of SEBI on the

working of the MIIs and they serve as a deterrent to any new player from entering the

heavily regulated market.

33. X- There are no evidence where in restriction on managerial remuneration is successful in

bringing in streamlining managerial compensation, and result into increase of public

interest. In fact, such controls have been proved counterproductive. Instead of capping and

restricting operating freedom, the regulator should insist on change of management if MII

does not break even or incur any failure. Leave managerial compensation to market for

managerial labour. It will govern it better than the regulation. However, an oversight is not

deterrent.

34. X- A bar disconnecting performance from pay will dis-incentivise good performance by

senior executives and MD/ the CEO of the stock exchange. The committee nowhere caps

the pay of the top management. It only disallows performance based incentives. This

recommendation lays net the foundation for destroying performance in stock exchanges

which cannot reward their management. Even the government of India has a performance

management department in the cabinet secretariat to enhance performance of ministries

and departments (performance.gov.in). Performance incentives are particularly necessary in

upcoming or struggling exchanges as managers would be paid well if they manage to make

the exchange (or MII) competitive and this would in turn be good for competition and for the

investors who get better performing exchanges to choose from.

35. X: Jalan has travelled to forbidden fields by going to the extent of suggesting salary cuts or

perq. cuts in BSE management’s pay package. I want to ask Jalan if anyone ever

suggested cuts in his salary when he was a government employee? Who do you expect to

run BSE, if not the present skilled professional team? A peon drawing Rs.5000/- a month?

36. X: Why there was no discussion on the FAT pay and perks of the executives of existing

stock exchanges and the super profits of NSE specially. They are robbing the investors to

pay these executives. NSE had not reduced the transaction charges inspite of the huge

volumes and disparity between BSE and NSE, saying that BSE is charging this and that.


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There should be a cap on the excessive salaries and perks of the executives of NSE and

ALL MIIs. Do you think 6 or 7 Crores Salary per annum is small money?

37. X: SEBI should appoint a committee to review the workings of the entire financial services

sector and put in place a cap on salaries and bonuses that get paid to the people involved

in asset / finance management.

38. X: A holistic review of the remuneration and salaries of all involved in the financial sector

should be carried out and their remuneration should be linked with some kind of objective

performance beneficial to the end-user, ie the investing public.


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S.No Summary of responses on listing

1. It is our view that Competition brings in better products, better prices and better services

and thus, listing brings in a lot of benefits, to the listing entity, the market, the investors and

the economy as a whole. In the evolutionary process of an Stock Exchange, ‘Listing’ is the

next logical step after demutualization. As regards listing without segregation of commercial

and regulatory roles of Stock Exchanges it is the view that while in the interest of

transparency, raising of capital and competition etc. there is need to allow listing of stock

exchanges, the regulatory vis-a vis commercial functions of the stock exchanges are

required to be the fine-tuned. Thus, while allowing listing of Stock Exchanges following

points need to be taken into account viz.

a) Ideally, Self –listing of the shares of the exchange should not be permitted, as this

would give rise to conflicts, as the exchange itself would then be responsible to

monitor its own compliance of all the regulatory requirements imposed on listed

entity. If Self-listing is allowed, then prior segregation of commercial and regulatory

roles of Stock Exchanges must be made mandatory.

b) Post-listing, no change in non-public shareholding should be permitted for the first 5

years, and all subsequent changes should require prior approval of SEBI.

SEBI could work out the norms of listing for Stock exchanges, in terms of turnover, net

worth, profits etc. in the light for best global practices. A fine balance between ensuring

healthy competition, encouraging of new exchanges, at the same time ensuring adequate

viability of the entities should be ensured.

For the first 3 years of its operations, new exchange may not be allowed to list itself.

2. X: While discouraging listing of MIIs at this juncture, we believe that the Report does not,

and rightly so, close the door for listing of MIIs. The underlying thinking appears to be that

once the recommendations made by the Committee for strengthening the governance and

segregating the regulatory and commercial functions are implemented, the situation needs

to be reassessed and the issue of listing of MIIs revisited.

One of the key lessons from the global crisis is that in the financial and capital markets,


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incentives do matter. Therefore, any changes in policy relating to capital markets should be

carefully calibrated so that they do not introduce incentives for creating systemic risks and

instability in the financial system.

The MIIs have a significant future role in promoting wider access, financial literacy and

inclusive and shared development. Listing MIIs without appropriate safeguards viz.,

segregation of regulatory and business responsibilities, at this stage, will inevitably inject a

short-term orientation and hamper the growth of MIIs with a long term objective.

• No other business, including banking, has as much of conflicting roles/interest

embedded in the ownership and governance structure as the MIIs.

• The importance of segregation of regulatory and business functions in MIIs in order

to minimise the effects of conflict of interest in ‘for profit’ and listed MIIs has also

been well recognised in other countries where segregation of regulatory and

business functions happened. Different countries have adopted different models best

suited to their particular environment.

• Each model has its pros and cons. For example, in the model where the state

regulator takes over the regulatory function, sufficient planning and preparation may

be required at the regulator end which needs to be factored in. Similarly, in the

independent SRO model, the community may require capacity building to take up

this function especially as SROs have yet to fully evolve in India.

• In India the “Chinese Walls” would invariably be porous to the point where they are

unlikely to act as an effective segregation.

• India, perhaps, can lead the world with the best model where all three regulatory

responsibilities, i.e., market surveillance, member inspection and listing compliance

supervision are segregated, as each one presents a significant and potent conflict,

and housed in a single entity whether it is the regulator, or an independent agency or

an SRO. This is because most brokers and their clients are common across the

exchanges and therefore their positions and transactions across the exchanges

need to be viewed and analysed by a single entity in order to be effective.

• However, segregation of regulatory and commercial functions of MIIs is a pre-

requisite for allowing listing of MIIs. Therefore, it is important to select an appropriate


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model for segregating the conflict of interest and lay down a road map with a time

frame for its implementation.

• The Report appears to discourage permitting of listing of MIIs for the next five years

due to the inherent conflict of interest present in the MIIs. However, MIIs already

have a large number of shareholders, who had invested when no such policy was in

place. Such shareholders need a more transparent exit route. Therefore, instead of

specifying a five year period before the issue of listing can be reviewed, it may be

better for the time period to emerge out of the implementation roadmap to segregate

the regulatory functions from the commercial functions of the MIIs.

3. X: The Jalan Committee recommendations appear to possibly restrain the freedom of

exchanges and other MIIs to develop and innovate their businesses. This is driven out of a

perception that the restriction on going public could interfere with their ability to manage HR

policies according to global best practices and in a manner that can hope to achieve

excellence. The restrictions will also prevent MIIs from entering meaningful partnerships

with international exchanges and other strategic partners.

These partnerships have been known to allow MIIs to achieve better governance, improved

know-how for state of the art technology and risk management systems in sync with the

dynamic market conditions. enhanced platforms for cross listing, etc. The measures

proposed by the Committee, in our belief is perceived to make Indian MIIs and the overall

Indian capital markets less competitive internationally.

Exchanges all around the world have successfully managed the conflicts of having a for-

profit entity run an exchange. The prevalent norm is also to allow these for-profit exchanges

to go public because of the benefits in terms of efficiency, enhanced competitiveness and

customer responsiveness. In fact, being publicly traded rather than privately held provides

greater transparency for investors and brings in accountability into the management to

bring in efficiency into the operations of the MII. Many countries have resolved the

exchange’s commercial and regulatory function through effective segregation of the

commercial and regulatory functions and through corporate governance enhancements.

This same separation of regulatory and commercial activities, along with enhanced


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supervision can and could be done by SEBI in India.

Similarly, from an international reputation perspective, implementing the no-listing and

profit-limit recommendations of the Committee will send a negative signal to international

investors who invested in exchanges in good faith at the time of the de-mutualization and

after. Rather than a blanket ban, therefore, we would suggest that SEBI puts in place a

timetable and a pathway so that exchanges could list if they meet certain regulatory

conditions.

4. X: Existing regulatory framework does not provide for listing of recognized stock

exchanges. As a result, securities of Indian Stock Exchanges are not capable of being

listed at present. It was expected that SEBI would prescribed framework permitting stock

exchanges to list. However, the recommendations of the Committee adversely prejudice

the expectations of the exchanges and their shareholders.

After having studied global best practices, Justice Kania Committee recommended that “for

profit” and they should be allowed to list. We recommend that SEBI should disregard the

recommendations of the Committee as far as listing of Stock Exchanges.

As per the IMRB Survey Findings on ‘Perceptions of stakeholders towards


• Majority of respondents are of the opinion that the listing of stock exchanges will be

necessary for better corporate governance; significantly higher proportion of

corporate investors, exchanges and economist/researchers feel this way.

• 80% of the respondents polled feel that stock exchanges should be listed with all their

activities and operations under the supervision of SEBI

• Majority of the respondents are of the opinion that listing of stock exchanges would bring

out the best performance from them

With no funding or exist route for investors, the competitiveness amongst the Exchanges of

the India’s capital markets could take a setback. Thereby we may witness a very slow or no


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progression in the evolution of new-generation exchanges leading to lack of globally-

accepted exchange traded products and services at optimal prices.

Thus in nutshell the advantages of the listing of securities of the Stock Exchange is as

follows:

i. Transparency / Better Governed Entity due to mandated disclosers

ii. Availability of information in public domain: quarterly submission of results, shareholding

pattern etc

iii. Open to public level scrutiny / shareholders query, which helps in keeping everything up

to mark

iv. Access to alternate sources of capital, if required

v. Unlocking of shareholders value by providing exit route

vi. Better performance evaluation as benchmarking will be done with other Listed

Exchanges internationally

5. X:- The information dissemination framework suggested by the Committee is laudable and

can be implemented at the Clearing Corporations. However, relating to listing, our view in

this regard is that there should not be any blanket ban on listing for MII, rather, the

recommendations should have encouraged appropriate ground work for listing in future

keeping in view that today; perhaps it is not wise to allow listing because the regulatory and

commercial elements of MIIs are too intermingled. The Regulators should formulate

appropriate regulations to allow MIIs to list after separating the regulatory and commercial

functions appropriately. A timetable and pathway for such segregation and subsequent

listing for the Clearing Corporations adhering to the requirements should be recommended

so that Clearing Corporations can spin off their regulatory functions into separate entities

under the Regulations said above

6. X: MIIs should be permitted to list only after their regulatory functions are shifted to SEBI or

any other SRO.

MIIs play certain crucial regulatory role vis-à-vis their Participants/Members. Before the

MIIs are treated like any other business (e.g. listed commercial entities), their regulatory


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functions must be segregated out of the business of MIIs and should preferably rest with

SEBI or any other SRO as decided by SEBI. Merely by dual reporting, conflict of interest

issues cannot be sufficiently addressed.

7. X: There is a strong lobby in favour of listing of a SE either on itself or another SE. This

lobby is led by investors who have no long term interest in the SE. Such investors are

motivated only by profit gains. It is rather odd that such investors were later permitted by

the Govt to acquire stakes in the SEs after embracing a totally different philosophical

paradigm about the MFIs which led to the setting up of NSE, NSCCL, and NSDL. The Govt

appears to have forgotten the ills that plagued MFIs when their ownership and corporate

governance structure are not designed to play the role of socially oriented infrastructure

entities. This is one more conspicuous example of short memories of public policy makers.

Further, listing of SE for providing exit route to investors who have no long term interest in

the business of MFIs is basically bad idea for several reasons including all the strong

reasons given in the Report. Any entity with an embedded regulatory role in its functioning

should never be listed. This creates lot of conflicts of interest. A listed company is invariably

a profit maximising entity. Its shareholders keep a continuous watch on its quarterly/half-

yearly/annual profit trends and the management has to respond to the expectations of the

shareholders. Pursuit of pure profit motive for SE is bound to result in according much

lower priority to maintenance of market integrity as also adoption of a policy of

appeasement of large broker members at the cost of equal treatment to all investors and

market players irrespective of their size.

8. X: The committee seems to have overlooked the facts that the financial crisis that affected

the world economies had its genesis in the unlisted markets. Transparency and public

participation would have acted as an automatic safeguard for the listed markets. Therefore

the recommendations which do not favour Listing of a stock exchange appear irrationally

based.

The concerns raised by the committee primarily pertain to the fact that self listing may

usher in conflict of interest and monitoring compliance of a competing MII would be an

issue. Given the fact that MII are regulatory bodies functioning within the ambit of well laid

down codes, the fear raised seems out of place. Listing at other stock exchanges would


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vouchsafe greater credibility and abidance to compliance norms.

9. X: Dr. Bimal Jalan Committee Report is not in favour of Listing of MIIs, but disclosure and

corporate governance requirements of the Listing Agreement as applicable to the listed

companies be made applicable to MIIs, which appears quite strange. While advising all the

Stock Exchange to demutualize the SEBI notified on 13th November, 2006 MIMPS where

the option was kept open to invite outside investors “through prospectus” and thus, it was

implied that an appropriate time the Stock Exchanges can bring an IPO to dilute their

equities for the purpose of demutualization. During the last four years investors have

pumped in over Rs.10,000 crores in India’s existing Stock Exchanges. These investments

were made based on the view that Exchanges would divest and demutualized based on

SEBI’s MIMPS regulations. Now, the Exchanges are disallowed to list, there will be no

scientific price discovery and transparent exit option left for these investors, thus, putting

their investments into geopardy. Non-listing coupled with cap on profits will mean that

existing investors will have to exit at high discount to attract some investors which is unfair.

MIMPS notified on 13/11/2006 did not put any such restrictions on “Listing” either explicit or

implied, at the time of demutualization, and therefore, such restrictions would only make the

existing non trading shareholders to a huge financial loss for the investments made at the

time of demutualization in good faith of earning a reasonable return. Had these known at

that time of probable non Listing and cap on profits, they could have assessed the matter

accordingly. Now such embargo amounts to breach of trust.

It is a normal commercial prudence that any person who invests in any business does so

with a hope to earn a reasonable and sufficient profit over the fixed deposits normally put in

the Bank for a simple reason that such investments are not risk free, especially putting their

money into the Stock Exchange. Therefore, we humbly suggest that the restrictions put in

the recommendations of Dr. Bimal Jalan Committee Report should be dropped in totality,

as this clause will render investment in Exchange non remunerative and will not serve the

purpose of demutualization. It would also be difficult to raise additional resources for

capital investment. It is also a proven fact that widely diversified companies are best made

accountable by listing and offer healthy competition.

10. X: As part of Corporatisation and Demutualization Scheme for Stock Exchanges, SEBI


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promulgated SCR (Manner of Increasing and Maintaining Public Share Holding in

Recognised Stock Exchanges) Regulations, 2006 [MIMPS]. As a consequence only 2 years

back i.e. in 2008, the Stock Exchanges invited public including Overseas Stock Exchanges

and other Institutional Investors to subscribe their shares. Now the share capital of Stock

Exchanges is widely held. Non permitting listing of Stock Exchanges virtually amounts to

breach of trust in as much as those investors would have no exit route. The premise of the

Committee that the listing shall bring Speculative Investments in the Exchanges is

illfounded.

Even self listing is permissible in Regulation 5 of MIMPS. SEBI could very well regulate

and monitor Listing Requirements and compliance of Stock Exchanges as in case of other

listed companies. The principles of Transparency, Fairness, Accountability and natural

justice, can be served only by Listing of Stock Exchanges as is the case in the listing of

Public Sector Undertakings and other institutions like Banks and Insurance Companies.

This recommendation, therefore, should not be accepted.

11. X: In India, MIIs play the role of quasi-regulators, entrusted with monitoring compliances of

some of the biggest corporations for the purpose of listing. While the MIIs are found

competent enough, to refuse confidence in them to manage listing of every other Company

in the country, the categorical bias to negate them to be able to handle listing of other MIIs

only on the grounds of conflict of interests, seems a little unfounded.

Moreover, the total number of MIIs being limited, it is manageable for the regulator to

monitor them closely as far as listing norms and all the information sought by a MII are

concerned. The committee seems to hold the view that shareholders of listed companies

are least interested in the functioning of the companies and add little, if any, value to the

growth of the companies. Moreover, the tone suggests that all the investments in a listed

company are of speculative nature. One is unable to follow this line of thinking or the

rationale behind the same.

In India, all the Public Sector Banks are allowed to be listed and their share prices

experience as much volatility as any other company. There have been numerous instances

when all of them have portrayed a downward trend without causing any loss of credibility to

the Financial Infrastructure of the nation. While on one hand, listing of important


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Infrastructure Institutions like Banks, NTPC, Power Grid, Coal & Oil Companies and

Infrastructure Companies is allowed and even encouraged, it is illogical and

incomprehensible to conclude that non-listing of Stock Exchanges is Public Good. Notably,

listing of Stock Exchanges is a Natural Corollary to demutualization and hence we strongly

suggest and recommend to allow the listing of MIIs in the overall interest of investors,

markets and the free economy.

12. X: The Stock Exchanges were given to understand, during 2006, by the specific provisions

in Regulations 4 & 5 of Securities Contracts (Regulation) (Manner of Increasing and

Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006 that

the Securities of the Stock Exchange will be permitted to be listed. Further to achieve the

net worth requirement recommended by the Dr. Bimal Jalan Committee, the only recourse

available to Regional / Small Stock Exchanges will be raising fresh capital from the

public.Moreover, listing will provide liquidity for the shares of the Stock Exchanges and will

also be an indicator of the performance of the Stock Exchanges to certain extent. Other

regulated bodies in the financial sector like Banks and Insurance Companies have been

permitted to list.

Whether a Stock Exchange is a public utility is being debated in the public domain.

However, it is to be noted that even the real public utilities like Hospitals - concerning the

life and death of human beings – in the Health care sector and companies in education

sector are permitted to list. Whether the prices of their shares come down or go up, it

doesn’t affect the working or credibility of the company directly or cause any damage to the

investor in the long run. There is an imperative need for permitting the listing of the shares

of Recognised Stock Exchanges, which will give more transparency and proper price

discovery for investors.

13. X: I) Stock Exchanges were demutualised and global and domestic investors have invested

more than Rs.10,000 crore in various Stock Exchanges. Now with restriction on listing,

there will be no transparent exit option left for these investors and they may have to sell

their existing investment at deep discount. This will also jeopardise the future fund raising

capacity and the expansion plans of Stock Exchanges.

II) Demutualisation was with a view to ensuring financial autonomy for Exchanges and


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making them independent of trading members for funding and making them dependent on

their own balance sheet, including equity and debt funding. Not permitting listing will render

investment in Exchanges unattractive and thus defeat the purpose of demutualisation.

MIIs may be permitted to be listed in order to provide an exit route for existing investors and

also to be an attractive mechanism for investments.

14. X: Listing should be allowed. The report disallowing listing of stock exchange has come as

a big blow for the broker-shareHolders as well as public. They are to sell the holding as off

market deal which is not at all justified. Because there was clear understanding about plan

of listing. Listing will only bring more transparency and accountability in its operation which

will benefit larger investors community and companies listed in the exchange platform.

15. X: Dr. Bimal Jalan Committee (BJC) recommendation of not permitting listing to raise

capital goes against the basic premise that the shares of SEs should be widely held. The

conclusion of the Committee that the listing shall bring Speculative Investment in the

bourses is far from correct. It is illogical and irrational to state that listing of companies

including PSUs is good for the Economy and Investors and stating that SEs should not get

listed is, to say the least, contradictory and not practicing what they preach.

• Non permitting listing of SEs would amount to breach of trust to the Investors in SEs

at the time Demutualization of SEs in the year 2007; affecting goodwill and honor of

GOI as well as SEBI. It will have a big negative impact on the Investment Climate as

even Overseas SEs / Other Institutional Investors including PE firms have invested

in SEs based on such promise in SCR (Manner of Increasing and Maintaining Public

Shareholding in RSEs) Regulations 2006. If as a country we go back on our

promise, why would any Investor trust us? SCR Regulations are aptly titled - SCR

(Manner of Increasing and Maintaining Public Shareholding in RSEs) Regulations

2006.

• As per the Regulations 4 and 5 of the above referred SCR Regulations, it is crystal

clear that the IPO and the Offer for Sale both were envisaged and permissible

explicitly. Based on these Regulations, all Investors, both Foreign and Indian,

Institutional and Retail, have invested in Stock Exchanges at the time of


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demutualization. The demutualization would not have been successful, had there

been no exit route provided to investors. The majority of the exchanges worldwide

viz. ASX, CME, Deutsche Bourse, Japan Stock Exchange, London Stock Exchange,

NASDAQ, NYSE Euronext, Osaka Securities Exchange etc are listed.

• Self listing also was explicitly permissible in Regulation 5 of the above referred SCR

Regulations. The conflict of interest could be solved possibly by SEBI agreeing to

regulate and monitor the Listing Requirements and Compliance of SEs as listed

companies. An agreement could also be signed stating in clear terms the Roles and

Responsibilities of the SE(s). An example and an Empirical Evidence could be found

in Australia where ASX has entered into MOU with the Regulator for self listing.

• It is illogical and incomprehensible to conclude that non-listing of SEs is Public

Good. In fact, the correlation between listing and Public Good is positive and

possible more than 1. The Committee has put no convincing arguments about why

listing of SEs is Not a Public Good. If this Principle is true why far more important

Infrastructure Institutions like Banks, NTPC, Power Grid and others are allowed to

list?

• Listing of SEs shall attract New Capital and Investors in SEs at a Fair and

Transparent price. It shall also allow an exit opportunity to existing Investors at a

price discovered by and efficient and transparent computerized trading system.

• X request SEBI to permit listing of SEs including self listing in the overall interest of

Investors, Capital Markets and the Economy.

16. X: I agree with the view of the committee that it is not advisable to allow the exchanges to

list so long as they handle regulatory and commercial functions, as this may give rise to

conflict of interest. The subject may be revisited after the suggestions of the committee for

segregating the regulatory and commercial functions are implemented.

17. X- One does not expect an institution which facilitates buying and selling of financial

instruments, could be subject to selling and buying, however large funds may be offered in

trading of the institution. Extending this argument further would mean listing of State

Governments, Municipal Corporations, etc, Then one would question which should be the

authorised exchange on which an institution like the Government of India should be listed


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and whether, it should be domestic or foreign and there is no end to it.

These institutions could be rated rather than listed and it is by way of rating, the efficiency

of the institution could be judged rather than by listing. In the process of listing there is

another danger that their values could be manipulated by the few who are privy to the

institution or disgruntled employees.

18. X: One of the Committee's concerns was that if MIIs were to be listed, any downward

movement in their share prices might lead to a loss of credibility, which might be

detrimental to the market as a whole. We believe share prices of a company inter alia

reflect its performance and health. So it is only fair that if there are concerns with regard to

above, the general public should be aware of it and movement in share prices shall only

help them do so. Moreover, in our opinion, the premise itself that downward movement in

share prices leads to loss of credibility is debatable.

The issue of conflict of interest can be dealt with by regulatory oversight and surveillance.

In any case, the regulatory role of MIIs is limited and they are primarily responsible for

ensuring compliance of regulations laid down by the regulator. As such, there is no need to

prohibit the list of Mils altogether.

19. X: Item no. 6 of demutualization scheme 2005 of BSE ltd specially talks about the listing. It

seems, this vital document was not considered by the committee. Why this kind of entity

barred whereas all public utility PSU like Bank, power Co. This recommendation should be

rejected.

20. X: Publicly owned companies, as a result of their accountability to a wide number of

shareholders, must continually strive for efficiency and innovation. Corporate governance

has also seen a quantum leap forward as a result of securities exchanges ceasing to be

tightly controlled “old boys” clubs. All over the world, the thrust of the auditing profession

has been to make public company reporting transparent, accountable and comprehensible

to investors. To allow securities exchanges to remain private would be to deny investors

the benefit of the high standards which are being set for India’s public companies while

standing as an implicit criticism of the listing process and public companies in general.

Possibly the NSE and BSE could cross list on each other’s exchange if extra accountability


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is desired, but to not list at all makes everything that happens at exchanges more opaque

to the outside world. Publicly traded companies have a currency both to expand and to

attract better talent. Further, it can be shown that mutually owned or closely held

companies have continually failed to successfully compete with publicly held corporations.

21. X: One form in which an investor can “resell” its investment in an unlisted company is

through listing the Company. Listing helps diversify the ownership and acts as a deterrent

to dominant shareholding and therefore restricts controlling interest. Therefore listing per se

is not a speculative activity but only a medium of investment. The movement of the price of

any stock depends upon the growth of that company and in short its profitability, besides

technical factors of the market i.e. demand and supply for the stock. Arguably, if this

argument of listing of exchanges fostering speculative activities is tenable, all the

exchanges across the globe including India would need to shut down their operations as by

this definition, stock exchanges are only indulging in and fostering speculation. This could

not have been the intent of the recommendation. To avoid dominant shareholding in

exchanges upon listing, ownership rules could be similar like for banks or for FIIs in listed

companies.

22. X: During financial panic of 2008, exchanges continued to function flawlessly without any

distress while several other major customers failed on the brink of insolvency. There is no

evidence to suggest that profitable and properly capitalized exchanges are at risk during a

panic or that their declining share prices exacerbate a panic. The lack of transparency

resulting from private ownership of exchanges, particularly those that are not properly

accountable to shareholders, can exacerbate the principal / agent problem and create an

environment conducive to malfeasance and back room dealing. If it can be demonstrated

that there is in fact such a conflict between a listing and the regulatory function, then SEBI

should make explicit the exact nature of this conflict and how it could manifest so that

precautionary measures can be taken, and provide a clear roadmap for the objective and

measurable steps exchanges must take to separate the regulatory function from the

operation of the exchange to the extent necessary.

23. X: Listing is necessary in the interest of all the investors. Listing not only brings in


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widespread Share holder wealth (more equitable distribution of wealth) but also better

Governance norms.

24. X:

� The global trend currently is towards listing of exchanges. Not allowing MIIs to list

will lead to losing of opportunities to create and unlock value from investment in

Exchange industry.

� The natural progression in the evolution of the Exchange industry is to move from

being mutualized to a demutualized format and then to list and thus complete the

evolution cycle.

� According to World Federation of Exchanges, listed exchanges dominate the

exchange industry. About three fourth of the global turnover of the Exchange

industry comes from listed exchanges.

25. X: Listing of stock exchanges is a feature of demutualisation. After having studied global

best practices, Justice Kania Committee recommended that modern exchanges have to be

"for profit" and they should be allowed to list. We recommend SEBI should disregard the

recommendations of the committee as far as listing of stock exchanges.

26. X-

We believe that listing of stock exchanges is desirable for the following reasons:

(i) Improved transparency and disclosure through constant monitoring by various

stakeholder groups including shareholders, employees, the analyst community, the media

and SEBI. Any deviations from best-inclass practices will be picked up and reported on very

quickly;

(ii) Mitigation of the risk of capture of a stock exchange by its management team,


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particularly in the context of highly diffused ownerships. Listing of the stock exchanges

would expose management teams to enhanced scrutiny from a number of stakeholder

groups and highlight compensation practices, influence of management on the Board of

directors, mechanism for making key decisions, etc.;

(iii) More transparent price discovery for existing and future shareholders, all of which are

commercial organizations;

(iv) Listing would make it easier for competition to develop and flourish by improving access

to capital for new exchanges; and

(v) The desirability of listing by stock exchanges was acknowledged by the Kania

Committee Report (2002) which stated that "it would be desirable for demutualised stock

exchanges to list its shares on itself or on any other stock exchange".

The Report while acknowledging the obvious advantages to listing of MIIs provides the

following three reasons for not permitting listing of MIIs:

(1) Listing may result in a conflict of interest for the MII as it would be required to monitor its

own listing compliances;

(2) An MII should not become a vehicle for attracting speculative investments, instead, the

shareholders of the MII need to be long term investors which are sufficiently motivated to

take a keen interest in the functioning of the MII and contribute to its growth by providing

necessary value addition in terms of technology, market/product design, managerial inputs

etc.; and

(3) MIIs being public institutions, any downward movement in their share prices may lead to

a loss of credibility and this may bedetrimental to the market as a whole.

Our comments on these contentions are set out below:

• In respect of the first reason mentioned above, the only additional conflict that arises

pursuant to listing of stock exchanges is the regulation of their own listing compliances by

the exchanges. A number of stock exchanges the world over are listed on their own indices,

for e.g. ASX (Australia), SGX (Singapore), LSE (UK), Hong Kong Stock Exchange, Bursa

Malaysia (Malaysia) and CME (USA). Such exchanges have dealt with the issue of conflict


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of interest by relinquishing monitoring of listing conditions to the securities market regulator,

and we believe that it would be beneficial to adopt a similar model for the listing of Indian

stock exchanges. Moreover, in the present scenario of automated display of compliances

made by a listed company, the compliances made by the stock exchanges would be

instantly available for public scrutiny and any non-compliance by the stock exchanges

would be quickly identified and rectified. Therefore, the issue of conflict arising out of listing

of stock exchanges can be dealt with even without putting in place measures for complete

segregation of the regulatory and commercial functions of stock exchanges.

• As regards the second reason stated above, it is our opinion that listing of stock

exchanges would not result in any changes in the quality of their shareholder bases. The

ownership of Indian stock exchanges is already diversified as a result of the Securities

Contracts (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock

Exchanges) Regulations, 2006 ("MIMPS"). The ownership of stock exchanges has been

opened to domestic and foreign institutional investors (including FIIs) as well as to high net

worth individuals. The only constituency that is not reflected is the domestic retail investor

and we think it is unfair and inappropriate to deny retail investors the right

to participate in the ownership of exchanges on the basis that their investments are

"speculative" in nature.

• In respect of the third concern, we would like to point out that there are currently very few

restrictions on a shareholder of a stock exchange from selling its stake in the exchange to

another investor through a private transaction. Consequently, over the last five years, there

have been numerous transactions for sale of shares of exchanges and the share prices

have differed on the basis of the macroeconomic environment and the performance of the

exchanges. Listing of stock exchanges would only make such transactions more

transparent and efficient, particularly in respect of price discovery. We believe that a

downward movement in the price of shares of an exchange will not have an impact on the

market as a whole, a case in point being the decrease in the price of shares of the NSE in

the past which tumbled from INR 4000/share in mid 2008 to INR 2,650/share in mid 2009.

Globally, there is a wealth of data proving that exchanges continued to function robustly

even though the market capitalization of the listed stock exchanges sharply crashed, as


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seen in the table below:

Exchange High Date Low Date Drop

%

CME 2007 – December 2009 – January 74

CBOE 2010 – June 2010 – September 38

Deutsche Borse 2007 – May 2009 – February 79

NASDAQ OMX Group 2007 – December 2010 – June 64

ASX 2007 – December 2009 – February 56

NYSE Euronext 2006 – November 2009 – February 82

ICE 2007 – December 2009 – February 71

In view of the reasons identified above, we are of the opinion that stock exchanges should

be encouraged to list their shares. We believe that listing can take place ahead of a full

separation of the commercial and regulatory functions of the exchanges, as long as there is

a mechanism for the exchanges to monitor their own listing compliances.

27. X: While acknowledging the obvious advantages to listing of SEs which are higher

transparencies, better governance and providing the investors in stock exchanges with an

exit option, the Report lists the following three reasons for not permitting listing of MIIs:

1. Listing may result in a conflict of interest for the MII as it would be required to

monitor its own listing compliances;

2. An MII should not become a vehicle for attracting speculative investments, instead,

the shareholders of the MII need to be long term investors which are sufficiently

motivated to take a keen interest in the functioning of the MII and contribute to its

growth by providing necessary value addition in terms of technology, market/product

design, managerial inputs etc.; and

3. Mils being public institutions, any downward movement in their share prices may


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lead to a loss of credibility and this may be detrimental to the market as a whole.

Our comments on these contentions are set out below:

• A number of demutualised stock exchanges the world over are listed on their own

indices for e.g. ASX (Australia), SGX (Singapore), LSE (UK), Hong Kong Stock

Exchange, Bursa Malaysia (Malaysia) and CME (USA). Such exchanges have dealt

with the issue of conflict of interest rather easily by relinquishing monitoring of listing

conditions to the securities market regulator and a similar model may be adopted in

case of listing of Indian stock exchanges. Moreover, in the present scenario of

automated display of the compliances made by a listed company, the compliances

made by the stock exchanges would be instantly available for public scrutiny and any

non-compliance by the stock exchanges would be quickly identified and rectified.

• As acknowledged by the Report and the Kania Committee Report, the important

advantages of listing are that it gives a degree of liquidity to the shares and therefore

encourages public participation. Besides, it enforces a higher degree of transparency

in the functioning of the stock exchange and forces higher standards of corporate

governance. Being listed is likely to improve the value of stock exchanges, as

exchanges are urged to create value for their own shareholders through

improvement of their structure to operate more efficiently. As in any other sector, the

financial viability of stock exchanges would be jeopardized if it is not able to meet the

requirement of resources. The capacity to raise the resources would depend upon its

ability to provide exit and liquidity to its shareholders. This could be facilitated by

listing its securities.

• The recommendation of demutualization in the Kania Committee Report was to

extract stock exchanges from their out of the culture of private club and make them

more transparent as public companies and the best form of a public company is listed

company as it has shareholders democracy. Kania Committee Report acknowledged

this fact by stating "it would be desirable for demutualised stock exchanges to list its

shares on itself or on any other stock exchange." The Report does not mention any


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reasons for coming to a conclusion which is completely opposite of the conclusion

arrived at by the Kania Committee Report, fu ther, the Report does not discuss the

possibility of regulation of listing compliance of the stock exchanges by SEBI.

• As regards the second reason for the recommendation, it is our opinion that listing

of stock exchanges would not result in a significant change in the quality of their

shareholder base. The ownership of Indian stock exchanges is already diversified as

a result of the Securities Contracts (Manner of Increasing and Maintaining Public

Shareholding in Recognized Stock Exchanges) Regulations, 2006 ("MIlVIPS").

Most investors have invested in the stock exchanges with a long-term objective

but also in expectation of an orderly exit which would most naturally be through a

listing. Therefore a restriction on listing may discourage otherwise qualified

institutional investors from investing into exchanges while at the same time preventing

retails investors also interested in the long term growth of the exchanges from

investing into them.

• In respect of the third concern, we would like to point out that currently, there are

very few restrictions on a shareholder of a stock exchange from selling its stake in the

exchange to another investor through a private transaction. Consequently, over the

last five years, there have been numerous transactions for sale of shares of

exchanges and the share price have differed on the basis of macroeconomic

environment and performance of the exchanges. Listing of stock exchanges would

only make such transactions more transparent and efficient particularly in respect of

price discovery. As indicated in the chart above, there has been no evidence of an

exchange's decreased ability to operate efficiently as a result of the change in market

capitalization. As mentioned above, several stock .exchanges present in socially and

economically diverse economies have been listed for a number of years without there

being any impact on the stability of the broader market as a result of that.

In view of the reasons identified above, we are of the opinion that stock exchanges should

be accorded the right to determine if and when to list their shares. However if there is a

view that stock exchanges should not be listed at present, there should be a clear roadmap

of the conditions under which it would be possible and the time period for the same. The


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practice of setting goals and timelines have been successfully used in the past by Indian

policy makers, for e.g. path for opening up banking sector set out by the Reserve Bank of

India ("RBI") in 2009 and recommendations of the Tarapore Committee on Capital Account

Convertibility (2006).

28. X: X has forwarded a presentation on NSE Tracker of NSE. The following was informed in

this regard –

• Move ownership of shareholders desirable of exit in NSE to a new entity called NSE

Tracker Ltd. (“NSE Tracker)

• Shareholders willing to exit in the near /medium term could offload their shares – to

surrender their shares in NSE in lieu of new shares of NSE Tracker.

• NSE Tracker to list on Indian Stock Exchanges through an offer for sale to retail

investors and domestic institutions.

• Broad based ownership of a ‘national assets’ – IPO to retail and domestic institutions

to diversify the investor base

• Meet SEBI regulations – maximum shareholding of 5% for individuals and 15% for

institutional shareholders

• Institutional shareholders get proper valuations for their exits through the mechanism

of price discovery

• Benchmark pricing for negotiated stake –sales, if any.

How does NSE Tracker address Jalan Committee views on listing - Separation of

regulatory functions from commercial interest while giving liquidity to investors, in line with

international experiences.

29. X: Transparency is one of the objectives for listing MIIs. Achiever should be rewarded by

the market forces.

It will create competitive environment. Apparently self listing seems to be contrary to public

opinion.

30. X: We strongly believe that shares of MIIs should be listed.

31. X: No Stock Exchange Should be listed.


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32. X: MII should not be allowed to be listed on Stock Exchanges because it will give rise to

undue competition to earn more profits for higher valuations, at the cost of general

investors and economy.

33. X: We welcome the committee’s recommendation of not permitting the listing of MIIs for the

same fears of the committee in its report.

34. X: Status of MII should not be pure commercial. Stock Market is the barometers of the

economic health of the country and if these are made purely commercial, the conflict of

interest between the commercial objects and welfare of the public will arise in the long run.

Therefore if listing of the shares is allowed, the executives at the helm of MII will tend to

earn more profit for the organization at the cost of General investors.

35. X: Market infrastructure institutions should not be allowed to list as it could provide

incentives for exchanges to tinker with technology to enhance profits by working on the

edges of market practices.

36. X: We agree with the Committee.

37. X: The shares of BSE be listed on a recognised stock exchange in order to achieve the

final goal of corporatisation and demutualisation scheme of BSE.

38. X: I am shocked and surprised at the recommendation of the above committee, it once

again represents the flip Flop and retrograde SEBI policy of not having competition among

Stock Exchanges, Not Listing the shares especially when Global Investors have invested in

Indian Stock Exchanges.

39. X:Our company oppose Bimal Jalan Commitee report on Listing of BSE Shares on the

Exchange.

40. X: Based on the recommendations made by Dr.Bimal Jalan Committee appointed by SEBI

to look in to the issues of capital, ownership and governance of the exchange including

listing what reply could be given to those investors within India and across globe who have

invested around Rs.10,000 crores to buy shares of BSE and NSE?. It should not be

forgotten that these investors bought shares of above exchanges relying on the report of


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Kaniya Committee, which was duly constituted by SEBI after careful study of each and

every aspect of demutualization including approval for listing of these shares. These

investors by buying shares helped to complete the process of demutualization. Now these

very investors are taken for ride by betraying their trust and by not allowing the listing of

shares by the Jalan Committee. Question arises what message recommendation of Jalan

Committee will send to global investors who have invested in equity of 10 existing

exchanges and two new entrant in capital market?. Let us not forget that these are two

important issues. America, Europe, Singapore, Hong King, Tokyo, Africa, Malasiya and

Dubai are the examples of listed stock exchanges of the world. While in India we fail to

understand why the stock exchanges are not allowed to be listed. It is beyond any body’s

understanding of the capital market. If the exit route is not given then which bank would

become the anchor investor of the exchange? Without listing which anchor investor will

obey the basic fine lines of investments and also observe the corporate governance?

41. X: Why these concerns were not raised when the issue of demutualization was considered

and approved by the regulators? After being assured of listing at the time of

demutualization,now it is wrong,absolutely wrong to change track and say that it cannot

happen.Can anyone please explain what happens to one and all including foreigners who

put in their money at the of demutualization? Where is the exit route?

42. X: Our only contention is that the shares of the Bombay Stock Exchange Ltd be listed on a

recognised Stock Exchange in order to achieve the final goal of Corporatisation &

Demutualisation Scheme of the Bombay Stock Exchange Ltd. as notified by the SEBI in

2007.

43. X: Committee recommendations seem to contradict/undo what the MIMPS regulations

sought to achieve. The government of India/SEBI ought to have brought out these

recommendations before the demutualisation process was undertaken. These

recommendations seek to bolt the doors after the investors have got into the stock

exchanges.

These recommendations, if adopted, would be a serious breach of promises based

on which the demutualisation process was completed. The government of India/sebi


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may need to compensate the investors in stock exchanges by ensuring that the shares they

hold in these stock exchanges are bought back by the respective exchanges, offering them

an exit.

44. X: The recommendation will not only hamper but also jeopardize the interest and benefits

of the investors who had participated in demutualization process and acquired the shares of

Stock Exchanges.

45. X: We maintain that experiences in other countries where listing is allowed may be studied

by an expert group and their findings may be made public and debated widely. If the expert

group so comes to conclusion on the advisability of listing, Ministry of Finance and SEBI

may allow the same even earlier and not wait necessarily for period of 5 years.

It will be pertinent to point that out that an earlier report on Corporatisation and

Demutualization of Stock Exchanges constituted by SEBI, had recommended that a Central

Listing Authority may be mooted to ensure & oversee uniform Listing regulations,

procedures and compliances across Exchanges. Once certain regulatory functions relating

to Trading Members are left to SRO, Central Listing Authority is duly constituted and

surveillance functions are shifted SEBI, and effective Chinese wall is constructed between

Commercial roleof exchange and Regulatory Role, Listing may be allowed.

46. X: Listing of these shares will only provide greater transparency giving exit route to its

investors and will halt off market transactions which take place so rampantly. As a result of

this the government is losing its tax collections by way of Service Tax and STT.

47. X: We are unable to appreciate the Committee's reasoning, which is applicable to all listed

entities, that " An MII should not become a vehicle for attracting speculative investments.

The current system of monitoring listing compliances through self-regulation in a

competitive environment, oversight by SEBI with ultimate threat of de-recognition, is

applicable to ALL listed entities and is as efficient or inefficient for them as for a listed MII

We would support measures to strengthen this system.

48. X: The recommendation could deprive the established rights of corporate stock exchanges

under Section 73 of the Companies Act, 1956 and the Securities Contracts (Regulation)


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Act, 1956 to make public issue and list its securities, without adequate justification for

doing so. Stock Exchanges were demutualised in 2005 on the above SEBI mandate. As

investors have invested in these exchanges through both primary and secondary routes

since then, today the aggregate market capitalisation of these exchanges is over

Rs.10,000 crore.

The Committee proposal will defeat the very purpose of demutualization by making

investment unattractive and, thus, demutualization virtually impossible. All exchanges

should be listed for raising resources and also for better corporate governance.

49. X: Exchanges should be allowed to list as this is against the Companies Act. Listing will

enable them to raise resources and also ensuring their better corporate governance. Allow

cross-listing of exchanges to ensure better transparency and accountability Put in place

stringent corporate governance norms exclusive for listed exchanges.

50. X: Listing will allow investors transparent and more scientific exit options, without which we

will not be able to attract investors. The availability of exit option will help attract more and

more institutional investors to the exchange. (c) As the management will be accountable to

them. There will be more transparency in functioning of the exchange post-listing. Listing is

one of the ways to unlock value in shares. It ensures wider participation of investors and

boosts liquidity.

51. X: The intent of demutualization and corporatization was to diversify public ownership and

growth of exchanges, which is now being overlooked by disallowing listing. Internationally in

developed markets and many emerging countries, listing of Exchanges is allowed. Other

sectors like Bank, Insurance, Aviation, Telecom which are perceived to be public utilities

and equally crucial to the economy, are also allowed to list on the Exchanges in India and

abroad. The public as well as private sector banks of India are already listed and traded on

the Exchanges and their share price do fluctuate. That does not affect their credibility.

Further, the Exchanges that are run by professional managers under the independent

Board will have inherent strength to correct aberrations, if any, that affect the stock prices.

Investments in these Exchanges were made considering that post demutualization and

subsequent listing, investors would be provided with an appropriate exit option for their


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investments. By prohibiting listing, the Exchanges would not be position to gather resource

required for investing in technology and offering diverse products. Listing of an Exchange

would bring about more transparency and accountability which is necessary as Exchanges

are perceived to be public utilities. SEBI can suggest the Exchanges one of the several

modes of conflict resolution practiced across the world.

52. X:- If one has to derive causality between stock performance and company performance –

then there are umpteen empirical evidences to suggest that it is the performance of the

company which affects the stock price but not the other way.

Listing of stock exchanges has been a world wide phenomenon and a natural corollary to

demutualisation of the stock exchanges. The financial viability of the stock exchanges

would be under threat in the event it is not able to meet the requirement of resources. The

ability to raise the resources would depend on its ability to provide exit and liquidity to its

shareholders. This could be facilitated by listing securities. In addition, listing would require

disclosures from the stock exchange and would be subject to corporate governance

requirements like any other issuer company which otherwise is not bound to follow under

law even being a regulator of the listed companies.

The concern that self-listing could result in stock exchanges diluting the listing standards for

their own convenience or using their regulatory power for differentiating the competitors

listed on the exchanges is not so relevant in the Indian context. SEBI enjoys ample power

under SCRA to initiate action against erring issuers, which is more effective that the power

of the stock exchanges to initiate action against the issuer. Any discretionary action initiated

by stock exchange against an issuer is subject to appeal to the SAT. Hence it is not

possible for a stock exchange in India to initiate action against issuers who are competitors

without any basis.

It is a paradox that a stock exchange which provides price discovery and liquidity services

to the shareholders of listed companies is unable to do so in case of its own shareholders.

Some of the high courts in India have held that the securities of even an unlisted public

company are securities under SCRA. This is a serious disincentive for public to invest in

unlisted stock exchanges and is going to impair the ability of stock exchanges to raise

capital for expansion and meeting the cost of technology improvements.


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53. X:- The fact is that “The BSE (C&D) Scheme 2005” was approved by SEBI and Gazette

notification to that effect was issued by SEBI on May 20, 2005 along with Annexure wherein

in Article 6, it was clearly mentioned that “ Bombay Stock Exchange Limited may at any

time list its securities on any Recognised Stock Exchange. The BSE circulated an

information memorandum in 2007 to the prospective investors conveying the SEBI has

approved C&D scheme which offered listing as a exit opportunity for investors on the basis

of which the investors have invested in BSE. Kotak Securities had an exclusive merchant

bankers mandate for dispensing off the shares worth around 2000 crores which were sold

at huge premiums.

Dr.K.P.Krishnan has deliberately distorted the facts and conveyed wrong information to all

the participants (to the closed door interactive session with Dr.Jalan), including before the

Chairman of the Committee, Dr.Jalan. Dr.K.P.Krishnan has been biased supporter of NSE

in the past (supporting documents enclosed).

54. X:- It would desirable that the stock exchanges be allowed to list itself. To avoid any conflict

of interest its listing may be monitored by SEBI. In view of the fact that the stock exchange

is a public utility, there is greater benefit in allowing the public to invest in the securities of

stock exchange. Some of the safeguards could be introducing stringent lock in

requirements for promoter/anchor investors.

55. X: This should be allowed in the light of the regulations that have been brought in by SEBI

on various issues of listing and price manipulations. It is unlikely that speculation would

destroy the price discovery mechanism in the market. Only experimentation can show us

this. These arguments could very well apply to banks and financial institutions. Moreover,

new players may be brought to the MIIs through listing and this could encourage new

product introduction and innovation in the working of the exchanges. Listing could be

permitted in exchanges other than the one in which the investor has made strategic

investments.

56. X: This would limit price discovery and transparent exit option for the existing investors.

International experience shows that exchanges in several major markets (such as New

York, Canada and Tokyo) and even in emerging markets (such as Dubai, Malaysia and


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South Africa) are listed.

57. X: By recommending the MIIs not be allowed to list, the Committee risks derailing the

stability and growth of the financial sector. It fails to recognize (and in fact, it may impede)

the force of market discipline that helps investors separate ‘good’ firms from ‘bad’ firms, and

shuts down valuable early warning signals that listed stock prices convey to regulators and

policymakers.

Demutualising the exchange offered exchanges to: (a) expand their capital base to make

valuable investments in their trading platform and improve liquidity; (b) reduce the control of

member-traders in making important strategic decisions; and (c) institute market-initiated

internal governance reforms.

The benefits of demutualisation have been ignored with the Committee’s recommendations

to prevent MII’s from public listing.

58. X: Listing of Stock Exchanges is global phenomenon. It put pressure on cost and excessive

profits. Listing provide valuation and exit route which becomes precondition for entry of

serious investor in this segments – that include – clearing corporation, stock exchanges,

and depositories. Listing facilitates transparency and accountability from management.

59. X: Listing cannot be restricted due to volatility of the markets. Listing is natural progression

of corporatisation of the MII. Listing will help in bringing accountability and discipline of

public disclosure. It should be allowed – while subject to certain conditions like,

simultaneous listing on competing exchange or listing will not be allowed on self exchange.

With no funding or exit route for investors, India’s capital markets will not see evolution of

new-generation exchanges emerging out of technology advances and remain primitive as

with many emerging market – like “badla” markets. This will lead to non-availability of

globally-accepted exchange traded products and services at optimal prices.


of corporatisation of the MII. Listing will help in bringing accountability and discipline of

public disclosure. It should be allowed – while subject to certain conditions like,

simultaneous listing on competing exchange or listing will not be allowed on self exchange.

With no funding or exit route for investors, India’s capital markets will not see evolution of


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new-generation exchanges emerging out of technology advances and remain primitive as

with many emerging market – like “badla” markets. This will lead to non-availability of

globally-accepted exchange traded products and services at optimal prices.

61. X:

� Many people are in favour of listing as the share price is not the sole criteria for

trading activity on the exchange, the quality and the brand image of the exchange

matters more.

� We are far behind in implementing the state of the art of technology of many

developed exchanges. It is only in the last few years we are able to cope with them.

Many exchanges have incurred huge expenditure on this. Non-listing will affect their

financial autonomy that will jeopardize their expansion activity.

� A large number of investors have already invested huge amount in various stock

exchanges in the country. Many foreign investors have picked up equity in the BSE.

Non-listing will create panic among the investors since a more transparent and

scientific exit is not available to them. This will compel them to undersell their

investment. In the absence of such exit options that happens to be one of the

important pre-requisites for the investors to invest in equity investment, it is not

possible for the exchanges to attract investors if they are not allowed to be listed.


of corporatisation of the MII. Listing will bring in accountability and discipline of public

disclosure. It should be allowed subject to certain conditions like, simultaneous listing on

competing exchanges. With no funding or exit route for investors, India’s capital markets

will not see evolution of new-generation exchanges emerging out of technology advances

and remain primitive. This will lead to non-availability of globally-accepted exchange traded

products and services at optimal prices. No benchmarking. Less FDI in MII industry. It

churns the ownership. It is good for governance and performance.

63. X: The opinion against listing sound more like an assertion than a substantiated finding

because, if an exchange is not listed, the whole idea of demutualisation and its impact of

governance is defeated. Also, without proper ‘exit option’ it may prove to be difficult to


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attract ‘qualified’ anchor investors (stifling competition). If the problem is that of moral

hazard, then, a simpler solution would be to ask for listing the exchange company on an

exchange not promoted by it, or to list in multiple exchanges.

64. X: Listing will ensure reasonable governance and competition will take care of

‘supernormal’ profits.

65. X: Advantages of publicly traded exchanges:- * Enhanced visibility and liquidity for the

exchange and Technology. * Greater accountability, transparency and market discipline. *

Increased options to enter into restructuring arrangements via takeovers, mergers etc

route. * Greater scrutiny of management actions by investors leading to efficiency in

decision-making and improving exchange’s value.

Like the case of Singapore, Hong Kong and London exchanges, the issues arising from

listing conflicts can be entrusted to a third entity, not necessarily that market regulator,

which is vested with the responsibility to closely examine their activities as a listed entity

and rule out the chances of abuse in conflict of interest situations. If only banks and FIs

invest, and there is no listing of these stock exchanges, then how a particular bank will

liquidate its holdings with limited number of players in the market? The ultimate effect will

be on the shareholders of these banks.

66. X: Profits can become a key driver:- The pursuit of profits could become even more

acute when the stock exchanges get listed, when in addition, there would be a public

pressure to perform, and to report higher profits.

Need to survive/grow and chase for profits can lead to unfair practices:- Once an

exchange attracts a critical mass of liquidity, it is very difficult for a competitor to break into

this liquidity. This can potentially vitiate the growth of a level playing field for new

exchanges or for existing exchanges. In this scenario, the competing exchanges as well as

new exchanges would do whatever it takes, fair and unfair, to attract liquidity. At the same

time, the high-liquidity exchange(s) would also use such measures as to prevent the

competition from taking away the liquidity. Such wars could often relegate the regulatory

function of an exchange to a low level.

Valuation of stock exchanges is largely determined by the number of real-time transactions,


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listing revenues and trade data revenues. The new exchanges can focus initially only on

the first source, and will do whatever it takes to increase the same.

The salary and incentive structure of the management/employees of the stock exchanges

are now closely tied to the profits earned by the exchanges. Though this is a welcome

development in order to attract the best talent, it can drive some exchanges to pursue

profits even at the expense of sacrificing regulations or using unfair means/creative

accounting/short-term goals.

Promoters can become inside traders:- Chances of the promoters or management of an

exchange too getting lured into insider trading are high. Technology now also allows

circular trading and other market abuses that are becoming increasingly difficult to catch.

Dilution of norms for exchanges may open doors for many fly-by night operators

(promoters), and cause damage of large proportions.

Kania Report being misquoted:- Not only did the Kania report not recommend mandatory

listing but in case of listing, it had recommended separation of regulatory function. Why is

every critic silent on the second part? A particular exchange is now claiming that its brokers

were given an implicit understanding that listing would be eventually permitted. In reality,

there were neither any explicit guarantees in law nor oral implicit guarantees on the listing

of exchanges. It may be pointed out that listing shall also not be allowed to NSE, India’s

largest exchange, which also has several investors. Interestingly, NSE or its investors are

not complaining.

Validity of reasons for listing:-

Listing for better corporate governance? Jalan Report has already suggested full

adoption of Clause 49 even for the unlisted exchanges.

Listing for better disclosures and transparency? The important issue is for whom the

disclosures and transparency are meant. In the case of exchanges, these entities are being

closely monitored and regulated by SEBI with extensive disclosures. In addition, there are

intense formal meetings with SEBI on a weekly basis. Shareholders of all exchanges have

full access to not only all such information that any listed entity provides under the listing

agreement but to much more. Nevertheless, going forward, it may be worthwhile that all

disclosure requirements mandated in the listing agreement may be mandated for unlisted


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exchanges also for public disclosure?

Listing for greater management accountability? The reality is that the management of

exchanges presently is wholly, fully and only accountable to their shareholders (besides

being fully accountable to the regulator).

Listing for better valuation? There are news reports that the valuation of some

exchanges has fallen because of the Jalan recommendations on non-listing. Listing may

lead to a better price discovery but not necessarily to a higher price. The fact is that the

reason for the fall in valuation is the declining performance of the exchanges and lack of

business plans for the future.

Listing for providing an exit route? It should be emphasized that a vast majority of

investors had invested in the exchanges as long-term investors and not as short-term

traders. Both NSE and BSE have seen several off-market deals and at high valuations. The

demand for listing is coming from brokers of non-NSE exchanges. This is because the

exchange is struggling to increase its market share and its brokers are not confident of the

future. What should be questioned is why the brokers of an exchange are not proud of

owning the shares of their exchange? The fact is that they are seeing listing as an early and

easy means to palm off their shares, hopefully through a cartelized high price, to the gullible

small investors.

Listing for raising capital? Entities typically go for listing when they need capital. That is

not the case with almost all the existing stock exchanges. Listing is also being cited to allow

serious capital to flow in. The fact is that this has already happened even without listing.

What listing, in fact, will do is attract a lot of non-serious money (retail) and hot money

(FIIs). Empirical analysis shows that listing causes a churn of shareholding pattern, and as

such listing tends to make many shareholders leave in a short period of time. We should be

cautious of the scenario that if listing is permitted, it may lead to a string of IPOs from

newly-established exchanges, and many investors, including small investors, may be lured

into investing in what is perceived as a large and growing business. Yet history tells us that

only a few exchanges can survive and grow in a given jurisdiction.

Dangers of listing stock exchanges

Listing may abet insider trading


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Listing will create unnecessary scare in a volatile market

Listing would lead exchanges to perform for the short-term

Listing will attract hot FII inflows

Damage of failure of an exchange

Simply speaking regulators cannot be listed, even if they have a revenue stream. Listing

should be permitted only if their role is changed to pure trading entities with all regulatory

functions carved out.

If, however, listing is permitted, enabling environment that should be first put in

place:-

Integrated Market Surveillance System

Central Listing Authority

SEBI-operated corporate information platform

Restrictions on the role of brokers:- Proprietary trading by a broker should not be permitted.

Brokers should not be on the Board of the exchange. They should not also be on any

committee of the exchange which has regulatory/disciplinary powers. Moreover, they

should be in minority in the other committees of the exchanges.

Conditions that should be imposed on the exchanges wishing to list:- Every exchange

should be required to simultaneously list with all other national level stock exchanges.

No change in non-public shareholding should be permitted for the first 5 years, and all

subsequent changes should require prior approval of SEBI.

There should be a lock-in on the existing shareholders for a period of at least 5 years from

the date of listing.

A new exchange should be permitted to get listed with a track record of commercial

operations of atleast 5 years. The eligibility norms should specify some parameters like

turnover and networth. In addition a track record of continuous profits in the preceding 5

years should be mandated.

Any material regulatory action against an exchange should disqualify it from listing.

The regulatory functions of the exchange should be housed in an external agency,

supervised by an external board of directors.


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Appointment of the CEO and the first line of management should require prior approval of

SEBI.

SEBI should be empowered to appoint a second auditor for complete audit accounts of an

exchange.

Some conditions which should be imposed on listing of companies on new exchanges:-

For the first 3 years of its operations, a new exchange should not be allowed to list on its

exchange any company. During this period, only permitted securities should be allowed for

trading on the new exchanges.

After 3 years, for the next 3 years, companies may be allowed to list on a new exchange

but only if they are also listed simultaneously on at least one existing nation-level

exchange.

67. X: How are conventional companies to be encouraged to list their shares if the exchange

operators themselves are arbitrarily denied listed status? Such restriction appears to

entirely contradict the Kania Committee road map outlined in 2002.

68. X: It is pertinent to note that recommendations made by the Report are not in conformity

with the concept and process of corporatisation and demutualisation as recommended by

Kania Committee Report and as adopted thereafter. It is further submitted that MIMPS also

recognized the eventual listing of stock exchanges pursuant to demutualisation. This is

evident from Regulation 5(3) of MIMPS which provides that:

“Listing of equity shares or other securities of a recognised stock exchange on the same

recognized stock exchange shall be in compliance with such conditions as may be

specified by the board.” Therefore, it was expected that SEBI in the near future would

prescribe conditions on which a stock exchange will be entitled to list with itself.

The entire process of demutualisation was followed and complied with by stock exchanges

with the implicit understanding that the stock exchanges post-demutualisation would be

allowed to get listed in accordance with the standards adopted globally. It is pertinent to

note that Kania Committee in 2002 had also recommended that the stock exchanges, at

their volition, should be allowed to be listed. The investors in stock exchanges may fail to

realise their investments at the time of exit as they may have to sell at highly discounted


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prices to attract investors through off market deals. Investors may not be attracted to pool in

heavy investments as prohibition on listing would deprive them of benefits of liquidity,

transparency, scientific price discovery and unlocking value in shares which are available to

a listed entity, thereby making investment unattractive for them. This recommendation

would adversely affect the interests of investors as they will be deprived of exit options.

69. X: There is merit in not having listing of these firms. However, the report could benefit by

going further and thinking through the re-mutualised structure where big sell-side users of

critical financial infrastructure are the best share-holders. Their incentives in favour of a

liquid and efficient marketplace would be a valuable additional tool in keeping these

organisations on track. Once the shareholding is dominated by users, as emphasised

above, this would internalise the tension between paying high dividends to owners versus

reducing tariffs. For a large user of the NSE such as HDFC Bank, the increased dividends

from NSE would be tiny compared with the gains from reduced prices. This is a superior

strategy as opposed to SEBI decision making about the profit rates of critical financial

infrastructure firms.

70. X: Listing provides transparent exit route to investors. Instead of banning listing of stock

exchanges all together, the committee could have prescribed a lock-in period or a phased

exit route scheme for shareholders holding more than certain specific percentage of shares.

71. X: Once demutualisation takes place, if there is no listing investors do not have exit and

entry routes. It is not understandable what value one assigns to one’s investments in MIIs if

market is prevented from valuing its performance by bidding higher or lower price fro the

services rendered by the MIIs.

72. X: As capital requirements for stock exchanges continue to grow, listing becomes an

attractive mechanism of attracting risk capital because it promise investors an exit option,

potentially making the investment more liquid and therefore attractive. IOSCO 2006 which

explored some of the regulatory issues arising out of demutualisation did not report any

objection to listing subsequent on demutualisation.

73. X: �The recommendations could deprive the rights of stock exchanges in their evolution

into entities owned by the public. It would also keep them away from public scrutiny in


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terms of cost-effectiveness of their services to the economy to allocate its capital efficiency

among opportunities. � It would prevent exchanges to risk capital at market rates to better

position themselves in an evolving environment. A “full” demutualisation requires a public

offering of shares that are publicly tradable and widely held. � Investments in new-

generation, state-of-the art exchanges with effective surveillance keeping better balance

between its market promotion and regulatory responsibilities, will require huge capital

investment to be made at competitive rates in infrastructure, technology, human resources,

etc. � As the market opens gradually, Indian exchanges kept away from funding sources at

competitive rates would remain at a weaker position vis-à-vis their global peers due to poor

investment in technology, infrastructure, etc. � Exchanges going public may foster healthy

competition, transparency and public scrutiny.

74. X: Not allowing the exchanges to be listed is like throwing the proverbial baby out with the

bathwater. Dispersed ownership preceded by strict rules of corporate governance is the

real solution.

75. X: This recommendation if accepted in the present form would result in violation of law

stated in SCRA. A reading of section 4B(8) and 4B(2) of SCRA clearly reflects the will of

the Parliament that stock exchanges should be permitted to get listed. In fact the parliament

put the public issue method of divestment in the Act itself so that SEBI cannot take away

the right, while giving SEBI the discretion to provide other options to exchange as well.

• Section 4B(8) of SCRA requires a stock exchange to achieve 51% public shareholding

pursuant to the approval of scheme for corporatization/ demutualization by way of

fresh issuance of equity shares to the public or in any other manner prescribed by

SEBI. An issuance of equity shares to public necessarily requires a company to get its

shares listed on a recognized stock exchange. This is in view of sub-sections(1) and (4)

of section 73 of the Companies Act, 1956 which mandates compulsory listing in case of

public issues and specifies that any condition to waive this requirement would be void.

Hence the parliament contemplated listing for the stock exchanges.

• Furthermore, Section 4B of SCRA stipulates that a scheme of corporatisation and

demutualization approved under sub-section (2) of Section 4B shall have effect and be


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binding on all persons and authorities. Clause 6 of the scheme of corporatisation and

demutualization of BSE states that BSE may at any time list its securities on any

recognized stock exchange. Therefore, it was expected that SEBI in the near future

would prescribe conditions on which a stock exchange will be entitled to list as the

same emanates from statutory law.

• MIMPS also recognize the eventual listing of stock exchanges pursuant to the

demutualization. Regulation 5(3) of the MIMPS provides that: Listing of equity shares or

other securities of a recognized stock exchange on the same recognized stock

exchange shall be n compliance with such conditions as may be specified by the

Board.”

The recommendations in addition to violating statutory law, if implemented, would also

result in poor governance, lack of accountability to shareholders, poor valuation and lack of

transparency. If listing is good for all companies then to consider it bad for stock exchanges

is inconsistent. That listing may result in loss credibility because of price swings in stock

price is a conclusion drawn by the Report but, it is loss of credibility which causes fall in

share price and not the other way round. Such recommendations would adversely affect

the interests of investors as they will be deprived of exit options. Further non-listing would

take away from the stock exchanges the basic benefits of scientific price discovery and

transparency as available to a listed entity. Shares of the exchange can be more

appropriately valued and raising of capital both through an IPO and private placements

becomes easier given valuation and an exit option being available to investors. A

recommendation pertaining to non-listing also goes against the basic premise of the report

itself that the shares of stock exchanges should be widely held.

Kania Committee report had also recommended that a demutualised stock exchange may

list its shares on itself or on any other stock exchange, though listing should not be made

mandatory.

76. X: Ruling out new players will discourage entry of new players. Some of the most

advanced stock exchanges in the world are listed. The idea has to be clear and


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transparent regulation with severe penalties for non-compliance rather than a socialistic

step like profits are bad and there should not be listing.

77. X: Listing of MIIs must be permitted. The listing is not only for exit but entry of retail

investors. Self listing must be allowed. This will allow low networth individuals such as

myself to enter ownership of MII. It will provide me with knowledge and appreciation of the

magnanimity of capital market, which continues to be in the hands of a few ‘high networth’

individuals whose only interest is ‘self-interest’.

78. X: Closing the door altogether is certainly not the right solution. The reasoning that

exchanges are public utilities and not trading platform is skewed and even if one accepts it

for the sake of argument, all important public utility companies like SBI and other PSU

Banks, NTPC, NHPC, REC, HPCL, BPCL etc. are in fact listed and are scrambling towards

capital market with follow on public offers. Listing will only improve corporate governance

and transparency of Exchanges and make capital market more vibrant by attracting more

investors.

79. X: Certainly listing of exchange is an issue for those investors who have pumped in crores

of rupees. May be SEBI can take an appropriate decision on this matter little later. May be

SEBI can review this alone after 2 years with regard to the feasibility of the listing.

80. X: You should not accept recommendations of the commitee since if you may accept

recommendation than it should be applied to every listed PSU organisations. If we would

like to bring capital market to new high than without any delay you should ask the

exchanges to get listed and SEBI should form independent commitee in SEBI premises for

the survellance of the listed exchanges with strict norms.

81. X: Like finance companies who ran away with the investors money in the past, innocent

retail investors may be taken for a ride, if a transparent & efficient price discovery

mechanism like listing is not permitted; it will also send wrong signals to the investors about

other listed entities and undermine the basic concept of listing itself. In fact, going by the

same scale, hospitals also should not be permitted to be listed entities, as they may over

charge the patient in order to maximize the profits for their shareholders - conflict of interest

is there obviously.


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82. X: I like to put forward my disagreement with the learned Bimal Jalan Committee. support

the listing of Stock Exchanges as it would accelerate growth, transparency and help in

taking a step forward towards Globalisation of the Indian Capital Markets.

83. X: Being given to understand that the above clause 5.1 of chapter V of the report on

reforms of MII mentions that the equity shares of the MII should not be listed on Exchanges

is appearing to be going against the basic concept of demutualization of Exchanges ( the

scheme approved by the Regulator and passed in as the Act of Parliament). Sir, our

respected Government and the highly regarded Regulator is continuously intending and

encouraging to make the equity holdings in Corporation / Companies go into the length and

depth of the entire country and allow small investors to participate in the Growth story of our

country. I as the share holder appeal to kindly review the mentioned recommendation and

lighten the stand on your recommendation.

84. X: This is in regard to the issue of the listing of the BSE LTD shares and the relevant report

of the jalan committee .it is extremely shocking that such a report has come from a learned

person like mr jalan which says that there will be no listing of the BSE LTD shares because

of his “concerns” which are misconceived. can someone please tell me why these concerns

were not raised when the issue of demutualization was considered and approved by the

regulators? after being assured of listing at the time of demutualization, now it is wrong,

absolutely wrong to change track and say that it cannot happen. Can anyone please

explain what happens to one and all including foreigners who put in their money at the time

of demutualization? where is the exit route? that a learned person like mr jalan did not take

this factor into account is disturbing to say the least. It is as clear as daylight that this

decision of the jalan committee is unwarranted and unfair.

85. X: I submit herewith my objections to the Jalan Committee Report which suggests that BSE

Ltd’s shares should not be permitted to be listed. The craziest idea in the whole report is

that a company that lists other companies, is not fit for getting itself listed anywhere.

86. X: Listing should be allowed. It will bring more transparency & better management. Listing

of stock exchanges will not make them vehicles for speculation. There are Banks &

insurance companies also listed, who are more important & have bigger responsibilities.


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87. X: The Stock Exchanges are the Institutions to regulate the Equity market transactions and

amongst the various player constituents. If they themselves are allowed to get listed , there

would be great competition amongst the Exchanges to maximise their share price. In

order do so, the greedy few for their personal bonuses (under the pseudo name of

Efficiency and Proficiency etc) would definitely indulge with unfair transaction and favoritism

towards the powerful broker community . This is detrimental to the natural justice and would

result into Conflict Of interests amongst the regulatory role of the Exchanges over the Profit

maximisation motives.

88. X: I agree that MIIs should not list as yet since listing may confuse the objective of

shareholders to maximize short term return v/s the need to provide a stable stock exchange

that provides a long term, public good of matching savers with the users of the capital.







91. X: Yes, I too agree with the committee to not to listing the exchange in any recognised

stock exchange.




93. X: Yes, I agree. MIIs should not list as yet since listing does not service the providing a

stable stock exchange which is the need of the hour. SEBI has been doing an excellent job

in controlling what is being doing by BSE and NSE. Adding a private exchange will only

add to the confusion and the requirement of regulating them becomes even more onerous.

I am not against competition, but competition for its sake is a waste of precious resources.

94. X: As a normal citizen my full support to Bimal Jalan’s report against listing of stock


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exchanges. Market Infrastructure Institutions should not get listed. Else, they will become

profit generating machines without any national interests in mind. We do not want vested

interests to control stock exchanges, depositories etc.

95. X: The listing of stock exchanges will not be in interests of the investing public in India. It is

similar in lines to privatizing the utilities such as water and power. The private players could

hold the public for ransom. The jalan report is good for the country.

96. X: I Vote against the listing of stock exchanges.

97. X: Yes, I agree MIIs should not list as yet since listing may confuse the objective of

shareholders to maximise short term returns v/s the need to provide a stable stock

exchange that provides a long term, public good of matching savers with the users of

capital.

98. X: Its highly negative for Indian financial markets to have listing of stock or commodity

exchanges (MII) especially considering the recent spate of scams & corporate governance

issues in India. So its wise to be in favor of Jalan Committee Report to review the listing

after five years and as of now there should not be any listing of stock exchanges for time

being.




capital. I strongly feel that to protect the larger interest of public the stock exchanges &

other MIIs should not be listed in the present circumstances. Easy money available in the

western countries will destabilize the rock solid financial structure of our country.

100. X: I as a Small investor is terrified with the very idea of these stock exchanges being

allowed to be Listed . Pl ensure that this is not allowed and we the Small investors are

protected from recklessness of the profit maximisation motives of the Greedy few.

101. X: I would like to register my voice AGAINST THE LISTING OF STOCK EXCHANGES. The

purpose of s tock exchange is to provide a market in ALL situations whereas the purpose of

a listed corporation is to maximise profits. There are many occassions when the two


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contradict. In all such situations, listing will encourage a stock exchange to focus on profits

and work against its primary purpose of providing the broadets possible market in even the

most extreme circumstances

102. X: In case, if the present recommendation is implemented, atleast a proper exit route (by

way of Buy-back, etc) should be provided to the Trading Member Shareholders who do not

wish to hold on to these shares as they are handicapped then.

103. X: Stock exchanges were converted from closed broker group into non profit limited

companies. If listing is allowed then the question of profit maximisation, return of capital

invested, profit distribution, capital augmentation,etc will take place and the exchange will

also become another listed company like listed companies listed in it. There will no

difference between listed company and listed exchange. Further foreign stock exchanges

may take over the exchange as they have taken over the indian capital market. Therefore

listing is a retrograde step and against the concept of public welfare and capital safety.

104. X: The stock exchages should not be listed in my views. Stock exchanges are meant to

generate capital for india's infrastucture needs. They have moral responsibilty to protect the

interest of general public and nation at large.

They have to function more as watchdog for investor community rather than being

accountable to its shareholders only. They can have moderate profit inline with profits of the

cororate sector in India and acts as facililator to connect millions of general investors with

bright entrepreneurs to raise finance for growing businesses.

105. X: Stock exchanges should not be listed. These institutions are fundamental to the growth

of financial markets and should be owned by the State or Govt. entities. Such ownership

will ensure that the institutions serve the purpose for which they are created. Listing or

privatising will result in profiteering taking the central role and development of robust

financial markets will take a back seat.

106. X: I'm an investor. Please do not allow listing of the Stock exchanges. We don’t want to be

governed by some crazy financial guy, sitting in tax heaven. They will bother about

maximizing their profits.


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107. X: I trust and hope that the Jalan report on list of stock exchanges will be accepted. I agree

that the stock exchanges are for the public good and that their profits should be reasonable,

not abnormal like the bonuses paid to Wall Street crooks during the global financial crisis.

Listing of Stock Exchanges has the potential to confuse between the short term profits of

those who have already invested in these stock exchanges and the long term public good

of the investing public.

I am under no illusion that the financial wizards of Wall Street are now intent on prowling

the Indian streets to fleece innocent investors. We need Dr. Reddy of RBI and Mr. Bhave to

protect us from these 'do-gooders'.

108. X: Market infrastructure should not be listed.




capital. I voice my strong opposition to the listing of the Stock exchanges (BSE, NSE etc)

in India. Listing of SE's does not fit the public good they are performing & a strong

regulatory control with non-profit/reasonable profit (similar to utilities) clause should

continue in India. Please take into account the very very short term nature of senior

management of private companies to gain more profit & in turn boost their personal

bonus/profit completely disregarding the long term impact. This will have a very serious

impact on the SE's of a growing country like India & stunt the growth of the entire economy.

110. X: I wish to place on record my humble view regarding the listing of stock exchanges and

other market infrastructure institutions (MIIs). I believe it makes sense to wait for some time

as recommended by the Bimal Jalan committee in light of the fact that a conflict of interest

is likely to come up between their role as providers of a "public good", matching the savers

of capital with the users of capital, with that of maximising short term returns given the

inherent changes in the functioning of a business as a direct result of listing (need to meet

or beat "consensus analyst forecasts" in quarterly financials to ensure stock price rise, etc).


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We should also consider whether the Indian markets have the same level of depth as those

in developed markets. Indian stock markets are easily moved by foreign institutional

investors (FIIs), a clear and glaring example being in 2008, when the markets crashed

owing to the global financial crisis even though India was one of the least-affected

economies, as FIIs pulled out money from emerging markets including India and parked it

in "safer havens". Thus, it is apparent that the resilience of our markets to FIIs is very low.

These are some of the issues that need to be kept in mind before allowing MIIs to list.




capital.

112. Votes received on the internet:- Total 104


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S.No Summary of responses on networth requirements

1. X: We disagree with the committee recommendations of a networth requirement of Rs. 300

crs. We recommend that the criteria for networth must be linked to the risk exposure taken

by the clearing corporation as recommended by IOSCO and the equity capital could be

linked with Insurance, member deposit etc.

Further, stock Exchanges, Depository and Clearing Corporations are being categorized as

MII and still they have a differential shareholding. Moreover, if the risk mitigation was the

determinant for disperced holding then, the clearing corporation and depositories should

have had more dispersed shareholding than the stock exchange shareholding. The

committee has proposed 100% shareholding in Clearing Corporation, 24% in Depositories

and only 5% in Stock Exchanges.

As per the IMRB Survey Findings on ‘Perception of Stakeholders towards

Recommendations of the Bimal Jalan Committee Report’-

• An over-whelming majority of respondents are not aware of any clearing corporation

defaults. More than half the respondents feel that the current risk management

measures taken by clearing corporations guarantee protection against defaults or crisis

• A significant majority of respondents are against a fixed amount of Rs.300 crores as

the ideal capital requirement for a clearing corporation; the corporate investors

interviewed are unanimously in favor of using IOSCO guidelines

Thus;

• Inter-operability of clearing corporations will only help large and existing exchanges

and clearing corporations

• The new exchanges that are yet to build networking and net margins will be

discouraged. This should be left to Exchanges based on their risk management and

operating procedures.

In current circumstances wherein there are no such restrictions preventing stock exchanges

to use the services of a third party clearing corporation but a rule as mentioned by BJC


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being enforced could create imbalances and anti-competitiveness at the current stage

of market development

2. X: We believe that Clearing Corporations globally work on self insurance arrangement

which ensures that either defaulter pay every thing or else the clearing entity shares the

responsibility out of clearing funds created by them collectively.

However, as a matter of good corporate governance and instilling confidence in the

Clearing Corporation, we will be recommending to the promoters of X that the issued capital

of the X be increased to Rs. 300 crores from current issued capital of Rs. 50 crores by

transferring the Trade Guarantee Fund (TGF) of X after receiving appropriate approvals

3. X: This recommendation is acceptable to our Exchange, in the interest of the Capital

Market. However, it is preferable that the net worth may be linked to various criteria like the

turn over in the Exchange, etc. Otherwise, the higher net worth generated more than what

is actually needed, may not be put to any practical / productive use – particularly in the case

of Regional / Small Stock Exchanges like X.

4. X: A networth of 100 crores for stock exchanges which admittedly do not entertain clearing

functions and whose clearing functions are sought to be segregated even by the committee,

would be absolutely unwarranted. 100 crore is a whopping exaggerated figure intended

only to kill entities otherwise integral to the system, whose contributions, competence and

credibility have with stood the test of time.

5. X: It is suggested that while this may be made applicable to all those exchanges who have

Nationwide Terminals, but for RSEs like X which operate in limited periphery and segments

should not be made subject to such stringent requirement of Rs.100 crores which is difficult

to comply even within 10 years of time. The current net worth of our Exchange, i.e. X is

sufficient and adequately capitalized to take care of complete risk management of all the

investors who have been doing their business with this Exchange. Therefore, we suggest

that the net worth criteria for the Regional Stock Exchange like X should be reduced from

Rs.100 crores to Rs.25 crores within a period of 10 years and in this process SEBI should

also permit the investments made in it’s subsidiary as core investments. SEBI should also

permit the revaluation of its fixed assets currently held by the Stock Exchanges since it is


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rational and logical that these Exchanges have invested these assets long before and any

new Stock Exchange coming up shall have to play current replacement cost. This only

would help meeting the requirement of net worth of RSEs.

Dr. Bimal Jalan Committee has recommended that while initially a Clearing Corporation may

be permitted to setup with a net worth of Rs.100 crore, they may be required to increase it

to Rs.300 crores within a period of three years (or any other time as may be prescribed by

SEBI). It is suggested that for RSEs, who would like to establish their Clearing Corporation

collectively while having their own trading platform, the criteria of Rs.300 crores would be

very difficult to achieve, and therefore, for the RSEs, net worth criteria of Rs.100 crore for a

Clearing Croporation be considered as “adequate”. For large size Bourses, this provision

may be feasible to implement, but not for RSEs.

6. X: This recommendation of Dr. Jalan Committee is ‘Anti Regional Stock Exchanges’. Most

of these Stock Exchanges presently do not have their own working Trading Platform and

their members are working in subsidiary company as sub-brokers for BSE/NSE. It would be

in the fitness of things to split this recommendation in two parts. As suggested by Dr. Jalan

Committee, networth of Rs.100 Crores should be insisted upon in case of a Stock Exchange

which has its own independent Trading Platform. In case of other Stock Exchanges, there

should be no requirement of minimum networth. However, if some monetary limit is

considered desirable it should be Rs.25 Crores only and as recommended in case of

existing Regional Stock Exchange, a period of 10 years may be allowed to reach this limit.

It is also relevant to mention that the Stock Exchanges having immovable properties of

substantial value may be permitted to revalue them for working out the ‘net worth’ figure.

The investment made by a Stock Exchange in its ‘subsidiary’ should be treated as an

‘eligible investment’ for computation of networth of Stock Exchange.

7. X:

• As per the Dr. B. Jalan Committee’s recommendations, it could be concluded that all

Stock Exchanges having trading platform which operates at national level, would need

to maintain net worth of Rs.100 crore as soon as the recommendations are

implemented. X proposes to implement its trading platform in March 2011, for which it

has invested heavily in software and hardware. It would be impossible for X to raise its


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net worth to Rs.100 crore by March 2011. This will bring X to a standstill in addition to

incurring losses on account of investments in the trading platform. X would require at

least about 10 years’ time to raise its net worth to Rs.100 crore. Hence, it is requested

that 10 years’ time be given to National Level Stock Exchanges to raise its net worth to

Rs.100 crore.

• Net worth requirement for clearing corporations: This will be a huge burden for the

existing Stock Exchanges that have a separate clearing corporation as promoters will

have to maintain a networth of at least Rs 300 crore at all times.

• An Industry like insurance and banks, which runs a higher chance of risks, has much

lower networth criterion of Rs 100 crore and Rs 300 crore. Thus, the networth

requirement criterion for running a Stock Exchange and a clearing corporation is

illogical and will discourage investors.

• No Global jurisdictions impose capital requirement for clearing corporations as even

IOSCO specifies criteria for risk management and margining on members and open

positions. Clearing corporations are essentially operationing as self insurance

agencies for members and according to IOSCO the networth should be based on the

turnover. Since the Exchanges do not allow members to take risk more than 75% of

their risk capital and monitor it online, the risk of failure is near impossible.

X’s suggestions:

To begin with Clearing Corporation may be allowed to start with net worth of Rs.100 crore.

Only 1/3 of the networth requirement of Rs.100 crore for Clearing Corporation may be

maintained in liquid assets, instead of 100% prescribed by the Committee.

8. X: Achieving a networth of Rs.100 crore within a period of 10 years by the RSEs like X is far

reaching. Therefore, the said requirement should not be imposed on RSEs.

9. X: May be come down to 25 crores including subsidiary which will Facilitated the existence

of smaller Stock Exchanges in a period of 10 years from the notified date including the

findings in computation of networth requirement taking into consideration of investment in

the fixed assets/ infrastructure like Land and Building. This requirement of networth for

clearing corporation will be huge burden for RSE and the recommendation of no dividend

seems to be illogical and irrational. We request SEBI to fix the networth requirement for


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clearing corporation at much lower level than prescribed keeping in view of the capability of

Stock Exchange.

10. X: We honestly believe that there is a strong case for 2 types of Rules - one for Larger SEs

aspiring to become PAN India SEs and the other for those SEs who want to restrict their

presence in the Region /Jurisdiction in which they are operating. There are millions of

registered Small and Medium Enterprises in India and many of them would require equity;

from Public or otherwise. RSEs can play a very effective role in resource mobilization for the

eligible and viable SMEs.

Section 13 (SCRA) arrangements with BSE / NSE by CSE / MSE have resulted into a

significant number of Regionally listed and compliant companies being traded on BSE /

NSE; effectively a win-win situation for RSE, BSE, NSE and of course the Investors.

Many of the RSEs were formed decades before and therefore the investments in the fixed

assets /infrastructure like land building was done much earlier compared to new SEs.

RSEs, therefore, should be allowed to revalue such assets in computation of networth

requirement. The revaluation methodology could be prescribed by SEBI to make the

exercise fair and transparent.

X requests that the smaller RSEs could be allowed to continue with Rs.25 crores networth

in a period of 10 years from the notified date including the above referred revaluation

reserve. The revaluation reserve is a rational request as the new SEs will have to invest in

the fixed assets and infrastructure at current costs. Further, the investment in the

subsidiaries of SEs should be allowed as an eligible investment for computation of networth.

The requirement of networth of Rs.300 crores for Clearing Corporations can be huge

burden for RSEs and the recommendation of no dividend seems, prima facie, to be illogical

and irrational.

NSCCL, a Clearing Corporation subsidiary of NSE, started with an Equity Capital of Rs. 10

crores initially and now the capital is about Rs. 45 crores. It also appears that there was no

need for NSCCL to deep into its Equity Capital at any point of time as the Settlement

Guarantee Funds contributed by members and the income of the fund was more than

sufficient for meeting out the defaults by members. There is a Regulatory Guideline that the

shortfall in SGF has to be met by further contributions from Clearing Members. Thus, the


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initial Capital contribution forming Clearing Corporation may be fixed at Rs. 100 crores.

Even this capital is probably much more than what may be required and necessary to run

the Clearing Corporation effectively and efficiently.

Internationally, Clearing Corporation worked on what is known as Self Insurance

Arrangement; which ensures that either the defaulting member (s) pay / settle all dues or

else the other clearing entities share the risk out of a clearing fund / its income created by

them collectively but not through Equity Capital. This further proves the point that the

networth requirement for the Clearing Corporation may be fixed at much lower level than

prescribed. The Empirical Evidence in India of NSCCL also empathetically supports this.

X requests SEBI to fixed the networth requirement for Clearing Corporation at much lower

level than prescribed; apply the same ownership Rules to CCs as may be made applicable

to SEs. RSEs may encouraged to form a common Clearing Corporation / Common

Technology company so that even the networth requirement of RSEs could be fixed as

suggested by X hereinabove.

11. X: Net – worth criteria should be based on the size of the operations of the exchange.

Unless there is servicing capacity, equity capital should not be raised. Investors can them

selves deploy directly, their funds in fixed return instruments rather then investing in a

company which does the same.

12. X: The Committee recommends a minimum capital of Rs. 100 crore for stock exchanges

which was never the condition when we made an investment in BSE. Further Committee

recommends clearing corporation should have a minimum capital of Rs. 300 crores in which

the stock exchange has to have at least 51% share in equity. This in other words, would be

a deterrent to a smaller exchange, where we have invested to create a clearing corporation.

13. X: There is no instance in the world of a Clearing Corporation having been failed.

The CC need not be capitalized in the way BJC suggests. With the stringently high 300

crore net worth and proposal to introduce interoperability is against the spirit of competition

and it will help the existing monopoly of NSE and NSEEL.

14. X: Risks faced by stock exchanges are not the same as those faced by other financial

institutions, and exchange profitability is not driven by risk-taking activity.


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� In most markets, exchange members and clearing participants bear the brunt of

risk through the „waterfall� which determines assumption of risk in a widespread

default scenario. While exchanges have risk exposure in extreme default

scenarios, their core business model does not involve risk-taking activity.

� Following the Lehman Brothers crisis, several global exchanges and market

institutions had to unwind large default positions. In all cases, other exchange

members assumed the risk and the default management process did not implicate

the capital of the exchange or clearinghouse.

� Through several global financial crises including Long Term Capital Management

crisis of 1997, the Emerging Markets defaults of 1997-98, dot com bubble of 2001

and credit crisis of 2008, there was not been a single incidence of a major stock

exchange failure, globally.

� During the credit crisis of 2008 and its aftermath, several public exchanges saw

significant percentage declines in their respective stock prices without any

collateral impact on business operations or investor perception of their long term

prospects.

15. X: The proposed net worth requirements could be raised higher, but should not be diluted.

16. X: Net worth requirement should be minimum 1000 crores out of which 500 crores could be

entry level net worth for one segment/product and balance may be based on no. of

exchanges, products and volumes to be cleared by them.

Net worth should be one of the essential norms for entry of MIIs. In our opinion clearing

corporation should have net worth of 1000 crores and other MIIs should have net worth of

500 crores.

Transparent and efficient management is a prequalification for any MII. Robustness of all

the MIIs put together will create a healthy environment. There is no need for norm of exit

and at the most merger may be allowed. A detailed guideline can be issued in the matter of

net worth.


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17. X: The Stock Exchanges neither themselves trades nor are involved in any financial

activities which are incidental to trading in stocks, therefore, there appears no apprehension

that they will be required huge funds at any point of time. Only their brokers do transactions

and are under obligation, therefore, they should maintain a reasonable networth. Moreover,

the Regional Stock Exchanges are very small Exchanges and could built only small capitals

over the years and nor RSEs have nationwide terminals. The cap of networth after 10 years

may be fixed at Rs.20.00 Crores for RSEs.

18. X: If a networth of Rs. 100 crore is imposed, it would impose an unnatural burden on X as it

does not even remotely require a networth close to that figure. A stock exchange only

requires necessary information technology infrastructure as the risks are associated with

the clearing and settlement function. As we have applied for seeking registration as a stock

exchange, hence we respectfully submit that in absence of performing clearing and

settlement functions, the stock exchanges should be not be required to maintain net

worth of Rs. 100 crores. Such recommendation if accepted will deter small but highly

efficient players from entering the stock exchange space

19. X: The proposal of SEBI to impose a minimum of 100 crore share capital as base minimum

proposed is not workable hence stock exchange is liable to be closed down under the new

guidelines imposed – In which case the share capital must be refunded to all share holders

in full before closure on liquidation.

20. X: The Rs. 300 crore networth criterion for clearing corporation should not be accepted. It

should be made mandatory for Clearing Corporations to have a settlement guarantee fund

that is in proportion to its risk. Adequate Insurance cover (% of SGF) to be made mandatory

to address their risk concern.

21. X: The proposed Networth limits will be a huge burden for new-generation exchanges. An

Industry like insurance and banks, which runs a higher chance of risks, has much lower

networth criterion of Rs.100 crore and Rs.300 crore. Thus, the networth requirement

criterion for running stock exchanges and clearing corporations is not well conceived as

clearing corporations have well established margining systems and restricting the amount

to be traded linked to the deposits available with them.


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22. X: Networth requirements appear to be on the higher side. More focus should be made on

the professional qualification, practical experience and past track records of the promoters.

23. X: There is a need to revisit the amounts at periodic intervals as the MIIs and the economy

grow in size and the amounts prescribed may become insignificant.

24. X: The networth requirement of Rs.300 crores for CCs would impose significant burden for

new-generation exchanges and possibly lack rationality as the typical CCs have well

established margining systems.

25. X: New entrant in exchange business will find it difficult to compete with a mere networth of

Rs. 300 crore. As it requires more than Rs. 1000 crores to state of the state of art

infrastructure, there is no rationale to fix such a low networth limits.

26. X: This will be a huge burden for new-generation exchanges that have a separate clearing

corporation as promoters will have to maintain a networth of atleast Rs 300 crore at all times

(Rs.100 crore in the exchange plus 51% of Rs 300 crore for clearing corporation). This

recommendation will discourage innovations. An industry like insurance and banks, which

has more risks, has lower net-worth criterion of Rs 100 crore and Rs 300 crores. Thus, the

networth requirement criterion for running a stock exchange and Clearing corporations will

discourage investors. IOSCO specifies criteria for risk management and margining on

members and open positions. Clearing corporations essentially operate as self insurance

agencies for members. Since the exchanges do not allow a member to take risk more than

75% of their risk capital and monitor it online, the risk of failure is near impossible.

27. X: It is worth considering that many successful exchanges are being created throughout the

world to trade in small markets. Such ‘micro exchanges’ can become very successful in due

course. In the EU for instance, a new exchange or market platform can be regulated with

just 750,000 to 1 million Euros in capital. There are no restrictions on the extent of

shareholdings and non-financial institutions can create new markets. This facilitates the

creation of exchanges and allows for vibrant development of new markets.

28. X: Prescribing higher networth for clearing corporations doesn’t seem to be logical as they

already have well established margining, clearing and settlement systems in place. It will


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take a long period for a stock exchange to become a profitable venture. Further, this would

affect the promotes of new stock exchanges which have also set up separate clearing

corporations as they will have to maintain a minimum networth of Rs. 400 crores effectively.

29. X: The networth limits should be reduced for the companies setting up regional stock

exchanges for SME’s and regional companies. This would further pave way for

development of the regional depositories and clearing corporations. Overall this

development would allow the regional investor community to be able to connect to the local

development stories and also lead to generation of employment at the local level.

Experimentation on bourses with options to work with local languages is also a must for a

country of the size and stature of India with multiple languages & large development

requirements.

Networth requirement for a clearing corporation:- These limits should be reviewed in

order to allow regional exchanges to be set up in the cost effective manner.

30. X: Higher Networth requirements for clearing corporations:- �This will discourage the

launch of new-generation clearing corporations to support any investment in new-

generation exchanges that may come up in future. Their dependence on an existing

clearing corporation would raise issues related to competition and would retard product

innovations as clearing corporations may act as the third line of regulatory authority for any

innovative product offering end-value to the customers and has the potential to alter the

competitive conditions in the industry. � The Rs. 300 crores initial networth requirement for

a clearing corporation should be removed or reduced. This shall be gradually increased as

business turnover of the clearing corporation increases over a period in time along with that

of the growth of the exchange whose products it is clearing. � Adequate Insurance cover (%

of SGF) can alternatively be made mandatory to address the risk concerns of the clearing

corporations than putting a requirement of Rs. 300 crores.

31. X: In a stock exchange with no clearing and settlement functions, there would not be any

risk management functions and very less capital required. Stock exchange in such a case

would only be a technology platform which do not require a networth of Rs. 100 crores. A


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stock exchange only requires necessary information technology infrastructure as the risks

are associated with the clearing and settlement function. Such recommendation if accepted

will deter small but efficient players from getting in the exchange segment. In absence of

any clearing and settlement functions, the risk is actually borne by the clearing corporation

as the exchange is then a limited order matching computer platform and hence a networth

of Rs. 100 crores is excessive and should be omitted. A sophisticated risk model should be

built for calculating the networth requirement of the clearing corporation rather than a

blanket of Rs. 100 crores or Rs 300 crores – particularly given that they settle securities

which are a multiple of the GDP of India.

32. X: Today most effective clearing and depository mechanism can be created with not

significant amount of money but significant advances in technologies and hence it is the

maturity and sophistication of risk management system rather than networth criteria that

should matter. Not many global jurisdictions impose capital requirement for clearing

corporations.


corporation as promoters will have to maintain a net-worth of at least Rs 300 crore at all

times (Rs 100 crore in the exchange plus 51% of Rs 300 crore for clearing corporation).

There are many innovations in well-developed markets, which are possible only with well-

developed, vertically integrated MIIs. This recommendations would discourage this with

higher financial commitment and requirements. Thus, the net-worth requirement criterion

for running a stock exchanges and clearing corporations would discourage investors.


corporation as promoters will have to maintain a net-worth of at least Rs 300 crore at all

times (Rs 100 crore in the exchange plus 51% of Rs 300 crore for clearing corporation).

There are many innovations in well-developed markets, which are possible only with well-

developed, vertically integrated MIIs. This recommendations would discourage this with

higher financial commitment and requirements. Thus, the net-worth requirement criterion

for running a stock exchanges and clearing corporations would discourage investors.

35. X: The committee recommends a networth of Rs.100 crores for stock exchanges and


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Rs.300 crores for clearing corporations i.e. atleast Rs.250 crores will be required to set up a

vertical silo comprising both a stock exchange and a clearing corporation. This is bound to

create a significant entry barrier further hampering competition.

36. X: Networth should be increased to Rs.6000 crores at all times. Ours is a trillion dollar

economy, it is silly to have small amount to cover all contingencies.

37. X: As on now HSE is having networth more than 300 crores. It is enough to reproduce the

market as a stock exchange.

38. X: The regional exchanges should be given a different treatment from that of national

players. There is no need to increase the net worth ,which is not required of very high level.


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S.No Summary of responses on ‘MIIs to make reasonable profits’

1. X: Profit capping will have the unintended consequence of curtailing innovation, efficiency,

and cost control. It could also be counterproductive as it may well discourage further

investment in this sector including by Anchor Investors. It is also worth noting that the

current rates of return on net worth for exchanges fall well within the band that is not

uncommon along a spectrum of technology–intensive industries in India. Therefore, we

suggest that no profit cap be specified for MIIs. Instead of a cap on profits, other options,

such as intervening in pricing, if it is felt that an MII is levying exorbitant charges may be

explored. In this context, it is worth noting that currently exchange fees form only 1-2 % of

the total transaction cost for the investor. Capping of profits may discourage competition,

which will not be desirable.

2. X: We do not believe that the Jalan Committee has made a substantive case that there is a

problem with current levels of profitability of exchanges and other MIIs, or with their

compensation practices, to warrant recommending regulatory intervention. There is a

perfectly viable middle ground of substantial competition, with stringent SEBI oversight to

make sure that it achieves its objective without creating any potential instability. For

genuine profitability and compensation concerns, SEBI could achieve similar restraint by

delegating the responsibility to monitor profit and compensation issues to the Board of

Directors of the MII.

3. X: We recommend that profitability must be controlled through market driven factors and

competition rather being artificially capped by the regulator using any basis.

The debatable point is that when a competitive market mechanism endures that institutions,

including MIIs, earn profits commensurate to what they command in the market, it is too

costly and even futile to impose ceiling on profits through external fiat. In the

circumstances, the role of an efficient regulatory regime should be to ensure competitive

environment and a level-playing field for the market participants.

4. X: As you are aware, the profitability of exchanges and Clearing Corporations are


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essentially from three sources: transaction charge, penalty collected from members, and

income earned on treasury operations of the funds deposited by brokers as margins. The

cap on profit of MII will have effect on its growth as potential investors may not be

interested to invest therein. We would suggest that rather than have the

Regulator/Government direct involvement in these kinds of commercial decisions, same

could be achieved by delegating responsibility to the Board of Clearing Corporations for

overseeing the appropriate level of profitability. Responsibilities could be assigned to PIDs.

5. X: Direct regulation of the level of profitability of CDSL and NSDL (and other CSDs, if they

were established in India) would similarly be an unprecedented intrusion in the affairs of

organizations in a competitive industry. Moreover, it seems wholly unrealistic and

impractical and would merely create hideous incentives to distort the structure of MIIs –

incentivizing complex subsidiaries and financial structures that could be used to disperse or

divert “profit” to places where it could not be capped. In effect, profit caps might cause

profit to be “hidden” which could introduce new systemic risks into a system that is today

working without any serious problems or complaints. Additionally, we do not yet have any

realistic resources to determine what are reasonable profits and what are not.

6. X: This recommendation of Jalan Committee is anti investor and would discourage new

entrants and also force existing investors to fly at the first available opportunity. This would

hamper the growth of securities market in the country. This recommendation also

contradicts other recommendation regarding Anchor Investors because why an institution

with Rs.1,000 Crores Networth should enter an area where the distribution of income is

restricted to the level of return on debt securities, but at the same time carrying enormous

risk including loss of capital itself.

SEBI has adequate powers to rein in the MIIs and the experience of last two decades has

shown that no Stock Exchange has dared to challenge SEBI’s authority particularly in the

field of charging unreasonable fees, expenses or other charges from investors.

It is more irrational to say that excess over the so called ‘reasonable return’ should not only

be not distributed as profit amongst shareholders, but should also not be retained by the

Exchanges. This infact would lead to erosion of net worth of the Exchanges. It is, therefore,

requested that this recommendation should be rejected and the Stock Exchanges should


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be allowed to function like any other Corporate entity

7. X: This recommendation defeats the basic purpose of the investments made by non

Trading Shareholders at the time of demutualization who are now completely illusioned by

such recommendations. The recommendations of linking the maximum profit the MIIs can

earn and tag with the net worth would benefit only those large Exchanges which have made

more investment initially. This recommendation is again not favouring competition and

discourage enterprenuership in this industry, thereby doing enormous harm to the economy

and restrict expansion of securities market in India. This would restrict infusion of new

capital and make it very difficult/virtually impossible to start a new Stock Exchange, if we

read this recommendations and the ownership restrictions together. It would encourage

only making higher profit to one or two Stock Exchanges and rest will suffer an irreparable

loss. This recommendation goes against very basis of the Kania Committee Report

accepted and implemented by SEBI which suggest “Not for profit Stock Exchanges to

become For Profit corporate entities”. Therefore, the recommendations of Dr. Bimal Jalan

Committee is a kind of breach of trust to all investors who invested in good faith at the time

of demutualization.

It is incomprehensible and irrational to state that the profits are Evil in a market driven

economy – striving for Growth and needing Capital/Competition/ Enterprenuership in India.

The empirical evidence could be found in the profitability both premier Stock Exchanges in

India – NSE and BSE – who have done extraordinary services to the Investors, Capital

Markets and the Indian economy. If such was the case, why NSE, even to start with, was

incorporated as a profit making company?

SEBI, as a Regulator of Stock Exchanges, have enough powers to contain those Stock

Exchanges who go over board and charge unreasonable fees/expenses/charges from

Investors, Intermediaries/or Listed Companies. In fact, it has been empirically proved world

wide that competition brings the costs down. Allowing listing of Stock Exchange and

having free competition/no cap on profits would in fact do lot of good to all concerned

including investors, /economy and Capital Markets. Apart from PIDs on the Stock


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Exchanges’ Board of Directors, SEBI can appoint as many new Directors as it may desire

on any of the Stock exchanges.

It is often stated in some quarters that there are examples of a fixed return in other

industries like Power and Fertilizer which are extremely important for Indian economy and

the consumers – then why not a cap on profits in case of Stock Exchanges – an important

Infrastructure Institution? The comparison is both irrational and ab-initio incorrect. In other

Industries, it is not a cap but a guaranteed tax free return to Investors (ranging from 12% to

16% pa after tax); thus even in case of losses the Investors could earn the promised return.

It is exactly the reverse situation in case of Stock Exchanges – as Dr. BMJC Report

recommends a cap and not a guaranteed return to Investors. In case of loses the Investors

would lose unlike the other Industries referred hereinabove. Let us compare apples to

apples and not apples with oranges. Why disfavour present/potential Investors in Stock

Exchanges and do harm to them as well as the economy killing the competition?

Implementing this recommendation is going to be absolutely unfair to the existing Investors

(cumulative Investments aggregating to over Rs.10,000 crores) as the Stock Exchanges

can only earn fixed returns like a Debt Instrument with risk associated to Equity (possibility

of a loss) and also no transparent and fair exit in a computerized Trading Mechanism (if

listing is not allowed). Why such unfair/illogical treatment? For Public Good? Please state

why it is bad? Why loose trust of Investors and do breach of Promise? Why contradict and

do turnaround of earlier stand – recommendations of Justice Kania Report – accepted,

implemented and legally incorporated in SCR Act and the relevant Rules and Regulations;

with the support and recommendations of SEBI/GOI?

8. X: The Exchanges have been mandated to convert themselves as for profit organizations

and like their peers in the financial sector, for the Stock Exchanges also, there is no need

for restrictions on generating profits.

The Stock Exchanges are well regulated by the various enactments and the rules and

regulations framed thereunder. For regional / small Exchanges, there is no scope of


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monopolizing the industry and no justification for restricting generation of profits. Increased

profits, with regulated norms by adopting economy measures will help the Stock Exchanges

grow further and pay higher dividends to its investors. This will motivate more new entrants

and finally, the competition will bring down the cost automatically and benefit the ultimate

investor, as it has happened in many other sectors and avoid monopolistic / duopolistic

dominance of a few players.

The investors’ interest need not be put to hardship especially as what is reasonable profit

has not been defined anywhere and can lead to complications at a future date. In fact, there

is no such cap on profits that can be earned by a listed / unlisted Hospitals or Schools or

Colleges – which are really public utilities in true sense, touching the lives of the common

man and his day to day life.To sum up, this restriction on profits can be done away with.

9. X: I. At the time of demutualization investors were assured returns in the form of dividend.

Lack of exit route and cap on profits will discourage capital investment in this industry

where investment is considered to be risky.

II.Since 1991, India has ensured optimisation of profits through competitive market

structure and we must promote the same here as in telecom, insurance, banking and

airlines. No restrictions be imposed on generating and distributing profits by MIIs.

10. X: This recommendation by Dr. BJC Report again is not favoring competition and

discourage entrepreneurship in this industry; thereby doing enormous harm to the economy

and restrict expansion of Securities Markets in India. It does restrict entry of new capital

and makes it very difficult / virtually impossible to start new SEs if we read this

recommendation and the ownership restrictions together. It encourages monopoly /

oligopoly in SEs / other MIIs in this very crucial Industry.

It is incomprehensible and irrational to state that the profits are Evil in a market driven

economy – striving for Growth and needing Capital / Competition / Entrepreneurship in

India. The Empirical Evidence could be found in the profitability both premier SEs in India -

NSE and BSE - who have done extraordinary services to the Investors, Capital Markets

and the Indian economy. If such was the case, why NSE, even to start with was

incorporated as a profit making company? Why even the Investors in NSE, including but


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not limited to Institutions and Banks, both Domestic and Foreign, should suffer now as,

obviously, they were not communicated about the proposed CAP ON PROFITS before their

decision to invest in the Equity of NSE?

SEBI, as a Regulator of SEs, have enough powers to contain those SEs who go over board

and charge unreasonable fees / expenses / charges from Investors, Intermediaries and / or

Listed Companies. In fact, it has been Empirically proved world wide that competition brings

the costs down.

Allowing listing of SEs and having free competition / no cap on profits would in fact do lot of

good to all concerned including Investors, Economy and Capital Markets. Apart from PIDs

on the SEs' Board of Directors, SEBI can appoint as many new Directors as it may desire

on any of the SEs. It is often stated in some quarters that there are examples of a fixed

return in other industries like Power and Fertilizer which are extremely important for Indian

economy and the consumers - then why not a cap on profits in case of SEs - an important

Infrastructure Institution? The comparison is both irrational and ab-initio incorrect. In other

Industries, it is not a cap but a guaranteed tax free return to Investors (raging from 12% to

16% pa after tax); thus even in case of losses the Investors will earn the promised return. It

is exactly the converse situation in case of SEs - as Dr. BJC Report recommends a cap and

not a guaranteed return to Investors. In case of loses the Investors would loose unlike the

other Industries referred hereinabove.

The Recommendation of - only reasonable profits - might lead to shortage of capital /

discourage entrepreneurs in this industry where only about 1.5% of the populations have

demat accounts. It is a misconceived notion that SEs and the entire network of Members

can only trade in Equities. The same network could also help substantially even the lower

middleclass Investors by distribution of Mutual Funds and even the Debt Products; which

have insignificant share in SEs turnover / business as on date. Allowing capital /

competition will help broaden and deepen securities market in India (not necessarily only

Equities). The Empirical Evidence of vibrant Debt market Internationally and its turnover

proves the above point. The debt market turnover world over is a multiplier of Equities

turnover.

Thus, in fact, there is a strong case for allowing more risk capital in this industry - where the


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Investors would be prepared to take the risk of losses in their Investments provided the

profits are not capped. X requests SEBI to have a policy for encouraging New Investors in

SEs, provide a fair play for Existing Investors, Synchronizing with Existing Rules and

Regulations framed by SEBI / GOI / Parliament and keep its promises to Investors and

does not put a cap (neither envisaged nor communicated earlier to Investors) in the interest

of Investors, Capital Markets and Economy. It is our honest belief that it will increase

competition and fair play which itself shall ensure that there are no unreasonable profits;

there is absolutely no need to cap the profits.

11. X: No profit sharing. Capping on profit will scare away prospective investors and on the

other hand it will affect on our revival plan. No restriction be Imposed On generating and

distributing by MIIs.

12. X: No Corporate, however sensitive to the economy, has a cap on its profitability. The

efficiency of Public Sector Units, the Banks or Public Utility Companies is measured in

terms of their profitability. Stock Exchanges must therefore be profitable in long run to

adopt itself swiftly to the everchanging the financial/technological world. These changes

often involve significant investments and it is essential that the exchanges are financially

sound with more than adequate reserves. Hence, exchanges must be able to retain their

profits and build adequate financial reserves.

We believe that the Market forces will determine the pricing power and therefore it will be

very difficult to work on a profit maximisation model. Hence, there should not be any cap

on the profitability. Historically, the cost of trading / impact cost of the securities trading has

come down and investors have benefited over a period of time. We are of the opinion that

capping profitablity is an incentive for inefficiency and non-performance.

Dr BJC Report is not favoring competition and discourage entrepreneurship in this industry;

thereby doing enormous harm to the economy and restrict expansion of Securities Markets

in India. It does restrict entry of new capital and makes it very difficult / virtually impossible

to start new Stock Exchanges. It encourages monopoly / oligopoly in Stock Exchanges /

other MIIs in this very crucial Industry.

This recommendation goes against the very basis of the Kania Committee Report accepted

and implemented by SEBI / GOI / Parliament as amended SC(R) ACT mandated 22 "Not-


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For-Profit" Stock Exchanges to become "For-Profit" Corporate entities. Now, the Dr BJC

Report, in a flip-flaw, recommends Stock Exchanges to generate only Reasonable Profits.

Also a breach of Promise and Trust to all Investors in Stock Exchanges at the time of

demutualization.

We do not agree with the view that the profits are Evil in a market driven economy - striving

for Growth and needing Capital / Competition / Entrepreneurship in India. The Empirical

Evidence could be found in the profitability of all the premier Stock Exchanges in India

including X, who have done extraordinary services to the Investors, Capital Markets and the

Indian economy.

SEBI, as a Regulator of Stock Exchanges, have enough powers to contain those Stock

Exchanges, who go over board and charge unreasonable fees / expenses / charges from

Investors, Intermediaries and / or Listed Companies. In fact, it has been Empirically proved

world wide that competition brings the costs down. Allowing listing of Stock Exchanges and

having free competition / no cap on profits would in fact do lot of good to all concerned

including Investors, Economy and Capital Markets. Apart from PIDs on the Stock

Exchanges' Board of Directors, SEBI can appoint as many new Directors as it may desire

on any of the Stock Exchanges.

The comparison of a fixed return in other industries like Power and Fertilizer (which are

extremely important for Indian economy and the consumers) with profits of Stock

Exchanges, is incorrect. In other Industries, it is not a cap but a guaranteed tax free return

to Investors (ranging from 12% to 16% p.a. after tax); thus even in case of losses, the

Investors could earn the promised return. It is exactly the reverse situation in case of Stock

Exchanges - as the Report recommends a cap and not a guaranteed return to Investors. In

case of losses, the Investors would lose unlike the other Industries referred hereinabove.

In our opinion, this will discourage present / potential Investors in Stock Exchanges and do

harm to them as well as the economy, by killing the competition.

The Recommendation of - only reasonable profits - might lead to shortage of capital /

discourage entrepreneurs in this industry, where only about 1.5% of the population have

demat accounts. It is a misconceived notion that Stock Exchanges and the entire network

of Members can only trade in Equities. The same network could also help substantially


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even the lower middleclass Investors by distribution of Mutual Funds and even the Debt

Products; which have insignificant share in Stock Exchange's turnover / business as on

date. Allowing capital / competition will help broaden and deepen securities market in India

(not necessarily only Equities). The Empirical Evidence of vibrant Debt Market

Internationally and its turnover proves the above point. The debt market turnover world over

is a multiplier of Equities turnover.

Thus, in fact, there is a strong case for allowing more risk capital in this industry - where the

Investors would be prepared to take the risk of losses in their Investments provided the

profits are not capped. Implementing this recommendation is going to be absolutely unfair

to the existing Investors (cumulative Investments aggregating to over Rs. 10,000 crores) as

the Stock Exchanges can only earn fixed returns like a Debt Instrument with a risk

associated to Equity (possibility of a loss) and also no transparent and fair exit in a

computerized Trading Mechanism (if listing is not allowed).

X requests SEBI to have a policy for encouraging New Investors in Stock Exchanges,

provide a fair play for Existing Investors, Synchronizing with Existing Rules and Regulations

framed by SEBI / GOI / Parliament and keep its promises to Investors and does not put a

cap (neither envisaged nor communicated earlier to Investors) in the interest of Investors,

Capital Markets and Economy. It is our honest belief that competition and fair play itself

shall ensure that there are no unreasonable profits; hence there is no need to cap the

profits.

13. X: Currently exchange has basically two major sources of income. The first part of income

is by way of transaction charges which are levied in relation to the volume transactions

done by each member. The other major part of the income is by way of investment income

from interest free member deposits and interest free margin money collected from

members/investors who have open positions in the market. In fact, the huge investment in

the infrastructure made by the exchanges is funded largely by member deposits. In the

case of NSE its shareholders have given only about Rs 65 crore while its current net-worth

is close to Rs. 1000 crore. It is not appropriate to say that all the profit shown by the

exchange and its clearing subsidiary should belong only to the shareholders.


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The Jalan Committee refers to the concept of reasonable profits. But the reasonable profits

on which the shareholders have rightful claim should be discussed only in relation to the

share capital funds that they have contributed to the exchange. Exchange is a peculiar

business where shareholders’ contribution by way of equity is miniscule in relation to the

total funds employed in business. Exchanges are not like banks whose capital

requirements automatically increase as the size of their risk assets grows. Hence we find a

close linkage between the size of healthy bank and its net-worth. In the case of SE there is

no such linkage stipulated by the regulator. Given the nature of its business perhaps such a

linkage is not required except by way of settlement guarantee fund. The major risk

originating from settlement guarantee extended to exchange transactions is borne by the

clearing corporation. There are certain structural weaknesses in the way the settlement

guarantee fund is constituted today. There is need for a major relock in this area.

All the discussion on justified rates of return should be put in a right frame of reference.

Exchanges are able to collect such large amount of interest free funds mainly based on the

mandate given to them by the Market Regulator. One can even be generous and permit the

shareholders to make 18-20% profit (after tax) in relation to the net-worth which they have

contributed and not on the entire net-worth, major part of which has come into existence

because of the incomes flowing from interest-free member deposits, margin money of

investors and members, and various state incentives in the form of subsidised land etc.

which the traditional exchanges like BSE, Kolkota SE and DES received.

The income earned by the SEs because of interest free deposits etc is entirely because of

regulatory mandate/recognition given to them. Without such recognition the exchanges will

not be in a position to collect the interest free funds or receive state incentives. Therefore,

the shareholders have no rightful claim on the huge profit that accrues to the exchanges on

strength of the regulatory mandate received by them from the Market Regulator.

After setting aside the reasonable profit on shareholders’ net-worth the rest of the profit

should be used to create a separate fund over which the shareholders should have no


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claim. This surplus profit should go to a new type of Settlement Guarantee Fund created as

a separate trust; the incomes of this fund should accrue to the fund itself. A part of the

annual income of this fund may be used for market development activities including

investor education. No part of this fund should be used for investor protection as there is

already a separate fund for this purpose. This fund should basically be used for ensuring

market integrity in extreme market situations when the current settlement guarantee fund

becomes inadequate.

It may be noted that the current settlement guarantee fund serves a very limited purpose as

one member’s contribution cannot be used to for meeting rightful claims of other member/s

in grave market situations. In the past, in the case of NSCCL, the hit due to bankruptcy of

several member brokers during the market crisis of 2000 was taken by the general reserves

built out of its profits of NSCCL. But when serious market crisis happens in future there

could even be a possibility of NSCCL getting into bankruptcy. It is at such times that the

settlement guarantee fund built out of surplus profits of the exchange would go long way in

further strengthening market confidence. The suggestion to transfer surplus profits to a

separate fund is on the lines of returns to electricity companies which are required to

deposit in a separate fund profits in excess of 16% in relation to their net-worth. This fund

can be tapped only during years when the profitability is below 16%.

In this context we should note that no part of the profit arising from high price paid by the

investors who later bought equity from other shareholders accrued to the exchange. Hence

these late entrants to the group of shareholders have no right to claim the return of 18-20%

on the price they have paid to acquire stake in NSE or BSE.

The heated discussion today about the need for highly competitive conditions in exchange

business or allowing exchanges to list themselves on the premise that they are business

entities on par with other entities in competitive industries. There is no logic in this

discussion except greed for supernormal profits. The possibility of making super normal

profits on from SE business is entirely due to the mandate given by the Market Regulator.

Once it becomes clear to the existing and potential investors in stock exchange equity that


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bulk of the profits earned by an exchange do not belong to its shareholders, current high

pitched/decibel demands for listing of stock exchanges will automatically get sobered down.

14. X: Constraints on the profitability of any industry are, in effect, constraints on growth and

innovation. Profits result from numerous factors such as innovation, efficiency,

management skills, technology breakthroughs or simply providing a better product or

service. Regulating profits according to some formula based upon capital totally negates all

of the above. There is simply no reason to do things better or differently. Further, a profit

constraint based upon capital only rewards the largest entity in the field and constrains all

of its competitors. Effectively forcing more efficient companies to give away their “excess

profits” (payments to IPF or SGF) defies all logic. Governments have never been the best

judges of what a company requires in terms of the profitability required for growth,

diversification, new opportunities or contingent risks. Further, profits may come in one fiscal

period but growth or innovation possibilities can arise several periods later. Stripping profits

now can and will reduce options later.

15. X: The concept of ‘reasonable profit’ is a retrograde step in a competitive and market

economy and must be dropped, allowing the markets and competitiveness to decide

profitability of exchanges. The stock exchanges currently already in operations must be

allowed to operate without restriction of ‘reasonable profit’ and to list without restrictions like

any commercial enterprise/ company; subject to the framework on segregation/ ring-fencing

of the regulatory role.

16. X: The imposition of profit caps appears unnecessary and risky. It removes incentives for

exchanges to innovate, reduce costs, introduce new products, increase the number of

market participants, and increase the rate of capital formation. It could impair the

competitiveness of India as an international listing destination, driving large India issuers to

increasingly consider offshore listings at deeper liquidity pools. In the worst case, it send a

contradictory signal to institutional investors regarding the direction of Indian economic

policies towards liberalization and could be regarded as a form of nationalization, an ironic

outcome given that the iconic institutions that would be subject to the caps of emblematic of

India capitalism.


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17. X: This view inappropriate in an era in which profit is not a bad word. We may leave a

legacy of loss making enterprises living on Tax payer’s money. Also what is a reasonable

profit is not easy to be defined. Again discerning existing investors would demand a buy

back.

18. X: It caps the profit of Stock Exchange and recommends excess over capped profit should

be used for investor education. This would disincentivise the investors in stock exchange

and they would shy away from the market leaving the objective of demutualization of stock

exchanges defeated.

19. X:

� In no market, the world over, has the regulator assumed the role of defining,

assessing and monitoring what can be constituted as ‘reasonable profit’.

� In fact, competition will neutralize excessive profit making by increasing the

entrants in the industry.

� While the Committee is excessively concerned about excessive profit, it does not

express any concerns on regulatory tolerance for predatory pricing by one of the

monopolistic market infrastructure institutions for last two years in currency

derivatives segment.

� The evidence from World Federation of Exchanges shows that listing of

Exchanges has in fact reduced profit margins as compared to demutualized

Exchanges.

20. X: Restrictions on profitability will mean that no further investments will result in the stock

exchange segment and investors who had invested Rs.10000 crores based on the statutory

amendments in SCRA will not only lose a bulk of their investments but will get the returns of

debt (capped) and the risk of equity (possibility of loosing all). Lack of new investments will

also mean there will be no future competition and this will adversely impact the public at

large. This would reflect India as an unfriendly investment destination. The best way to

rein in profits is by encouraging competition and not by capping profits.

21. X: No cap should be imposed on distribution of profits.


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22. X: The Report takes the view that the role of stock exchanges as public utilities and 'first

level' regulators is not in harmony with their economic interests of maximizing profits. The

Report states that the motivation of the owners of stock exchanges should be to make only

reasonable profits and that such motivation should arise out of the desire to run the

exchanges in a clean and efficient fashion.

Our comments to the recommendations regarding profit regulation are as follows:

� The Report states that stock exchanges are public utilities. There are several

utilities in India that have been deregulated and have benefited from an influx of

new players (power, toll roads, pharmaceuticals, broadcasting, etc.), with the

resultant increase in competition not only leading to infrastructure development

but also to lowering of prices and increased benefits for consumers. In the Indian

context, the National Stock Exchange (NSE), despite being a profit making

company, has invested heavily in technology and steadily reduced the costs

involved in trading. In view of this, capping profits and the returns to the

shareholders on the basis that stock exchanges are utilities seems unfounded.

� Need for a profit cap in any public utility should be assessed relative to the price of

the service being provided. In the case of Indian exchanges, they don't impose

significant friction costs on financial intermediaries by any benchmark. Stock

exchanges' charges today constitute only 1% of the total transaction charges

(brokerage, taxes, stamp duties etc.). Moreover, charges in India are among the

lowest in the world as pointed out recently by the Wall Street Journal (25 October,

2010):

Country

Trading and Clearing

(%)

Stamp Tax

(%)

Singapore 4.75 None

Hong Kong 1.1 20

Taiwan 0.75 30


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Korea 0.54 30

Australia 0.53 None

India 0.35 27

Japan 0.24 None

� In our opinion, profit regulation creates perverse incentives and any regulation on

profits would most likely result in inflated balance sheets and higher cost

structures for the industry.

� Profit regulation would make it very difficult for competition to blossom as a cap

would leave all the risk on a new entrant while providing the upside to the state.

Regulation of profit would help create an anti-competitive environment as

potential new entrants would have no incentive for entering this sector.

� Stock exchanges differ from other utilities especially in two key respects: firstly,

due to their unique capital structure where in the absence of leverage, the risk is

borne by the shareholders of the exchanges which completely offsets the higher

return on net worth earned by the shareholders. Secondly, stock exchanges

require heavy investment in technology which makes them similar to businesses

like pharmaceuticals or IT rather than a traditional utility. In such a situation, any

attempt to regulate profit will have the effect of stifling innovation and efficiency

which will result in poorer customer service and Indian capital markets losing their

competitive edge over markets of other emerging economies.

� The Report recommends that the excess profit beyond the cap imposed by SEBI

ought to be transferred to the investor protection fund ("IPF") or settlement

guarantee fund ("SGF"). We agree that SGF and IPF are important for providing

institutional safety. However, these pools are adequately resourced, having more

than Rs. 5,800 crores, for the NSE alone, as on 31 March, 2010, and growing to

meet any contingencies and therefore there is absolutely no need for them to be

artificially augmented.

� As mentioned above, the Report states that stock exchanges should aim to earn


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reasonable profits which are at par with the average earnings of the corporate

sector in India. The profits earned by companies in various sectors differ due to a

plethora of micro and macroeconomic factors such as capital structure, capital

intensity, risks, performance of individual companies and the economy. Also,

computing profits across sectors would be an expensive and near impossible

exercise and the results arrived at would differ from year to year. Designating the

average of such profits as the criteria for regulation of profits earned by stock

exchanges is completely arbitrary, unreasonable and impractical. Furthermore,

this could also create opportunities for avoidable rent seeking.

� Pursuant to the recommendations of the Report on Corporatisation and

Demutualisation of Stock Exchanges ("Kania Committee Report") regarding

conversion of stock exchanges into "for-profit" companies, several investors have

invested in stock exchanges at high book valuation on a long term basis. Such a

radical change in the regulatory framework indicates abrupt policy reversal, which

is not conducive to long term investing.

On account of the reasons stated above, it is our opinion that SEBI should completely

disregard the recommendations on profit regulation and not make any change to the

present operations of the stock exchanges.

23. X: Our comments to the recommendations regarding profit regulation are as follows:

• Here again while we acknowledge that a securities exchange is a "business" with clear

commercial interests including profit we do acknowledge that the regulator would/should

have an opinion about all public good issues stemming from the business activities of a

securities exchange such as "predatory pricing" and "adequacy of investor protection

funds". Once such a view is formed by the regulator and compliance levels/methodology

established a "separation" of the public good activities can be achieved in a fair and

transparent manner to the satisfaction of all market participants. In our opinion, this will

enable each business within the MII universe to make decisions on its own accord

based on its stakeholders and board deliberations within the framework developed by

the regulator. Further, per the evidence below in terms of trading charges globally, we

would like to submit that securities exchanges in India would acquit themselves


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especially well in terms of pricing offered for trading and it is also our belief that there is

adequate provisioning in terms of the investor protection funds.

• The Report states that stock exchanges are a public utility, however, the meaning of the

term public utility has not been provided in the Report. Currently, although several

essential utilities are regulated by the government, there are numerous other utilities

(for e.g. telecommunications, etc.) which have been deregulated and have

beneftted from the influx of new players and the resultant increase in competition has

not only lead to development of the infrastructure involved but also lead to lowering of

prices and higher benefits for the consumers. In the Indian context, National Stock

Exchange ("NSE") despite being a profit making company has already reduced the

costs involved in trading and invested heavily in technology and infrastructure.

• Need for a profit cap in any public utility should be assessed relative to the price of the

service being provided. In the case of Indian exchanges, by any benchmark, they don't

impose significant friction costs on fmancial intermediaries. Stock exchanges charges

today constitute only 1% of the total transaction charges (brokerage, taxes, stamp

duties etc.). Secondly, charges in India are among the lowest in the world as pointed out

recently by the Wall Street Journal (25 October, 2010):

Country

Trading and Clearing

(%)

Stamp Tax

(%)

Singapore 4.75 None

Hong Kong 1.1 20

Taiwan 0.75 30

Korea 0.54 30

Australia 0.53 None

India 0.35 27

Japan 0.24 None

• In our opinion, profit regulation creates perverse incentives for management and any

regulation on profits would most likely result in an inflated balance sheet and higher cost


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structure at the cost of long-term efficiencies.

• The Report recommends that the excess profit beyond the cap imposed by SEBI ought

to be transferred to the investor protection fund ("IPF") or settlement guarantee fund

("SGF"). We agree that SGF and IPF are important for providing institutional safety.

However, these pools are adequately resourced and growing to meet any

contingencies.

• Stock exchanges differ from other utilities especially in two key respects: firstly, due to

their unique capital structure where in the absence of leverage, the risk is borne by the

shareholders of the exchanges which completely offsets the higher return on net worth

earned by the shareholders. Secondly, stock exchanges require heavy investment in

technology which makes it similar to businesses like pharmaceuticals or IT rather than a

traditional utility where this investment results in the creation of 1P as a barrier to entry

(seen in Indian exchanges through continued introduction of new products like the India

VIX etc.). Finally, the exchange primarily serves market participants all with economic

incentives. In such a situation, any attempt to regulate profit will have the effect of

stifling innovation and efficiency which will result in poorer customer service and Indian

capital market losing their competitive edge against markets of other emerging

economies.

• As mentioned above, the Report states that stock exchanges should aim to earn

reasonable profits which are at par with the average earnings of the corporate sector in

India. The profits earned by companies in various sectors differ due to a plethora of

micro and macroeconomic factors such as capital structure, capital intensity, risks,

performance of individual companies and the economy. Also, computing profits across

sectors would be an expensive and near impossible exercise and the results arrived at

would differ from year to year. Designating the average of such profits as the criteria for

regulation of profits earned by stock exchanges is completely arbitrary, unreasonable

and impractical. Furthermore, this could also create opportunities for avoidable rent

seeking.

• Pursuant to the recommendations of the Report on Corporatization and

Demutualization of Stock Exchanges ("Kania Committee Report") regarding conversion


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of stock exchanges into "for-profit" companies, several investors have invested into

stock exchanges. Such a radical change in the regulatory framework indicates abrupt

policy reversal, which is not conducive to long term investing.

On account of the reasons stated above, it is our opinion that SEBI should consider the

recommendations on profit regulation from a "separation of the public good" items

standpoint and then allow businesses to make all commercial decisions for themselves

under the established regulatory framework.

24. X: The recommendation made in Jalan Report would mean that the stock exchange space

will not witness any interest from the new investors and the old investors who are already

invested will make huge losses on their existing investments. This will substantially reduce

any competition (in absence of any new players in exchange segment) and harm the

stakeholders. Such a recommendation if implemented would be a major blow to the new

aspiring players like us who are looking forward to register, compete, grow and serve the

market as a stock exchange.

25. X: MIIs should act as any other incorporation incorporated under any Statute or Companies

Act, and they should earn profits within permitted parameters like other statutory

undertakings, enterprises or the companies do in their respective field. The entities who will

invest their precious funds in any MIIs, the said entity should not be deprived of returns

from their Investment.

26. X: Since there is a cap on percentage on annual return/profits and compulsory unlisted

status will offer no incentive to institutions to promote MIIs. Due to this there is a likelihood

of absence of creation of new MII’sand lead to monopoly. Therefore, certain ceilings based

on some specific yardsticks such as volume of business, number of trades etc.,(depending

upon the activity in which the MII is involved) may be placed on MIIs. On crossing these

limits there must be a compulsory and automatic requirement of shifting the volume to

another existing MII.

27. X: When only small profits will be generated and no new share capital will be allowed, then

how the Regional Stock Exchanges will built networth of Rs.100.00 Crores?

28. X: Public institutions are there to make profits they are not charitable institutions.


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29. X: Similar to requirements of Section 45IC of the RBI Act for NBFC, we propose that 20%

of the profits after tax of the exchanges be transferred into a long term reserve for

ensuring overall health of the MII and not be distributed to the shareholders.

30. X: We submit that MII must set aside some portion of their surplus towards development of

markets, research and analysis of data, investor education and generally other benevolent

market services for public good and market awareness.

31. X: Restrictions of Section 25 of the Companies At, 1956 shall apply to the SEs and

Clearing Corporations and as such they should not be allowed to distribute profits. We can

allow Depositories to distribute a reasonable profit. Depository charges may be regulated.

32. X: What is required is for exchanges to be profit-making, but not profit-maximizing. The

Jalan suggestion to put a cap on profits is, therefore, a reasonable one. The excess profits,

according to the Jalan report, would not belong to the exchange but would go to the public

investors through the Investor Protection Fund or the Settlement Guarantee Fund. This is

an excellent suggestion. It would be appropriate for SEBI to monitor utilization of these

funds effectively.

It may, however, be pointed out that this recommendation is unfair to the existing investors.

With cap on profits, they would surely feel short-changed as they had invested based upon

valuations derived from existing and potential profits. It would be appropriate for SEBI’s

formulation to be reasonable. Cap on profits is also good for sustainability of an exchange

and earn the public goodwill. In another case, MFIs, there is already a debate on cap on

profits.

33. X: We oppose the recommendation to cap profitability. We recommend strongly that

economic policy in India should encourage competition as a way to avoid supernormal

profits for the institutions and lower transaction costs for their customers. In India, we do

have competition amongst the MIIs, as well as safeguard against anti competitive

behaviour. Also, the Committee's recommendation that "Any return/profits above such

maximum attributable amount would be transferred to IPF or SGF" begs the question – is

the system for collecting adequate Investor Protection Fund or SGF inefficient, and if so,

should the recommendations not address that matter with priority rather than leave it to be


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topped up from the "super profits"?

34. X: Lack of an exit route due to prevention of listing and a cap on profits is bound to

discourage entrepreneurship in the industry.

35. X: Ensuring healthy and effective competition is a better way of keeping profits in

check rather than officially putting a cap on profit.

36. X: If returns are capped no one would take the lead to set up an unattractive exchange.

Investors won't be interested to invest in an exchange. IPF refers to investor protection

funds in which hundreds of crores are lying and are often not used by the exchange.

37. X: Permitting competition among stock exchanges would encourage introduction of

innovative products and services for the investing public at competitive pricing. Attractive

pricing of these services would automatically address the issue of high profits, as is evident

in sectors like telecommunication and aviation. Fixing a cap on profits will create an

obstacle for the Exchanges to develop and introduce innovative products and services to

cater to the needs of the investing public. Lack of exit route and cap on profits will further

discourage capital investment in this industry.

38. X: Profitability ensures investment in infrastructure, investor’s education and other market

related development. The cap on profitability would handicap the new stock exchanges to

commit larger expenditure for infrastructure development. At the same time, the existing

stock exchanges with their existing infrastructure would carry on their business. The cap on

profitability will not affect the dominant exchange; rather it will certainly discourage the

setting up of new exchanges. It would act as one of the biggest entry barrier for aspiring

entrepreneurs. If the Jalan committee wants to seriously curb the unreasonable profits in

the Exchange business, then the most effective channel is to encourage competition.

39. X: Cap on the maximum profit will be detrimental to the financial health of the MII.

Ambiguity of profitability, restrictions on fees charged, lack of exit opportunities and

restriction on fund raising will lead the cost of capital to an astronomical level which will not

be sustainable for the MIIs and will severely hamper investments into the MIIs. They should

have the liberty to retain their entire profit and reinvest the same in their business. This will


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result in the development of the market at large.

SGF is a fund which is built by mutual contribution of the members and stock exchanges.

The MIIs contribution to the SGF may be fixed at a certain percentage of their annual

revenue/profits. Determination of the transaction fees is best left to the exchanges as they

are in a better position to estimate it owing to their locus standi. SEBI may introduce a

robust reporting and approval mechanism to make sure that the MIIS do not charge

monopolistic rents.

The estimation of equity risk and liquidity risk premium will be a subjective exercise as the

securities of the stock exchange are not listed in India and overseas benchmarks would

have to be considered with appropriate adjustments for Indian conditions.

The very reason for C&D was to imbibe professional culture in the MIIs and creation of the

need for operational excellence. Restrictions such as capping of the maximum profit to be

retained will leave no motivation for the exchange to innovate and excel in their operations

and will take up back to the era of mutual exchanges. Innovation and excellence is all the

more necessary in the view of the magnitude and complexity of technology which is

required to be used in the operations of the MIIs.

40. X: This recommendation of the committee needs to be reexamined as any investor would

be interested in committing huge money only if he is able to generate returns

commensurate with the risk he is undertaking. The cap on profit should not drive away the

competition and bar the well experienced and intended institutions/individuals to invest in

MIIs. There should not be any cap on profits at this stage. SEBI can certainly examine at

periodic interval whether there is a need to intervene in this matter.

41. X: Here there is a case for competition that eventually can ensure that there are no

unreasonable profits, rather than an administered cap on profits.

42. X: Setting a return cap that is too high will incentivise innovation-shirking by exchanges,

and mandating a return cap that is low will encourage moral hazard problems of heightened

risk activities. Benchmarking the return to industry profit levels would be countercyclical and

may have further ratchet down effects. The bottom line is that return caps would result in

significant adverse selection problems in the marketplace and might engender wider


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systemic risk problems. The efforts of the Committee might be better devoted towards

devising a more fair-minded and macro-prudential policy that establishes risk-based capital

guidelines and capital dilution policies for MIIs, promotes transparency in corporate

governance, accounting and transaction processes and encourages entrepreneurship.

Efforts to setting profit limits are likely to reduce competition, choke industry innovation, and

may lead to significant underinvestment in important risk management and trading

technologies. It would also render Indian exchanges at an unnecessary and unfair

competitive disadvantage relative to international exchanges, hinder price discovery in

domestic markets, and result in greater offshore trading.

43. X: Profit alone drives investments and provides funds for innovation and technology. When

market grows, the infrastructure required will also grow sequel to these changes. A cap on

profits would prevent new investors from investing in the exchange stunting its growth.

44. X: Dictating/placing caps on profits and earnings has never been successful. Risk and

return parity will prevail in long term and any attempt to interface will result in distortions

and weakening of market mechanism. MII are not charitable institutions, Considering them

as public utilities pull India back to early 1990s and 1980s days of nationalisation. Telecom

and airlines are excellent examples of what the market forces can give to the consumer and

society in general competition. Telecom and airlines are excellent examples of what market

forces can give to the consumer and society in general by improving competition.

45. X: With competition, it would be difficult for an exchange to charge higher transaction costs

to earn super normal profits consistently. Further, it has been proven beyond doubt in

economic literature that such measures would lead MIIs to ‘over invest’ so as to meet the

fixed return criteria. Such arbitrary capping of profitability would either lead to (a) ‘rational

apathy’, because whatever you do, your returns are going to be the same or (b) Over

investment in trading, settlement and clearing infrastructure so as to keep profits at

prescribed rates.

46. X: Creating regulatory cap on profits would only help in hampering growth and innovation.

An environment of healthy competition would result in growth of the market and innovation.

The cap on profitability of exchanges, bans on listing and divorce of performance with pay


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of senior management are inexplicable and destructive. If the public sector ONGC can seek

profits, why shouldn’t exchanges that are privately owned? The correct way to eliminate

monopolistic pricing is by taking appropriate anti-competition action or by encouraging

competition, not by passing a fiat against profitability. With a ban on listing, whatever

possible exit opportunity for investors and governance check against management could

exist, will also vanish. A bar on disconnecting performance from pay will disincentivise good

performance by management.

47. X: Profit and dividend caps are regressive and discriminatory against investors and all

market users. They also explicitly discourage exchanges innovating through new processes

and technologies.

India already boasts some remarkably low cost transaction fees on exchanges thanks to

the competition between exchanges – capping profits and restricting dividends simply will

not help create better or cheaper markets.

I would also argue that restricting the flexibility of exchanges to profit and manage their

business and payment in a normal corporate fashion could significantly discourage FDI in

India, particularly when such a move would materially disadvantage a number of high

profile foreign investors in India. The markets in Brazil and Russia are not subject to any

such profit or shareholding restrictions. The Brazilian exchange is already a highly

successful and innovative public traded for profit market. The Russian exchanges are

looking at listing their shares. In North America and Western Europe, the ‘for profit’ public

traded exchange is increasingly the norm as I have already mentioned.

48. X: Treating MIIs as public utilities with a fetter on their profit making abilities and allowing

the government bodies to have pervasive control in their functioning is likely to act in a

counter-productive manner. MIIs should be treated as business entities and subsequently

all the natural corollaries in respect of a business entity must follow. In the guise of

protecting the interest of investors, the report has deprived the MIIs from one of the most

basic motive of setting up or running a business which is earning profits. There is a

fundamental flaw in capping the profits of a business entity in proportion to its net worth.

This will lead to entities with higher networth to earn more profit irrespective of the fact that

entities with lower networth may be operating in a more efficient manner and have a greater


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potential for growth and productivity.

The recommendation that MIIs should generate only reasonable profits is being proposed

to bring in fair play. However to bring in fair play competition should be allowed as well, as

fair and healthy competition would automatically ensure that there are no unreasonable

profits.

49. X: It would be more effective if the exchanges are asked to contribute a minimum

percentage of profit to the IPF/SGF. Similarly a specific percentage of profit should be

earmarked for creation of fund to withstand any shock. Stock exchanges should also be

encouraged measures to invest more in technology, surveillance, and investors’ education

so as to develop a equity culture in India.

50. X: These (cap on profits) are difficult to administer, involving too much regulatory

intervention and interface, which creates incentives for corruption and regulatory capture,

just as the earlier control regime did. Regulators are also fallible so another basic principle

of regulatory design is to minimize regulatory discretion. In a market-based system the best

way to reduce profits is to encourage competition; today’s battle must be fought with

modern weapons.

51. X: Given that MIIs produce a public good, we believe that it is fair to have expectations

about a reasonable level of profits that MIIs might make. But it is much better to achieve

this through taxes on windfall profits (as for public utilities in the UK) rather than cap profits

at an arbitrary level.

52. X: The reasonable profit idea as suggested by the committee is illogical as internationally

there is no agreement on basic definitions of market risk premium among researchers as

well as analysts worldwide.

53. X: Dictating / placing caps on profits and earnings has never been successful. Risk and

return parity will prevail in long term and any attempt to interfere will result in distortions and

weakening of market mechanism. MII are not charitable institutions. Considering them as

public utilities pull India back to early 1990s and 1980s days of nationalisation. Telcom and

airlines are excellent examples of what the market forces can give to the consumer and

society in general by improving competition.


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54. X: Dictating / placing caps on profits and earnings has never been successful. Risk and

return parity will prevail in long term and any attempt to interfere will result in distortions and

weakening of market mechanism. MII are not charitable institutions. Considering them as

public utilities pull India back to early 1990s and 1980s days of nationalisation. Telcom and

airlines are excellent examples of what the market forces can give to the consumer and

society in general by improving competition.

55. X: Corporatisation and demutualization forced 22 exchanges which were not for profit to

convert into ‘for profit’ companies. Section 4A of SCRA made it compulsory for the stock

exchanges to get corporatized and demutualised. This was a result of Kania Committee

report which as stated above, mandated 22 not for profit exchanges to become for profit.

Hence implementation of such recommendation would violate the explicit will of the

Parliament.

Such recommendations propogate the misnomer of profit making entities being somehow

inferior. NSE as profit entity has consistently evaded scams but the BSE prior to

corporatization (as a charitable organization) was involved in several scams. Restrictions

on profitability will mean that no further investments will result in the stock exchange

segment and investors who had invested Rs. 10,000 crores based on the statutory

amendments in SCRA will not only lose a bulk of their investments but will get the returns of

debt (capped) and risk of equity (possibility of losing all). Lack of new investments will also

mean there will be no future competition and this will adversely impact the public at large.

This would also reflect India as an unfriendly investment destination. The best way to rein in

profits is by encouraging competition and not be capping profits.

Stock Exchanges should be treated as business entities and subsequently all the natural

corollaries in respect of a business entity must follow. In the guise of protecting the interest

of investors, the recommendations in the report deprive the stock exchanges from one of

the most basic motive of setting up or running a business which is earning profits. The

report does not mention any other jurisdiction in the world which prescribe such practices

and the recommendation restricts an entity’s freedom to carry on trade.


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Even public sector enterprises are permitted to make profits and hence restricting the stock

exchanges from making profits by tagging them as public utility would be highly

discriminatory. As argument that other similar economically significant sectors viz. fertilizers

and power also have a profit cap then why not stock exchanges, is completely incorrect. In

the above referred industries, it is not a cap but a guaranteed retrun to the investors. Who

wouldn’t want a 16% sovereign guaranteed return with no risk of losing one’s capital?

One argument heard in support of this is that since stock exchanges are held to be ‘state’

under the constitution, that is reason to disallow profits and listing. This argument must be

rejected at the outset. ONGC declared an advance tax for the quarter this month in excess

of Rs. 6000 crores and it is listed entity while is state. The fact that exchanges are stable is

in fact irrelevant to the issue at hand.

56. X: The cap on profitability, the cap on remuneration of top executives are an indication of

an increased interference of SEBI on the working of the MIIs and they serve as a deterrent

to any new player from entering the heavily regulated market.

57. X: Since there will be competition in the market no company will be able to take the

unreasonable profits for long.

58. X: Retails investors also felt that exchanges should function in a professional manner and

ensure cost effectiveness in trading. Profit maximization need not be the motive for

exchanges.

59. X: Yes, I agree. MIIs provide a public good and must earn a reasonable profit for that

service.


service.

61. X: MIIs to generate only reasonable profits. Yes, I agree. MIIs provide a public good and

must earn a reasonable profit for that service.



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service.

63. X: In short term, excellent idea from the point of view of investors, day traders, speculators,

intermediaries like stock brokers, who are likely to benefit immensely from this

recommendation, as the charges may come down if their is a cap on profits, but not from

the point of view of shareholders. This may be done if Exchanges again REMUTUALISE

and pay back the money of the investors who came in as Shareholders during

demutualization, with an idea of developing these Exchanges. In long term, this will have

adverse effect to the small & retail investors and the Nation’s economy as their will be

absolutely no competition and will lead to monopolistic/duopolistic dominant situation as

many will not enter this field. Lets not forget that there is no cap on a profits that an

essential and critical service like a hospital or an educational institution can make !

64. X: While disinvestment is made for the public is participate, now it is said stock exchanges

cannot make make UNREASONALE profits; what is unreasonale profit not defined - above

10% or 40% ot 500%. We are not provoding them an exit route for them ( iam taking abt the

regional exchages).

65. X: If Public Sector Units are allowed to make super normal profits then why should stock

exchanges be asked not to make profits. If that’s the stand then how will you attract new

investments & new players. The Monopoly of NSE will continue. Why should the money be

transferred to IPF & SGF how has that benefited investors till now. They are already having

lots of money.

66. X: Yes, I agree. MIIs are aimed serving the investing pubic and for public good and must

earn a reasonable profit for that service.

67. X: I support Bimal Jalan’s recommendation that MII should generate only reasonable

profits.

68. X: I strongly support Mr. Jalan’s views expressed in his report. Maximising profits by stock

exchanges should be discouraged.


service.


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70. X: I fully agree with the Jalan report that the motive for MIIs should not be profit-

maximisation, but to secure investor protection. They should be a watchdog for public funds

invested in the entities they purport to serve. Given the current state of the Indian economy

and the world financial scenario investor-protection is a bigger driving force as compared to

profit-maximisation.


service

72. X: Market infrastructure should not work towards profit maximization because Market

Infrastructure has an additional role to perform as the first-line regulator. For any regulator,

profit maximization will result in a conflict of interest and will put investor protection on the

back-burner. Hence, I support the report on this count.


service. Listing of SE's does not fit the public good they are performing & a strong

regulatory control with non-profit/reasonable profit (similar to utilities) clause should

continue in India. Please take into account the very very short term nature of senior

management of private companies to gain more profit & in turn boost their personal

bonus/profit completely disregarding the long term impact. This will have a very serious

impact on the SE's of a growing country like India & stunt the growth of the entire economy.


service

75. X: The excess income from markets should be used for investor education, investor

redressal and for improving and making market infrastructure accessible to everyone to

increase retail participation in the markets.

76. Votes received on the internet: Total No - 99


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S.No Summary of responses on ‘limit on number of exchanges’

1. X: In order to have healthy competition in our opinion our country can have;-

1. Three stock exchanges of national level.

2. Two Depositories of national level.

3. One clearing corporation of national level.

There is no need to have regional stock exchanges and they should not be permitted to be

member of national level exchanges through sub broker route. This will create conducive

atmosphere for investing into Indian Capital Market by foreign institutions / investors. This

will also create confidence building environment for Indian Capital Market.

2. X: Number of stock exchanges should be limited. National Exchanges are enough with

platform in each for small companies also. The decision has to be regulator driven.

3. X: Stock exchange is not a business for just about anyone with money can get into. It is one

of those entities where competition should not be brought in indiscriminately as it is

extremely important to maintain the sanctity of the stock exchanges and integrity of the

market. Stock exchange is also one business where benefits are significantly dependent on

size. We should have more than one exchange but with several exchanges, more

fragmentation will happen and the benefits of size would vanish. Importantly, if there were

several exchanges, each exchange would see only its part of the market. An effective

integrated market surveillance system should be first put in place before allowing more

exchanges.

Sufficient enabling competition already exists. A question that no dissenter is answering is

that what prevents BSE, an old, large, well-capitalised exchange to provide competition. Or

why SEBI-approved regional exchanges cannot come up with a business model and

compete. The so called prohibitive suggestions in the Report for new players also are not

prohibitive in any mature sense.

4. X: The recommendation is contradictory as the Committee on one hand talks of being in

favour of competition, but simultaneously mention that large number of stock exchanges will

fragment liquidity. Mention may be made of well-functioning liquid markets in USA as more


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than 10 SEC approved exchanges in USA and Europe too has many exchanges.

Competition among stock exchanges, if enhanced, shall result in better services, lower

costs for customers and higher range of products and liquidity. By ensuring that the stock

exchange space would be unattractive for new entrants; the Report, if implemented, would

further stifle the growth of the Indian financial market. The advantages of competition vis-à-

vis monopoly are evident from the sectors like aviation, telecom and banking. This lack of

competition in the stock exchange space has kept our country behind many other

developed and developing countries and this fact can be substantiated that India with a

population of 130 crores, hardly 1.5% of its population is investing population in capital

markets as against 10% in China. Increased competition will compel the exchanges to

reach to potential investors in the far flung areas of the country.

5. X: Restriction on number of MIIs is an anti-competitive recommendation contrary to the

Competition Act 2002. Kania Committee Report had recognised the need for the stock

exchanges to cope with the competition and hence recommended demutualization.

6. X: Evidences and experiences suggest that competition has contributed significantly in the

growth of the market and benefited the public and retail investors, at large.

• When other industries which are considered more sensitive than the Exchange

industry, for example, banking, telecom and insurance, etc., do not attempt to identify

the “optimum’ figure”, why should then the report try to restrict the number of players

in MII industry?

• For the more than a decade old monopoly of MII in equity segment, Indian financial

market has witnessed only one new product: equity derivatives. Due to lack of

competition, virtually every other product, be it the corporate bond, interest rate

futures, or ETFs, has failed miserably. It is only under the competition, the currency

futures grew into such a big market segment.

• When BSE was the largest exchange, there were several other regional exchanges

operating with numerous brokers across the country. When NSE assumed leadership

through screen based trading over the years, the regional players were made

redundant. The Committee does not devote any time on what should happen to

these 20-odd regional stock exchanges spread across the country and what should


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be their future. The scope for revival of the regional exchanges has not been

addressed at all.

7. X:- Only top 4 cities contribute more than 3/4th of total trade and majority of Indian

population are yet to understand the intricacies of the securities market. Under such

scenario, the committee believes that need for multiple stock exchanges are limited. It

shows their obsession to maintain the monopoly status of National Stock Exchange.

8. X: Allowing only a few exchanges can create monopoly and further restrict the market

innovations in the exchange technology and products. This can be revisited once we have

sufficient number of exchanges. Moreover fixing the number of exchanges would also be

arbitrary and may stifle competition and growth.

9. X: It is like working the way Indian license raj operated years ago in coexistence with

current state of market where competition is allowed. This would deter investors from

investing in MIIs in India, and would hamper global alignment of India’s financial markets

and also cause a blow to financial inclusion with less investment in product innovation,

financial literacy and technology due to dictating number of players. Lack of competition has

led to repeated failure of development of debt market, interest rate derivatives markets,

currency options, SME exchange and made equity derivatives market so narrow and

shallow.

10. X: Not allowing new MIIs in the market would hamper the growth of our capital markets.

This recommendations if adopted would close the gates for potential futures entrants.

11. X: Whenever a new exchange starts, it has to bring something new to the table; otherwise it

would not attract trading volume. Existence of large number of exchanges would promote

competition and thus encourage innovation. Further, developed technology should act as

facilitator to provide choice of multiple exchanges for trading rather than act as a barrier to

the entry of new stock exchanges.

12. X: Since exchanges can compete in products, even if liquidity tips over in one product, an


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exchange need not die since it can compete in other products. Liquidity remains high if the

transaction is conducted at the exchange offering the best deal. Customer service will

improve and transaction costs reduce. Exchanges will be pushed to remain at the fast

moving frontier of technology and even compete globally, as many Indian corporations are.

For example, America’s security and exchange commission (SEC) has a “best-price” stock-

handling rule to maintain competition across exchanges. But when NYSE was using

favorable network effects to lock-in users, resist automation, and reward insiders, SEC

leveled the playing field by allowing “fast” automated markets that execute trades

automatically to bypass a better price on a “slow” exchange within some limits.

“Too frequent exits of stock exchanges will jeopardize the interest of the investors and

disrupt the stability of the markets themselves.”

The Committee becomes over protective since they are wary of spillovers from any

instability in this space. Lessons from international experience suggest, however, instability

may not be a problem. First, strong risk management systems make exchanges robust.

Although many banks were in trouble during the global crisis, not a single exchange failed.

Exchanges were stable despite the pro-competitive stance of regulators, who knew that

managements, aware of the possibilities of tipping in networks, try to lock in customers in

various ways.

13. X: There should not be any limit. However there should be a mechanism to transfer the

shares from a company which is exiting to the other existing player and enough time to

extinguish the equities in case no other player is ready for the transfer. The OTCEI may

become the alternate stock exchange.

14. X: The current situation in the markets is supportive of development of monopoly and

should be remedied by all measures that encourage competition to flourish. Any attempt to

fix an optimal number of exchanges would further aggravate the prevailing monopoly

conditions in the capital market.

15. X: It is the result of the monopoly in the Exchange industry that has led to concentration of

trades in the hands of a few clients in equity cash and derivative segment (as per

revelations in Rajya Sabha by Ministry of Finance, 6% and 3% of the clients account for


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90% of the trading in equity cash and derivative segment respectively). The market

becomes volume – quantity centric instead of contributing for fulfilling economic objectives.

Had we limited the number of banks, telecom companies, and mutual funds what would

have been the service levels in financial sector and telecom sectors – what would have

been the level of product innovations, quality and cost of services and technological

advances in these sectors? It is the competition between BSE and NSE in early 1990s that

brought in screen based trading and penetration of trading and equal opportunity to

investors across the country. More number will not always fragments existing business, as

opined by the committee, but also develop and enlarge new businesses.

16. X: It is difficult to comprehend when one talks about competition and also seek to limit the

number of players in the industry. This would deter investors from investing in MIIs in India,

and would hamper global alignment of India’s financial markets and also cause a blow to

financial inclusion with less investments in product innovation, financial literacy and

technology due to dictating number of players. Lack of competition has led to repeated

failure of development of debt market, interest rate derivatives markets, and currency

options markets. Lack of competition in stock exchanges has strangulated emergence of

SME exchange and made equity derivatives market so narrow and shallow.

17. X: It is difficult to comprehend when one talks about competition and also seek to limit the

number of players in the industry. This would deter investors from investing in MIIs in India,

and would hamper global alignment of India’s financial markets and also cause a blow to

financial inclusion with less investments in product innovation, financial literacy and

technology due to dictating number of players. Lack of competition has led to repeated

failure of development of debt market, interest rate derivatives markets, and currency

options markets. Lack of competition in stock exchanges has strangulated emergence of

SME exchange and made equity derivatives market so narrow and shallow.

18. X: “SEBI should have the discretion to limit the number of MIIs…”:- This is an anti-

competitive recommendation contrary to the Competition Act 2002 and cannot be

adequately condemned. The regulator should prescribe logical minimum standards and not

pick winners. The regulator should prescribe logical minimum standards and not pick


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winners. The alternative would breed pointless discretion and corruption in the system

besides creating an uncompetitive market. The argument made that too many exchanges

would result in fragmentation of liquidity is a valid argument – but only before the advent of

computers in the exchange space. The US has a dozen exchanges and 75 alternative

exchanges (ECNS/ATSes) and yet liquidity is not fragmented. The reason is simple, with

electronic connections between exchanges and brokers’ duty to get the best price for their

clients, the order book of all the exchanges behave as a single exchange. In India too, with

smart order routing, the two order books (of BSE and NSE in equities) now are like single

order book. Therefore the argument that multiple exchanges fragment liquidity is rooted in

the 1960s and is wrong today in mythological proportions.

19. X: The committee report states that the number of Exchanges in a country should be as few

as possible. The reasoning is again based on faulty lines of thinking that Exchanges are

public utilities or national treasure and competition will drive them only towards

maximization of profit neglecting corporate governance. One can understand that the

number should be restricted with the objective that the promoters have sufficient credibility

and there is no unhealthy competition between the Exchanges.

It appears that the report is more backward looking rather than a forward looking, path

breaking initiative towards a vibrant capital market. If implemented, NSE will retain its

monopoly status and BSE, the oldest Asian Exchange will die a slow death due to lack of

Investor interest where as investors both global and local would be left clueless about their

investment of Rs.11000 crores into Indian Stock Exchanges without an exit route. Stock

Exchanges will lose on an opportunity to integrate globally and become more competitive

and technology driven, more transparent with improved corporate governance and more

accountable after coming into public domain. One can only hope that SEBI takes a wise

move and scraps the report.


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Stability Versus Growth – the perennial debate

1. X: In light of the findings and recommendations of the Financial Stability Forum

(FSF), this clearly specifies that the turmoil / financial crisis of the year 2008 were

an outcome of Non-Exchange platforms & products. The crisis was largely due to

products &entities that were not regulated and margined on an online ongoing basis

unlike the Exchanges that are highly controlled risk management measures.

Thus the BJC argument of ‘Stability versus Growth – The perennial Debate’ in the

context of this report appears to be completely ill-founded and irrelevant, and thus

cannot be considered as the basis to the recommendations that a topic as large and

critical as ‘Review of Ownership & Governance of Market infrastructure Institutions’.

2. X: The financial crisis will certainly influence future regulation but the references

made by the Report in the context of the functioning of Ws being impacted by a

crisis may not always be relevant. This is because the financial crisis originated with

banks and thereafter impacted insurance companies, mortgage providers and

financial intermediaries who were heavily leveraged but not the securities

exchanges that are inherently largely low-leverage equity driven business models.

There were no allegations of wrong-doing in exchanges and especially no issues

with settlement even in volatile market conditions like late 2008 when the S&P V1X

had reached volatility levels of ---60% versus a 5-year average of -21%. Further,

exchanges continued to function robustly even though the market capitalization of

the listed stock exchanges sharply crashed, as seen in the table below:

Exchange High Date Low Date Drop %

CME 2007 - December 2009 - January 74 CBOE 2010 - June 2010 - September 38 Deutsche Borse 2007 - May 2009 - February 79 NASDAQ OMX Group 2007 - December 2010 – June 64 ASX 2007 - December 2009 - February 56 NYSE Euronext 2006 - November 2009 - February 82

ICE 2007 - December 2009 - February 71


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While the lessons of the global financial crisis, which are in deed serious, are indeed

relevant to future regulation of the overall financial services industry we would urge

you to consider the specific business model utilized by securities exchanges that

has remained stable through such a turbulent period and not propose generic

measures which in the long run could hurt the markets.

3. X: There is naturally a concern that exchanges may be subject to some form of

regulatory ‘race to the bottom’ when there are ‘for profit’ or publicly traded. However,

this is a fallacious notion that hardly gives much credence to the core aspect of

market trust implicit in an exchange operator. Given that the life blood of markets is

to be the epicenter of multiple members and other interested parties, exchanges are

under constant scrutiny not just from regulators but form their clients, all of whom

have a vested interest (as does the exchange) to ensure high standards of market

probity and strong regulation. Indeed the experience of fierce exchange competition

even suggests that regulation may improve as a result! A report by the OECD

published in April 2009 “The Role of Stock Exchanges in Corporate Governance”

explicitly notes the absolute lack of any systematic evidence that any publicly

quoted exchange has sought to abuse its regulatory position.

The London Stock Exchange and its AIM division are consistent, aggressive,

competitors for listing of Indian companies. In the event of the domestic exchanges

being less competitive due to regulatory restrictions (eg due to lack of ability to

maximize profit and therefore seek efficiency etc) then it is not unreasonable to

suggest that overseas exchanges will continue to seek Indian companies to list

overseas, beyond the SEBI regulatory framework.

It is concern that the wish to develop a world class financial centre in India would be

significantly dented if the Indian financial infrastructure is not allowed to be owned

and operated in accordance with global standard practice.

It is also not clear why the concept of arbitrarily revisiting the regulation of

exchanges in such a prescriptive fashion is pertinent. The world’s exchanges have

adopted a path to public profitable exchanges that has served markets very well


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despite the ‘credit crunch’ of 2008 (at no time were any exchanges in danger

despite significant collapses in equity values and the closure or nationalisation of

many banks) and has been given a clean bill of health by the OECD.

A key issue is can India (or any other nation) afford to be unique amongst major

economic nations for its market infrastructure?

Market Infrastructure Institutions

1. X: Taking cognizance of the BJC’s line of reasoning for defining MIIs, all the

frontline entities of these regulators like Banks, Insurance companies, Airline

companies, form part of the Market Infrastructure and are thereby as per BJC’s

terminology known as MIIs. Further extending the BJC’s line of reasoning in defining

MIIs, even industries that handle the national natural resources are important from

the point of view of national security or public utility like telecom, banking, insurance,

healthcare, airlines will all need to be categorized as MII.

Further, once they get categorized they should get similar treatment unlike BJC

recommendations which let the least riskiest MII which is a Stock Exchange be

owned 5% by a corporate by most risky Cleaning Corporation is allowed to be

owned 100% by the same MII. A Rs 100 crore networth organization is allowed to

own Rs 300 crore Cleaning Corporation or a Depository cannot own a Stock

Exchange. Corporate can own 24% of depository but 5% of a Stock Exchange.

2. X: The report defines the characteristics of infrastructure as one which is essential

and that has externalities, switching costs and standards, economies of scale and

high sunk costs. However, these characteristics are more typical of hard

infrastructure. For instance, the total fixed assets of NSE for 2010 is Rs. 478.45

crores. This scale of investment doesn’t warrant a ‘natural monopoly’ to ensure

profitability. Further, the Net current assets of NSE for the financial year ended

March 2010 was Rs. 2,688.22 crores of which Rs. 2,488.88 crores are due to short

term investment which are not related to the scale of operation of the exchange.

Hence, the committee’s argument in favour of existence of ‘natural monopoly’ looks


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a bit farfetched. Further, the report argues that MIIs provide network effects and

hence may enjoy market power. I argue that if the network effects argument were

valid, then we would not have witnessed a separate clearing corporation and

depository for the two prominent exchanges that exist today.

I would recommend a wider debate and would like to know the committee’s

response, to the queries raised in popular media and academic circles, before the

recommendations are accepted. I argue that failure in stock market would affect the

society much lesser than failure in a bank or commodity exchange where private

investors are allowed.

Competition

1. X: We endorse the viewpoint of the Committee. We acknowledge the value of a

calibrated approach and also the value of ensuring continued innovation. However

we would like to underline the absolute necessity – even in the context of a

conservative approach – to keep a competitive environment alive to bring in

efficiency and effective development of the market. We would like to summarize our

views in the following manner:

1. In the absence of dramatic failure or problems with existing policies, we

should be very cautious about making radical changes. Many of the Jalan

Committee recommendations – e.g., a return to a non-profit exchange model

– at this point in time represent radical change and should be carefully

weighed before they are implemented. Where possible, achieving the

objective of the policy change recommended by the report may be able to be

done with less disruption to existing norms, which have served India well in

recent years.

2. We would urge that SEBI tailor any governance and ownership norms so that

they ensure safety AND competition. Competition has been the engine of

innovation in India’s capital markets in the last 15 years. Without it, India’s

capital markets will not reach their potential to develop into a global financial

center.


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3. In the current environment, with one exchange having achieved a

dramatically dominant position, any proposed policy change should be

weighed carefully to make certain it does not cause further deterioration to an

already fragile competitive environment. In our judgment, implementing the

Jalan Committee recommendations fully would have a severe impact on

competition in Indian capital markets. It would effectively establish a new

paradigm – a government-controlled utility model. This is a model that has

been abandoned in virtually all leading capital markets around the world. It is

also a radical step for a country which has benefited from a very successful,

competitive, dynamic model over the last 15 years.

2. X: We recommend that the healthy competition must be encouraged to ensure that

the benefit of competition as seen in airlines, telecom, insurance and banking

industry is also witnessed in Capital Market. Indian market is under penetrated and

skewed with concentration of business in few cities, companies, brokers, investors

and instruments. US and Europe which have very developed market are still having

new Exchanges coming up even now cornering significant market share only based

on better price, service, products or technology. In countries which are penetrated to

the extent of 30% to 50% of their adult population where new exchanges are being

established then where is the choice for Indian market to even think about this

measure currently.

The investor population in India at 1% is least in BRIC nations with China being at

10%. Many products are still not available on Indian exchanges which account for

80% of the global exchange business. All the benefits will come only when more

exchan ges and more brokers will chase business across country and across

instruments.

CCI in its investigation report has held that “it is proved beyond a seasonable doubt

that NSE has the design of eliminating competitors and substantially lessening the


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competition since the date of commencement of trading in the CD segment”. This

investigation report was submitted to Chairman, SEBI in confidence and a copy of

the same could be obtained from his officer or from CCI.

The BJC recommendation only continues to protect the monopoly of he existing

dominant exchange as against the international practices of opening up the markets

for more competition. Even the so-called other MIIs in India have opened their

markets for competition.

This may lead to Indian capital markets not seeing any world-class exchanges for a

long time to come.

The ostensible reason that too many exchanges would ‘fragment liquidity’ takes a

static view of the market as it stands today, rather than a dynamic view of a huge

untapped potential waiting to be reaped, given the above statistics.

3. X: The economic doctrines, more particularly the notion of competitive inefficiency,

have been relied upon to justify upholding a monopoly. While commenting on the

necessity of having many stock exchanges, the committee held that the entry of a

large number of stock exchanges will fragment liquidity to such an extent that it

might stifle growth and innovation in the process. Also, there is an opinion raised

that technology has altered the market place so much that the need for multiple

stock exchanges has been reduced largely. It may be noted that the United States

of America has 78 Stock Exchanges while Europe has 32, including deemed ones.

While, the market activity may be highly segmented in these Exchanges, the

Exchanges have worked to make it highly liquid all the same and thereby more

profitable and economically viable.

4. X: The current monopolistic market condition in India should give way to more

competitive condition, like is the case with mature markets and even in markets like

China Any anti- competitive, predatory pricing and pro-monopoly conditions should

be dealt with by the Regulator.


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5. X: More competition and corporate governance in MIIs will drive the growth of

industry where the economy is set to develop rather than less competition and

outsourced regulation.

6. X: Market Competition:- It is known that effective competition is key to innovation

and reduced cost to clients. Entrepreneurs who see value in a particular enterprise

are often guided by larger value to the society and to them as well.

Vertical integration:- The future volume of capital market will be so large that

easily several firms can have enough market size and all vertically integrated forms

can compete. If proper checks and balances are created and transparency is

introduced vertically integrated firms will be more efficient. Another view can be that

the size of business will be so large that each function could be independently done

and still be sufficient to provide services effectively and efficiently. Therefore, one

need to see the volume of business involved in the future.

Technology:- The modern day software and technology make it possible to provide

virtual information and speedy transaction. But it is very expensive and therefore,

large amount of investment is required. Further, innovation in this field can come

only by creating more competition and not by reducing competition.

Revision:- I suggest that the committee resubmits the report after taking inputs

from various stakeholders on the JLC and after a series of discussions in various

forums. I think similar procedure is being followed in formulating Direct Tax Code

by the Finance Minister.

7. X: Arguments appearing in the media against the Committee’s recommendations

are based on the expected advantages from a model of competition among stock

exchanges, divested of their regulatory function, a la telecom industry of lower

prices and innovation. The comparison of the stock exchange platform with the

telecom sector, is I thing, inappropriate. Unlike telecom, which is a sector of the

economy, stock exchanges, along with other MIIs, have economy-wide implications

for risk management and financial stability. The benefits form further competition in

stock exchanges, especially after hiving off their regulatory functions, will be low.

Transaction cost is already low, relative to taxes and brokerage, thanks to


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information technology and the enormous increase in volume, with the growth of the

economy. The returns to the economy from further reduction in transaction cost, as

a result of increased competitive efficiency, will not be significant. Innovation from

competition among firms in only one segment is limited. Incremental returns from

competition from stock exchange platforms, with their regulatory functions hived off,

is marginal.

On the other hand, the hiving off of the regulatory function, a pre-requisite for the

competition model, would weaken the regulatory function. Competitive firms resist

providing complete information. Secrecy is considered essential for competitive

firms. Identifying cases of insider or circular trading or front running will be rendered

even more difficult for a regulator who depends on independent competitors for

comprehensive information.

I, therefore, feel that in making a choice between the Jalan committee

recommendations and the alternative of competitive stock exchange platforms,

neither lowers cost nor increased opportunities for innovation are appropriate

criteria. Effective risk management and reducing vulnerability of the financial system

should be the key criteria.

Rich and flexible regulatory response to changing market conditions and the

behaviors of market participants are critical. Coordination among the MIIs should

not be made structurally difficult as it would be if a regulator has to work through a

set of competing stock exchanges. Even advanced countries, which had proceeded

far along the competition model, are currently reconsidering their model, in the

context of the black swan events that occurred recently. The favoured approach is

to move towards a calibrated and a more institutional framework for regulation to

handle risk and vulnerability.

8. X: Committee should encourage competition by easing existing norms and

compliances rather than putting arbitrary conditions as regards to the ownership of

the MIIs, non listing of MIIs and cap on the executive remunerations. Because of the

present monopoly of a few exchanges, there has been a concentration of trades,

especially in the equity and the derivatives segment on their trading terminals,


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rather than allowing for a more diversified and level playing field.

9. X: The committee’s recommendation that the exchanges are natural monopolies

sneakily protects the salaries of the NSE’s top brass.

Regulatory model

1. X: Independence of Stock Exchange: As regard independence of Stock

Exchanges, with suitable board and management structure, the main issue,

however, would be that of funding. One possibility could be that this body is partly

funded be the exchanges themselves and partly by the Govt., through Investor

Education Fund. Transfer of substantial regulatory responsibilities of the exchange

to a separate, independent, private regulatory body to be overseen by SEBI seems

to be the appropriate way forward.

2. X: The Indian Exchanges can be classified as strong Regulator controlled Exchange

Model, which is a different from the model as classified in the BJC report. Thus the

very basis of the BJC report highlighting the prminence of the Exchanges role over

the regulator is questionable. At best the exchanges are implementation agency of

SEBI rules under their very tight oversight.

The IOSCO report states that “Most regulators focused on governance

arrangements as the primary means of ensuring that Exchanges have robust

arrangements for maintaining proper balance between the Exchange; commercial

interests and its regulatory responsibilities.”

It is evident that SEBI has over-pervading powers over the Stock Exchanges and all

concerns around ‘conflict of interest’ have been already dealt with, just like other

global regulators have taken care of the governance norms.

As all the Exchanges deal with each parameter similarly, any differential treatment

by any exchange can prompt regulatory action from EBI. This is an additional check


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on Exchanges. SEBI meets Exchanges on a weekly basis for reviewing all

surveillance actions of Exchanges will be identified in the weekly surveillance

meeting of Stock Exchange makes each regulatory compliant manner and anyone

not doing so will be identified in peer evaluation. In light of the above facts which

clearly state that SEBI not only defines the regulatory framework but also closely

supervises and monitors all policies & processes of the Exchanges have the option

to only tighten the norms further.

India has an option to outsource regulatory operations as in the US or to continue

with the tightly regulated supervision of SEBI as is currently within which SEBI

approves the MD & CEO and also requires a Compliance Officer to ensure on

regulatory compliances at their risk and at the overall risk of the Board.

At best the Committee or Board can be appraised periodically, in a similar manner

as is done with the Public Interest Directors Committee, Executive Committee & the

Board.

3. X: In this context a suggestion is being put forth that the regulatory role of the SE

should be separated from its business activities. But this is neither eminently

feasible nor desirable. Historically, the SEs have been acting as the front line

regulators. And even after market regulatory authorities were set up later in several

countries, the market regulators always required SEs to continue to act as the front

line of regulators. Market regulators get involved in regulatory issues either to

examine matters that lie beyond the regulatory powers of the SE and/or when the

SE does not discharge its regulatory responsibilities to the satisfaction of the

regulators. It is desirable that this arrangement should continue as in the past.

While arguing in favour of separation of regulation from the SE to make it a purely

business entity, two types of suggestions are being put forth In the first model, the

regulation is expected to be entrusted to a separate body carved out of the SE. If

this is accepted it would mean that the residual SE will be merely running a trading

engine and the staff of the exchange will comprise primarily IT oriented employees.

The exchange staff handling market surveillance, investor complaints, arbitration of


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disputes between investors and brokers or between two brokers, membership

regulation including admission of new members, their periodical inspection, etc will

have to be transferred to the regulatory body. After a close scrutiny of all the

numerous activities that the exchange today undertakes it will become clear that

most of the important activities of the existing exchanges will have to be entrusted to

the regulatory body that will be newly constituted for separating the so called

business activities from the regulatory activities. It will become abundantly clear that

the entity running the trading engine would no longer be entitled to be called a stock

exchange as we understand it today. Such an entity managing only the trading

engine would almost be in a commodity business. Therefore, there is no reason

why such an entity should not be called as one more variety of an IT company.

There is no justification for such an entity to seek approval of SEBI for conducting its

IT business since SEBI has hardly anything to do with it. In a way, one may argue

that the regulatory body called as the new brand of SE can as well outsource its

requirements of running a trading engine to any third party. For this purpose the

newly constituted stock exchange can as well entrust the business of running a

trading engine to another entity chosen through a bidding process.

Under the second solution it is suggested that all the regulatory functions of a stock

exchange should be transferred to SEBI itself. This is a highly impractical proposal.

SEBI cannot and should not take up the front line regulatory responsibilities of all

the stock exchanges. The argument in favour of SEBI taking up the regulatory

functions of all the SEs is tantamount to saying that SEBI should be running all the

stock exchanges except their trading engines. If that is so then there is no need to

have more than one stock exchange in the country which is managed by SEBI,

There is tremendous advantage in having regulation split at two levels as it happens

today. The best arrangement is one where the stock exchanges act as front line

regulators while SEBI continues to function as the overall Market Regulator.

4. X: The Report cites four models internationally for self-regulation. The report does

not provide any satisfactory reasons for not adopting a now internationally accepted


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‘Independent SRO Model. India is the world’s second most important FDI

destination with an impressive annual growth rate of an average 8%, NSE enjoys

the reputation of being one of the three most liquid exchanges wordwide. Still, the

Committee has recommended that the time is not ripe in India to separate the

regulatory functions from the stock exchanges and believes that the highly

conflicted model where the market regulates itself is right for India. Committee

therefore denies adoption of global best practice which the other foreign stock

exchanges had adopted long back.

5. X: The existing market structure arrangement between stock exchanges, clearing

corporations and depositories are appropriate for the current stage of market

evolution and we do not believe that separating the functions would provide

meaningful incremental advantage to the market at-large.

6. Xi: Evidence suggests Exchanges, either listed or private recognize and adequately

manage conflicts of interest. Major conflicts faced by a corporatized Exchange can

be:

1. Conflict between business and regulatory mandates

2. Conflict with regulating competitors

3. Self listing conflict

4. Conflict in regulatory and investigative administration

5. Conflict in funding the regulatory initiatives

7. X: Despite the regulatory and commercial functions being presently housed under

the same entity in securities exchanges in India, we as a country are performing

admirably well in terms of securities regulation and are ranked #15 globally (and

above large global exchanges like the US at #64 and the UK at #42) in terms of

"regulation and supervision of securities exchanges" (World Economic Forum 2010-

2011 Global Competitiveness Report). Further, we would like to also bring attention

to the fact that this issue has been dealt with in many parts of the world (both

developed and emerging markets) to the satisfaction of the respective governments,

the general public as well as the market participants. The Financial Industry


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Regulatory Authority ("F1NRA") in the US offers an example where it performs

market regulation under contract for the major US stock markets, including the New

York Stock Exchange, NYSE Arca, NYSE Amex, the NASDAQ Stock Market and

the International Securities Exchange. The Johannesburg Stock Exchange ("JSE"),

the world's #1 exchange in terms of regulation and supervision (per the World

Economic Forum 2010-2011 Global Competitiveness Report), which is also publicly

listed has achieved its status through a close working relationship on the regulation

front with the Financial Services Board ("FSB") to whom it is accountable to for the

regulation of its markets, market integrity and investor protection. The JSE-FSB type

relationship is also observed in Singapore where the Monetary Authority of

Singapore ("MAS") monitors the regulatory activities of the Singapore Exchange

("SGX").

As regards the regulatory role, we believe it is desirable, feasible and in fact,

necessary to separate the regulatory and commercial functions. Thus, we would like

to request an immediate initiative to focus on the same and develop a time bound

roadmap specific to India on what would be "adequate" separation of the regulatory

functions from the commercial functions to deal with the potential conflict of interest.

Further, it is our belief that the regulatory functions should be housed in one

autonomous entity for all securities exchanges (akin to FINRA) enabling all

participants across markets, products and at different stages of evolution to be

covered under one regulator - from our experience invsting in exchanges globally

we further believe that such an autonomous regulator be adequately staffed and

funded. We would reiterate that this should be achieved as soon as practicable to

ensure continued confidence in the Indian markets.

8. X: Separation of regulatory and commercial functions within MIIs. This appears to

be a major focus of the report and, as such, we believe that a final recommendation

would be incomplete without publication of a clear roadmap for separation of these

functions.

9. X: MIIs are the first level regulator of their members to keep them disciplined and


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10. X: We submit that it is time that we move towards 'Limited Exchange SRO Model.'

As the Committee has already noted such SRO model is successfully functioning in

Hong Kong, Singapore, Dubai and Sweden. some areas of regulation, like

certification, sub broker registration, implementation of fair trade practices among

Trading Members and generally investor friendly practices etc. in respect of the

Members of MII, that is currently regulated by the MII, should be allowed to be Self

Regulated by members body that has wide representation such as ANMI.

11. X: There seems to be broader consensus that Exchanges be allowed more

commercial autonomy and therefore, regulatory burden should be reduced from

them. Now the issue is who will share the regulatory burden and will act as a first

line regulator. Association of National Exchanges Members of India (ANMI) fits the

bill completely. We request that Association of National Exchanges Members of

India (ANMI) be made SRO and be given some of the functions of first line regulator

like Registration, Education & Inspection of its members. This SRO will have

nominee of the Government, the Regulator and Exchanges beside the Stock

Brokers, in the ratio / proportion decided by SEBI from time to time. Based on the

experience, SEBI may delegate some of the other regulatory power to SRO.

12. X: There should be a strong SRO Model in India on the lines of JSDA and KSDA.

JSDA (Japan) and KSDA (South Korea) are very strong and successful SRO

Models which have proper Chinese Wall between their Regulatory and Lobbying

operations. In India, we can have ANMI (Association of National Exchanges

Members of India) as SRO, whereby Regulatory Operations of SE’s like Members

Registration, Inspection, KYC, etc may be passed on to SRO to ease pressure on

shall keep eye and day to day operations. In view of changed circumstances when

multi exchanges are going to be operational it will be better if the task of regulatory

function is assigned to a independent body, which can take care of regulatory

function of all MIIs.


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SE’s.

13. X: SEBI has already notified SRO regulations in 2004. There is only one difference

that as per SRO regulations in India the majority of Directors should be of SEBI’

nominee directors. It was suggested that looking to the size of the country the

number of directors should be increased to 14 or 15. In the composition 30%

should be SEBI nominee, remaining should be from investors’ associations,

independent directors of repute and elected trading members. Of course the

chairman should be independent director and the appointment should be approved

by SEBI (as per existing provisions). If the above amendment takes place, the

Association of National Exchanges Members of India can perform the role as SRO

very well. It is the only institution which has the capability, capacity and

acceptability all over.

14. X: Can the need for greater competition and a no-compromise approach to

regulation be achieved simultaneously? One way to do this is by separating

regulatory functions to a non-profit organisation, akin to the model adopted by

NYSE and Nasdaq. That way, exchanges can focus on their products and services

and make as much money as the system permits.

15. X: One of the best suited and widely prevailed solutions is separation of regulatory

oversight and pursuit of profits.

16. X: Dealings in financial markets are full of instances of conflicts of interest. But that

does not mean or warrants encouraging and preserving and protecting monopoly.

Experiences of US, Europe, Australia, Japan, South East Asian countries in

managing resolution of conflicts of interests in financial sector and in particular MII

are worth noting.

17. X: Dealings in financial markets are full of instances of conflicts of interest. But that

does not mean or warrants encouraging and preserving and protecting monopoly.

Experiences of US, Europe, Australia, Japan, South East Asian countries in

managing resolution of conflicts of interests in financial sector and in particular MII

are worth noting.


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18. X:- Professional managements and good systems are sufficient to prevent broker or

insider dominance in any modern exchange, since structure follows technology.

Regulatory function:- Exchanges may be SROs but there is a regulator above

them to enforce standards. Designing random checks and reporting norms will not

be very labour intensive. India’s past experience shows that overprotecting an

industry, as an infant is a good way to ensure it never grows up. Dr.Jalan (2005)

himself wrote, in his book on Indian governance, replacing “old and cumbersome

administrative procedures” based on multiple discretionary approvals “by a rule-

based system largely based on self-certification” was very successful in the

regulation of the capital account, which must be applied to MIIs too.

19. X:- “It is premature of think of the ‘independent SRO model’…….the government

model may not be entirely possible int eh Indian context considering the size of the

market.” There is no further elaboration of this very critical assessment in the report

of the committee. What aspect of the current stage of evolution makes it premature

to consider the ‘independent SRO model’? What does the Jalan Committee report

mean when it says that government model may not be possible “considering the

size of the market”? Is the size too big? Both the UK and France follow the same

model and the UK market is many times that of India. SEBI has been an effective

regulator and therefore either the independent SRO model or the government model

is open to us.

Market structure:- Indian stock market operates more like a duopoly. Therefore,

while remaining agnostic about the optimum number of players in the market, for us

what is much more important is making the market contestable.

We could do this in two ways: first, by reducing the barriers to entry by having an

independent clearing and settlement corporation; second, letting market dynamics

decide whether competition in trading platforms will come in the shape of new

entrants, new products or both. Therefore, what is important is to allow players in

the trading market the flexibility of choosing their competitive strategies in a way that

increases market competition whereas at the same time ensuring systemic de-

risking. We believe that horizontal integration allows us to do both.


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20. X:- Market structure:- Going forward, the commercial and all regulatory roles of the

exchanges have to be segregated appropriately. Once that happens, the argument

that stock exchanges should be treated like commercial entities can be entertained.

Inappropriate comparison with banks:- Some have argued that when RBI allows

more competition in banks and that when banks are allowed to raise capital through

listing, why should there be lesser competition in stock exchanges?

Exchanges cannot and should not be compared with banks. Shareholders or

management of a bank do not have access to information on the bank’s clients on

the basis of which they can trade nor do they have members who can take

proprietary positions or who can trade with themselves. Banks have no access to

price-sensitive information that can be used for trading on its own platform, they do

not have powers to list a company, they do not have any similar regulatory functions

nor they have a trading platform. Finally, customers of a bank do not make money

from the bank like those of the exchanges. Closure of one bank, though unnerving,

can still be managed. Failure of an exchange closure can have devastating

repercussions.

21. Xii:- The most important areas of focus for policy makers consist of eliminating the

securities transaction tax, and of the indirect levers which can influence impact cost

such as improving disclosure, enforcing against insider trading and increasing the

diversity of market participants.

The present design in India is an elegant one, featuring private audit and legal firms

alongside the staff of critical financial infrastructure organisations (NSE, BSE,

CDSL, NSDL, CCIL) adding up to a massive enforcement system that is performing

transaction-intensive discretionary functions.

There is merit in being cautious before shifting away from this two-tier system in

favour of a three-fold or five-fold expansion of SEBI, in return for a small scale of

maximal gains (since the sum total of charges of the critical financial infrastructure

firms adds up to 2.992 basis points out of the total cost of 84.9 basis points that is

suffered on a round-trip by investors doing index arbitrage).

In the medium term, India must focus on building regulatory capacity. In the medium


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term, the goal should be to come up to OECD standards on the legal system,

courts, regulatory agencies, etc. However, in the short term, a realistic sense about

the enforcement capabilities of RBI and SEBI should guide decision making.

Further, the introduction of high powered incentives in financial firms, that RBI and

SEBI has then to regulate, might itself cause a reduction in the capabilities of RBI

and SEBI, to the extent that relatively unethical firms try to subvert the middle level

staff at these agencies, and try to subvert the appointment process. Hence, the

sequencing that appears to be useful is to first emphasise low powered incentives,

and focus on institutional capabilities. Once India starts achieving governance

scores that compare with the 25th percentile of OECD members, then there would

be room for greater risk taking by policymakers.

22. X:- The report does not provide any satisfactory reasons for not adopting a now

internationally accepted ‘independent SRO model’ or even a statutory model. Given

the highly sophisticated surveillance system which SEBI has (amongst the best in

the world) and its ability to see manipulative trades across exchanges, clearing

bodies and depositories, it bears to reason that the surveillance of a single

exchange is highly inadequate. In addition, the highly conflicted model of the

company regulating itself needs to be abandoned. Hence SEBI should take full

responsibility of surveillance and supervision. There are no legal hurdles in

achieving the same and can be quickly done.

India has progressed at a great speed in the past 2 decades post economic

liberalisation and is considered to be one of the best investment destinations across

the large growing economies. Still, the Committee has recommended that the time

is not right in India to separate the regulatory functions from the stock exchanges

and believes that the highly conflicted model where the market regulates itself is

right for India. Committee therefore denies adoption of global best practices which

the other foreign stock exchanges have been following since long back.

SEBI has the requisite powers under SEBI Act, 1992 and SCRA, 1956 to levy


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penalties, suspend any errant exchange official, take measures to regulate the

business of stock exchange, issue directions to the stock exchange in the interests

of investors and the securities markets and punish an exchange to its most extreme

by prosecution. Hence, the time is ripe to separate the regulatory functions from

stock exchanges and move towards an independent SRO model or a statutory

model of regulations.

23. X: In order to ensure that arrogance of infallibility is avoided in such organizations,

the executive and adjudication functions are separated and the people at helm of

affairs are selected based upon rotation among the stake holders in the system.

SEBI must take a more active role and set a level-playing field regarding fees,

entry, etc. of members.

1. X: This recommendation is fully acceptable. With the implementation of this

recommendation, any issues that may arise in respect of monopolistic abuse will

also disappear. SEBI can also ensure that there is no manipulation of the system

and allow a level playing field for all the Stock Exchanges and no outside influence

is exercised on the day-to-day operations of the Exchange. However, a different set

of rules and requirement for RSEs and Exchanges with national level trading is

needed, considering their size and scale of operations. A separate set of rules can

also be framed to encourage Regional / Small Stock Exchanges to address SME

segment, considering the Development Role of SEBI.

2. X: SEBI should see the working of SRO and based on the positive experience,

more commercial autonomy (like listing), concept of broader anchor investor, cross

holding etc. be allowed to Stock Exchanges.

3. X: Currently, SEBI regularly inspects SEs. But something more than mere periodical

statutory inspection is required. A stock exchange requires listed companies to

submit annually structured reports on status of adherence to stipulated corporate

governance norms. SEBI should demand more detailed reports on quarterly basis

from the SEs. During the recent past there were reports in the press that everything


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was not all well in regard to the governance standards and functioning of the Boards

of some exchanges. Hence, SEBI should insist on quarterly reporting on the

functioning of corporate governance mechanism in SEs. Such reporting should be

both structured and interactive. In the quarterly structured report SEBI should ask

details on functioning of the SE and its board.

The SEBI Board Member in charge of SEs should hold periodical consultations with

the CEO, Chairman, and 2/3 chairmen of important committees of the exchange

board to assess quality of corporate governance in a SE. SEBI should insist on

constitution of a nomination and corporate governance committee of the board in

each of the exchanges. SEBI should not give up its right to appoint its

nominees on the board of SEs. The nomination mechanism should be relied

upon to send right types of signals to exchanges as also to the market.

Whenever SEBI feels that governance standards are getting diluted in an exchange

it should appoint its nominees on the board of such an exchange.

Mechanism to ensure autonomy of regulatory

departments

1. X: We have already recommended that all (stock Exchanges, Clearing

Corporations, Depositories) may have same shareholding norms. Further, we

recommend that in case SEBI decides to make the shareholding norms uniform for

all MII’s as being suggested by us then it would be appropriate to have the same

selection norm for all MII’s. We agree to the recommendation on compliance officer.

2. X: The mechanisms for conflict resolution can be implemented in practice easily and

hence we support this recommendation.

3. X: As recommended by Dr. Bimal Jalan Committee, the dual reporting by senior

executives (including handling critical functions as stated in the report), to both

MD/CEO and an independent Committee of the Board shall severely undermine the

authority and independence of MD/CEO, whose appointment in any case is subject

to prior approval of SEBI. Further, this recommendation goes against the entire


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philosophy and present regulatory guidelines of SEBI giving statutory duties and

responsibilities along with requisite powers to the MD/CEO of a Stock Exchange.

Therefore, the dual reporting as recommended by Dr. Bimal Jalan Committee

Report may not be insisted upon.

Moreover, the composition of this Committee appointed by the Board should have

equal representation of shareholder directors (non trading member) and Public

Interest Directors instead of having majority of PI Directors. However, the “Listing”

portion should be taken away from this area of reporting since many times, it

involves tremendous leg work and also perpetual follow up where the help of even

Trading Member Directors may have to be taken being the intermediary contact

person in the Capital Market. This is because the PI Directors or non Trading

Member/Shareholder Directors may not have adequate knowledge. Since, “Listing”

is a source of revenue generation for the Stock Exchange, positive contribution

from the entire Board is always solicited. Therefore, we suggest that these aspects

be considered sympathetically.

The current regulations makes MD/CEO to be responsible as compliance officer

and his function is as such mandatory for Stock Exchange. Therefore, appointing

an additional compliance officer for monitoring the compliance of the Act, Rules and

Regulations, Notifications, Guidelines, Instructions etc. issued by SEBI or the

Central Government for redressal of investor’s grievances would come in direct

conflict with current duties and responsibilities of MD/CEO of MIIs who have been

otherwise performing their duties judiciously. Therefore, the current system of

MD/CEO to act as compliance officer should continue for an avoidable duplication

and conflict of interest. While such compliance officer may independently report to

SEBI in the event of non compliance, the same should also be briefed to the Board

of Directors who do not look after day-to-day affair of the Stock Exchange and need

to know exactly where the lapse has occurred.

4. X: The Exchange supports the recommendation made by the Committee in Para 4.1

and Para 4.4 (measures to ensure autonomy of regulatory departments and

appointment of compliance officer) to guard against potential conflict of interest with


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representation of Trading/Clearing Members on the Board of the Exchange.

5. X: Dual reporting of certain senior executives:- This recommendation if implemented

will increase confusion and create lack of accountability. A properly designed

Management Information System (MIS) addressed to the Board can take care of

these issues.

6. X: Dual reporting by key personnel will cause difficulty in carrying out day to day

operations, hence it may be withdrawn.

7. X: i) Duel reporting should be avoided. No-one can serve two masters. You can not

serve both God and Money.

As recommended by Dr. BJC, the Dual reporting by Senior Executives ( handling

critical functions as Stated in the Report ) to both MD/CEO and an Independent

Committee of the Board shall severely undermine the authority and independence

of the MD/CEO whose appointment in any case is subject to prior approval of

SEBI. Appointment of another compliance officer independent of MD/CEO may not

be insisted upon including cap on management compensation. II) Compliance

Officer effectively should be MD/CEO/Secy. But jurisdiction with the Board who

would decide.

8. X: As recommended by Dr. BJC, the dual reporting by senior executives (handling

critical functions) to both MD / CEO and an Independent Committee of the Board

shall severely undermine the authority and independence of the MD/CEO whose

appointment in any case is subject to prior approval of SEBI.

Further, this recommendation goes against the entire philosophy of the present

Regulatory Guidelines of SEBI - giving Statutory duties and responsibilities along

with requisite powers to the MD / CEO of a SE. Therefore, dual reporting as

recommended by Dr. BJC Report may not be insisted up on. Further, the MD / CEO

could himself act as compliance officer as recommended by Dr. BJC Report; who

shall immediately and independently report to SEBI any instance of non compliance.

Appointment of another compliance officer independent of MD / CEO may not be

insisted up on; which could be optional to be decided by the Board of Directors of


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respective SE.

9. X:- We strongly oppose any commercial interest in stock exchanges. We agree to

the recommendation that MD/CEO should be appointed with the approval of SEBI.

We suggest that the maximum of three years and outer side two terms of 3 years

each may be given. Compliance officers to be appointed with SEBI’s approval and

Government nominee Board members must be there in selection process. The

compliance officer should be professionally qualified.

Related Business of MIIs

1. X: Prior SEBI approval for certain commercial arrangements: It is understood that

such restrictions are not a commonplace in other countries. Commercial

arrangements and their terms and conditions are left to the parties while the

regulator only approves the product based on international indices after considering

the same from the investor protection stand point. The index providers may not like

to license their indices to countries where the regulator needs to approve the

commercial terms and conditions including the exclusive rights or deal with more

than one exchange. Therefore, we feel that the prior approval requirements are not

desirable.

2. X: We recommend that Exchanges and other MIIs should have this flexibility under

overall control and regulation of SEBI. All global exchanges have established

multiple subsidiaries to further their business and meet the requirement of the

market. There cannot be rules made for managing such institutions. However, the

regulator must ensure level playing field and prevent anticompetitive practice being

indulged by any exchange.

We recommend that SEBI may separately call only the relevant stakeholders

debate and finalize on the matter. This problem has been seen sometime back in

depository but eventually SEBI had to intervene and get it resolved. Similarly, this

problem could be faced in clearing corporations. In fact there is already a problem


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going on in technology related matter and predatory pricing by a Exchange.

Having close relationship with technology providers provide strategic edge to a

Stock Exchange in reducing cost and improvising products or services. Any change

in this relationship could have serious ramifications on the business model of Stock

Exchange.

Stock Exchanges try to retain technology exclusively within the country / region

even if it is bought from third party so that the Stock Exchanges have necessary

competitive edge.

In fact, it is easier for a technology company to hire staff and establish a Stock

Exchange by deploying capital rather than for a bank to hire technology and

establish an Exchange. We are of the view that no specific regulation should be

build to structure between a Stock Exchange and a technology partner.

3. X: All MIIs should be allowed to get into any business in the form of 100% owned

subsidiaries/ joint ventures, etc. subject to a negative list drawn up by SEBI (eg.

Stock broking business, etc.)

With the Committee recommendations of SEBI ensuring equal access to all MIIs by

all MIIs, there seems no rationale to tinker with the existing provisions of the

Depositories Act 1996.

4. X: MIIs should be permitted to perform activities incidental and inherent to their core

activities only.

5. X: What’s wrong if a stock exchange leverages its homegrown technological

knowledge and generates revenue by providing technological solutions to other

MIIs.

Replacement of SCR(MIMPS) Regulations

1. X: In the context of MIMPS regulations, we submit that the power of SEBI is limited

to prescribed the procedure for increasing the public shareholding. Hence we


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recommend that new regulations, if any, shall not go beyond prescribing the

procedure for increasing public shareholding.

2. X: We are in agreement to the committee recommendation. Persons acting in

concert to be defined very carefully to be exhaustive. A guidance can be taken from

the Takeover code and definition of associated enterprise. All direct and indirect

relations to be covered including deep business relation with each other.

Exit norms

1. X: We agree that the same needs to be examined by SEBI and recommend that it

be done through a consultative approach by involving the relevant stakeholders.

However, what is surprising is that SEBI is not undertaking any proposal to revive

the existing Exchanges and simultaneously seeking proposal for new Currency, and

interest Rate Future and SME Exchange. Ideally, SEBI could look at MIFID norms

of Europe and National Stock Market system (NSMS) of USA, to create relevance of

existing stock exchanges alongwith getting new exchanges in India.

2. X: We are in agreement to the committee recommendation.

Power of SEBI in relation to MIIs.

1. X: We are in agreement to the committee recommendations and suggest that both

the powers should be exercised jointly by MoF and SEBI.

Review after five years

1. X: We recommend on an immediate basis there must be a complete review by a

high Powered committee to study the current state of Indian Capital Market and

Gaps that needs to be addressed like the one we have done across Our Sections C

& G, wherein we have brought out the essence of achievements & lacunas that co-

exist in the Indian Capital Markets today and thus far from stated as a ‘Developed


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Market’.

Other suggestions

1. X: We recommend that the regulator should suggest a road map for development of

Indian Markets.

Since various recommendations of the Committee have impact on competition in

MIIs market, we recommend SEBI to take the opinion of Competition Commission of

India on the recommendations of the Committee. We recommend SEBI to make

statutory reference under Section 21 of the Competition Act, 2002 in this regard.

2. X: The Board of X also viewed that RSEs though have been derailed from the way

of business operation on account of infrastructural revolution in the securities

market, have a significant role to play for promotion of securities market including

protection of interest of the investors in securities. Considering growing investor

population at present, it may not be possible for national level stock exchanges

operating in the country to reach all the urban, sub-urban and even rural investing

public to address their grievances. Similarly, it is not possible for a small investor

from semi-urban or rural India to travel a very long way to visit the base of national

level stock exchanges in case his grievance is not addressed.

Financial literacy is another key area which demands urgent attention if we want to

enlarge the size of the investing public for the growth of securities market. RSEs

having reach all over the country can play a significant role in their respective

region/ state/ area to address the issues of financial literacy and investor grievances

in addition to facilitating and regulating the business of dealing in securities. In other

words, taking the investor population from the existing level of 20 million to a level of

100 million in coming years into consideration, the RSEs can play a vital role when

the economy is moving from a developing to developed one. In light of the above,

the Board of X was of the view that SEBI should promote the cause of the RSEs in

the interest of securities market.


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3. X: To service long term investors in selected index shares, a local qualified equity

adviser should get more freedom. Situation will further improve with the introduction

of UID favouring KYC.

4. X: What is the necessary for day trading by the FIIs. Are our exchanges gambling

dens? Is this a way to attract long term funds to India? Will there be a discussion

and answers and action?

5. X: The major reason for failure of most of the PSUs are interference of politicians. If

some regulation or code of conduct is established for politicians and is monitored,

most of our PSUs shall become profitable.

6. X: Market structure/interoperability:- All regional exchanges can be daughter

exchange to a National level bourse. Interoperability at national level may be

implemented.

7. X:- X decided to take some of the questions of the Committee to the individual

investors. The total sample size was 5,392 drawn from a database of over 700,000

members of 140,000 households.

Findings of the survey

1. Nearly 50% of respondents prefer Stock Exchanges to be like

Regulatory Institutions

All Graduates Should a Stock

Exchange be

Coun

t

%of

sampl

%of

responde

Count %of

samp

%of

respondeA commercial 370 6.9 22.0 224 7.2 21.7 A public utility 517 9.6 30.8 287 9.2 27.8 A regulatory body 793 14.7 47.2 521 16.7 50.5

Respondents 1,680 31.2 100.0 1,032 33.2 110.Total sample 5,392 100.0 3,113 100.0

8. Monitoring of broker is Most Important to 55% of

respondents

How important is it to All Graduates


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Most important 912 16.9 54.9 591 19.0 57.9 Important 640 11.9 38.6 361 11.6 35.4 Less Important 108 2.0 6.6 69 2.2 6.8

Respondents 1,660 30.8 100.0 1,021 32.8 100.Total sample 5,392 100.0 3,113 100.0

9. Over 55% of respondents say brokers should

be monitored by SEBI

Should your broker be All Graduates monitored by Coun

t

%of

sampl

%of

responde

Coun

t

%of

samp

%of

respondeSEBI 910 16.9 55.1 579 18.6 57.1 One Stock Exchange 152 2.8 9.2 86 2.8 8.5 Multiple Stock Exchanges 319 5.9 19.3 194 6.2 19.1 Self regulatory

organisation (SRO) of

270 5.0 16.4 155 5.0 15.3

Respondents 1,651 30.6 100.0 1,014 32.6 100.Total sample 5,392 100.0 30.6 3,113 100.0 32.6

10. 75% of respondents say prices are more

trusted from an Exchange owned by public

institutions

Which kind of a Stock All Graduate Exchange will you

trust prices from?

Coun

t

%of

sampl

%of

responde

Count % of

% of sample Owned by a company 417 7.7 25.4 248 8.0 24.5 Owned by public 1,22 22.8 74.7 764 24.5 75.5

Respondents 1,64 30.5 100.0 1,012 100.Total sample 5,39 100.0 30.5 3,113 32.5

11. Over 50% of respondents say regulating

exchanges is Most Important


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that your stock

exchange is

Count %of

sampl

%of

responde

Count %of

sampl

%of

respondeMost important 826 15.3 50.2 518 16.6 51.Important 631 11.7 38.3 375 12.1 37.0 Less important 189 3.5 11.5 121 3.9 11.

Total respondent to this 1,646 30.5 100.0 1,014 32.6 100.Total sample 5,392 100.0 30.5 3,113 100.0 32.

About the report

1. X: As per the IMRB Survey Findings on ‘Perceptions of stakeholders towards


The BJC recommendation will only continue to protect the monopoly of the existing

dominant exchange as against the international practices of opening up the markets

for more competition. Even the so-called other MIIs (Banks, Telecom, Airlines,

Insurance, Power, etc.) in India have opened their markets for competition. The

recommendation disallows more able, organically suited and worthy investors with

domain knowledge and interest to develop the industry from setting up exchanges.

This may lead to Indian capital markets not seeing any world-class exchanges for a

long time to come, thus depriving Indian investors from availing the benefits of

enhanced competition and new product development.

2. X: Bimal Jalan committee recommendations which is a clear attempt to reverse the

basic premise of demutualization and listing proposed by Honourable Justice Kania

committee's guidelines. In the Jalan committee recommendation, it has not provided

any recourse to the investors like us who had invested in the stock exchanges at a

hefty premium few years back so that investors get some relief when a roadmap is

nearly drawn up for the stock exchange contrary to the guidelines laid down about

five years back.

3. X: There is a strong on-going campaign from various quarters against the

recommendations given by this committee. This campaign is being done for and on-

behalf of the investors who had invested in the MIIs during the process of their


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demutualisation. These investors had invested in these MIIs with an expectation to

earn good amount of return when they get listed. Now, on seeing the

recommendations of the committee, they feel that they got trapped into these MIIs

equity. Considering the quantum of the long term benefits that this report is going to

bring in, this campaign may be completely ignored.

4. X: Retail investors are quite happy with the outcome of the report and its

recommendations as everyone feels safety of the market and settlement system for

an investor is the most important aspect.

5. X: I think giving everything any private end with less regulation can create the

similar situation in India what happened in US so i wish the Bimal Jalan committee

recommendations will be implemented.

6. X: X would be gravely impacted by the Report. The implementation of this Report

would make it impossible for X to continue to exist, hence, we request SEBI to

appreciate the strengths of the existing Stock Exchanges and their need to continue

to contribute to the capital market, their shareholders, regional/ smaller investors,

small brokers / sub-brokers and employees based across various towns and

villages of India, where the major Stock Exchanges are not keen on extending their

reach.

7. X: With humble submission, we would like to state that Dr. Jalan Committee Report

seems to be against the Capital Market so far all the Stock Exchanges in India

except three. There are numbers of negative aspects for the continuation of stock

exchanges. The X probably the only Stock Exchange who caters entire 8 states in N

E Region and responsible for overall growth of the Capital Market as well as service

to the Investors in particular and public in general. X is performing its job with limited

resources and extending the services towards national economy particularly in this

Region.

Another important aspect is employment generation. Considerable numbers of

persons engaged directly or indirectly earns bread and butter in this capital market


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and in case Dr. Jalan Report is implemented the entire scenario will be vanished . In

case the said report is implemented, there should be special consideration for N E

Region. As per the Central Budget is also extending special benefit for this region.

Because this part can not be compared with any other part of India as regards

environmental, geographical, insurgency, lack of Industrial growth as well as

economy.

8. X: The report will discourage private investment in the MII (as called in report) which

will in turn kill competition. While increased competition is required to bring the

transaction, infrastructure and communication costs low. Such low costs helps in

widespread participation and inclusion. Some apprehensions like

weak implementation of regulations, increase in costs, taking excessive risks for

profit maximisation can easily be dealt with by SEBI and another regulatory body

under supervision of SEBI. A recent example of action by SEBI in case of entry

loads on Mutual Funds is well known enough. Also, low competition creates

monopolistic conditions which can easily simulate rogue practices within any

organisation. Good competition will check such rogue practices.

9. X: The contents of Bimal Jalan Committee recommendations will adversely impact

the capital markets in general and stock exchange industry in particular to the utter

detriment of investors fraternity having already taken investment action based on

the prevailing regime for demutualisation of stock exchanges. The committee

recommendations has not provided any recourse to the investors like us who had

invested in the stock exchanges at a hefty premium few years back so that investors

get some relief when a road map is nearly drawn up for the SE contrary to the

guidelines laid down about five years back.

10. X: They are Shareholder of MPSE and stated that none of the recommendations of

the committee should be accepted.

11. X: I find the report submitted by Mr. Jalan is contrary to Demutualizsation done

earlier by SEBI.

12. X: The Committee's recommendations if implemented wholly or partly will signal to


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the world a reversal of the reforms towards a market-driven economy that began in

1991, affect foreign investment into the country that is sorely needed to support high

growth, and lead to possible inefficiency in the functioning of market infrastructure

institutions. The model that IMC would like to suggest for the Indian Capital Market

should take good points of the Indian banking model which emphasis macro

management. Micromanagement of MIIs needs to be avoided.

13. X: In our view, the Bimal Jalan committee report, if implemented, will be a road

block for the development of the Indian capital market. The committee initially

expresses its desire for having more competition but completely loses this in

conclusion due to contradictory recommendations, on the type of shareholders,

anchor investors, extent of shareholding, means of funding, and restrictions on

listing. These recommendations are anti-competitive and would ensure continuation

of monopoly in the exchange industry.

i X has also submitted material on International scenario alongwith their comments on the Jalan Commitete Report ii Paper on ‘Ownership and governance of financial firms under conditions of weak governance’, December 31, 2010

s.no summary of responses on ownership norms 1. … summary of public comments page 1 of 190 s.no...

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