One of the reasons MCX Stock Exchange’s application to run an equities exchange ended up in the courts is that India doesn’t have a clearly articulated policy on setting up new exchanges. With the Bimal Jalan committee’s report on the governance of exchanges now out, the Securities and Exchange Board of India must lay out clear rules that pertain to setting up these institutions.
As far as the contents of the report go, the line taken by the committee is rather similar to the historical view Indian policymakers have taken—that market infrastructure institutions are systemically important and perform important regulatory functions. Hence, their ownership and governance structure should be such that they are primarily focused on orderly functioning of the market, rather than profit maximization of the firm.
To ensure the primary objective of market integrity, it has prescribed limits on ownership, suggested structures for the board, recommended a cap on profits, frowned on listing of exchanges and suggested that remuneration of exchange officials shouldn’t include variable pay or stock options.
While the underlying reasons behind these prescriptions are fine and consistent with the committee’s line of thinking on the issue, it is getting into too many details. Issues such as a cap on profits, for instance, would be difficult to implement. How would the regulator define what is a reasonable amount of profit to make? Besides, it totally disregards previous policy decisions such as demutualization of exchanges and creating a shareholder structure. For those who bought shares in exchanges, it’s a case of shifting goalposts.
Unfortunately, the report doesn’t bring fresh thinking (apart from saying that banks and financial institutions, or FIs, can own up to 24% in an exchange) on how to foster greater competition in the exchange space. Unless some banks and FIs rise up to the occasion, the near-monopoly situation in the equity space is likely to continue. And although the report alluded to concerns about competition-related issues such as dealings with competing technology providers, it hasn’t been forthright with its recommendations on some of these issues.
So while the committee report has taken a step forward in articulating some of the policy issues with ownership and governance of exchanges, this still seems to be work-in-progress.
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