The Bimal Jalan committee set up by the markets regulator to review the ownership and governance structure of stock exchanges, depositories and clearing corporations—collectively referred to as market infrastructure institutions—has come out with a questionnaire seeking views of the public on the matter. The central principle before the committee is a simple one—the need to build world-class financial infrastructure in this country. All issues, such as what should be the limits on ownership, the extent of regulation, and so on, should be examined with that objective in mind.
Towards that end, two things are important. First, there must be competition and, second, exchanges must be listed. Competition will lead to innovation and better customer service. But competition could also lead to a race to a regulatory bottom. Similarly, listing a for-profit stock exchange will focus its attention on attracting customers, while allowing for greater transparency. It could lead to tie-ups with other bourses, perhaps even letting our exchanges have an international footprint. At the same time, it could lead to cutting corners, to sharp practices to get a higher valuation and to conflicts of interest. In short, there is a need for strict regulation and for resolving these issues before listing is allowed. The owners of the exchanges will also realize that the best way to create long-term value is to be seen as well regulated.
Illustration: Jayachandran / Mint
Thankfully, many exchanges have already been listed and we can easily draw upon their experiences.
For instance, several for-profit exchanges have opted to separate their regulatory functions in another entity. NYSE Euronext has a 100% not-for-profit subsidiary, with a board that has a majority of directors unaffiliated to any other NYSE board, responsible for the regulatory function. The Australian Stock Exchange has a separate entity that reviews the policies and procedures of units in the ASX Group which have supervisory functions. The point here is that the stock exchanges, as self-regulated bodies, are well placed to be in the front line of regulation because of their ability to monitor real-time data. Ways and means of making them able to perform this function, while avoiding conflicts of interest, must therefore be found. Transparency on the amount of funds provided by an exchange for regulatory activities is also a must.
What about ownership restrictions? Different countries have different limits, but too low a cap on shareholding, such as the current 5%, will deter investors. A middle path could be the limit of 26% suggested for strategic investors in regional stock exchanges by the Anantharaman committee. And finally, of course, there is no substitute for intelligent oversight by the markets regulator.
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