It’s been a little over a month since the Bimal Jalan committee’s report on the “Review of ownership and governance of market infrastructure institutions” has been put up for public comments. And opinions and criticism have been pouring in from all directions incessantly almost every other day. With some contentious recommendations such as a cap on profit, disallowing the listing of stock exchanges’ shares and forbidding variable pay and stock options for key management personnel in the exchanges, the response isn’t all that surprising.
News reports suggest that some of these contentious recommendations may not be accepted by policymakers. It’s important to note that if all of the above-mentioned recommendations are ignored, it would essentially mean a status quo in the stock exchange space. One of the major criticisms of the Jalan committee report is that its recommendations are anti-competitive. But the fact of the matter is that existing guidelines are as anti-competitive, if not more. So if all that the hectic lobbying against the report achieves is to get some of the contentious recommendations scrapped, it would amount to almost nothing with respect to promoting competition in the exchange space.
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According to one news report, policymakers are likely to consider the possibility of a separation of the regulatory role of stock exchanges. This is something this column has strongly argued in favour of. This way, stock exchanges would be free to focus on profit maximization and keeping stakeholders happy, without having to worry about ensuring market integrity. This is not to say that ensuring market integrity is a trivial issue—that role can be done by an independent regulatory organization on the lines of FINRA (Financial Industry Regulatory Authority) in the US and IIROC (Investment Industry Regulatory Association of Canada).
Needless to say, if this model is to be adopted, it would require another round of deliberations and discussions so it may be a while before the last word has been heard on this subject. Regardless of the course of action policymakers take on this issue, it’s clear that 2011 will be an eventful year as far as policy on stock exchange competition goes.
This year has had its fair share of policy-related developments as well. One of the highlights was the application by MCX Stock Exchange (MCX-SX) for equity trading, which was rejected by the Securities and Exchange Board of India (Sebi). Again, the last hasn’t been heard on the subject, but one good thing about the development is that it has forced policymakers to think about issues related to ownership and competition in the stock exchange space. In fact, the Jalan committee was set up months after news reports suggested that MCX-SX was planning to apply for permission to run an equity trading platform. Its application brought to the fore issues such as the fact that there aren’t clearly laid down stipulations for new exchanges. The Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges Regulations, 2006, or MIMPS, guidelines, which MCX-SX was asked to comply with, was originally drafted for exchanges planning to go through the demutualization process. Hopefully, by next year, there should be clear guidelines for entities planning to set up a stock exchange.
Of course, Sebi hasn’t only been busy with policymaking related to stock exchanges. One of its big achievements under chairman C.B. Bhave has been the vast improvement in the investigation and enforcement division. One example of this in the current year was the order in the HDFC Mutual Fund front-running case. The order against the culprits shows that the investigations are thorough and done relatively quickly. In the past, this was an area of weakness for the market regulator, and it’s heartening to see that things are falling in place as far as investigation and enforcement go.
One interesting new development in the beginning of the year was the decision by stock exchanges to advance the market opening time to 9am. Of course, this stemmed from the regulator’s decision to give freedom to exchanges to decide trading hours between 9am and 5pm. This doesn’t seem like much—in fact, critics would argue why regulators should have any say in this matter at all. But this marked an important change in policymaking at Sebi. Traditionally, the regulator has decided everything pertaining to the functioning of the markets from market timing to product introduction. It now seems to be open to allowing exchanges some freedom. This was also visible when it allowed exchanges the option to choose between cash-settled and physically settled single stock futures and options. They also have a choice between American- and European-type options. This is a good beginning and one hopes that there will be progress on this front in the new year, even if there’s a change of guard at Sebi.
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