The markets regulator the Securities and Exchange Board of India (SEBI) has proposed setting up an expert body to look into the corporate governance and ownership structure of stock exchanges.
The committee will look at some of the important issues such as exchanges as for-profit organisations, the need for strategic investors in bourses, separation of clearing function of a stock exchange and entrusting the same to an independent clearing corporation, self listing by an exchange and possible conflicts of interest and eligibility criteria for opening an exchange among others.
Under the scheme of corporatisation and demutualisation, most exchanges have begun incorporating themselves as regular companies under the Companies Act and not as those falling under Section 25 of the Act. The National Stock Exchange (NSE) from its inception itself, was formed as a regular company.
As regular companies, stock exchanges are free to pursue commercial interests, as long as they are not detrimental to their investors. Besides, exchanges have traditionally been the first line of regulation in the securities market.
It merits careful consideration whether there is a conflict between the profit maximisation goal of an exchange and its regulatory role, an internal note to the SEBI board said.
With growing commercialisation of the exchanges, and the aggressive competition between exchanges that will naturally ensue, there is a worry that exchanges might compromise on their regulatory role in their urge to canvass large volumes of business from intermediaries and investors, the note said.
The regulators worry is that the quest for profits might, in the long run, dilute exchanges commitment to uphold market integrity. Across the world, including in India, exchanges as part of the trading infrastructure are viewed as public utilities. As a public utility, an exchange becomes the organisation that maintains the infrastructure for a public service.
In this view (of an exchange as a public utility), there is evidently a strong reason why profit maximisation cannot be allowed to become an overriding priority for an exchange, the SEBI note said.
The regulator is concerned about three aspects of an exchange operation. One, control and oversight exercised by exchanges over intermediaries who are the mainstay for their revenue; two, equitable practices in the treatment of investors vis--vis intermediaries; and three, the likelihood of unfair practices in allowing selective access to price sensitive data to market participants and exchange resources.
SEBI is also considering to mandate a minimum net worth requirement of Rs 100 crore for a stock exchange.