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A couple of events in early 2001 triggered off major structural changes by the government and India’s securities market regulator. The first was the stock market crash and manipulation of stocks featuring stockbroker Ketan Parekh — along with allegations that the president of the Bombay Stock Exchange, Anand Rathi, had sought information in early March of that year on the positions of some brokers and foreign investors from the surveillance department of his own exchange. The other incident occurred at the Calcutta Stock Exchange — where the software was manipulated, so that brokers did not have to set aside money as margins for their trade.
The Atal Bihari Vajpayee government came in for strong attack in Parliament, and agreed to a Joint Parliamentary Committee probe into the stock market scam. Finance Minister Yashwant Sinha assured the House that stock exchanges, for long the cosy clubs of brokers, would be corporatised to boost investor confidence. The JPC had recommended this in the interest of transparency and efficiency of exchanges, and the government gave a commitment to this effect in its Action Taken Report.
But the move met with huge resistance. The powerful lobby of brokers wasn’t ready to accept a complete redefinition of their rights and role. The government and SEBI had intended to separate stockbrokers’ trading rights from the ownership and management of exchanges to eliminate conflicts of interest of the sort involving the BSE chief in 2001. Some of the top names in the financial sector, who had interests in the stockbroking business as well, led the resistance. By that time, in 2002, Jaswant Singh had succeeded Sinha at North Block. A meeting in Delhi, organised the Mumbai South MP and Minister of State Jayawantiben Mehta, turned unpleasant after aggressive exchanges between stockbrokers and a senior government official. But bitten recently by the stockmarket scam, Singh and the government were determined to put corrective measures in place.
SEBI, then headed by the former LIC chief G N Bajpai, asked former Justice M H Kenia for recommendations to set up a scheme for demutualisation or corporatisation of stock exchanges. But the Committee’s suggestion that stockbrokers be made shareholder members wasn’t acceptable to the government, which wanted a clean break from old practices. There were options for successful models to adopt — among them, the National Stock Exchange, which had started operations in November 1994 with a wide and diversified ownership clearly separated from the trading rights of members. This too had been the fallout of a stockmarket scam from an earlier period — featuring Harshad Mehta. There was also the example of the Over the Counter Exchange of India, which did not, however, take off.
As the Finance Ministry decided to push ahead, U K Sinha, the current SEBI chief, who was then a Joint Secretary in the capital markets division of the Finance Ministry, led negotiations with stockbrokers and the Revenue Department. The brokers weren’t about to give up easily. At stake for them
were also the assets of stock exchanges, especially the Bombay Stock Exchange, which they claimed that they had helped build. Over several years, the BSE’s reserves had swollen, and it had built a landmark structure for itself in South Mumbai. Other stock exchanges too had assets, mainly property. But the Revenue Department was clear that it wouldn’t agree to any proposal that would allow brokers to gain from the sale of assets, or tap into the reserves of the exchanges, which had been set up as not-for-profit, Section 25 companies.
The resistance gradually weakened as stockbrokers were told that the government had the right to transfer the reserves and funds to the Consolidated Fund of India, and that they were a monopoly only because they had been allowed for long to restrict trading rights — or the number of brokers who could be admitted. It was like licensing of the old days — and a card or membership of the exchange was attractive, as trading outside of the stock exchange was barred. An agreement was finally reached after it was agreed that the assets of the exchanges would be used only for the development of the bourses, and that the assets, including Intellectual Property Rights, would vest with the new corporatised entity. The demutualisation scheme decided upon by 2003-04 mandated that all times, at least 51% of the voting rights were to be held by the public other than the broker shareholders.
The Vajpayee government lost power in 2004, and in the second half of that year, the UPA government issued an ordinance to give effect to some of the changes in the Securities Contract (Regulation) Act. In August 2005, the first scheme for the corporatisation and demutualisation of the Bombay Stock Exchange was given effect — a step that was helped by the government allowing a stamp duty exemption in the Budget for the conversion of a not-for-profit organisation into a for-profit firm. The Maharashtra government, which was taken aback at the proposal because of the potential loss of revenue, could only protest feebly.
This article was originally published on December 17, 2015.
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