Listing of bourses and variable pay for exchange management staff allowed

The Securities and Exchange Board of India (SEBI) today misleadingly claimed that it has "broadly accepted" the Bimal Jalan-headed committee report on market infrastructure institutions (MII) submitted about one-and-half years ago. The following decisions have been taken in the SEBI board meet: The stock exchanges will have minimum net worth of Rs100 crore and the existing stock exchanges will be given three years to achieve it. It said, stock exchanges would have a diversified ownership and no single investor will be allowed to hold more than 5% except the stock exchange, depository, insurance company, banking company or public financial institution, which may hold up to 15%.

Currently, the ownership of the stock exchanges is restricted to 5% of the shares being held by a single entity. Stock exchanges, the depository and clearing corporations are allowed to hold 15% collectively and the holding of existing trading members is restricted to 49%. Persons residing outside India, investing through the foreign direct investment (FDI) and foreign institutional investor (FII) routes are allowed to hold 49% cumulatively, which is further sub-divided into 26% through FDI and 23% through FII routes.

According to the SEBI statement, the minimum net worth for the clearing corporation (CC) and the depository will be Rs300 crore and Rs100 crore, respectively. All existing clearing corporations shall be mandated to build up to the prescribed net worth of Rs300 crore over a period of three years from the date of notification/ circular, it added.

In a statement, a senior official from NSE, who does not wanted to be quoted, said, "It is a welcome and significant development of considerable importance to the MII industry. It should have a significant impact on the way the MII industry is structured."

The exchanges will not be allowed to list on itself and 51% of the stock exchanges will be held by public. No single investor will be allowed to hold more than 5% in exchanges. At least 51% clearing corporation will be held by stock exchanges.

The public interest directors representation on board of stock exchanges will be 50%, and will be two-third of the board strength. The appointment of all directors to the board of exchanges will be subject to approval by SEBI. Stock exchanges will be mandated to transfer 25% of their profits to the Settlement Guarantee Fund (SGF) of the clearing corporation.
The Bimal Jalan Committee was appointed in February 2010 to deliberate on governance, ownership, listing of bourses and other issues. The Committee appointed to "Review of Ownership and Governance of Market Infrastructure Institutions (MIIs)" submitted its report to SEBI in November 2010. However, it was dubbed as damp squib by market participants.

Clearly SEBI has not accepted a large number of suggestions of Bimal Jalan Committee. Mr Jalan, a former RBI (Reserve Bank of India) governor, who quit the central bank rather abruptly and was made a Rajya Sabha member in early 2003, was appointed by former SEBI chief CB Bhave to review the issue of ownership and governance of stock exchanges, among other market infrastructure institutions 2010.

He had suggested some bizarre ideas such as limiting the ownership of stock exchanges, allowing only 24% of capital in depositories to be held by exchanges, key executives will not have any variable component in their remuneration (even though "remuneration should be determined after giving due regard to industry standards"!), no listing of exchanges and that stock exchanges and other institutions should not be making money more than a few percentage points above the RBI bond rate. He came up with the idea of capping profits.

In taking the above decisions, the current SEBI chairman has not exactly trashed Mr Jalan's ideas but has certainly undermined the fundamental basis of Jalan report philosophy.