Role of Stock Exchange in Corporate Governance

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stockstockexchange
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exchange
corporate
exchange
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governance/&title=Role
OnMay21,2014
of
of
Stock
Stock
Introduction.
exchange
exchange
in
in
CorporateSectorswantawidemarketfortradingofsecurities.Theinvestorswant
Corporate
Corporate
Governance Governance
liquidityfortheirinvestments.Thesecuritieswhichtheyholdshouldeasilybesold
|
|
IT
IT
Exchange)
Exchange
whentheyneedcash.Thus,thereshouldbeaplacewherethesecuritiesmaybe
&summary=
<p>Introduction.
purchasedandsold.Stockexchangeprovidessuchaplacewheresecuritiesof
Corporate
Sectors
differentcompaniescanbepurchasedandsold.Stockexchangeisabodyofpersons,
want
a
whetherincorporatedornotformedwithaviewtohold,regulateandcontrolthe
wide
market
businessofbuyingandsellingsecurities.Stockexchangesprovideservicestothe
for
trading
investors,corporatesectorsandalsotothesociety.[1]
of
securities.
(/Users/om/Documents/Role%20of%20Stock%20exchange%20in%20Corporate%20Governa
The
investors
(%20Project)..docx#_ftn1)
want
liquidity
for
ThisprojectisconcernedwiththeroleofStockexchangesinCorporateGovernance.
their
investments.
RoleofexchangesinCorporateGovernancehasbeenlistinganddisclosure
The
securities
standardsandmonitoringcompliance.Demutualizationhasraisedissuesontherole
which
they
ofexchanges.AfterdemutualizationtheroleofstockexchangesinCorporate
hold
should
Governancehaschanged.Thisprojectfocusesontheimpactofdemutualizationof
easily
be
sold
stockexchangesonCorporateGovernance.Theprojectisstructuredinfollowing
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sold
stockexchangesonCorporateGovernance.Theprojectisstructuredinfollowing
when
they
manner.ChapterIdescribestheconceptofstockexchange.ChapterIIisroleofstock
need
cash.
exchangeinCorporateGovernance.Thischapterdealswiththetraditionalroleof
Thus,
there
stockexchangesthatwaslisting,disclosurestandardsandmonitoringcompliances.
should
be
ChapterIIIisimpactofDemutualizationofstockexchangesinCorporateGovernance.
a
place
Thischapterdealswiththechangingscenarioofthestockmarketandalsocorporate
where
the
Governanceafterdemutualizationofexchanges.ChapterIVdealswiththeRoleof
securities
may
SEBIincaseexchangesfailingshortofitsdisclosurerequirements.
be
purchased
and
Statementoftheproblem
sold.
Stock
Historicallyifweseestockexchangesrolewasmostlylimitedtoissuingrulesand
exchange
provides
such
clarifyingaspectsofexistingframeworks.Stockexchangeswereassignedtheroleof
a
place
monitoringthecompliancewithlegislationandsecuritiesregulations.Sincethe
where
securities
promulgationofOECDPrinciplesofCorporateGovernance,stockexchangehas
of
different
contributedtothedevelopmentofCorporateGovernance.Itprovidednewmarketfor
[]
</p>
securities,increasedgoodwillofthecompany,helpedinthegrowthoftheCompanies.
)
RecentlywefindstockExchangehavedemutualisedandinmostcasesbecomelisted
andnowstockexchangeshavebecomeengagedinintensifiedcompetitionandare
refashioningthemtomeetthechallenge.Thus,thisishowtheroleofstockexchange
ischangingtowardscapitalmarketandcorporategovernance.
Overviewoftheliterature.
TheresearcherhasreferredanArticleontheRoleofStockexchangesinCorporate
GovernancebyHansChristianenandAlissaKoldertsovatogettheclearideaofthe
roleofstockexchanges.
AnotherArticleondemutualizationofstockexchangesbyL.CGuptaisfollowedto
understandtheeffectofdemutualizationofstockexchanges.
AnArticleIssuesinDemutualizationofexchangesbyR.Ramaseshanisreferred
forthegettingtheclearideaabouttheissuesraiseafterdemutualizationofthe
exchanges.
AnArticlebyHerbertSmithonStockExchangeDemutualizationisfollowedto
understandtheimpactofstockexchangedemutualizationonCorporateGovernance,
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thechangingroleofstockexchangesinthechangingscenarioofdifferentcountries.
AbookonCommercebyR.KSharma(2005)isalsofollowedasitdealswiththe
servicesprovidedbyStockexchangestotheCorporateSectors.
Objectiveoftheproject.
Theobjectiveoftheprojectis:
1)TotracethetraditionalroleofstockexchangesinCorporateGovernance.
2)ToexaminetheimpactontheroleofstockexchangesinCorporateGovernance
afteritisdemutualised.
3)Toanalyzeimpactofdemutualizationofstockexchangesindifferentcountries
onCorporateGovernance.
ResearchQuestions
1)WhatwerethetraditionalrolesofstockexchangesinCorporateGovernance?
2)WhatistheimpactofdemutualizationontheroleofStockexchangesonthe
CorporateGovernance?
3)WhatistheroleofSEBIincasethestockexchangesfailstomeetthedisclosure
requirements?
ChapterI
StockExchange.
Stockexchangesareorganizedandregulatedmarketsforvarioussecuritiesissuedby
corporatesectorandotherinstitutions.Thestockexchangeenablesfreepurchase
andsaleofsecuritiesascommodityexchangesallowtradingincommodities.Stock
exchangesprovideaplatformforthebuyersandsellerstopurchaseandselloftheir
stocks.[2]
(%20Project)..docx#_ftn2)Stockexchangesitselfdoesnotownshares.Insteaditacts
likemarketwherestockbuyersconnectwiththeirstocksellers.Stockcanbetradedin
anystockexchangeslikeBSEandNSEofIndia.Thoughthemeaningofstock
exchangeisexplainedbutitispertinenttoknowthehistoryofstockexchanges.[3]
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InthisArticle,thebirthofstockexchangewillbefocused.Indianstockmarketis
markedtobeoneoftheoldeststockmarketinAsia.Itdatesbacktothecloseof18th
centurywhenEastIndiaCompanyusedtotransactloansecurities.In1830stradingof
corporatestocksandsharestookplaceinBankandcottonpressfirstinBombay.An
informalgroupof22stockbrokersstartedtradingstocksunderabanyantreeopposite
TownHallofBombayeachinvestingprincelyamountofRupee1.In1860the
exchangeflourishedwith60brokers.ThesharemaniainIndiastartedwhenthe
AmericanwarbrokeandthecottonsupplyfromU.StoEuropestopped.Further
brokersincreasedto250.Theinformalgroupofstockbrokersorganizedthemselves
astheNativeShareandstockbrokersassociationwhichin1875formallyorganized
astheBombayStockExchange[4]
(%20Project)..docx#_ftn4).
Theprimaryfunctionofanexchangeistohelpprovideliquidityinotherwords,togive
sellersaplacetoliquidatetheirshareholdings.Stocksfirstbecomeavailableonan
exchangeafteracompanyconductsitsinitialpublicoffering
(http://www.investopedia.com/terms/i/ipo.asp)(IPO).InanIPO,acompanysells
sharestoaninitialsetofpublicshareholders(theprimarymarket).AftertheIPO
floatssharesintothehandsofpublicshareholders,thesesharescanbesoldand
purchasedonanexchange(thesecondarymarket
(http://www.investopedia.com/terms/s/secondarymarket.asp)).[5]
Theexchangetrackstheflowofordersforeachstock,andthisflowofsupplyand
demandsetsthestockprice.Dependingonthetypeofbrokerageaccountyouhave,
youmaybeabletoviewthisflowofpriceaction.Forexample,ifyouseethatthebid
priceonastockis$40,thismeanssomebodyistellingtheexchangethatheorsheis
willingtobuythestockfor$40.Atthesametimeyoumightseethattheaskpriceis
$41,whichmeanssomebodyelseiswillingtosellthestockfor$41.Thedifference
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betweenthetwoisthebidaskspread(http://www.investopedia.com/terms/b/bid
askspread.asp).[6]
Moststocksaretradedonexchanges,whichareplaceswherebuyersandsellers
meetanddecideonaprice.Someexchangesarephysicallocationswhere
transactionsarecarriedoutonatradingfloor.Theothertypeofexchangeisvirtual,
composedofanetworkofcomputerswheretradesaremadeelectronically.The
purposeofastockmarketistofacilitatetheexchangeofsecuritiesbetweenbuyers
andsellers,reducingtherisksofinvesting.Justimaginehowdifficultitwouldbetosell
sharesifyouhadtocallaroundtheneighborhoodtryingtofindabuyer.Really,a
stockmarketisnothingmorethanasupersophisticatedfarmersmarketlinking
buyersandsellers.Beforeexplainingfurtheritisneedtounderstandthedifference
betweenprimarymarketandsecondarymarket.[7]
Definition
Section2(j)SecuritiesContract(Regulation)Act,1956,stockexchangemeans
(a)anybodyofindividuals,whetherincorporatedornot,constitutedbefore
corporatisationanddemutualisationundersections4Aand4B,or
(b)abodycorporateincorporatedundertheCompaniesAct,1956(1of1956)
whetherunderaschemeofcorporatisationanddemutualisationor
Otherwise,forthepurposeofassisting,regulatingorcontrollingthebusinessof
buying,
Sellingordealinginsecurities.
Accordingtothisdefinitionsstockexchangeallowstradinginsecuritiesundercertain
rulesandregulations.
Actuallyinvestorswantliquidityfortheirinvestments.Thesecuritieswhichtheyhold
easilybesoldwhentheyneedcash.Similarlythereareotherswhowanttoinvestin
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newsecurities.Thereshouldbeaplacewherethesecuritiesmaybepurchasedand
sold.Stockexchangeprovidessuchaplacewheresecuritiesofdifferentcompanies
canbepurchasedandsold.Stockexchangesareorganisedandregulatedmarkets
forvarioussecuritiesissuedbycorporatesectorsandotherinstitutions.Thestock
exchangesenablefreepurchaseandsaleofsecuritiesascommodityexchanges
allowtradingincommodities[8]
Characteristicsofstockexchanges
1)Itisaplacewheresecuritiesarepurchasedandsold.
2)Thetradinginanexchangeisstrictlyregulatedandrulesandregulations
prescribedforvarioustransactions.
3)Bothgenuineinvestorsandspeculatorsbuyandsellshares.
4)Thesecuritiesofcorporations,trust,governments,municipalcorporations,
etc.areallowedtobedealtatstockexchanges.
5)Stcokexchangesareusuallyestablishedatjointstockcompanies.
6)Thetransactionstakeplacebetweenthemembersortheirauthorisedagents.
7)Thesecuritiesarelistedatstockexchangeinasystematicmannerandonly
thesearetraded.
8)Thestockexchangesaremanagedbytheboardofdirectorselectedby
shareholders.
9)Theexchangesarerunaspercertainrulesandbyelawsdecidedearlier.[9]
SEBIsroleinastockexchange.
ThesecuritiesandExchangeBoardofIndia(SEBI)Act,1992waspassedbyCentral
GovernmentforestablishingaBoardtoprotecttheinterestsofinvestorsinsecurities
andtopromotethedevelopmentofandtoregulate,thesecuritiesmarketandfor
mattersconnectedtherewithorincidentalthereto.[10]
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mattersconnectedtherewithorincidentalthereto.[10]
EverystockexchangeneedsrecognitionfromthecentralGovernment.Anystock
exchange,whichisdesirousofbeingrecognized,maymakeanapplicationtothe
centralgovernment.Theapplicationshouldbeaccompaniedbyacopyofthebye
lawsofthestockexchangefortheregulationandcontrolofcontractsandacopyof
therulesrelatingingeneraltotheconstitutionofthestockexchange.Ifthecentral
Governmentissatisfiedthatbyelawsoftheexchangeensurefairdealingandprotect
investorsstockexchangeiswillingtocomplybyotherconditionswhichtheCentral
Governmentimposesanditisintheinterestoftradeandpublictograntrecognition,it
mayrecognizethestockexchange.
Stockexchangesprovideservicesnotonlytotheinvestorsbutalsotothecorporate
sectors.[11]
ChapterII
RoleofStockExchangeinCorporateGovernance.
CorporateGovernanceisatermthatrefersbroadlytotherules,processorlawsby
whichbusinessareoperated,regulatedandcontrolled.Thetermcanrefertointernal
factorsdefinedbytheofficers,stockholdersorconstitutionofacorporationaswellas
toexternalforcessuchasconsumergroups,clientsandgovernmentregulations.[12]
(%20Project)..docx#_ftn12)Historicallythemaindirectcontributionofexchangeshas
establishedthemselvesaspromotersofcorporateGovernancerecommendationsfor
listedcompanies.DemutualizationandtheCorporatizationhavechangedtheroleof
stockexchangesinCorporateGovernance.[13]
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SEBIcommitteedefinedtheobjectiveofcorporategovernanceasthemaximizationof
shareholderswealthkeepinginmindtheinterestsoftheotherstakeholders.
itTraditionalRoleofstockexchanges.
Theregulatingfunctionsofstockexchangeswereinthepastmostlylimitedtoissuing
ruleandclarifyingaspectsofexistingframeworks.Thestandardsettingroleofstock
exchangeswasessentiallyexercisedthroughtheissuanceoflisting,ongoing
disclosure,maintenanceanddelistingrequirements.Ontheenforcementsidestock
exchangeshavesharedtheirregulatoryfunctionwiththecapitalmarketsupervisory
agencies.Stockexchangeswerealsoassignedtheroleofmonitoringthecompliance
withthelegislationandsubsidiaryregulation[14]
1)Stockexchangesprovidenewmarketforsecurities.Thesecuritiescanbelisted
andthentradedattheexchanges.Itprovidesanopportunitytocompaniestoraise
fundsforcapitalissues[15]
2)Itincreasesgoodwilltothecompany.Thesecuritiesarelistedonlyafterthe
scrutinyoffinancialpositionsofacompany.[16]
3)Stockexchangesprovidereadymarketforthepurchaseandrateofsecurities.
Besidesnewcompaniestheexistingcompaniesalsoneedtoissuesharesatthetime
ofexpansion.
4)Thosewhoinvestinsharesareconfidentofgettingareadymarketfortheir
securities.Theexchangeprovidesliquiditytosecurities.Wheninvestorsarenotsure
ofgettingreadymarketfortheirsharesthentheywillhesitatetoinvest.
5)Thecorporatesectorcangetinformationregardingtrendsofinvestment,
investors,choiceandprioritiesetc.,fromstockexchangesonregularbasis.Onthe
basisofthisinformation,companiescanplantheirfutureissues.[17]
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basisofthisinformation,companiescanplantheirfutureissues.[17]
Stockexchangesactasmediumforcapitalformationinthecountry.Ithelpsin
creatingthehabitofsavingsamongpeople.Peoplecaninvesttheirsavingsin
corporateandgovernmentsecurities.Smallsavingsoflargenumberofpeoplehelpin
capitalformationinthecountry.Companiescanselltheirsharesthroughstock
exchanges.Stockexchangesprovideaplatformtothecompaniesforraising
additionalfunds.Anexchangeallowsthetradingoflistedsecuritiesonly.Whilegetting
theshareslistedonanexchange,acompanyisrequiredtofollowcertainguidelines
forprotectingtheinterestsofshareholders.Whilefollowingtheguidelinesofthe
exchange,themanagementofthecompanyisalsoregulated.[18]
SSBIcommitteedefinedtheobjectiveofcorporategovernanceasthemaximizationof
shareholderswealthkeepinginmindtheinterestsoftheotherstakeholders.
However,wemustalsoensurethattheinterestsofotherChachashareholdersarenot
gettingaffectedintheprocess.EBISEBIcommitteedefinedtheobjectiveofcorporate
governanceasthe
ChapterIII
ImpactofDemutualizationandCorporatizationofstockExchangesinCorporate
Governance.
Historically,stockexchanges,wereowned,controlledandmanagedbyasetof
brokers.Theysettherulesandregulationswhichtheywereexpectedtofollow.This
ledtoaconflictofinterest.Incaseofdisputes,integrityofthestockexchanges
suffered.NSE,however,wassetupwithapuredemutualisedgovernancestructure
i.e.,ownership,managementandtradingrightsweredistributedbetweenthree
differentsetofentities.NSEsownershipvestedinthehandsofbanks,insurance
companies,financialinstitutions,itsmanagementwasdrawnfromtheprofessionals
andbrokerswereofferedtradingrightsontheexchange.Thisseparationof
ownership,managementandtradingrightseliminatedconflictofinterestandprovided10/29
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ownership,managementandtradingrightseliminatedconflictofinterestandprovided
transparencyinoperations.CurrentlyallthestockexchangesinIndiahavea
demutualisedsetup.[19]
Demutualization
Demutualizationmeansrestructuringthestockexchangeandchangingitfroma
nonprofitorganizationmutuallyownedorganizationbyitsmembersintoaprofitable
companyownedbyvariousentitiesincludingthepublic.Thesharesoftheexchange
canthenbedistributedamongmembers,financialinstitutionsandthepublic.Done
properly,achangeinthestatusofthe
Exchangecouldprovidetheneededcapitaltobuildthemarketplace,lowercoststo
membersandbetterserveinvestors.[20]
Nowthemembersofitareitsshareholders.Ithasbecomeapubliclytradedcompany.
Whenstockexchangesgoforpublicitisdemutualization.
Corporatization.
Corporatizationmeansstockexchangeshouldbeorganizedasacompany.Theidea
istoseparateownership,managementandtradingrightsfromeachother.[21]
Itisnotnecessarythatanystockexchangewhichiscorporatizedisalso
demutualized.TherearestillsomestockexchangeslikeCalcuttaStockexchange,
Bhubaneswarstockexchange,BangaloreStockexchangeetc.,outof20,18stock
exchangesarecorporateentitiesandneedtobedemutualizedthatitmustbe
convertedintoprofitmakingorganization.[22]
CorporatizationandDemutualizationofStockexchanges.
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CorporatizationandDemutualizationofStockexchanges.
Accordingtosection2(aa)oftheSecuritiesContractandregulationAct,1956
Corporatizationmeanscorporatizationmeansthesuccessionofarecognizedstock
exchange,beingabodyofindividualsorasocietyregisteredundertheSocieties
RegistrationAct,1860(21of1860),byanotherstockexchange,beingacompany
incorporatedforthepurposeofassisting,regulatingorcontrollingthebusinessof
buying,sellingordealinginsecuritiescarriedonbysuchindividualsorsociety
AccordingSections2(ab)oftheSCRA,1956demutualizationmeansthesegregation
ofownershipandmanagementfromthetradingrightsofthemembersofarecognized
stockexchangeinaccordancewithaschemeapprovedbytheSecuritiesand
ExchangeBoardofIndia]
Accordingtosection4AoftheSCRA,1956onandfromtheappointeddateall
recognizedstockexchangeswhoarenotcorporatizedanddemutualisedbeforethe
appointeddateshallbecorporatizedanddemutualisedaspertheprovisions
containedinsection4B.AppointeddateshallbefixedbytheSEBIbyissuinga
notificationinofficialGazetteandSEBIcanfixdifferentappointeddatefordifferent
recognizedstockexchanges.
SEBIcanextendthedateforcorporatizationanddemutualizationofanexchange,ifa
particularstockexchangecouldnotconvertonoraftertheappointeddatefor
sufficientcause[23]
Changeintheroleofstockexchangesafterbeingdemutualised.
Overthepast15years,theexchangeindustryiscontinuouslychanging.Exchanges
havedemutualisedandinmostcasesbecomelisted.Aprecursortomostofthe
recentstructuralchangesinthestockexchangeindustryhasbeentheprocessof
demutualization.Thelistingofstockexchanges,perhapsevenmorethantheir
demutualization,hastransformedtheirbusinessmodel.Demutualizationhaschanged
theownershipofstockexchanges,significantownershipstakeswereoftenretained
bypreviousmemberfirms.Thefundamentalgovernancestructureofexchangeswas
notsignificantlyimpacted.Butselflistingandthesubsequentdispersionofownership 12/29
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notsignificantlyimpacted.Butselflistingandthesubsequentdispersionofownership
ofexchangeshavefinallydivorcedtheirinterestsfromthoseofbrokerdealers.While
competitionamongstockexchangesisnotnew,ithasintensifiedinrecentyearsin
variousareasofexchangeactivities,includingtrading,listingandsettlement.In
additiontotheobviouseffectsofdemutualizationandlistingofexchanges,arapid
improvementininformationtechnologyandthecreationofinnovativefinancial
instrumentshavealsobeenamongthekeyfactors.Moreoverthescopeof
competitionhasbroadenedfromthenationaltotheinternationallevel.Whileearlier
therewasonlyamongthedomesticlevelnowithasincreasedtointernationallevel.
[24]
Withregardtothefunctioningofsecuritiesmarketcompetitionbetweenexchanges
canproduceconflictingresults.Ontheonehand,greaterliquiditymaybegenerated
duetoenhancedintermarketcompetition.Ontheother,insofarascompetitionmay
resultintradingfragmentation,concernsregardingmarkettransparencyandindeed
financialstabilityofexchangesemerge,sinceilliquidmarketstendtobelessresilient
inperiodsofvolatility.[25](/Users/om/Documents/Role%20of%20Stock%20exchange%20in%20Corporate%20Governance.
Concerningtheabilityofstockexchangestoenhancecorporategovernanceoflisted
companies,competitionbetweenstockexchanges,intheabsenceofminimum
standardssetbytheregulators(orweakenforcementofsuchstandards),raises
concerns.Theincentivesfacedbyexchangestoestablishandmaintainhigh
regulatorystandardsmightweakenastheyweightheriskofdeterringlistings
altogetherorlosingthemtocompetingmarketplaces.Thisriskmaybeexacerbated
bythepressuresademutualisedexchangeissubjecttofromitsshareholderstogive
topprioritytomaximizingprofitability.[26]
(/Users/om/Documents/Role%20of%20Stock%20exchange%20in%20Corporate%20Governance.(%20Project)..docx#_ftn26)
AsthestockexchangehasitselfturnedintoBusinessCorporation,insome
jurisdictionsitsregulationfunctionhasbeenremoved.[27]
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ChapterIV
RoleofSEBIincaseExchangesfailure.
Wheneverinvestorswanttoinvestinacompanyitneedstogetinformationaboutthe
company.Onecansearchtheinformationofthecompanyinitswebsiteorformore
convenientinformationitscansearchinthestockexchangeswebsitewherethe
companyislisted.[28]
Acompanyisboundtokeepupdatethestockexchangeaspartofitslisting
agreement,informationregardingannualreports,quarterlyfinancialinformation,
shareholdingpatternsandcorporategovernancecompliancereports[29]
Thecompanyalsohastoupdatetheexchangeonanyeventthatcanimpactits
financialperformanceorstockprice.Ifacompanyfailstodoso,thenthestock
exchangecantakeactionagainstit.[30]
SEBIhasalsopointedoutthatnotonlycompaniesbutsometimesevenstock
exchangesfailsshortofadequatemonitoringdisclosurecompliances.NowStock
Exchangesarealsoprofitmakinginstitutionswithcommercialoperations.[31]
VeryrecentlymeasureshavebeenintroducedbySEBI:
Stockexchangeshavebeenaskedtocompareinformationfiledonshareholding
patternwiththatinthepreviousquarterandtofindoutwhetherthedisclosurescomply
withtheexistingregulations,suchasthoseoninsidertrading.
Theyhavetokeepthemselvesinformedonmediaupdatesoncompaniestocheck
whethertheinformationhasalsobeenfiledwiththem.Besides,separatecellshaveto
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whethertheinformationhasalsobeenfiledwiththem.Besides,separatecellshaveto
besetupformonitoringcompanydisclosures.
Whilestockexchangeshavebeenpursuingcompaniesincaseofunsatisfactory
disclosures,whathasbeenmissingsofarisaneffectivefollowupprocess.Thisis
nowsettochange,asadetailedfollowupprocedurehasbeenlaidout.[32]
Deadlineshavebeensetforexchangestoseekinformationandforcompaniesto
respondtothequeriesraised.Whatsmore,correspondencebetweenthetwohasto
beputuponthestockexchangeWebsite.
Also,SEBIhastobekeptregularlyupdated(throughanexceptionreport)on
defaultingcompaniesandalsoontheactiontakenbythestockexchangeconcerned.
Whilethesearestepsintherightdirection,giventhatstockexchangesareprofit
makingentitieswithcommercialoperations(besidesaregulatoryrole)tobetaken
careof,onewillhavetowaitandseehowallthiswillbeaccomplished.[33]
Accordingsection7oftheSecuritiesContractandregulationAct1956,everystock
exchangeisshallfurnishtheCentralGovernmentwithacopyoftheannualreports
andsuchannualreportsshallcontaintheentirerequirementasmaybeprescribed.
[34]
AccordingSection8(2)oftheSecuritiesContractandRegulationAct1956,Ifany
recognizedstockexchangefailsorneglectstocomplywithanyordermadebythe
CentralGovernmentwithintheperiodspecifiedtherein,theCentralGovernmentmay
maketherulesfor,oramendtherulesmadeby,therecognizedstockexchange,
eitherintheformproposedintheorderorwithsuchmodificationsthereofasmaybe
agreedtobetweenthestockexchangeandtheCentralGovernment.[35]
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Accordingtosection8(A)oftheSecuritiesContractandRegulationAct1956thestock
maywiththepriorapprovaloftheSEBItransferthedutiesandthedutiesandfunction
ofaclearinghousetoacorporationbeingacompanyregisteredundertheCompanies
Act,1956.[36](/Users/om/Documents/Role%20of%20Stock%20exchange%20in%20Corporate%20Governance.(%20Project)..docx#_ftn36)
ThesearethelawsthatareframedunderSCRAincaseanystockexchangesfailto
meetitsrequirementsthesemeasurescanbeadopted.
Secion11.3(c)oftheSEBIAct1992providesthatitshallbethedutyoftheBoardto
protecttheinterestoftheinvestorsinsecuritiesandtopromotethedevelopmentof
andtoregulatethemarketsecuritiesasitthinksfit.Itempowerstheboardtoregulate
thebusinessinstockexchangeandtoregulatetheworkingofthestockbrokers,sub
brokers,sharetransferagentsetc.[37]
Section11.3(d)oftheSEBIAct1992statesthatasallStockExchangesarerequired
toberegisteredwithSEBIundertheprovisionsoftheAct,underSection12ofthe
SEBIActallthestockbrokers,subbrokers,sharetransferagents,bankerstoan
issue,trusteesoftrustdeed,registrarstoanissue,merchantbankers,underwriters,
portfoliomanagers,investmentadvisersandsuchotherintermediarywhomaybe
associatedwiththeSecuritiesMarketsareobligedtoregisterwiththeBoardandthe
Boardhasthepowertosuspendorcancelsuchregistration.TheBoardisboundby
thedirectionsgivenbytheCentralGovernmentfromtimetotimeonquestionsof
policyandtheCentralGovernmenthastherighttosupersedetheBoard.TheBoardis
alsoobligedtosubmitareporttotheCentralGovernmenteveryyear,givingtrueand
fullaccountofitsactivities,policiesandprogrammers.Anyoneaggrievedbythe
BoardsdecisionisentitledtoappealtotheCentralGovernment.[38]
ChapterV
SuggestionsandConclusion.
ThusfromtheabovediscussionsaninferencecanbedrawnthatStockexchanges
16/29
25/08/2016
ThusfromtheabovediscussionsaninferencecanbedrawnthatStockexchanges
playaveryimportantroleinthecorporategovernancebutrecentlytheroleofithas
changed.CorporatizationofStockExchangehasnoadverseeffectonCorporate
Governanceasseparationofownership,managementwillcauseefficiency.Butprofit
motiveofstockexchangeafterbeingdemutualisedmaysomehowaffectthe
performanceofthestockexchangeincorporategovernanceasnowititselfhas
becomeacompany.Therearedifferentopinionsontheperformanceofstock
exchangesafteritisdemutualized.Somesaysthatintensecompetitionmayincrease
theskilloftheperformanceofstockexchange.Someothersviewisthatbecauseof
profitmotiveitmayhoweverhaveadverseeffectonthestockexchange.Thisproject
hascommentedonthemainissuesthatpresentthemselveswhenexchanges
considerwhatistobetheexchangesmostappropriatestructurepost
demutualization,including:
1)Corporategovernanceissues,suchaswhatshouldbethecompositionofthe
board,whethertheboardshouldestablishcommittees,andwhatsharedealingrules
andpoliciesshouldbeintroducedfortheexchangesowndirectorsandmanagers.
[39]
2)Competitionhasincreasedamongthestockexchanges.[40]
3)StockexchangesnowfacecompetitionfromAlternativeTradingSystem.Investors
aregettingTraditionalfunctionsofthestockexchangebecameavailablefromother
sourcesandmadeinvestorsseekthemeansthatcanprovideliquiditymoreefficiently.
[41]
Thediscussionhighlightsavarietyofissuesthatneedtobeaddressedinorderto
maximizethebenefitstobegainedfromdemutualization.Itisunlikelythatonesetof
solutionswillsuitall
17/29
25/08/2016
solutionswillsuitall
Exchanges.Eachexchangewillneedtoconsidertheseandotherissuesinthelightof
itsownparticularenvironment.
However,somelawsareimplementedlikeSCRA,SEBIACT1992,whichshallprotect
theinterestoftheinvestorsaswellasothercorporatesectorswhicharelistedinthe
stockexchangesforsellingofitsshares.
SEBIplaysaveryimportantroletoregulatethesecuritiesmarket.SEBIregulatesthe
securitiesmarketandgivesguidelinestothestockexchangesandthussprotectthe
interestoftheinvestors.
Someissuesthatshouldbetakenintoconsiderationareasfollows:
Themangementofthestockexchnagemustbemadestrong.
Corporatisationanddemutualisationofstockexchangesarecomplexsubjectsand
involveanumberoflegal,accounting,CompaniesActandtaxissues.Theseissues
wouldneedcarefulexamination,beforeaclearroadmapcouldbepreparedtotake
thisprocessforward.SEBIfeltthatitwouldbedesirabletoappointaGroup
comprisingofeminentpersonalities,infieldsoflaw,accountancy,finance,company
lawaffairsandtaxationtoadviseSEBIonthismatterandtorecommendthesteps
thatneedtobetakentoimplementtheannouncementoftheFinanceMinister.
ItisalsofeltthatthereisneedtochangesomeoftheActssuchasIncomeTaxAct,
sothatthepastprofitsofanstockexchangewhichwerenottaxedwhenithadthe
characterofanotforprofitentityshouldnotbetaxedwhenitscharacterchanges.
Thus,thesearesomeoftheissuesthatshouldbetakenintoconsideration.
Bibliography
Books.
SharmaR.K.andShashiK.Gupta,StructureofCommerce,(2005)
Articles
Tejpal.NHistoryandevolutionofstockexchangesinIndia,
shodhganga(2011)shodhganga.inflibnet.ac.in
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HarperDavid,Gettingtoknowthestockexchange,investopedia(22
September2013)http://www.ivestopedia.com
InvestopediaStaff,Stockbasicshowstockstrade?,
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4.Rouse.M,CorporateGovernance,TechTarget,
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5..ChristaniansenHansandAlissaKoldertsova,RoleofstockexchangeinCorporate
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Commerce,171(2005)
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(%20Project)..docx#_ftnref10)id
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25/08/2016
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1. Securities Regulation and Contract Act, 1952

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