DEMUTUALIZATION OF STOCK EXCHANGES :

The process of demutualization is to convert the traditional “not for-profit” stock exchanges into a “for profit” company and this process is to transform the legal structure from a mutual form to a business corporation form. SEBI had set up a committee under the Chairmanship of Justice Kania for the same which came up with report on demutualization of Stock Exchanges through uniform scheme prescribed. Accordingly, SEBI issued scheme of demutualization to BSE and other Regional Stock Exchanges.

The important features of the demutualisation exercise are as follows :

(1) The board of a stock exchange should consist of 75% public interest/ shareholder directors and only 25% broker directors, and

(2) 51% shareholding of the stock exchange should be divested to public/ investors other than trading member brokers and only 49% of shareholding can remain with the trading member brokers. This will  transform our broker-owned stock exchanges into professionally-run corporate stock exchanges.

The options prescribed for divestment/dilution of brokers’ shareholding in a stock exchange are as follows:

(1) Offer for sale, by issue of prospectus, of shares held by trading member brokers.

(2) Private placement of shares (either of the shares held by the member brokers or new shares by the exchange) to any person or group of persons subject to the prior approval of SEBI and the maximum limit of 5% to any single person/group of persons.

(3) Fresh issue of shares to the public through an IPO.

The purpose of demutualisation is as follows:

1. Stock exchanges owned by members tend to work towards the interest of members alone, which could on occasion be detrimental to rights of other stakeholders. Division of ownership between members and outsiders can lead to a balanced approach, remove conflicts of interest, create greater management accountability.

2. Publicly owned stock exchanges can enter into capital market for expansion of business.

3. Publicly owned stock exchange would be more professionally managed than broker owned.

4. Demutualisation enhances the flexibility of management.