25 November 2009

Bombay Stock Exchange survival – ray of hope

The only hope of survival for the century old Bombay Stock Exchange seems to appear in sight. News that BSE aims to list itself is welcome (see ET piece).

BSE, which ruled the exchange business for well over a century, has steadily lost market share since 1995 and further after 2000 punctuated by many problems. Many of the problems related to the fact that the brokers owned the exchange and controlled the exchange, thus creating a problem for the governing body which had conflicting interests at play, particularly when it came to competing broker factions, some in executive power at the exchange.

The parliament amended the regulatory scheme and mandated separation of ownership from management and from trading rights in what is known in technical parlance as demutualisation of the exchange. Later regulations also mandated that no person could own more than 5% shares (later enhanced to 15%). While these regulatory changes corrected the problem of conflict, it created a second problem of lack of ownership and a vacuum in the governance. No one really cared much about the future of the exchange as shareholders could not exercise any material control over the functioning of the exchange, and a non accountable governing board ran the show albeit independently. This lack of ownership and self perpetuation of management could be corrected only by listing of the exchange – bringing transparency and accountability to shareholders by the management and the Board and also periodic disclosures.

Though listing itself has some minor issues attached, particularly if the listing is at the competing exchange, NSE, the real question is has the action come too late for BSE to survive? Only time will tell, but with the MCX almost ready to launch equity trading, it will be a very competitive market ahead.

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