14 January 2010

Livemint Home / Blogs Home > Initial Private Opinion Stock exchanges – bad exchanges worse regulations

I have written an article in today’s Economic Times on governance and accountability in the stock exchange space titled “Exchange biz: A time to change“. Here is an excerpt from the article:

“regulations passed by Sebi in 2006 restricted ownership by one person to 5% each (I was working as an executive director at Sebi then). This number was later modified to 15% for certain financial institutions and 5% for others.

In 2008, Sebi raised the cap on ownership for certain Indian financial institutions to 15%, while retaining the cap on individuals, corporates and foreign persons at 5%. Counter-intuitively, this worsened the problem. Now, a person would have to sink 15% equity stake without any ability to drive control or improve performance. Why would a rational investor want to invest so much more money without having a say on improving performance and governance, without even a veto on important issues? Sebi’s present paper itself realises this problem, though a bit late in the day, “The cap on shareholding (at 5% and 15%) has led to a situation where a single entity may not be interested in furthering the business interests of the exchange because of its limited ownership interest in the exchange.”

Our policymakers have substituted one evil of conflicting ownership and governance with another evil of lack of governance structures, resulting in lack of competition in the exchange space. Unless urgent reforms are introduced to reform the cap on ownership, the space will continue to exhibit signs of a wrongly-regulated market. In the meanwhile, it would be important to aggressively mandate the listing of exchanges that see a governance vacuum, so that there is some accountability of management to shareholders. The original sin of conflict of corporate entities misusing their ownership of exchanges should be by way of a regulatory check of ownership above 1% and a continuous enforcement mechanism that severely punishes actual wrong doing. Murder is not an argument against making knives after all. Thankfully, Sebi is at least asking the right questions.

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