The committee recommendations fight economics tooth and nail. They seek to disconnect ownership from management, disconnect performance from pay and continue the disconnect between the competition and existing exchanges.
The first problem with the recommendations is a marginal opening of the window on ownership of stock exchanges. Today’s regulations permit only a 5% (15% in limited cases) ownership of exchanges by a single person or persons acting in concert. This has meant that no one wants to give birth to an exchange. The only way for a new exchange to form would be if 20 people meet in a room and all spontaneously think of starting a new exchange (they cannot act in concert) at the same time. This has meant the chilling of competition in the exchange space and some of the juiciest margins in any business. The committee recommends allowing anchor investors to invest up to 24%, but the definition of such investors is so narrow and limited (to large banks and public financial institutions) that the opening up is meaningless. It also means the Rural Electrification Corporation, with no competence, is eligible to promote a new exchange but a commodity exchange like MCX cannot invest over 5% and thus promote an exchange.
In addition, the committee contradicts its report’s own annexure. It says, “Annexure C & Annexure D of this report depict the ownership restrictions in select countries and details of ownership of stock exchanges in select countries, respectively. It is seen that the existing shareholding restrictions in India generally are similar to that of most other countries.” In fact, the annexures, if read carefully, show that not one of the countries in the world cited in the report has this perverse 5% cap on ownership, with the exception of India. The annexure merely shows countries require either disclosure or permission on crossing the 5% or 15% threshold, not a bar.
The second problem is that while the committee recognises that the real risk of ‘exchanges’ as commonly understood is actually borne by the clearing corporation (the exchange is only of a limited order matching computer system), its insistence on a net worth for exchanges is not reasonable. Similarly, the committee’s recommendation of a Rs 300 crore net worth for clearing corporations is absolutist rather than scientific and probably grossly inadequate. Remember that the clearing corporations/houses’ handling of equities alone exceeds India’s GDP.
Third, the cap on profitability of exchanges, bans on listing and divorce of performance with pay of senior management are inexplicable and destructive. If the public sector ONGC can seek profits, why shouldn’t exchanges that are privately owned? The correct way to eliminate monopolistic pricing is by taking appropriate anti-competition action or by encouraging competition, not by passing a fiat against profitability. With a ban on listing, whatever possible exit opportunity for investors and governance check against management could exist, will also vanish. A bar on disconnecting performance from pay will disincentivise good performance by management. This recommendation cannot be adequately condemned.
Overall, the recommendations further a cause that neither existing nor potential exchanges will support, and will take India back to the dark ages of exchange governance.
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