22 December 2010

Meeting the Jalan committee

Yesterday I was at a CII organised event where the Jalan committee defended their report. What was interesting was that they did not address any of the issues being discussed but went on an irrelevant tangent for the entire 2 hours plus (the meeting was supposed to tbe closed doors, but it was not - there was tonnes of media present, therefore I can write on it). In addition one member of the committee made a patently wrong statement - that the shareholders of exchanges were never promised listing at the time of the corporatisation and demutualisation process. This directly contradicts the C&D scheme (linked here) which states:
6. Listing of Shares of Bombay Stock Exchange Limited.
Bombay Stock Exchange Limited may at any time list its securities on any recognized stock exchange.

It may be recalled that the C&D scheme is statutory in nature. See the language of S. 4B of the SCR Act.

(4) Where the scheme is approved under sub-section (2), the scheme so approved shall be
published immediately by—
(a) the Securities and Exchange Board of India in the Official Gazette;
(b) the recognised stock exchange in such two daily newspapers circulating in India, as may be specified by the Securities and Exchange Board of India, and upon such publication, notwithstanding anything to the contrary contained in this Act or any other law for the time being in force or any agreement, award, judgment, decree or other instrument for the time being in force, the scheme shall have effect and be binding on all persons and authorities including all members, creditors, depositors and employees of the recognised stock exchange and on all persons having any contract, right, power, obligation or liability with, against, over, to, or in connection with, the recognised stock exchange or its members.

Here are some other jewels presented by the committee: 'you cannot allow cars to be manufactured which pollute the air' - therefore exchanges should not be allowed to make profit and therefore they cannot be listed. This is irrelevant to the discussion. No one is arguing that exchanges should not be regulated. There must be laws to regulate the car manufacturer and the exchange, and no one is disputing that. What is in issue is that you should not prohibit people from making a profit who build the highway otherwise there will be no highway and no cars to speak about.

Another jewel was directed at me - referring to the strong article I wrote in the Economic Times - the panel member said that I did not refer in my article that exchanges are 'state' under the constitution. My response - yes they are, but that point is irrelevant to  the issue. ONGC limited is also state, but it is listed and yesterday it was reported that it paid over Rs. 6,000 crores (60 billion rupees) in advance tax for the quarter. How is being state an argument against listing or being for profit?

Interestingly, none of the points raised by me in the article were taken up or rebutted - including the point that they have not even read the annexure to their own report (the annexure says the opposite of what is asserted in the report as a globally accepted norm).

Disclosure: I am advising exchanges and investors in exchanges on the impact of the committee report.


Renganath said...

Can it not be argued that Cl. 6 of the C&D Scheme is merely enabling? Further,there is no time schedule specified in Cl. 6 as contemplated in the proviso to Cl. 1 of the Scheme. In these circumstances, the claim that shareholders were never "promised" listing may be difficult to fault.

Anonymous said...

Section 4B (8) makes it mandatory for the exchanges to go public. See the language:

"(8) Every recognised stock exchange, in respect of which the scheme for corporatization or demutualisation has been approved under sub-section (2), shall, either by fresh issue of equity shares to the public or in any other manner as may be specified by the regulations made by the Securities and Exchange Board of India, ensure that at least fifty-one per cent of its equity share capital is held, within twelve months from the date of publication of the order under sub-section (7), by the public other than shareholders having trading rights:"

The phrase " shall, ...by fresh issue of equity shares to the public" does not give any other meaning but mandatory listing of its securities by an exchange.

Further, Regulation 4 of the most debated SECURITIES CONTRACTS (REGULATION) (MANNER OF INCREASING AND MAINTAINING PUBLIC SHAREHOLDING IN RECOGNISED STOCK EXCHANGES) REGULATIONS, 2006 ( MIMPS Regulations) also provide for listing. See the following extract of the regulation.

“Manner of increasing the public shareholding

4. Subject to the provisions of sub-section (8) of section 4B of the Act and the scheme, the recognised stock exchange shall ensure that at least fifty-one percent of its equity share capital is held by the public, either by fresh issue of equity shares to the public through issue of prospectus or in the following manner: -

(a) offer for sale, by issue of prospectus, of shares held by shareholders having trading rights therein;”

The above regulation makes it a vested right for the shareholders of the Exchanges to go public.

If somebody wants to be under false illusions that there is a merit in saying that shareholders were never promised listing, let them be. As far as the law is concerned, it is very clear.

In any case, if law enables listing at the time of my investment, how can it disable now after I am trapped into investing?