Page 48 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 1: Introduction to Capital Market

2. All traders and dealers of ISE have access to NSE through ISE Securities and Services Ltd. Notes
(ISS), which ensures the continuous attention of investors.
3. Proposing to introduce the 'IPO Distribution System' for offering primary market issue.

4. ISE has set up an 'Investors Grievance and Service Cell' which looks after all types of
complaints of investors located across the country and provides decentralised support.
5. Listing of stocks with ISE would give the company an advantage of being identified as a
technology-savvy and investor-friendly company.

1.3.12 Demutualisation of Stock Exchanges

Historically, stock exchanges were formed as 'mutual' organisations, which were considered
beneficial in terms of tax benefits and matters of compliance. They are generally 'not-for-profit'
and tax-exempted entities. The trading members who provide broking services, also own, control
and manage such exchanges for their common benefit, but do not distribute the profits among
themselves. The ownership rights and trading rights are clubbed together in a membership card
which is not freely transferable and hence this card at times carries a premium. In contrast, in a
'demutual' exchange, three separate sets of people own the exchange, manage it and use its
services. The owners usually vest management in a board of directors which is assisted by a
professional team. A completely different set of people use the trading platform of the exchange.
These are generally 'for-profit' and tax paying entities. The ownership rights are freely
transferable. Trading rights are acquired/surrendered in terms of transparent rules. Membership
cards do not exist. These two models of exchanges are generally referred to as 'club' and
'institution' respectively.
There are 23 recognised exchanges in the country. Three of them are 'Association of Persons',
while the rest 20 are companies, either limited by guarantee or by shares. Except one exchange
(NSE), all exchanges, whether corporates or association of persons, are not-for-profit making
organisations. Except for two (OTCEI and NSE), all exchanges are 'mutual' organisations.
An expert committee appointed by SEBI has recently recommended demutualisation of stock
exchanges since stock exchanges, brokers associations and investors association have
overwhelmingly felt that such a measure was desirable. The committee has accordingly suggested
the steps for such demutualisation.
The most important development in the capital market is concerning the demutualisation of the
stock exchanges. Demutualisation of exchanges means segregating the ownership from
management. This move was necessitated by the fact that brokers in the management of the
stock exchange were misusing their position for personal gains. Demutualisation would bring
in transparency and prevent conflict of interest in the functioning of the stock exchanges. The
Minister of Finance in his union budget speech of 2002-03, has made an important announcement
that the process of demutualisation and corporatisation of stock exchanges is expected to be
completed during the course of the current year.

There would be various benefits of demutualisation, a few of which are narrated herein below:
1. Stock exchanges owned by members tend to work towards the interest of members alone,
which could on occasion be detrimental to the 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, and take into consideration
the interest of other players.
2. To cope with competition, stock exchanges require funds. While member owned stock
exchanges have limitations in raising funds, publicly owned stock exchanges can tap
capital markets.

LOVELY PROFESSIONAL UNIVERSITY 43