demutualisation of ludhiana stock exchange
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Demutualisation of Ludhiana Stock ExchaneTRANSCRIPT
INTRODUCTION TO STOCK MARKET
Every individual tries to plan & secure his/her future using various avenues of
investment. An individual invests money because of multiple reasons. A few of
these can be listed as :-
More and more returns on money invested, thus a new source of income.
Planning/ securing one’s future
Tax benefits
Saving for children’s education/ social obligation
Safety
Hedging against devaluation
Possessing liquidity
The growth of an economy and hence development of a nation depends on the
amount of resources that are readily available to various factors of production in
the economy. Implicit in this statement is the fact that savings/investment of the
inhabitants and other like Non- residents, foreigners, both individual and
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institutions play a key role. It is financial markets which help in channelising the
savings/ investments into the economy and makes it available to factor of
production.
Financial Markets consist of Money Market and Capital Market.
Money Market provides short-term capital to borrowers for meeting their short
term working requirement.
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“Capital Market is a market for long term funds.”
ABOUT CAPITAL MARKET
The major borrowers in this market are corporate, agriculture sector and the
government. The corporate sector needs funds for capital investments purposes like
expansion, diversification, integration (both forward & backward), mergers and
acquisitions. The government needs funds for its various programs for
infrastructure development like roads, highways, power, sanitation, water supply
etc. The supply of funds for the capital market comes for individual households,
corporate banks, insurance companies, specialized financial agencies and the
government.
Capital market is divided into market and equity market. Though in common
parlance, when we talk of market, it is to imply equity market or stock market.
India has one of the oldest stock market in Asia. India has the second largest share
holding population, with about 8 crore share holders next only to U.S.A.
Capital market is further sub divided in to:
PRIMARY MARKET
It is market where security is issued for the first time.
Secondary market
The secondary market is represented by Stock Exchange which provide an
organized market place for investors to trade in securities.
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INTRODUCTION TO STOCK EXCHANGE
Stock exchange refers to an organized market where govt. Securities and shares,
bonds and debentures of the benefited trading units are regularly transacted. Its
business is carried on with in a particular building in which a person can easily
convert his shares into cash or new securities. Thus it is a market for the exchange
of transfer able securities by providing a continuous market.
The term stock exchange is referred by some people to stat Market. Therefore
some writer says, "It is a place to get rich quick while others regard as place of
gambling. The securities of public companies can be transacted in the exchange
only if they have been approved by the committee of the stock exchange.
A company desiring its shares to be approved must first satisfy very rigid rules
concerning the prospectus. It must also agree to abide by the regulations of the
stock exchange about any aspects of its conduct.
Stock Exchange Defined:
The supreme court of India has enunciated the roll of stock exchanges in
these worlds:
“A stock exchange fulfills a vital function in the economic development
of a nation. Its main function is to liquefy capital by enabling a person
who has invested money in, say a factory to convert it in to cash by
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disposing off his shares in the enterprise to someone else.”
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Features of Stock Exchange
1. Specialized market. Stock exchange is a specialized market for the
purchase and sale of industrial and financial securities.
2. Rigid rules. There are large number of buyers and sellers who conduct their
activities according to rigid rules.
3. Basis of formation. Its activities are controlled by the company ordinance in our
country. It can be formed as company limited by guarantee or company limited by
shares.
4. It is an association of persons known as members.
5. Membership is must for transacting business.
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ORIGIN OF STOCK EXCHANGE
The trading in securities in India was started in the early 1973. In the
19th century there was a major increase in the volume of trade. The
reasons underlying were the enactment of Indian Companies Act 1850,
which introduced the concept of limited liability and the outbreak of
American Civil War which resulted in the increased demand of Indian
cotton in Europe. The earning from the export of cotton was channelized
into capital market which was given tremendous attention by investors.
The stock market witnesser a disastrous slump with the end of American civil
war in 1853. The brokers realized the need to organize themselves into well-
regulated body with definite rules and regulations for the continuance of
securities dealings. Thus the
“native shares and stock brokers association”came into being the 1875 which
latter came to be called as the “Bombay Stock Exchange”- BSE.
This being the first stock exchange in India was followed by setting up of
Ahmdabad Stock Exchange in 1897 and another at Calcutta in 1908.
At present there are 24 Stock Exchanges in India recognized by the Govy. Under
the SC ®act, 1956.
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LIST OF VARIOUS STOCK EXCHANGES IN INDIA
Sr_NoName of stock exchange
Years of establishment
Type of organization
1
Bombay stock exchange 1875 Voluntary Non- profit organization
2
Ahmedabad stock exchange
1897 Voluntary Non- profit organization
3Calcutta stock exchange 1908 Public limited company
4
M.P. stock exchange, Indore
1930 Voluntary Non- profit organization
5Madras stock exchange 1937 Co. limited by guarantee
6Hyderabad stock exchange
1943 Co. limited by guarantee
7Delhi stock exchange 1947 Public limited company
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Bangalore stock exchange
1957 Pvt. Converted into public ltd. co.
9Cochin stock exchange 1978 Public limited company
10U.P. stock exchange, Kanpur
1982 Public limited company
11Pune stock exchange 1982 Co. limited by guarantee
12Ludhiana stock exchange
1983 Public limited company
13 Jaipur stock exchange 1983 Public limited company
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14Guahati stock exchange 1984 Public limited company
15Kannaar stock exchange 1985 Public limited company
16Magadh stock exchange 1986 Co. limited by guarantee
17Bhuvneshwar stock exchange
1989 Co. limited by guarantee
18Saurashtra stock exchange,kutch
1989 Co. limited by guarantee
19Vadora stock exchange 1990 N.D.
20Meerut stock exchange 1991 N.D.
21 O.T.C.I. 1993 Pure demutulised
22 National stock exchange 1995 Pure demutulised
23 Coimbatore stock exchange
1996 N.D.
24 Sikkim stock exchange 1997 N.D.
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FUNCTIONS OF STOCK EXCHANGE
The functions performed by a stock exchange are as follows:
1. Ready Market: Stock exchange ensures increased liquidity and ready market for
the securities. This enables it to attract people who have surplus money even for a
short period of time.
2. Mobilisation of Savings: Stock exchange helps in mobilization of surplus funds
of individuals, business firms and cooperatives for investment in popular
securities.
3. Evaluation of Securities: Stock exchange helps in determining the price of
various securities. The prices at which transactions take place are recorded and
they are made public in the form of market quotations which help the investors to
know current market prices of various securities.
4. Capital Formation: Stock exchange not only mobilises the existing savings but
also induces the public to save money. This facilitates capital formation in the
country.
5. Proper Channalisation of Capital: Stock exchange directs the flow of savings
into the most productive channels. When an existing company issues securities to
raise more capital, it will be successful only if it is earning sufficient profits. Public
response to such issues by weaker companies will be discouraging.
6. Fair Dealings: Stock exchanges ensure fair dealings and safety of funds because
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of strict regulations on the working of stock exchange. The members of the stock
exchange have to operate under certain rules which checks over trading,
illegitimate speculation and manipulation. Thus, stock exchange safeguards the
interest of the investors.
7. Control of Corporate Sector: Every company has to conform to the rules framed
by the stock exchange. Through these rules, stock exchange exercises influence on
the management and working of companies in public interest
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WHO BENEFITS FROM STOCK EXCHANGE?
Benefits to Companies :-
1) A company whose shares are dealt in on a stock exchange enjoys great
reputation in the capital market.
2) The marketability of shares is ensured and in consequence, the company enjoys
a wide market for its shares.
3) Because of their shares listed on the stock exchange, the market value of shares
of a company is likely to be higher in relation to earnings, dividends and property
values. This helps the company in merger plans.
4) New companies can raise funds easily from the capital market because of
indirect support provided by the stock exchange.
5) The activities of speculators save the listed securities from frequent fluctuations
in the prices of securities.
Benefits to Investors :-
1) Stock exchange safeguards the interests of the investors. They are assured of a
ready and continuous market for the securities held by them. The brokers can’t
cheat the investors.
2) It provides liquidity of investments by providing a continuous market in shares
and debentures.
3) Securities can be used as collateral security for loans.
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4) Price quotations of stock exchange help the investor to know the real value of
his investments.
5) Normally the securities of sound companies are traded in the stock exchange.
The investors are saved from the risk of investment in unsound companies.
Benefits to the Community or Society :-
1) The stock exchange helps in the economic development by encouraging
investors to invest their savings in securities of corporate sector. It encourages
capital formation in the country.
2) By encouraging marketability of securities, the stock exchange upholds the
position of efficiently managed companies.
3) It facilitates a well managed enterprise to raise further funds easily.
4) It helps the Government to borrow from the public and thus enables it to
undertake development projects of national importance.
5) Stock exchange helps in optimum utilisation of scarce financial resources.
6) A stock exchange is a barometer of the economic conditions of a country. It
reflects the trends in the economy through fluctuation of prices of various
securities.
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INTRODUCTION OF LUDHIANA STOCK EXCHANGE
HISTORICAL BACKGROUND
The Ludhiana Stock Exchange Limited was established in 1983, by Sh. S.P. Oswal
and Sh. B.M. Munjal, leading industrial luminaries, to fulfill a vital need of having
a Stock Exchange in this region. Since its inception, the Stock Exchange has grown
phenomenally. The Stock Exchange has played an important role in channelising
savings into capital for the various industrial and commercial units of the State of
Punjab and other parts of the country.
The exchange had a total of 284 brokers, out of which 79 were corporate brokers.
Among 284 brokers, it was further classified as 212 proprietor brokers, 2
partnership brokers and 70 corporate brokers. Then, there were only 23sub-brokers
registered.
Ludhiana Stock Exchange became the second bourse in India to introduce
modified carry forward system after BSE on April 6, 1998. On the same date, LSE
also introduced a settlement guarantee fund (SGF). The SGF guarantees settlement
of transactions and the carry forward facility provides liquidity to the market.
LSE became the first in India to start LSE Securities Ltd., a 100% owned
subsidiary of the exchange. The LSE Securities got the ticket as sub-broker of the
NSE. In 1998, the exchange also got permission to start derivative trading.
For the settlement of dematerialized securities, the Ludhiana Stock Exchange has
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also been linked up with National Securities Depository Ltd. (NSDL).
OBJECTIVE
1. To channelize the savings into investment in Capital Market there by
providing funds for growth and expansion.
2. To provide liquidity to the investors of the region by providing them with a
Secondary Market Network.
3. Disseminating information among investors thereby saving their interests.
4. To main high standard of commercial honour and integrity.
5. To promote and inculcate honorable practices and just and equitable
principle of trade and business.
6. To discourage and to suppress malpractice detrimental to the interest of
investors at large.
FEATURES OF LUDHIANA STOCK EXCHANGE
1. First regional stock exchange to give proposal of making subsidiary as
broker of NSE and BSE for survival of stock exchange and second to start
operations like broker of NSE and BSE.
2. First regional stock exchange to start trading in commodities market.
3. First regional stock exchange to start courses on capital market, only BSE is
performing this sort of activities and NSE is also performing courses on
capital market only for members but ludhiana stock exchange will start for
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outsiders also.
TERRITORIAL JURISDICTION:
LSE has played an important role in generating capital for the companies in the
states of Punjab, Jammu and Kashmir and Himachal Pradesh with only six
companies listed in the beginning, now it has risen to nearly 357 companies (231
regional and 126 non-regional).
ADMINISTRATION AT LSE OF IST PROFILE
The council of management of the Exchange consists of nine members, out of
which two are Government Nominees, four are Public Representatives and one
Executive Director who is also Ex- officio member of Board. At every Annual
General Meeting, one third of the elected the Exchange is managed by the
Executive Director who is also Ex- officio member of the Board. At every Annual
General Meeting, one third of the elected Directors retire by rotation.
Administration of the Exchange is managed by the Executive Director who is
assisted by a Company Secretary and a team of Executives, Assistants, Technicians
and Sub- Staff.
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MILESTONES AT LSE October 17th, 1981 : certificate of incorporation.
April 29th, 1983 : recognition by Govt. of India under section 4 of securities contract (regulation) act 1956.
August 16th , 1983 : certificate of commencement of business.
January 1990 : The ludhiana stock exchange set up investor protection fund.
November 18th , 1998 : Implementation of online screen based trading. LSE become 5th stock exchange in India to introduce online screen based trading.
April 6th ,1998 : implementation of MCFC (modified carry forward system). LSE become 2nd stock exchange to get permission from SEBI to introduce MCFC.
April 6th , 19978 : Establishment of SGF (settlement guarantee fund)
November 16th , 1998 : commencement of trading and settlement on demat scrips. LSE became 4th stock exchange in India to get membership in NSDL.
October 1999 : commencement of trading at remote sites through VSAT counters.
January 10, 2000 : introduction of rolling settlement cycle in 10 scrips.
July 2nd , 2000 : introduction of compulsory rolling settlement in 414 scrips.
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July 28th , 2000 : BOLT trading system was installed at LSE.
April 1st ,2002 : rolling settlement cycle prevailing at LSE on T+3 basis.
April 1st , 2003 : rolling settlement ctcle prevailing at LSE on T+2 basis.
TRADING MECHANISM
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To do trading of LSESL, an investor must identify a Registered Broker who is
willing to deal on his behalf. The transaction is made at level where the bidding is
at the highest and offering is at the lowest and is acceptable to both buying and
selling brokers. The operation of sale and purchase of scrip’s is as follows. Walk to
any Broker/ Sub-Broker.
See the prices of the Shares
↓Scan the Counter at LSESL
↓It will display the Five best Bidding
Offer for all the scrips Listed/ Traded
↓Decide to buy and sell, ask your
broker to deal on your behalf.
↓Make the Payment/ Margin Money/ Shares
Certificate be for the pay-in-day
↓Collect the Confirmation Slip
↓Visit the same counter on pay
↓Out day to collect Delivery/ Payment
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CORPORATE GOVERNANCE PROFILE:
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Although the LUDHIANA STOCK EXCHANGE is not a Listed Company, yet it
has followed a model of corporate governance, which is evident from the
composition of the Statutory Committee. The Investor Services Committee
comprises of Four Public Representatives and Broker Member.
It is headed by Sh. D.K. Malhotra, a legal expert. The Audit Committee is headed
by Sh. R.K.Bansal, Chartered Accountant. Statutory Committees are represented
by Broker and Non-Brokers in 20:80 ratio.
TURNOVER
LUDHIANA STOCK EXCHANGE is one of the leading Stock Exchange among
the Regional Stock Exchanges of the country, and has been providing trading
platform for the investors situated in Punjab, J&K, Himachal Pradesh &
Chandigarh. At present, it has 335 Listed Companies and among them, 193 are
Listed as Regional Companies. It had been generating significant amount of the
business in the Secondary Market.
The Structural changes that took place in recent past in the Capital Market of the
country had a negative impact on the trading volume of the Regional Stock
Exchanges. There has been a significant reduction of turnover during the financial
year 2001-02, but the reduction in turnover of the Exchanges has been more than
adequately compensated rise in the turnover of LSE Securities Limited, a subsidiary of Ludhiana Stock Exchange.
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LISTING
Listing is one of the major functions of the Stock Exchange wherein the Securities
of the Companies are enlisted for trading purpose. Any Company Incorporated
under COMPANIES ACT, 1956, coming out with an IPO, has to mandatorily list
its Shares on a Stock Exchange.
The Listing Department of Ludhiana Stock Exchange deals with listing of
Securities, further listing of issues like Bonus and Right Issues, Post- Listing
compliance of the companies, which are already listed with Ludhiana Stock
Exchange. The companies desirous of listing its Securities on the Exchange have to
sign a Listing Agreement with the Stock Exchange. After getting the
Listing approval, the company has to ensure and report compliance of the post
listing requirements. The listing section of LSE monitors the post- listing
compliance of all the listed companies, which are found deficient in compliance.
SETTLEMENT GUARANTEE FUNDS (SGF)
The Stock Exchange established a settlement guarantee fund (SGF) on April 6,
1998. It provides guarantee of all the genuine trades made through the Screen
Based Trading System of the Stock Exchange.
END OF AN ERA
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The management of the Stock Exchange apprehended that the smaller regional
Stock Exchanges would not be able to meet the challenges imposed by expansion
of bigger Stock Exchange like NSE and BSE and might end up loosing their
business to VSAT counters of the bigger Stock Exchanges. In order to prepare for
such a eventually, Stock Exchange set up a broking arm in the name of LSE
Securities Limited (a subsidiary company of the Stock Exchange) in January 2000
and built Infrastructure and IT based sophisticated systems to enable its members
and investors to trade on NSE and BSE through the subsidiary route.
The Stock Exchange was thus able to convert the “threat” if faced from expansion
of NSE and BSE through the Subsidiary Company. The shift became more
prominent when SEBI introduce Compulsory Rolling Settlement and banned the
deferral products like Badla, MCFS and ALBM w.e.f. July 2, 2001 causing thereby
an end to arbitrage opportunities between the Stock Exchange and NSE/BSE.
Ultimately. There was complete shift of trading from the Stock Exchange to the
LSE Securities Limited in January 2002.
TRADING ON BIGGER STOCK EXCHANGES THROUGH
SUBSIDIARY ROUTE
As stated in the preceding para, the Exchange acquired the membership of NSE &
BSE through its subsidiary, the LSE Securities Limited, with the
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objective of the providing an enabling mechanism to its member brokers to trade
on NSE and BSE as sub-brokers of LSE Securities Limited.
Trading at BSE and NSE was commenced through the subsidiary route from
September 2000 and December 2000, respectively, and the trading in F&O
segment of NSE commenced in February 2002.
DEPARTMENTS
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The aim of LUDHIANA STOCK EXCHANGE is to ensure the secure channel to
the investment of the investor & to provide the proper services under the
prescribed guidelines of SEBI. To maintain the proper system of working of Stock
Exchange, there are so many Departments in which particular functions are
performed. The LSE has categorized its functioning of Department into Two types.
These are Services and Operational.
OPERATIONAL DEPARTMENT:
LEGAL DEPARTMENT
SECRETARIAL DEPARTMENT
LISTING DEPARTMENT
MEMBERSHIP DEPARTMENT
TECHNICAL & MAINTENANCE DEPARTMENT
DEPARTMENTS
OPERATIONAL SERVICE
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PERSONAL DEPARTMENT
ACCOUNTS DEPARTMENT
SERVICES DEPARTMENT:
EDP/ Computer Section
MARGIN SECTION
CLEARING SECTION
SURVEILLANCE SECTION
DEPOSITORY SECTION
OPERATIONAL DEPARTMENTS
√ LEGAL DEPARTMENT:
When a broker or outsider clients do not settle the claims in between then
they move to the Legal Court. The Legal Department comes in to a picture to fight
for the cause of the Investors & against the Defaulting Member. Legal Department
also assists the members & to settle their dispute through the arbitration committee
or investor grievance committee so that they may be settled at earliest without
incurring heavy dues on amount regarding account fee, advocate fee etc.
The main objective of Legal Department is to undertake & make effective, the bye-
laws, rules & regulations of the Exchange & to see the guidelines, circulars & any
amendments in bye- laws made by SEBI & to enforce them at right time so that the
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further complications may be reduced or avoided.
√ SECRETARIAL DEPARTMENT:
The duties and the function of this department include maintenance of records of
minutes like:
Meeting of Various Committees.
Meeting of Members.
Meeting of Board of Directors
Minutes of Annual General Meeting (AGM)
Minutes of Extra Ordinary General Meeting (EGM)
√ TECHNICAL & MAINTENANCE DEPARTMENT:
The Technical and Maintenance Section of LSE is regulated the activities of
Electrical, Mechanical and Security of LSE. It looks after the following functions:
Electrification of Building.
Air Conditioning of Plant.
Maintenance of Generators.
Fire Fighting System.
Other.
√ PERSONNEL DEPARTMENT
Motive of this Department is to choose a right person for right job. It deals with the
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Appointment, Interview and Leaves, PF of Employees, Recruitment and Selection.
Employees get salary after 5 years of duration. DA is not more than 43% of Basic
Salary. Now the LTC is freezed. LUDHIANA STOCK EXCHANGE DOES NOT
HAVE PERSONNEL DEPARTMENT IN ITS ORGANIZATION CHART.
√ ACCOUNTS DEPARTMENT
Most of the work in Accounts Department of LSE is done manually. Help is taken
from the computers for the purpose of making the Trial Balance, Income and
Expenditure Statement and Balance Sheet. The Annual Report of the Exchange is
generally published in September after Annual General Meeting every year. It
performs the following functions:-
To make and receive payment to the outside agencies.
To disburse personal expenses.
To keep the record of all incomings and outgoing money and preparation of
Financial Statement at the end of the Financial Year.
To get their Accounts Audited from the third party.
SERVICES DEPARTMENT
√ EDP SECTION
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The growing Technicalities and increasing work load has enhanced the importance
of computer section of LSE. This department is mainly referred as “EDP Section”
i.e. Electronic Data Processing Section. In the present time this section is the
backbone of entire Stock Exchange because it is performing many important
activities. The whole function of Stock Exchange would come to halt, if this
department becomes inactive. It prepares several reports namely:-
Scrip Wise Statement of Number of Each Settlement Period.
Sub Broker wise delivery bills receives order.
Downloading of delivery orders.
Sub Broker wise Final Statement.
HDFC Bank Entry.
√ MARGIN SECTION
Behind the establishment of the Margin Section, there is some rationale, which is
To prevent broker from indulging in excessive speculation.
To keep a track of Base Minimum Capital (BMC) and Additional Base
Minimum Capital (ABMC) and set exposure limit for the each broker
member.
Before the Trading being started a broker has to deposit BMC to this Department
CASH PORTION CASH/ FDR/ BG CRIPS
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Cash track only RS. 1.25 Lakhs RS. 3 Lakhs
The Margin Section allows two types of limit to broker. They are:
NET EXPOSURE LIMIT
NSE = 25 times gross 3.5 times net.
BSE = 25 times gross 6 times net.
√ SERVELLANCE SECTION
In LSE, for the purpose of ensuring a fair market, this section is responsible for
monitoring the trading activity. Some Companies rig the price of their scrips. So
this section keep track of trading patterns of the broker to prevent the market
manipulation. Whenever a member makes excessive exposure, beyond the limit
alert (signals) are given by the system. Then large variations in the price as well as
the volume of the scrip are scrutinized and appropriate actions are taken.
√ DEPOSITORY PARTICIPANT DEPAERTMENT
Another most important section is depository in LSE. This system commenced
trading in demat shares from November 6, 1998 by becoming a depository is a
system, which holds out shares in the form of electronic accounts in the same way
a bank holds our money in a saving account. Depository system provide the
following advantages:-
Shares can not be lost or stolen and there is no need to doubt the genuineness
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of shares i.e. whether they are forged or fake.
There is no risk of bad delivery shares transactions like transfer etc. can no
delay in transfer.
√ CLEARING HOUSE
There are rolling settlement cycles w.e.f. 1st April 2002 which is prevailing at LSE
and commenced on daily basis. At the end of settlement date member have scrips
wise delivery notes and have to deposit it with clearing house as per following:-
T = Trading period (say Monday)
T+2 = Pay in of funds on Wednesday by 10.30 a.m.
T+2 = Pay in of Securities on Wednesday at 2.00 p.m.
T+3 = Auction for undelivered scripts on Thursday.
T+4 = Auction pay in securities and funds on Monday by 10.30 a.m.
T+5 = Auction pays of securities and funds on Monday at 2.00 p.m.
LIST OF HEAD OF VARIOUS DEPARTMENTS
Sr.No. Name Designation
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1. Ms. Pooja SharmaTRAINING COORDINATOR
2. Mr. Pawan BhardwajMEMBERSHIP DEPARTMENT
3. Mr. Sudesh K. SharmaLISTING DEPARTMENT
4. Ms. SarabjitSECTARIAL DEPARTMENT
5. Mr. Vinay MahajanDP DEPARTMENT
6. Mrs. Jyotika SharmaKYC DEPARTMENT
7. Mr. Shammi KohliIT DEPARTMENT
8. Mrs. Deepti MahajanCOMMODITY DEPARTMENT
9. Mr. Rajinder Pal SinghMARGIN DEPARTMENT
10. Mr. Dheeraj AroraACCOUNTS DEPARTMENT
SOURCES OF FUNDS:
Membership fee from brokers at the beginning.
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Initial Listing fee from companies i.e. RS.1,000 /-
Annual Listing fee from companies.
Fines and Penalties from brokers.
Maintenance charges @ RS. 1216 per room per month from those members
having room and those not having room are charged at the rate of RS. 3000
p.a.
Interest earned on fixed deposits.
Broker members served a notice for 60 days. If the member fails to comply
with notice, then he can be expelled.
APPLICATION OF FUNDS:
5% of Listing Fees to SEBI each year.
20% for Providing Services to Investors.
Personal Expenses.
Administrative Expenses.
Electricity Charges.
Security Charges.
Telephone Charges.
VSAT Charges.
Printing and Stationary.
PAY-IN
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All the members are required to honor their pay in obligations up to T+2 day at
10:30 am e.g. a member who has traded on Monday can meet his/ her pay-in
obligation up to Wednesday.
The LSESL in turn is required to pay in the Securities and funds on T+2 day to the
Clearing House of NSE and BSE (as the case may be).
PAY-OUT
The pay-out of Securities/ funds is done on T+2 basis up to 1:30 pm.
THE DEPOSITORY SYSTEM
Depository system is concerned with Conversion of Securities from Physical to
Electronic form, Settlement of Trades in Electronic Segment, Electronic Transfer
of Ownership of Shares and Custody of Securities. The system results in instant as
compare to six week’s time under Physical Mode.
In depository system, there is no physical script and as such most sat eh problem of
fraudulent transfer, take certificate, hare lose etc. virtually disappear. Electronic
transfer is faster in comparison to paper work. Stamp duty exempted and turns over
& liquidity enhances manifold.
After going through we are in position to state that the principal function of a
depository is to dematerialize securities and enable their transactions in book entry
from. Debiting the transfer’s depository account and crediting the transfer’s
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depository account transfer the securities.
Re- Materialization.
Rematerialization refers to the process of conversion of conversion of shares from
electronic from into physical form. This process is prevalent in certain case only
and used selectively.
Pledge Creation and Closure.
DP provides the services of pledge creation, in case the account holder gets a loan
granted against the pledge of securities. The balance lying in the account of person
or part thereof is pledged with the institution granting loan to the holder or the
account.
Pledge closure refers to the process whereby the securities already pledged are
credited to the account of the person after the person has repaid the loan. This is
done as per instructions of account holder.
Settlement of Trades.
All the trades are settled through either market or off market transfers. In case of
settlement of trades by market transfers the buyer’s account in the DP is credited
on the account of seller of securities is debited in the concerned DP. This way the
DP trades the market or off market transfers.
LSE SECURITIES LIMITED
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PROFILE
OBJECTIVES OF THE COMPANY
LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange, which
was formed with an objective to enhance business and investment opportunities
for the investors and members of Ludhiana Stock Exchange at large, through
innovative products by encompassing a variety of activities related to the capital
market. The company has a paid-up capital of Rs 5.55 crores.
INTRODUCTION OF THE LSE SECURITIES LTD.
LSE Securities Ltd., was incorporated in January, 2000 with a view to revive
the capital market in the region and for taking full advantage of the emerging
opportunities being provided by expansion of bigger stock exchanges like NSE
and BSE. The company since its inception has marched forward rapidly and
achieved many milestone in a short span of existence.
GOVERNING COUNCIL
The Council of the management of the Company comprises of 10 directors of
which 3are broker members and 7non-brokers. Five non broker members are
Independent Directors of eminent status from the field of finance, law and
management and remaining two are Chief Executive Officer of LSE Securities
Limited and Executive Director of the holding company (Ludhiana Stock
Exchange), who are on the Board of the company as ex-officio Directors. Thus
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the council of management has representation of sub-brokers as well as
professionals and subject specialists representing various fields of business
activities. Operations of the company are run in a professional, transparent and
fair manner keeping in view of the interest of investors as well as other stake-
holders.
CORPORATE MEMBERSHIP OF NSE & BSE
SEBI, at the initiative of LSE, permitted smaller Stock Exchanges, to trade on
bigger Stock Exchanges through their subsidiary companies. The Ludhiana
Stock Exchange floated its subsidiary company, the LSE Securities Limited,
with the objective of obtaining trading rights on bigger Stock Exchanges. It has
obtained corporate membership of both NSE and BSE in the first half of year
2000.
TRADING AT NSE AND BSE
The LSE Securities Ltd. commenced trading operations in Capital Market
Segments of BSE and NSE in September, 2000 and December 2000
respectively. The turnover of the Company at NSE and BSE is growing by
leaps and bounds ever since in incorporation. There was encouraging response
from the sub-brokers specially at NSE counters.During the financial year 2005-
06, the Company recorded a turnover of Rs. 7975 crores and Rs.3834 crores in
"Capital Market" segments of NSE and BSE respectively. For the year ended
37
2005-2006, there were 128 sub-brokers registered for NSE and 68 for BSE.
F&O SEGMENT OF NSE
The LSE Securities Ltd. commenced trading operations in Future and Options
Segment of NSE in February 2002. The Company became the first subsidiary of
any Regional Stock Exchange which commenced trading in “F&O” Segment of
NSE. Response to trading facilities in the “F&O” segment of NSE has been
very encouraging and volumes generated in this segment soon exceeded those
in “Capital Market” segment.
TRADING THROUGH V-SATS
The LSE Securities Limited has provided facility to its sub-brokers for trading
on NSE and BSE through VSAT counters which are located outside Stock
Exchange Building. During 2005-2006, 27 sub-brokers of the company have
been trading through VSAT on NSE and 13 on BSE.
CERTIFICATION IN FINANCIAL MARKET
In order to provide professional services to the investors of LSE Securities
Limited through its sub-brokers, the company motivated its sub-brokers and its
staff to qualify the certification in financial markets conducted by NSE. All
trading terminals for Capital Market Segment and F&O segment are being
operated by the persons after having qualified the said certification
DEPOSITORY PARTICIPANT SERVICES – NATIONAL SECURITIES
38
DEPOSITORY LIMITED (NSDL)
The LSE Securities Ltd. commenced its operations as Depository Participant of
NSDL in August 2000. The DP services provided by the Company have
technology edge over other DPs, as DP of the company is the only On-line
Real-Time DP in the region. As a result of efficient services and competitive
rates, the Company has been able to increase its market share in the DP
business at the cost of other DPs in the region. As on date DP of NSDL and
CDSL of the Company at Ludhiana is servicing over 35000 beneficiary
accounts.
DEPOSITORY PARTICIPANT SERVICES – CENTRAL DEPOSITORY
SERVICES (INDIA) LIMITED (CDSL)
In order to further strengthen its services to sub-brokers and investors, the
Company applied for the DP of CDSL. It started DP operations of CDSL in
December 2001. With the operationalisation of DP Services of CDSL, the
Company has been able to provide delivery of shares to sub-brokers and
investors on the day of pay-out which in turn helps the sub-brokers to give
timely deliveries to their clients. Introduction of CDSL operations has also
enabled the sub-brokers and investors of the Company to timely meet the pay-in
obligations of securities purchased by the investors on BSE and sold next day
on NSE through the Company and vice-versa.
39
EXPANSION PROJECTS
To increase its presence in the region further, the company plans to open its
branches of Depository Services in the major cities of the region. To start with,
it has already opened its branches at Jalandhar Amritsar and Chandigarh.
INTRODUCTION
Globalization and technological advancement are twin forces in the 20th century
40
has resulted in closed integration of capital markets and will high level of cross
border investment participation. Today business world increasingly reliance on
private capital flows, economics are striving to cut through capital attracting
competitive advantages. The stock market world wide are experiencing a churn
resulting in increasing competition, unification in happening right before our
eyes and the day is not far when there will be single unified “stock exchanges”.
Stock exchanges are under going a change as investor seek cheeper, quicker and
better services. So there is increasing trend among international stock market to
demutualize for mobilizing capital and cross the border access.
Traditionally stock exchanges have been mutual associations set up by men be
for member and use by the member. Generally they have been operated on not
for profit basis so that any profit are returned to members in the form of lower
trading cost or access fees. Stock exchanges are operated and regulated
differently in terms of the role of the board and the staff of the exchange,
powers of the chief executive commitiees. Exchanges have a variety of voting
structure and the balance of power between different users.
The key issues were :
Increasing pressure for low cost trades
41
Access to cross border trading
Electronic mode of trade
Professional management of exchanges
MUTUALISED STOCK EXCHANGES
Traditionally most of the stock exchanges have been non- profit and mutual
cooperative organization all over the world. Their precise legal form varied
from country to country, depending on the domestic legal and corporate finance
system, but their ownership and governance structure has some common
features.
In India most of the exchanges are organized as “Association of person” under
section 25 of Companies Act, 1956. These exchanges are “Mutual” exchanges
and these are non- profit organizations and exempted from tax. The stock
exchanges generally to be owned, controlled and governed by exchange
members who are usually stock brokers. Brokers elect their representatives to
regulate the activities of exchange including their own activities. On one side
the trading members are the owners of the stock exchanges and on the other
side they are consumers or they are real beneficiaries. In mutual exchange
ownership, management and trading is in same hands. Now the traditional
42
ownership and governance structure is being questioned. In mutualised
organization there is always conflict between regulatory and public interest role
of exchange with private interest of elected directors. The main reason for
scams by the exchange management.
Largely due to the broker interference with day to day administration and
ultimate decision making power is in the hands of brokers due to absence of
SEBI nominees and public representatives in board meetings. The limitations of
mutualised structure gave birth to the demutualised structure.
LIMITATIONS OF MUTUALISED STOCK
EXCHANGES
43
Mutualised stock exchanges have following limitations:-
CONFLICT BETWEEN INTEREST OF INVESTORS AND BROKERS:-
Conflict between the interest of investors and brokers is main drawback of
mutual exchange. The elected directors misuse their official positions for
personal interest. In case of dispute between brokers and investor, investor’s
interests do not always receive the same utmost objective treatment. The
regulatory and public interest role of the exchange conflict with private interest
of the elected directors as the same sometimes gets precedence over regulation
broker on exchange does not offer an effective model for self regulatory
organization.
ABSENCE OF SEBI NOMINEES AND PUBLIC REPRESENTATIVES
IN BOARD MEETINGS:-
Many non-broker directors are busy in their professional life they do not often
understand the intricacies of functioning of stock exchanges and are not
assertive enough and not regular in attending meetings. So in board meetings
broker director have dominance over taking important decisions. Mutualised
exchanges lack quality of administration or we can say broker managed
exchanges is far satisfactory stage where ultimate owners and real beneficiaries
are same.
44
LACK OF ADEQUATE FINDS:-
Today where stock market needs change for technological advancement mutual
exchanges have no funds for which most of the part they got from members.
For further expansion, these exchanges need funds, which these can collect
from commercialization of stock exchange. So mutualised exchanges are facing
so many problems. These exchanges want there own place among the crowd.
The only solution to the problem of mutual structure is demutual structure.
CONFLICT BETWEEN ELECTED BROKER AND OTHERS:-
Another major drawback of mutualised stock exchange is that there is a conflict
between elected broker and others. The elected broker misuse there official
position for personal interest.
LACK OF PROFESSIONAL MANAGEMENT:-
The mutualised stock exchanges lack professional management because of the
conflict between broker and investor.
LOW PUBLIC CONFIDENCE:-
Due to lack of professional management and lack of transparency public lack
confidence in stock exchanges and resist to invest.
LACK OF TRANSPARENCY:-
45
Mutualised stock exchange lacks transparency as they do not reveal full
information as required by brokers and investors.
DEMUTUALISATION OF STOCK EXCHANGES
Demutualization consists of two words.
46
“de” and “mutualisation”
↓ ↓
NO ASSOCIATION
So demutualization means no association.
Demutualization refers to the transition process of an exchanges from mutually
owned association to a company owned by shareholders. The above in effect
means that after demutualization the ownership, the management and the
trading rights at the exchanges are segregated from one another.
In recent years there has been trend for exchanges to convert from non- profit
member owned organization into profit shareholder owned organization without
strict regard to whether prior to conversion of the exchange was truly mutual or
cooperative in nature or a company limited by share.
Demutualization represents wholesale corporate cultural transformation ie.
Changing every dimension of exchange.
But also involves change in the corporate thinking at each level.
The organization should act as a commercial organization.
According to Securities Act, 1956……….
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“demutualization means the segregation of ownership and management
from trading right of members of a recognized stock exchange in
accordance with a scheme approved by the Securities Exchange Board of
India.”
Here “Scheme” means schemes for cooperation or demutualization of
recognized stock exchange which may provide for
1. The issue of shares for a lawful consideration and provision of trading
rights in lieu of membership cards of members of a recognized stock
exchange.
2. The restriction on voting rights.
3. The transfer of property, business, assets, rights, liabilities, recognition,
contracts of recognized stock exchange, whether in the name of the
recognized stock exchange or any trustee or otherwise and any
permission given to or by the recognized stock exchange.
4. The transfer of employees of a recognized stock exchange to another
recognized stock exchange.
5. any other matter required for purpose of, or in connection with, the corporatisation or demutualization, as the case may be, of the recognized
stock exchange.
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In stock exchange term demutualization refers to the segregation of three groups
i.e. ownership, management and trading. It also aims at maximizing stakeholders
value of unlocking hidden values.
MUTUAL VS. DEMUTUAL
49
SR. NO. MUTUAL EXCHANGE DE- MUTUAL
EXCHANGE
1. Owned by traders Separate ownership
2. Not for profit For profit
3. Restriction on trading
rights
No such restriction on
trading rights
4. Card carries premium No such card exists
5. Usually open cry system Electronic mode of
Trading
6. For mutual interest For public interest
7. Slow to adapt system Quick to adopt new
System
MUTUALIZATION OF STOCK EXCHANGE
50
DEMUTUALISATION OF STOCK EXCHANGE
WORLD SCENARIO
In capitalism, the ultimate driving force and the regulator is competition.
Exchanges are no exception to this rule and single most important cause behind
OWNERSHIP MANAGEMENT TRADING RIGHTS
OWNERSHIP MANAGEMENTTRADING RIGHTS
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demutualization is competition driven by technological advances. In the 80s,a
potent competitive threat from electronic communication networks (ECN).
These provided low cost order matching services with in a brokerage house so
that lesser orders are routed to the exchanges for execution.
ECN also provided anonymity to block trades, extended trading and greater
disclosure of the orders in queue, which were usually not offered by exchanges.
These technological advancements were happening more in developed parts of
the world that is Europe and America. So fearing there existence, stock
exchanges in these countries planned to find out some way, to cope up with the
immense competition that these stock exchanges were facing from ECNs and
the competition they were giving to each other i.e. mutualised stock exchanges
themselves.
The first ever international stock exchange that adopted demutualization model
was” Stockholm stock exchange” in 1993. SSE converted itself from mutual
organization to a demutualised co. ltd bt shares. After that, Helsinki stock
exchange was demutualised in year 1995.
52
DEMUTUALISED STOCK EXCHANGE
(INTERNATIONAL)
53
SR.NO. Name of the stock exchange year
1. Stockholm stock exchange 1993
2. Helsinki stock exchange 1995
3. Copenhagen stock exchange 1996
4. Amesterdam stock exchange 1997
5. Borsa Italian stock exchange 1997
6. Australian stock exchange
1998
7. Keland stock exchange 1999
8. Athens stock exchange 1999
9. Singapore stock exchange 1999
10. SIMPEX 1999
11. LIFFE 1999
12. Toronto stock exchange 2000
13. Sydney future exchange 2000
14. Chicago mercantile exchange 2000
15. New York mercantile exchange 2000
16. London stock exchange 2000
17. Pacific stock exchange 2000
18. Osio exchange 2001
19. NASDAQ 2001
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20. Euronex 2001
21. Deutsche orsi 2001
22. New York stock exchange 2001
INDIAN SCENARIO
Demutualization has been experimented in India even before the concept to be
propounded internationally. The “over the counter stock exchange of India”,
promoted and incorporated in 1990 by financial institutions as non- profit
company under Section 25 of the companies act, was a pioneering attempt in
separating ownership and membership of the exchange. The subsequent setting
of the national stock exchange of India limited in November 1992 as a tax-
paying company unlike other stock exchange in the country was another
significant effort. With a distinctly different organizational structure, its co-
existence with other mutualised exchanges was an interesting phase in the
capital market history of the country. Events of conflicts of interests and their
impact on the market have led to union budget for 2002-03 laying emphasis on
demutualization of stock exchanges. A group set by SEBI is expected to
deliberate on this issue, and could be precursor for sweeping change in the
55
structure, market position and management of stock exchanges in the country,
in curbing of market is the prime driver for demutualization. In addition, other
impacting factor technology, competition and institutionalization and
globalization of the investors have changed the Indian capital market. This
restructuring opportunity may have to be utilized to assess the competitiveness,
efficiency and global aspirations and opportunities of the Indian market it is an
important destination in the global financial scene.
In terms of legal structure, the stock exchanges, which are recognized under
securities contracts (regulations) act 1996, in India, could be segregated into
two board groups: 20 stock exchanges that were set up as companies, limited
either by shares or by guarantee, and three stock exchanges that are set up as
association of person (AOP).
In India two exchanges are demutualised national stock exchanges NSE is pure
form of demutualization and another exchange OTCEI over the winter
exchange of India. NSE is the first stock exchange that adopted demutual model
in April 1993, and NSE is financed by most of the leading financial institutions
( IDBI, LIC, GIC, ICICI, UBI, IFCI, ETC.). NSE has two fully owned
subsidiaries one is National Securities Clearing Corporation LTD. And other
one is VSE IT LTD. commenced on April 1996, and October 1999,
56
respectively.
Recently on 20th may 2005 SEBI has approved the scheme of demutualization
of Bombay Stock Exchange (BSE) with certain modifications.
CLASSIFICATION OF STOCK EXCHANGES IN INDIA
57
WHO CAN DEMUTUALISE?
Is the term restricted only to corporation of stock exchanges?
58
STOCK EXCHANGES IN INDIA
20 stock exchanges either as companies limited by shares
or by guarantee e.g. NSE.OTCEL, LSE, BGSE, etc.
3 stock exchange asassociation of person (AOP)
i.e. BSE, ASE, and Indore stock exchange
Any organization that is non- profit body (which is not as same as loss making),
and is not distributing its profit to owner members but retains the same to
develop infrastructure of the organization, can demutualise.
WHY DEMUTUALED?
The arguments in favour of demutualization could be summarized as follows:
TO REMOVE ILLS OF MUTUALISATION:
Removal of conflicts between the interest of investors and brokers is main
drawback of mutual exchange. The elected directors misuse their official positions
for personal interest. In case of dispute between brokers and investors interest do
not always receive the same outmost objective treatment.
The regularity and public interest, role of exchange conflict with private interest of
the elected directors. As a same some times get precedence over regulation, broker
on the exchange does not offer an effective model for self regulatory organization.
1. Appointment of SEBI nominees and public representatives in board meetings:
Many non-m brokers are busy in their professional life. They do not
often understand the intricacies of functioning of stock exchange, and
are not assertive enough and are not regular in attending meetings. So
in board meetings broker director have dominance over taking
59
important decisions. Mutualised exchanges lack quality of
administration or we can say broker managed exchanges is far from
satisfactory stage, where ultimate owners and real beneficiaries are the
same.
2. Removal of conflict betwwn elected brokers and others:
Another major drawback of mutualised stock exchange is that there is conflict
between elected broker and others. The elected brokers misuse their official
positions for interest.
FOR FINANCIAL BENEFITS:
1. Acess to variety of capital sources:
Demutualization will benefit by variety of capital sources. The
financial institute and general public will be interested to invest
their funds in stock exchange’s shares.
2. wider customer base:
demutualization will help in widening the customer base as the
products and services will be easily accessible from any where.
Different products and services will be introduced.
3. Improve shareholder value:
60
This lead to payment of dividends resulting in better relationship.
Demutualization will improve shareholder value because it will be
more regulated market and payment of dividend will also be regular.
It will maintain better telations.
4. More profits driven:
As the cost will decline profit will rise.
5. Better cost control:
Regulators of exchange will control the cost. The cost will decline
because of better quality products and services.
6. Share price improvement:
Share price of the exchange will improve because of high
competition and profitability.
7. Increased market capitalization:
Market capitalization of shares will increase because of better
management and control.
FOR NON FINANCIAL BENEFITS:
1. More focused management:
Because of ownership, trading right and management will be in
three different hands so the management will be more focused.
2. Freedom to purse:
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Business opportunities unconstrained by vested interest issue:
more business opportunity will be accepted because the interest of
different parties will be separated and there will be no concern
with them.
3. Quicker decision making:
As the professional staff will turn the exchanges there will be
quicker decision making. Brokers decision will not influence
organization interest.
4. Flexibility, efficiency and competitiveness:
Stock exchanges will be more flexible with new technology, more
efficient and it will be competitor for other stock exchanges.
5. Ensuring own destiny and reliant on member:
Earlier the member of stock exchange determines the stock
exchange destiny. They were the regulator but after
demutualization members will not interfere in stock exchange’s
decisions.
6. Better public relations:
Positive press coverage public interest will be priority and this will
Increase its value in media’s eye.
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In addition there should be more transparency of exchange as a public
company.
IMPORTANT CRITICAL FACTORS FOR SUCCESS
Balanced ownership
63
Aggressive Service Level Agreements (ASLA)
Customer Relationship Management (CRM)
Stakeholder Relationship Management (SRM)
Modern Corporate Governance
REASON FOR DEMUTUALISATION
Demutualization is the need of the day. There are many reasons, which lead to
64
demutualization of stock exchanges, which are as follows:
For new organizational form:
In mutualised form of exchanges brokers were the owners and they regulate
the stock exchanges. They preferred their interest for the sake of
organizational interest. This leads to scams of stock market. In demutualized
form administration will be separated grom brokers.
For technological improvement:
Today where advance technology is the key to success. Traditional
exchanges members have purchased seats that entitle them to use the
exchange as their business place, vote on policy matters and share in
exchange’s profit importantly members are also the source of capital for
exchange expansion and up keep. To keep up with heavy investment in
technology and to streamline the exchanges decision process, exchanges are
planning to demutualise in order to improve accountability and operate
primary for own profit interest.
Condition for regional stock exchange:
Today nearly all RSE have nil turnovers. These stock exchanges are working
as an asset management companies looking after their assets. These stock
exchanges have threats from NSE and BSE also the ban on bald has killed
65
the RSE.
SEBI and government enforcement:
SEBI has enforced the stock exchange to go for demutualization because
demutualised exchanges have self regulatory system. For merger of stock
demutualised exchanges have self regulatory system.
If the stock exchanges needs to be merged than these should be mutualised
because if the stock exchanges themselves are listed companies, perhaps
because of their wide shareholding, laws relating to disclosure & substantial
acquisition may arise because of their application just as in the case of any
other public listed company.
Globalization:
For globalization exchanges want more funds & for cross border self listing
of stock exchanges is needed which can be possible in demutualised cases.
Development of capital market:
Capital market is suffering from its growth and recognition. The
demutualization is needed for its development.
To face the competition:
Capital markets are growing and these are offering new products. For
leading them exchanges need differentiation which can give them growth in
the trading.
66
Lack of transparency:
Mutual exchanges are less transparent these exchanges have rough
management and the facts are behind the veil. Demutualization of stock
exchanges will low the costs of service provided.
High cost:
Investors are facing high cost both in terms of financial & non- financial.
They need a protective environment & low cost. Demutualization of stock
exchanges will low the cost of services provided.
Non- Profit organization:
Exchanges are working as non- profit organization. It retains profit for the
expansion and does not pay to shareholder. To be a for profit organization
demutualization is needed.
Separation of risk management and surveillance function:
In stock exchanges the function of risk and prefer their interest. So
demutualization is needed for separation of these two functions.
Brokers are consumers:
In stock exchange brokers are self consumers and buyers. They are taking
services from stock exchange. To separate these two demutualization is
needed.
Rationalization governance:
67
If the greater competition exists and the interest of the member diverges
from the exchange, the mutual governance model ceases to function well.
The corporate model will enable management to take actions that are in the
best interest of the customers and the exchange will achieve greater
independence from its members with respect to regulatory functions.
Investor participation:
The new corporations will be more profit oriented due to shareholder
accountability. However in today’s competitive environment, a stock
exchange must be responsive to the needs of the companies and institutional
and retail investors in particular, institutional investors have a strong
preference for any anonymity when they are in the best affecting the large
block trade.
Competition from ATS an upstairs trading:
The threat of competition from alternative trading system (ATS) has forced
traditional exchanges to examine their role as trading arenas and to take
measure that facilitates more competitive future strategies. An ATS is a
privately operated computerized system that performs many of the functions
of an exchange by centralized and matching buy and sell orders and
providing post trading information.
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HURDLES FACED BY STOCK EXCHANGES
WHILE IMPLEMENTING DEMUTUALISATION
69
Demutualization does not only mean legal changes, but it means cultural
transformation in corporate entity and every dimension of exchange will change.
There are many problem faced by exchanges while implementing demutualization
model.
Before commencing demutualization following issues must be properly analyzed
and need to be considered for successful demutualization program. The exchanges
must be clear with their objectives.
1. What does the exchange hope to achieve from demutualization and
how far is the management prepared to achieve complete
demutualization?
2. What infrastructural changes need to be in place to achieve the
desired results?
3. What is the appropriate corporate governance structure for an
exchange?
4. How does demutualization entity provide the organization before
an IPO (Initial Public Offering) take place?
5. How do you protect your brand in a post- demutualised
environment?
70
6. Can you achieve your business goal, as per your target earning
rates when regulators are setting moving targets?
These are just some of the so many questions that need to be answered, for
successful implementation of demutualization program. A failure to recognize
these issues there is risk to exchange’s reputation and in future exchanges may be
unhappy even after demutualization.
The term demutualization hides a number of complex issues that need to be
understood and addressed.
Provision regarding election, tenure, and retirement of directors
POST DEMUTUALISATION
71
Category of Directors Election Tenure and RetirementBroker members
Having trading rights
Trading member
Representation.
By shareholder from
amongst the persons
having trading rights on
LSE limited.
Term of 3 years with
Maximum two terms for
Each director 1/3 will retire by rotation at AGM.
Non- brokers
Shareholders culture
By shareholders from
among the person not
having trading rights but
are shareholders of LSE
ltd.Independent directors SEBI will appoint these
directors.
Will hold office at
pleasure of SEBI.
Chief executive officer
CEO of exchange
Will appointed by BOD
with prior approval of
SEBI
Are permanent members
of body and are not
subject to retire by
rotation.
PROCEDURE FOR DEMUTUALISATION
1. Transfer of ownership
2. Valuation of assets and liabilities
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3. Division of net assets into the shares
4. Offering of assets to public
5. Distribution of funds to brokers
6. Listing of shares of exchange
STEPS OF DEMUTUALISATION
Step 0 – Mutualised exchange
Step 1 – Corporate structure
Step 2 –Trading of shares among members
Step 3 – Trading of OTC
Step 4 – Corporate governance
Step 5 – Stakeholders relationship management
Step 6 – SLA – driven operational management
Step 7 – Customer relationship management
Step 8 – Private placement of exchange shares
Step 9 – Free trading of exchange shares
PROCEDURE FOR DEMUTUALIZATION
WITH BUTTERFLY STAGES
73
Comparison of demutualization with butterfly stages “Metamorphosis”
Stages Description Comments Egg stage Starting point
(mutualised)
If starting now start as a
commercial entity like
eons (Electronic
Communication Network)
Caterpillar stage Getting fatter, earth bound
and vulnerable victim of
circumstances
Demutualised upto step 3
a legal maneuver.
Pupa stage Massive internal change
in process still vulnerable
Demutualization
implemented step 4 to 7
Butterfly stage Highly mobile, very
attractive, able to make
master of own destiny
Highly commercialized
step 8 & 9
KANIA COMMITTEE REPORT
INTRODUCTION
According to governments proposal to corporatism and demutualization the stock
74
exchange by which ownership, management and trading right would be segregated
from each other and legislative changes, if required, would be proposed
accordingly to give effect to corporatisation and demutualization of stock
exchanges.
Corporatisation and demutualization of stock exchanges are complex subjects.
These issues would need careful examination and then SEBI felt it necessary to
appoint a group of eminent personalities in the field of law, finance etc. to advice
SEBI on this matter.
TERM OF REFERENCE
To review and examine the present structure of exchanges includes those set
up as companies and as unincorporated bodies and in this light examine the
legal, financial and fiscal issues involved in corporatising and demutualisating
the stock exchanges.
To recommend the specific steps that need to be taken for implementing the
schemes.
To advice on the consolidation and merger of stock exchange. The group
would submit its report within two months from the date of its first meeting.
The date of submission of report has further extended till 31st Aug, 2003.
METHODOLOGY
75
The group in all held to meetings to obtain a better assessment and appreciation of
these issues, the group felt that it would be useful to first heat the different points
of view of major stakeholders. The group also studied the proposal of BSE on
demutualization submitted to SEBI. The group also submitted the existing article
of association, charters trust deed, rules regulations and by laws of the exchanges.
RECOMMENDATION OF THE GROUP
Desirability of demutualization and sequencing of the process:-
Group noted that stock exchange representatives of brokers association and
investors association were unanimous and the corporative and demutualization by
which the ownership and management would be separated from each other.
EFFECTIVE AND TRANSITION FROM A NON- PROFIT MAKING
ENTITY
The group recommended that:-
As demutualization of exchange is essential a conversion from non-profit to
profit making company, and would result in distribution of assets under the
income tax act be so amended if necessary.
Necessary provisions should also be made in the Indian stamp act and the
sales act laws, the transfer of assets from mutual exchange to demutualised
76
exchange.
As only the scheme approved by SEBI will qualify for exemption under the
income tax act. Indian stamp act and sales act. Each stock exchange would
be required to submit a scheme drawn on the line recommendation to SEBI
approval.
SEGREGATION OF TRADING RIGHTS FROM OWNERSHIP
Trading card system to be replaced by the deposit system where by in the
money deposit by the member to obtain trading rights only, be considered as
the deposit with the exchange for trading purposes, while the group favour
the deposit system it would like to leave the choice of adopting the either
system to stock exchange.
The following procedure is adopted if the deposit system is adopted by the
exchange for segregated of trading rights and ownership.
LISTING OF THE DEMUTUALISED EXCHANGE:-
The group felt that while listing of the stock exchange it should be the desired
objective, it may not be mandatory. The group therefore recommends that it would
be desirable for demutualised stock exchange to list its shares on itself or any other
stock exchange.
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CEILING ON THE VOTING RIGHTS OF THE SHAREHOLDERS
Having regards to the public interest in the efficient functioning of the exchange, it
is important that no single entity of the group of related entities should be allowed
to control a stock exchange through concerning its shares.
LEGAL CHANGES REQUIRED
The group felt that it would be difficult to implement these recommendations
without amendments in some of the provisions in the various relevant statues. The
group recommended that the relevant provisions of the securities contract act 1956,
the income tax act 1961, and the Indian stamp act 1899 be suitably amended.
MERITS OF DEMUTUALISATION
Success of demutualization depends upon its implementation. Following are the
merits of demutualization:
78
1. ABILITY TO RISE NEW CAPITAL
Demutualised entities have wider access to capital and can have wider horizons as
compared to mutual exchanges. This gives the demutualised exchanges a
competitive edge in winning business and a better position to embrace the
technology evolution.
2. BALANCED OWNERSHIP STRUCTURE
In demutualised structure there is a balanced ownership structure. Because
ownership, management and trading are separate. The separation of shareholding,
management and users in a demutualised exchange makers for better strategic
decision making.
3. FLEXIBILITY AND TRANSPERANCY
Demutualised stock exchange have more transparency and flexibility as
compared to the mutual exchanges. These exchanges are free from personal
interest of brokers as day to day affairs are settled by related committees i.e.
NSE there is executive committee(EC) or trade related issues committee(COTI)
on settlement issues(COSI) for managing the affairs of the exchange.
4. BETTER RELATIONSHIP WITH STAKEHOLDERS
Demutualised stock exchanges have improved the relationship with external parties
through stakeholder relationship management(SRM) and customer relationship
management(CRM).
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THREATS TO DEMUTUALISED STOCK
EXCHANGES AND ITS SOLUTION
80
“The debate had centered on safeguards against control changes and the wider
issues of regulations. Those who oppose the proposal have argued about the risk of
loss of sovereignty in terms of ownership”
Successful demutualization is required to be aware about the following threats:
1. BALANCE BETWEEN COMMERCIAL AND REGULATORY
ROLE:
A demutual exchange suffers from a different type of conflict of interest, since
it is for-profit organization, its commercial role may get precedence over the
regulatory role. Every decision is likely to be tested against its impact on
profitability. It may be either very lenient in enforcing the rules to encourage
the volume of business or very strict in enforcing of rules to increase penal
revenue. NSE has been able to strike a fine balance between its commercial and
regulatory roles, which supplements each other.
2. SELF LISTING TO REJECT OF INTEREST:
A demutualised exchange to be listed on an exchange, this would open up another
arena of conflict of interest if it listed on itself as has the AXS done, it is unlikely
that the exchange would like to subject itself to some strict discipline as applicable
to other listed companies. One solution could be to list securities on the other stock
exchange. But permit trading on it. A better solution would be vest the listing
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power in a body, like UK listing authority separate from stock exchange.
3. ELECTION OF NOMINEES:
In a mutual environment, the governing council including nominees of
regulators and public representatives. This is necessary in the public interest to
refrain the elected directors from pursuing their self interest only, in the
demutualised environment such a check is necessary to ensure that the board of
directors do not act only in the best commercial interest of the organization, this
may be achieved by including a few public representatives, who should have
specific responsibilities and to held accountable.
The practice of having nominees of regulator must, however, be discounted.
This makes regulator vicariously liable for the entire crisis occurring in the
exchange. Further the regulator cannot be expected to make, at least in theory, a
fair investigation into the affairs of the exchange.
4. THREAT OF TAKEOVER:
In demutual environment, the shares can be concerned by a few undesirable
person. The exchange should be prone to hostile takeovers; such probability can be
reduced by prescribing ceiling on shareholding requiring regulator’s approval for
change in ownership beyond a theshhold limit. Public representatives will be
82
useful to prevent mismanagement in such cases.
5. LACK OF KNOWLEDGE:
It is an underlying fact that a mutual exchange has a better access to expertise and
knowledge of the market participants, which are critical inputs for framing rules.
As the brokers are involved in framing the rules a “mutual” generally ensures
compliance with such rules by them the access to market expertise and knowledge
and compliance with the rules have been successfully achieved by NSE through
EC, COSI, COTI etc.
6. FINANCING:
Government and SEBI seem to be suggesting NSE model of demutualization. They
are implicitly hinting at capital contribution by financial institutions. A large
number of financial institutions, banks an insurance company have already
contributed capital in OTCEI and NSE. Would they like to make similar
contribution for 21 exchanges, more so when majority of they are only clinically
alive? It is doubtful if there would be adequate response from the public if all 21
exchanges are corporatized and there securities are evaluated professionally and
offered for sale. But why should policy maker regulator suggest a particular model
if they have to, they should first look at consolidation of exchanges before they
mutualised them.
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7. NON-COMPLIANCE:
It is more desirable if the initiative for demutualization comes from exchanges
themselves. The authorities have to just approve the memorandum and article of
association of demutualised structure as they did for NSE and OTCEI. It is
hearting that some exchanges have already started working towards
demutualization. What if they do not demutualize voluntarily? The lanes provide
enough stick for the authority to enforce demutualization. They have power to
recognize a stock exchange, renew the recognition or withdraw the recognition/
renewal of recognition, a stock exchange is required to comply with such
conditions as are or may be prescribed or imposed under the provision of SCRA
and the SCRR from time to time. The authorities also have the power to direct
stock exchanges to make rules or amend rules. In exercise of these powers. The
authorities have been tinkering with the composition of governing body. In the
extreme case of non compliance by any stock exchange, the authorities can
withdraw recognition.
8. SHAREHOLDING:
The process of demutualization would involve offering of a corporatized
exchanges to public, including trading members subscribed for the shares and in
terms of their right under the company’s act, get themselves elected to the board of
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directors. This defeats the purpose of demutualization. It is necessary to specify
under SCRA that a shareholder which is also a trading member can not join the
board. There is thus an apparent conflict between the companies act and SCRA in
the sense that the former confers a right on the right too shareholder to join the
management. While the later deprives a broker shareholder from joining the
management this conflict is easily well accepted principle of special law (SCRA)
prevails over the general law (co. Act) a deep understanding of the laws, however,
overshadows this conflict and makes it clear that the both the act are seeking to
fulfill the same objective. The co. Act requires an interest’s directors to refrain
from participating in the deliberation in the board of directors of an exchange
would be perpetually interested director, he has to refrain from attending the board
meeting and hence can not really contribute use to management it is therefore
desirable that such a shareholder refrains voluntarily from joining the board or in
prevented from joining the board by SCRA. Thus SCRA would reinforce the
objective of co. Act at more explicitly.
9. EXEMPTION FROM CAPITAL GAINS:
It is reported that a few exchanges are seeking exemptions from stamp duty on
transfer of asset and tax assumptions on capital gains arising from transfer of any
asset of an exchange or membership in the pursuance to corporation. These
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exemptions in respect of transfer of assets from the erstwhile non corporate to the
emerging corporate exchange is understood. This should be granted to encourage
corporatisation in public interest. But the need for reserves and surplus of the
exchanges or his right to trade? The membership card is a fictitious asset.
According to recent Supreme Court ruling, the membership card of a stock broker
is not a property. The reserves and surplus, which have grown because of so many
concession and tax benefits, of not for profit organizations cannot be shared by the
contributing member. What need to be transferred is the right of a trading member
to take from erstwhile non corporate exchange to the emerging corporate
exchange, which should be automatic.
10.MEMBERS AND SHAREHOLDERS MEMBERS:
The corparatisation cum demutualization would result into two classes of members
namely, trading members and shareholders members. Since member under the
SCRA means a member of recognized stock exchange, it is apprehend in some
circles that the SCRA may accommodate different classes of members, provide the
solution. It has been affirmed recently by the Supreme Court that there can be more
than one class of members and they will fall in the definition of “members under
the SCRA”
86
SCHEME OF DEMUTUALISATION
Ludhiana Stock Exchange Association Limited
1. The name of “The Ludhiana Stock Exchange Association Ltd.” has now
87
been change to “Ludhiana Stock Exchange Limited”. The report of Kania
committee along with the public comments was considered by board of
SEBI and was approved subject to the certain conditions, such conditions
are:
The existing members of stock exchange will get shares in
demutualised entity but whether they will hand voting rights or not is
yet to be determined by SEBI.
The board will have equal representation of the broker shareholder
and investing public.
2. Amendment of Memorandum and Articles of Association for
compliance SEBI guidelines for demutualization.
Post demutualization the name of company will be “Ludhiana Stock Exchange
Ltd.”
In order to comply with SEBI guidelines on demutualization the Board of
Directors has purposed suitable amendments in the Memorandum and Articles of
Association in accordance with the provisions of companies act, 1956 and SEBI
guidelines and securities laws (amendment) ordinance 2004 on corporation and
demutualization of stock exchanges.
3. Implementation
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The scheme shall upon publication be binding on all persons and authorities
including all members, creditors and employees of Ludhiana Stock Exchange and
on all persons having any contractual right, power, obligations or liability with,
against, over, to, or, in connection with Ludhiana Stock Exchange or its members.
4. Split of shares
It is purposed to split the shares in 10, 00,000 of re. 1 each member would be given
2000 shares of re. 1 each after split.
5. Purpose composition of Board of Directors/ purposed structure on
appointed date
As on appointed date of Demutualisation, since there would be no shareholders in
the company who are from trading members as separate category the composition
of governing board shall be as under:
Trading member representatives 3
Shareholders representative Nil
Independent directors 9
Executive directors/ MD/ CEO 1
Whole time director (if appointed) 1
PROPOSED STRUCTURE AFTER 1 YEAR
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With in one year from the date of demutualization upon disinvestment of shares by
trading members to the shareholders, the composition of the governing members
would be as under:
Trading member representatives 3
Shareholders representative 3
Independent directors 6
Executive directors/ MD/ CEO 1
Whole time director (if appointed) 1
6. Restriction of Voting Rights
Regarding the voting rights of the shareholders of the LSE will have the voting
rights in the general meeting of the company.
However no single shareholder can exercise by voting rights in excess of 5% of
total voting rights of exchange however there will be no restrictions of voting
rights of the shares held for public financial institutions as defined in the
companies act 1956.
7. Process of elections
The election of appointment of directors under the entire public
representative category will require prior approval of SEBI.
90
Broker represent representatives would be elected by the
shareholder from the amongst the brokers of the stock exchange in
terms of the provisions of the companies act, 1956.
One third of such directors shall be retired by rotation at each
annual general meeting.
There is appointment of a committee of charted accountant for the
valuation of assets or liabilities of stock exchange.
8. Tenure of Directors
The tenure of various categories of directors will be in accordance with the
guidelines to framed by SEBI in following manner:
The managing director to whole time director:-
They will be the paid employees as well as the permanent members of the board,
so they will not subject to retirement on rational basis, they will hold them
positions as long as they continue to be in employment of the exchange.
Public representation:-
Public representation will have their tenure expiring in the next annual general
meeting at one year from the date of their appointments which ever is later.
Shareholder Directors and Brokers Directors:-
91
They will be appointed on rational basis and out of them 1/3 will retire every year.
9. Corporate governance
LSE shall observe all norms relating to corporate governance, disclosure and
reporting as may be stipulated by SEBI from time to time.
10.Impact on Registration of Stock Brokers and SEBI Turnover Fee
Applicability
Any change in the name, status, organizational and management set up of
Ludhiana Stock Exchange pursuant to this scheme of demutualization, there
will be no impact on the status of member of Ludhiana Stock Exchange in
respect of their liability relating to SEBI turnover fee.
All existing broker getting trading right will continue to trade under the same
SEBI registration certificate, as existing on the date of demutualization.
11.Disinvestment/ Forfeiture
LSE shall ensure that at least 51 % of its equity share capital is held within 12
months from the date of publication of the order under sub – section (7) of section
(4) of the securities laws (amendment) ordinance,2004 by the public other than
shareholders having trading rights and the exchanges shall ensure that the shares
held by trading members thereafter do not exceed 49% of the share capital
The exchange shall have fixed and permanent lien an right of forfeiture on all
92
equity shares of the members who have not settled their dues to exchanges and/ or
SEBI.
12.Clearing Corporation
The exchange has provided in its Bye-Laws/Article of Association for transferring
the duties of the clearing house to a clearing corporation. The exchange shall
appoint Clearing Corporation for the clearing of the trades depending upon the
economic feasibility to be decided by the Board of Directors of the exchange from
time to time.
13.Participation of LSE Members in BSE indonext
Members of LSE can participate in the BSE indonext or any other scheme for
providing trading platform approved by SEBI. Members of other stock exchanges
can also trade on LSE and vice-versa. If allowed by SEBI.
14.Settlement Guarantee Fund(SGF) Customer Protection Fund(CPF)
Post demutualization, the SGF and CPF maintained by the exchange shall continue
in the same form and utilized for the same purpose for which they have been set
up.
15.Power of SEBI
SEBI shall have powers to amend, modify or delete any of the provisions of this
93
scheme.
PUBLIC NOTICE
“LUDHIANA STOCK EXCHANGE ASSOCIATION
LIMITED”
94
DEMUTUALIZATION SCHEME, 2005
[Approved and notified by SEBI on September 15, 2005 vide
S.O.NO.1317 (E)]
1. Title and Commencement
1.1 This Scheme shall be called “The Ludhiana Stock Exchange
Association Limited (Demutualisation) Scheme, 2005” (hereinafter
referred to as “this Scheme") and shall have effect on its publication under
sub-section (4) of Section 4B of the Securities Contracts (Regulation) Act,
1956 (hereinafter referred to as the “SCRA”).
1.2 The Ludhiana Stock Exchange Association Limited (hereinafter
referred to as “LSE”) shall be demutualised in accordance with this
Scheme on and from the Appointed Date as may be notified by the
Securities and Exchange Board of India (hereinafter referred to as
“SEBI”) in respect of LSE under Section 4A of the SCRA:
95
Provided that the activities specified in the respective clauses of this
Scheme shall be implemented as per the time schedule specified in
those clauses.
2. Definitions
In this Scheme, unless the context otherwise requires, -
2.1 "Due Date" means the date, as may be determined by the
Governing Board, which shall not be later than 3 months from the date of
publication of the Order under sub-section (7) of Section 4B of the SCRA.
2.2 "Governing Board" means the Board of Directors of LSE.
2.3 "Member" means a person who is a member of LSE on the day
preceding the Due Date as per the Register of Members maintained by it.
2.4 "Shareholder" means a person who holds any equity share(s) of
LSE on or after the Due Date.
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2.5 "The Ludhiana Stock Exchange Association Limited" (LSE)
means the Company limited by shares, registered under the Companies
Act, 1956 vide registration no 16-4696, having its Registered Office at
Feroze Gandhi Market, Ludhiana, which has been recognised as a stock
exchange under the SCRA.
2.6 "Trading Member" means a stock broker of LSE and registered
with SEBI as such under the SEBI (Stock Brokers and Sub-Brokers)
Regulations, 1992.
2.7 Words and expressions used and not defined in this Scheme but
defined in the Securities and Exchange Board of India Act, 1992, the
Depositories Act, 1996, the SCRA, the Companies Act, 1956, the rules
and regulations made under these Acts, the Memorandum and Articles of
Association, Rules, Bye-Laws and Regulations of LSE, shall have the
same meaning respectively assigned to them in the above mentioned
97
Acts, memorandum and articles, rules, bye-laws and regulations.
3. Memorandum and Articles of Association, etc.
3.1 LSE shall incorporate the provisions of this Scheme appropriately in
its memorandum and articles of association and the rules, bye-laws and
regulations on or before the Due Date.
3.2 The memorandum and articles of association and the rules, bye-laws
and regulations of LSE may be amended after the Due Date in accordance
with the applicable laws, provided that no such amendment is inconsistent
with any provision of this Scheme.
4. Governing Board
4.1 On and from the Due Date, the Governing Board shall be constituted
in accordance with the provisions of the Articles of Association of LSE in
force from time to time:
Provided that -
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(i) the representation of Trading Members does not exceed one-
fourth of the total strength of the Governing Board, and the remaining
directors are appointed in the manner as may be specified by SEBI
from time to time, and
(ii) the Chief Executive, by whatever name called, is an ex-officio
director.
4.2 Notwithstanding anything contained in clause 4.1, SEBI may
nominate directors on the Governing Board as and when deemed fit.
5. Listing of Shares
The LSE may at any time, list its securities on any recognised Stock
Exchange.
6. Demutualisation
6.1 A Trading Member may or may not be a Shareholder.
99
6.2 A Shareholder may or may not be a Trading Member.
7. Trading Rights
7.1 A Member, who is registered as a stock broker on the day preceding
the Due Date, shall become a Trading Member on the Due Date.
7.2 A Member, who is not registered as a stock broker on the day
preceding the Due Date, shall become a Trading Member on being
registered as a stock broker under SEBI (Stock Brokers and Sub-Brokers)
Regulations, 1992 within 3 months from the Due Date.
7.3 After the Due Date, a person desirous of becoming a Trading
Member shall be admitted if he complies with the requirements and brings
in fees and deposits as specified in the rules, bye-laws and regulations of
LSE.
7.4 LSE shall, for the purpose of admitting any person as a Trading
Member, follow uniform standards in terms of capital adequacy, deposits,
100
fees, etc. irrespective of mode of acquisition of trading right by that
person:
Provided that different standards may be followed for admission
of a person as a Trading Member who has acquired trading right by way of
transmission.
7.5 A Trading Member may surrender his membership to LSE in the
manner specified in the rules, bye-laws and regulation of LSE.
7.6 Irrespective of the date or mode of acquisition of trading right, the
Trading Members shall have uniform rights and privileges.
7.7 Trading Members on the Due Date shall continue to have the same
rights and privileges in respect of their clients and constituents and other
members arising out of or under any act, omission or contract or law,
notification, order, direction, etc. as had accrued to them while being
101
Members on or before the Due Date.
7.8 Trading Members shall be bound by all obligations and liabilities
towards their clients and constituents, SEBI, LSE and other authorities or
other persons arising out of or under any act, omission or contract or law,
notification, order, direction, etc. while being Members on or before the
Due Date.
8. Shareholding Rights
8.1 A Member shall become a shareholder on the Due Date:
Provided that the shares in respect of a defaulter member, vested with
the defaults committee of LSE, shall be dealt with as forfeited shares
under the Companies Act, 1956.
8.2 LSE shall ensure that at least 51% of its equity shares are held by
public other than shareholders having trading rights in the manner and
within the period prescribed in sub-section (8) of Section 4B of the
102
SCRA.
8.3 On and from the Appointed Date, LSE shall ensure that public other
than shareholders having trading rights continuously holds at least 51%
of equity shares.
8.4 On and from the Due Date, no Shareholder, who is a Trading
Member, shall have voting rights (taken together with voting rights held
by him and by persons acting in concert with him) exceeding 5% of the
voting rights in LSE.
9. Transfer of Clearing and Settlement Functions
9.1 LSE shall, within two years of the Due Date, subject to the prior
approval of SEBI, transfer the duties and functions of its clearing house
to a Clearing Corporation, recognised under the SCRA.
9.2 Until the duties and functions of the clearing house are transferred as
provided in clause 9.1, the clearing and settlement functions in relation to
103
trading on LSE, shall be carried out by the clearing and settlement
mechanism as used by LSE at present or in such other manner as the
Governing Board may determine.
10. Utilisation of Assets and Reserves
10.1 LSE shall not do anything contrary to the provisions of Section 4B
(3) of the SCRA.
10.2 Without prejudice to the generality of the provisions of clause 10.1,
LSE shall not use its assets and reserves as on the date of publication of
this Scheme or the proceeds from disposal of such assets or the proceeds
from disposal of successive species of assets acquired from the proceeds
of disposal of such assets for any purpose other than discharging the
current liabilities outstanding as on the date of publication of this Scheme
or the business operations of stock exchange.
104
11. Compliance with this Scheme
11.1 LSE shall ensure compliance with the provisions of this Scheme at
all times and shall not do anything contrary to the provisions of this
Scheme.
11.2 Without prejudice to the generality of the provisions in
clause 11.1, LSE shall continuously comply with the provisions in clauses
3.2, 4.1, 6, 7.3, 7.4, 7.5, 7.6, 8.3, 8.4 and 10.
11.3 LSE shall report compliance with the provisions of this Scheme in
such manner as may be required by SEBI from time to time.
12. Removal of Difficulties
If any difficulty arises in giving effect to the provisions of this Scheme, SEBI may,
at the written request of LSE, relax any of the provisions of this Scheme.
OVERVIEW OF DEMUTUALISATION
PROCESS
105
In order to demutualized, the proposed regime would require a company to
follow the steps outlined below, the entire conversion process would be
overseen by the office of the superintendent of financial institution (OSFI).
1. Board Authorization
First, the company’s board of directors must authorize management to
develop a conversation proposal ( Canada’s four large mutual life companies
have already taken this step.)
2. Preparation of the Documentation
The second step is to develop the conversion proposal. This is a
comprehensive package that must first be approved by the company’s board
of directors, and then sent to OSFI. Among other things, the proposal. This
is a comprehensive package that must first be approved by the company’s
board of directors, and then sent to OSFI. Among other things, the proposal
contains the estimated market value of the company and a description of
how the value would be allocated to eligible policyholders {for e.g. in the
form of shares, cash or policy enhancements}.
Under the proposed regime, the entire value of the co. must be allocated to
eligible policyholders- i.e. policyholders entitled to vote at annual meetings
of the co. these policyholders would receive benefits upon demutualization
106
in exchange for their current ownership rights and interests in the co.
A number of experts opinion are required in the conversion proposal, such as
opinions on whether the methods used to estimate the co. value are
appropriate whether the distributions among the policyholders is fair and
equitable, and on the security of the policyholder’s policy benefits.
3. Review of Documentation and authorization by OSFI
In addition to the conversion proposal, the co. must submit to OSFI for review all
information destined for eligible policyholders. This package must, among other
things, include the conversion proposal and a summary of the expert opinions; a
description of the advantages of the demutualization to the co. and its
policyholders; a description of the alternatives to demutualization considered and
the reasons why the directors of the co. believe demutualization are the best
interest of the co. and its policyholders and a discussion of the tax treatment of the
demutualization benefits. OSFI would also review and approve the notice of
meeting and proxy from that would be sent to eligible policyholders with the
information package.
The notice of the meeting must be sent between 45 and 75 days before the special
meeting to consider demutualization, to allow policyholders sufficient time to
review the information package. If the superintendent is of the view that
107
policyholders require additional information prior to the vote on demutualization,
he may direct the co. to undertake such measures as the sending additional
information to policyholders or holding information sessions.
4. Special Meeting to consider Demutualization
A special meeting must be held at which eligible policyholders vote on the
conversion proposal. The proposal must receive the support of at least two third of
eligible policyholders who cast votes, either in person or by proxy.
5. Application for Ministerial Approval
If the conversion proposal is approved by the eligible policyholders, an application
for demutualization must be forwarded within three months to the minister of
finance for his approval.
6. Allocation of Benefits
Upon demutualization, contractual obligations between the co. and its customers
would not be changed. What would change are the policyholder ownership rights
in the co. in the exchange for these rights, the co. would distribute benefits to
policyholders, as described in the conversion proposal. Nevertheless, policyholders
would still have the right to elect at least one- third of the board of directors of the
converted co.
Demutualization benefits would generally take the form of shares which kept or
108
sold for cash. Each share would entitle the shareholder to one vote (shareholders
elect upto two- third of the board of directors). Benefits could also in the form of
cash, policy enhancements or premium reductions. When benefits other than shares
are distributed, an independent actuary or a valuation expert must provide an
opinion that these benefits are appropriate substitutes for shares.
7. Post Demutualization
Converted co. will face a public market environment, and should be allowed time
to adjust to their new corporate structure before being approached by possible
acquisitors or mergers partners.
Therefore, after demutualising, co. must remain widely held {i.e. no one person
can own more than 10% of any class of the shares of the co.}. the restriction will
be reviewed in two years after the demutualization regulations come in to the
force. In addition the govt. will not approve merger proposals between large
demutualized companies during the adjustment period.
A shareholder will allow converted companies more flexibility to raise capital to
offer innovative new products to meet their customer’s evolving needs and invest in new technologies. Increased access to capital will also enhance co.’s ability to
make acquisitions, which will enable converted companies to take advantages of
growth opportunities and complete for a market share in a rapidly changing market
place.
109
TO STUDY THE CHANGING SCENARIO OF
LUDHIANA STOCK EXCHANGE
(From mutualisation to demutualization)
110
Dear respondents,
You are kindly requested to fill this questionnaire any information that
you will provide would be kept confidential.
NAME ------------------------------
OCCUPATION ------------------------------
ADDRESS ------------------------------
PHONE NO. ------------------------------
E-MAIL ------------------------------
1. How are you related with LSE?
Broker
Investor
Employee
Any other
2. Are you satisfied with present working of LSE?
Satisfied
Not satisfied
Can’t say
3. What are the reasons for the downfall of regional stock
111
exchange (RSE)?
Lack of knowledge
Growing competition
Lack of transparency
Any other
4. Regional Stock Exchange should be?
Close down
Merged
Demutualization
None
5. Do you know the concept of demutualization?
Yes
No
Not exactly
6. Do you think demutualization will improve the functioning of
LSE?
Yes
No
Can’t say
112
7. Will demutualization of stock exchange help in reducing
scams?
Yes
No
Can’t say
8. Will the concept of demutualization will minimize the say of
brokers in stock exchange?
Yes
No
Can’t say
9. Do you favour listing of shares for stock exchange to others or
self stock exchanges?
Yes
No
Can’t say
THANKS FOR YOUR SUPPORT AND CO-OPERATION
DATE SIGNATURE
113
ANALYSIS OF QUESTIONNAIRE
Analysis and interpretation of facts makes clear the idea about the studied
effects.
Following are some results from the survey of questionnaire.
114
Q-1 How are you related with LSE?
Q-2 Are you satisfied with present working of LSE?
Q-3 What are the reasons for the downfall of regional stock
115
Brokers-40%Investors-30%Employees-10&Any other-30%
Satisfied-80%Not satisfied-20%
exchange (RSE)?
Q-4 Regional Stock Exchange should be?
Q-5 Do you know the concept of demutualization?
116
Lack of transperancy-35%Lack of technology-ø%Growing competition-50%Any other -15&
Closed down-10%merged-35%none-55demutualised-ø%
Q-6 Do you think demutualization will improve the functioning of
LSE?
Q-7 Will demutualization of stock exchange help in reducing
scams?
117
Yes-80%No-15%Not exactly-5%
Yes-60%No-25%Can’t say-15%
Q-8 Will the concept of demutualization will minimize the say of
brokers in stock exchange?
Q-9 Do you favour listing of shares for stock exchange to others or
self stock exchanges?
118
Yes-35%No-40%Can’t say-25%
Yes-40%No-35%Can’t say-25%
Q-10 Do you think that appointment of CEO and Chairman as
different persons improve the working of Stock Exchange?
119
Yes-80%No-15%Can’t say-5%
Yes-90%No-7%Can’t say-3%
AGGERGATE RESPONSE OF BROKERS,
INVESTORS, EMPLOYEES AND OTHERS.
SR. NO. QUESTIONS REPLY RESPONSE1. How are you
related with LSE?
Broker
Investors
Employee
Any other
40%
30%
20%
10%
2. Are you satisfied with present working of LSE?
Satisfied
Not satisfied
Cant say
80%
20%
ø%
120
3. What are the reasons for the downfall of regional stock exchange(RES)?
Lack of technology
Growing competition
Lack of transparency
Any other
ø%
50%
15%
35%
4. The regional stock exchange should be
Close down
Merged
Demutualised
None
10%
35%
55%
ø%
5. Do you knoe about the concept of demutualization?
Yes
No
Not exactly
80%
15%
5%
6. Do you think demutualization will improve the functioning of LSE?
Yes
No
Cant say
60%
25%
15%
7. Will demutualization of stock exchange help in reducing SCAMS?
Yes
No
Cant say
50%
20%
30%
8. Will the concept of demutualization minimize the say
Yes
No
40%
35%
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of brokers in stock?
Cant say 25%
9. Do you favour listing of shares for stock exchange to other or self stock exchanges?
Yes
No
Cant say
90%
7%
3%
10. Do you think that appointment of CEO and chairman as different persons improve the working of stock exchange?
Yes
No
Cant say
90%
7%
3%
CONCLUSIONS
Based upon the findings from the data collected from brokers and
other secondary data that has been used to carry out the research
project here is the conclusion.
There is a mixed reaction of the brokers on the demutualization
of the regional stock exchanges. However, overall they are not
happy with the demutualization because they think that are the
people who have prompted this exchange, they have some
intimate relationship with exchange, and now SEBI is
separating them by misusing the powers.
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Frequent reforms made by SEBI (which were the need of the
hour) in the capital market leads to zero turnover at regional
bourses, some of these reforms in chronological order are as
follows:
Regional stock exchanges had their embarked region where no
other stock exchanges were allowed to enter but then NSE was
allowed to expand throughout the country.
Then all regional stock exchanges were asked to computerized
and have online trading system ( regional stock exchanges
spend more than Rs. 150cr. On it ).
Then SEBI allowed BSE to expand outside Mumbai to regions
of RSE’s ceiling of 5% on the voting rights of shareholders so
that the basic purpose of demutualization of stock exchanges
would not be deteriorated. Further , some broker wanted the
chairpersons of the board should be a broker member so that
they should have a strong position in the exchange even after
demutualization. However, many believe that since the
exchange being demutualization. It does not matter to them as
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to who should be the chairperson.
One of the most criticized provisions of the scheme is the exist
routine provided by the company. The reason is that those
brokers have access to the national bourses like NSE and BSE
having a wide range of products. So it is expected that
exchange will have to pay to the brokers their due amount three
years post demutualization because there will be hardly any
buyer of the trading rights of the members, however, those who
do not have trading rights at these bourses would perhaps like
to trade at the exchange.
Further the revival if regional stock exchanges by allowing the
financial companies and other institutions to hold more than 5%
of the shares will hardly serve the purpose. The reason is,
would they like to make similar contributions and there
securities are evaluated professionally and offered for sale.
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SUGGESTIONS
There are some suggestions for mutualised to turn its structure from a
mutualized to demutualized one. This demutualized structure will benefit the
exchanges up to a large extent.
The brokers task should be confined to the purchase and sale of
securities. If the broker is allowed to participate in management he will not
justify to his work. So it is better for him to do single work as the principal
of division of work will efficiency of his work and hence exchange.
The ownership should be in the hands of financial institutions means
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the third party will finance the exchanges day to day functions. This will
raise the source of funds of stock exchanges.
Stock exchange should have a different technology, different products
from other exchange.
The broker should follow the code of ethics given by SEBI.
The post of presidents and vice presidents should not be in the hands
of the brokers.
So to reform the capital market, various amendments should be done.
Out of which demutualization is the first reform part from this SEBI
should change its rule and regulations and should take care of each
and every exchange separately.
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BIBLIOGRAPHY
BOOKS
Indian Securities Market – Issued by NSE
‘LSE Bulletin’ issues of April 2007, May 2007, June 2007
Beuro Report
Kothari C.R. Second Edition “Research Methodology” Vishwa Prakash Publications 2004
NEWSPAPERS
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FINANCIAL EXPRESS
BUSINESS WORLD
THE TRIBUNE
HINDUSTAN TIMES
BUSINMESS LINES
BUSINESS STANDARDS
THE HINDU BUSINESS LINE
ECONOMIC TIMES
WEBSITES
WWW.SEBI.GOV.IN
WWW.BSEINDIA.COM
WWW.NSEINDIA.COM
WWW.GOOGLE.COM
WWW.SHAREKHAN.COM
WWW.YAHOO.COM
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