jalan committe recommendations - fin divb - group2
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PT-MBA Finance Div- B
Group 2
A STUDY of JALAN COMMITTEE
RECOMMENDATIONS
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GROUP MEMBERS
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Name Roll.No.
Anant Jadhav 113
Sushil Kadam 122
Nishit Shah 145
Prasad Matkar 147
Suresh Vemula 151
Bipin Waingankar 153
Shashank Ware 154
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AGENDA
y Backgroundy Scope of JALAN Committee Why the need ?
y Considerations and Methodology of Study
y What is MII ?
y Composition of NSE and BSEy Composition of CSDL and NSDL
y Recommendations
y Reason
y Impacty Reaction from Stakeholders
y Overall Impact
y Groups Views
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BACKGROUND OF BIMAL JALAN COMMITTEE
y Bimal Jalan Committeey Constituted by SEBI
y To study issues arising from ownership to governance of MII's
y Members of the committee werey Dr. Bimal Jalan, (Former Governor, Reserve Bank of India)
y Dr. K.P. Krishnan, Joint Secretary, Ministry of Finance Secretary
y Shri. Uday Kotak, Managing Director, Kotak Mahindra Bank Ltd
y Prof. G. Sethu, Officer on Special Duty, NISM
y Dr. K. M. Abraham, Whole Time Member, SEBI
y Shri J.N. Gupta, Executive Director, SEBI (Member Secretary)
y Shri. Kishor Chaukar, Managing Director, Tata Industries
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SCOPE OF BIMAL JALAN COMMITTEE
y Stock exchanges and Clearing Corporationsy Ownership Structure
y Board Composition
y Listing and Governance
yBalance between Regulatory and Business Functions
y Study of Relationship betweeny Stock exchanges and clearing corporations
y Stock exchanges and technology providers
y Competition policy for stock exchanges and clearingcorporations
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BROAD CONSIDERATIONS
y Change in the financial regulatory approach to a structure or functioning ofinstitutions such as stock exchanges, clearing corporations and depositoriesshould be introduced in a calibrated manner.
y Committee recognizes that conditions conducive to innovation in these
institutions are necessary for the growth of an economy like India.
y Governance and ownership norms for such institutions need to be tailoredcarefully
y Ensure safety and reliability of markets
y MIIs retain their ability to innovate on the products, processes and the rangeof services they offer.
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METHODOLOGY
yConsultative approach to have the benefit of views of all the stakeholders.y Market infrastructure institutions (MII),
y Market participants,
y Shareholders of MIIs,
y Industry associations,
y Investors and general public
y Sub-committee also held discussions with representatives of NSE, BSE, MCX-SX, NSDL, CDSL, ANMI, BSE Broker Forum, DPAI, LIC, UBS, Deloitte, FinancialTechnologies and others.
y The consolidated views of the all were placed for deliberation before theCommittee.
y Examination ofGlobal Experience concerning ownership norms of MIIs.
y Several papers published by World Bank, IOSCO and other such institutions werestudied.
y The Committee recommended that the report may be placed on SEBIs websitefor public comments
y Comments received therein to be taken into account before implementing therecommendations.
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What Is MII ?
y Stock Exchanges
y Stock exchanges provide transaction facility to investors and thus discover the price
of securities traded on them .
y Efficient allocation of resource in the economy.
y Depositories
y Provide maintenance of ownership
y Transfer records of securities in an electronic book entry
y To ensure transferability of securities with speed, accuracy and safety.
y Clearing Corporations
y Clearing and settlement of trades that are executed on the stock exchange
platform
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Facets of MIIs
y MIIs are economic entities that have to be capable of
sustaining themselves
y Core facets to MIIs are as follows;y MIIs are in the nature of public utilities.
y All of them are vested with regulatory responsibilities, in
varying degrees.
y They have systemic importance to the economy.
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NSE-BSE
y NSE
y 9th largestin World in terms of MarketCapy 2nd fastestgrowing exchange
y Mutually Owned byy Leading Financial Institutions
y Banks
y Insurance Companies
y Other Financial Intermediaries
yForeign Holdingsy NYSE
y Euronext
y Goldman Sachs
y BSEy 1875 : Founded by private stockbrokers
y 4th
largestin Asia and 8th
largestin Worldy 1956 : Recognised by Govtof India
y 1986 : DevelopmentofSensex
y 1995 : Electronic Trading
y Introduced Worlds firstcentralized exchange based
trading system
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CSDL-NSDL
y CSDLy Major Promoters
y BSE
y Banks
y BOI, BOB,HDFC
y Stan Char, Canara Bank
y NSDL
y Major Promoters
y IDBI
y UTI
y NSE
y Banks
y SBI, HDFC, Axis, Citibank
y Stanchar, HSBC, OBC
Bombay StockExchange
Limited54%
Bank of India6%
Bank ofBaroda
5%
State Bankof India
10%
HDFC BankLimited
7% StandardChartered
Bank
7%
Canara Bank6%
Union Bankof India
2%Bank of
Maharashtra2%
The CalcuttaStock
ExchangeLimited
1%
Others0%
CSDL Shareholding Pattern
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JALAN COMMITTEE RECOMMENDATIONS
1. Committee is not in favor of permitting listing of MIIs2. MIIs should not be permitted to make unreasonable profits
3. Committee proposes to support the concept of AnchorInstitutional Investor , but restricted to banks and publicfinancial institutions.
4. Holding of exchanges in depositories to be restricted to 24%5. Net worth requirement for clearing corporation fixed at Rs 300
cr
6. Shareholding limits inclusive of all exposures of the shareholderto the MII
7. Minimum capital required for an exchange is Rs 100 cr8. Clearing corporations and depositories cannot invest in other
class of MIIs
9. Fair competition with optimal number of exchanges
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Recommendation 1 : On Listing of MIIs
y
Committee is not in favor of permitting listing of MIIs.y Reasons
y An MII should notbecome a vehicle for attracting speculative investments.
y anydownward movementin its share prices mayleadto a loss of credibility
y more conflictof interests for the stock exchange
y monitoring its own listing related compliances or thatof related/competing MIIwill be an issue
y Impact
y No exitoption leftfor shareholders thus putting their investments into jeopardy.
y Itwill notserve the purpose ofdemutualization as this clause will render
investmentin exchanges unattractive.y Also difficultto raise additional resources for capital investment.
y Non-listing would reduce accountability of MIIs
y Non listing will make itunattractive to infuse capital for resource intensive
marketdevelopmentinitiatives like new generation technologies and
infrastructure.
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Recommendation 2 : On Profits for MIIs
y MII should not be permitted to misuse its monopoly position and earn
profits disproportionately at variance from average industry earnings inthe country.
y Reasonsy MII's seen as public utilities - providing basic equipment, system ,facility and service.
y MII's should make reasonable profits in order to be self-sustaining.
y MII should levy reasonable charges on its users without abusing its dominant or
regulatory positiony Committee feels that "unreasonable profits" would conflict between shareholders
interest and public interest.
y SEBI should monitor the profits earned by these public utilities and intervene whennecessary.
y Any profits above such limits should be transferred to funds towards ensuring settlementguarantees and investor protection.
y Impacty Exchanges which begun with low capital will get less entitlement for return due to fixed
RoI model
y There will not be a rush for starting new exchanges as barriers have been set high and thereturns capped.
y The report realizes that there will not be an increase in competition
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Recommendation 3 : Support Anchor Investors
y
Concept of Anchor Investory The anchor investor is a recently introduced category of investor in the Initial Public
Offer (IPO).
y A Qualified Institutional Buyer who gets firm allotment in an IPO of up to 30% of the
institutional quota is an anchor investor.
y The lock-in period for such an investor is 30 days.
y This is done to instill a higher degree of confidence among the investing
community, as an anchor investor is its brand ambassador.
y Who can be an Anchor Investor for Stock Exchanges?y Public Financial Institutions and Banks having a net worth of more than Rs. 1000
crore.
y A single anchor institutional investor may be permitted to hold up to 24% of the
total equity capital of an exchange, along with persons acting in concert.
y All anchor institutional investors put together shall not hold more than 49% of the
total equity capital of an exchange.
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Recommendation 3 : Support Anchor Investors
y
Support the concept of Anchor Institutional Investorbut restricted to banks and public financial institutions.
y Reasons
y Stock exchanges are systemically important institutions
y Need to exercise regulatory control over them through ownershipnorms.
y Impact
y Stock exchanges are not the first line of business for public financial
institutions and banks.
y They have always remained as passive investors.
y Assumption that banks and PFIs will also not actively partake in this
industry as this is
y Not their core line of business.
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Recommendation 4: Holding of exchanges in
depositories
y Holding of exchanges in depositories to be restricted to 24%
y Clearing Corporations and Depositories may not be allowed to invest in other
class of MIIs .
y FIIs should be allowed to acquire the shares through off market transactions
including through initial allotment, as allowed for any othershareholders, subject to the limits specified by the Government from time to
time
y Impact
y Holding in depositories will be a conflict of interest
y
It sees no conflict when a Bank has trading and brokerages subsidiaries and areallowed to be Anchor Investors in them
y No logic that Stock Exchanges, Clearing Corporations and Depositories are identified
as MIIs, but have different ownership norms
y This norm will force BSE to reduce its 54% stake in CDSL to 24%
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OVERALL IMPACT
CLAUSE EFFECT
Exchanges should not generate super
normal profit
Could force NSE to cut transaction charges
and hurt BSE
Include all exposures in shareholding limit Will hurt MCX-SX in its case against market
regulator SEBI
Disallow listing of market infrastructure
institutions
Will hurt BSEs plans of an IPO
Restrict exchanges holding in depositories
to 24%
BSE will have to reduce its stake in CSDL
from current 54%
Raise net worth criteria for clearing
corporation to Rs 300 Cr
BSE & MCX-SX will have to infuse capital in
their clearing houses
Fix pay without variable linked to
commercial performance
NSE brass may lose their fat bonus
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y
In a free market economy, enterprise should be allowed toflourish within the regulatory framework.
y No cap on profitability for non-government enterprises.
y Some proportion of profit should be used for educating &protecting investors.
y Listing of Exchanges should be allowed as anchor investors willensure that enterprises are here to stay, which will provide
comfort. (No rules being imposed on banks and insurancecompanies then why exchanges ?)
y Fair competition must be promoted by setting of more MII'swhich will drive costs down
GROUPs VIEWS
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