This document summarizes the seminar on demutualization and corporatization of stock exchanges in India. It discusses the mutual structure of Indian stock exchanges and the drawbacks like conflicts of interest. It defines demutualization as converting a mutually owned exchange to a for-profit company. The process involves valuing exchange assets, issuing shares, and separating ownership, management, and trading rights. Demutualization aims to increase transparency, competition, and access to capital. Key Indian stock exchanges like BSE and NSE have been demutualized with oversight from regulatory bodies like SEBI.

1. SEMINAR ON
Demutualization & Corporatization
of Stock Exchanges
By:
PURUSHOTTAM.N.VAIDYA
R.No.49 M.com I semester
Karnataka University Dharwad.

2. CONTENTS :
1. Structure of Stock Exchanges in India
2. Mutual Structure of Indian Stock Exchanges
3. Drawbacks prior to Demutualization
4. Demutualization
5. Corporatization
6. PROCESS OF DEMUTUALISATION
7. ADVANTAGES OF DEMUTUALISATION.
8. SEBI’s GUIDELINES
9. LIMITATIONS BY SEBI
10.THEORITICAL FRAMEWORK

3. Structure of Stock Exchanges in India
 BSE the oldest exchange in Asia was established in 1875 as Voluntary
‘not for profit’ un-incorporated association of persons.
 Ahmadabad and Indore stock exchanges were other exchanges
having similar structure.
 The membership of these exchanges entitled the person to be the
part owner of the exchange as well as a broker on the exchange.
 All other regional stock exchanges were formed as companies under
section 12 of the Companies Act, 1956 as company limited by
shares/guarantee, but had a “not for profit” motive.
 These exchanges worked like a co-operative society where the share
of the company entitled the owner to be the shareholder of the
exchange and also gave him a right to act as broker on the
exchange.

4. Mutual Structure of Indian Stock Exchanges
Indian stock exchanges(except NSE and
OTCEI) therefore followed a mutual structure
where the ownership and management rights
of the exchange are bundled with trading rights
as a broker and all three are represented by
ownership of share of the exchange.

5. Drawbacks prior to Demutualisation
• The conflict of interests between the owners,
the members and the management - since all the
brokers are managing the exchange together then
such conflict is advent to happen
• Brokers were manipulating the market for their advant
age-That is investor’s interest was ignored.
• Scams took place in pre-demutualization phase-1992-
Harshad Mehta scam & 2001-Ketan Parekh Scam
• Lack of strict vigilance on the market-No one person
or management was there to look after the affair of the
exchange.

6. Demutualization
“Demutualization is referred to the
transforming the legal structure of an
exchange from a mutual form to a business
Corporation form”
In simpler terms it is a process by which a mutually owned
stock exchange is converted into a company owned by
shareholders through transforming its existing legal structure
into a business entity.
The process of converting exchanges from nonprofit,
member-owned organizations to for-profit, investor-owned
corporations.

7. Corporatization
In order to demutualise a corporate structure of the exchange
is a necessity.
The process of converting the organsisational structure
of the stock exchange from a non-corporate structure to
a corporate structure is called Corporatization of stock
exchanges
The Stockholm Stock Exchange was the first
stock exchange to be demutualised. It is a Swedish
based stock exchange.

8. How does Demutualisation and Corporatization will
overcome the drawbacks of Mutual Structure
• The ownership, management and trading is
separated and are in different hands.
• They are clearly separated like a commercial
entity.
• The management of the exchange is separated
from the shareholders and the brokers.

9. PROCESS OF DEMUTUALISATION
All the assets are valued by the exchange, which includes the
value of seats. A total value is founded and divided into
shares, which are offered to the public. Then the stock
exchange lists the shares. The members of the exchange will
get the payment for their seats from the funds available
through the sale of shares. The goal of demutualization
is corporate structure which offers the management
greater flexibility. Demutualization helps to respond to
changes in a better way and it also provides the company to
spin-off its subsidiaries, get into mergers and acquisitions,
raise funds,etc. Membership cardholders of the exchange will
be the shareholders of the exchange initially.

10. There would be only a single class of trading members having the
same rights and privileges. If any person is admitted as a trading
member then uniform standards will be followed in terms of capital
adequacy, deposits, fees, etc. In the governing board of any
demutualized exchange, the representatives will not exceed one-fourth
of the total strength of board. The public, apart from the
shareholders who have the trading rights, will hold at least 51%
of its equity shares. The trades are being cleared and settled by the
trading members until the clearing and settlement functions can
passed on to a recognized clearing corporation which might take
place within two years. The corporatized and demutualized
exchange will initially use the existing assets and reserves
transferred from the previous exchange. The government transfers
the surplus funds built in the process of demutualization to the
consolidated fund of India. It also has the option of using such
funds to acquire capital assets or to develop the market.

11. ADVANTAGES OF DEMUTUALISATION.
1. Rationalized Governance:- The corporate model will enable
management to take actions that are in the best interest of custo
mers and the exchange itself. There would be transparency.
2. Investors Participations:- A demutualised exchange affords
both
institutional investors and retail investors the opportunity to b
ecome shareholders. Institutional investors require much
greater liquidity for block trading.
3. Competition from Alternate Trading System’s (ATS) and
Electronic Communication Networks:- ATS and Electronic
Communication Networks provide cheap and efficient access to
quoted stocks unlike traditional stocks exchanges. To cope with
competition, exchange required funds. While members have
limitations in raising funds.

12. 4.Globalization: - Historically brokers and exchanges were locally
focused. Exchanges did not face meaningful competition from
exchanges in distance places. Through alliances, exchanges seek to
attract more investors by harmonizing distinct trading environment and
by offering greater product variety.
5.Resources for capital investment: - One of the drivers of stock
exchange demutualization is screen trading, which has replaced floor
trading on most exchanges. Once customers have direct access to
screens, exchanges memberships no longer have as much economic
value and clearing firms rather than traders become a dominant force in
exchange activities.

13. SEBI’s GUIDELINES
SEBI issued its guideline on 31- 11- 2006 for investment in
stock exchanges in India. Under this guidelines, shareholdings of
trading Members have to be brought down to 49% which can be
either by divestment or additional equity capital to be issued to
make the shareholding of existing trading members to 49%.
Therefore, it can be way of
1) Offer for sale by prospector by existing trading members
2) Placement of shares of shareholders having trading rights to
such persons or institutions may be short listed by the
exchange with the approval of SEBI.
3) Issue of equity shares on private placement basis by the
stock exchange to any person or group of persons not having
trading rights subject to approval of SEBI

14. LIMITATIONS BY SEBI.
 No person shall directly or indirectly acquire or hold more
than5% in the paid up capital.
 No person shall either individually or together with persons in
concert with him acquire and or hold more than 1% of the paid-up
capital.
 Foreign investment up to 49% will be allowed in stock exchang
es with a separate FDI cap of 26% and FII cap of 23%.

15. THEORITICAL FRAMEWORK
Lets see some models
of demutualization from the Indian
stock market. The models are
of Bombay Stock Exchange, National
Stock Exchange and National
Commodity and Derivative Exchanges
Limited.

16. DEMUTUALISATION OF BSE
.
The Bombay stock exchange. Asia’s oldest stock exchange
with 131 year old history. It was handled by 790 brokers.
BSE submitted its duly approved scheme to SEBI in June
2003. Amendments to Rules and MOA and AOA also
submitted in July 2003(based on Kania committee report) to
SEBI for approval.
It was corporatized on 19 May 2005
Around51% stakes of 790 brokers were offloaded to 21
investors. Like SBI, LIC, Aditya Birla Group, beside Deutsche
Brose and Singapore Exchange’s.
 19 investors (like SBI, LIC, Aditya Birla and so on)
have picked up41% stake.
 10% by Deutsche Borse and Singapore Exchange. Each
group has picked up 5 % stake for Rs. 189 crore each

17. Members of BSE:-
1) 18 Board members
2) 1 Chairman
3) 1 Managing Director
4) 8 Independent director
5) 7 Broker director

18. DEMUTUALISATION OF NSE
The National Stock Exchange was formed in November
1992 as a tax paying company. Unlike other
stock exchanges in the country. From day one, NSE has
adopted the form of a demutualized exchange’s. It
is owned by a set of leading financial institutions like
banks, insurance companies and other financial
intermediaries and is managed by professionals, who do
not directly or indirectly trade on the exchange. The
promoters of the NSE are like: –
• Industrial Development Bank of India Limited.
• Industrial Finance Corporation of India Limited.
• National Insurance Company Limited.
• Infrastructure Development Finance Company
Limited. And so on.

19. Members of BSE:-
1) 1 Managing director
2) 2 SEBI nominees
3) 4 Public representatives
4) 4 Independent director
5) 8 Share holder’s representative

20. DEMUTUALISATION OF NCDEX.
National Commodity & Derivatives Exchange Limited, is a public
limited company incorporated on April 23, 2003 under the
Companies Act, 1956. It obtained its Certificate
for Commencement of Business on May 9, 2003. It commenced
its operations on December 15,2003. NCDEX currently facilitates
trading of 57 commodities
NCDEX is a national-level, technology driven de-mutualised on-line
commodity exchange with an independent Board of Directors
and professional management - both not having any vested interest
in commodity markets. It is committed to provide a world-class
commodity exchange platform for market participants to trade in a
wide spectrum of commodity derivatives driven by best global
practices, professionalism and transparency.

21. DEMUTUALIZATION OF REGIONAL STOCK EXCHANGE
S.
Government asks for demutualisation of regional stock e
xchanges in two ways:-
1) Either by becoming trading arms of BSE & NSE,
or
2) no. of regional stock exchange joins hands to make a
separate platform.
Nine exchanges recently signed an MOU with the National
Stock Exchange (NSE) to extend its trading platform on the
regional stock exchanges.

22. Demutualized Regional Stock Exchanges
1. Vadodara Stock Exchange
2. Magadh Stock Exchange
3. Jaipur Stock Exchange
4. Ludhiana Stock Exchange
5. Saurashtra Kutch Stock Exchange
6. Delhi Stock Exchange
7. Bhubaneshwar Stock Exchange
8. Cochin Stock Exchange
9. Pune Stock Exchange
10. Bangalore Stock Exchange
11. Ahmedabad Stock Exchange
12. Calcutta Stock Exchange
13. Madras Stock Exchange
14. Guwahati Stock Exchange

23. The stock exchanges not demutualised are :-
1)Coimbatore Stock Exchange.
2)Mangalore Stock Exchange.
3)Meerut Stock Exchange.
4)Uttar Pradesh Stock Exchange.

24. COMMITTEE FORMED FORSUGGESTION.
Under the chairmanship of Justice M.H.Kanai a group was
constituted by SEBI to advice on the matter of corporatization
and demutualisation of exchanges.
Some suggestions are :-
1. Stock exchanges be converted into companies limited
2. Amendment is made to the Income Tax Act 1961, so that pa
st accumulated profits of the stock exchanges are not
subject to tax.
3. Amendment would also be required in the Indian Stamp
Act 1899 and Sales Tax law to allow a tax- free transfer of
assets from the old entity to the demutualized new entity.
4. The system of permission to trade on the basis of
ownership of a trading card is replaced by a system where
money is deposited to obtain trading rights.

25. 5.Shareholders, brokers and investing publics are equally
represented on the governing board of the demutualized
exchanges.
6. A uniform model for corporatization and demutualization
would have to be adopted by all stock exchanges.
7. The merger of stock exchanges is a commercial decision
that would be left to stock exchanges.

26. Challenges Of Demutualisation
• Here will be no changes in the conflict of interest if an
exchange is converted from an association of persons into a
limited liability company
• The same board and the same organizational structure will
continue to exist and nothing much will be achieved
• The government can not solve the exchange’s management
problem by steering the Demutualisation process
• There have been arguments that Demutualisation by itself may
not achieve improved governance

27. CONCLUSION
 If the stock exchange are the self regulatory in nature
they find ways to profit making.
 The exchange have option of setting up separate entity
within stock exchange defining the regulatory power.
 Though Demutualisation is beneficial, many stock exchanges
are hesitating to adopt it because they are afraid of loosing
their identity
 They also have the fear of paying huge tax conversions
 This issue has already gained importance at the international
level but it needs to be considered more intensely at
domestic level