DEMUTUALIZATION OF STOCK EXCHANGES

Demutualization is the process by which any member owned organization can become a shareholder owned company. Such a company can either be listed on a stock exchange or be established as a closely held company. In simple words, a demutualized stock exchange is basically a company form of organization in which the company goes public and owners will be given equity shares. 

Earlier (i.e. prior to 1991), all stock exchanges in India are broker owned and broker controlled. In other words, it is the brokers who collectively owned, controlled and managed these exchanges. However, the ownership and managership of these stock exchanges led to a conflict of interest where the interest of these brokers was given prominence than the investors. These led to price rigging, frequent payment 

crises on stock exchanges and misuse of official position by office bearers. Therefore, demutualization of stock exchange was resorted to instill confidence in the minds of the investors. 

So, through the demutualization process, a stock exchange becomes a profit making company and a tax paying entity. Demutualization separates the ownership and control of stock exchange from the trading rights of members. This reduces the conflict of interest and also the chances of brokers using the trading mechanism for personal gains. 

In November 2002, SEBI approved the uniform model of corporatization and demutualization of stock exchanges, recommended by the Kania Committee. Further, Securities Contract Regulation Act was amended on October 12, 2004, through an ordinance, making it compulsory for the exchanges to convert into corporate entities and delink their broker members from the management. The ordinance restricts brokers’ representation in the governing body of stock exchanges to 25%. It also reduces their shareholding from 100% to 49%. Moreover, 51% of the stake of the stock exchange should be held by the public. This segregation was initiated to safeguard the interest of shareholders, bring greater transparency and efficiency of stock exchanges. 

Advantages of Demutualization 

(i) Enable stock exchanges to have more access to funds for investment in technology. 

(ii) Facilitate merger and acquisition of other exchanges. 

(iii) Facilitate alliances with other stock exchanges. 

(iv) Benefit to members of the stock exchange as their asset becomes liquid. 

(v) Members get share of the profits made by exchanges through dividends. 

(vi) Makes operations of the stock exchanges transparent. 

(vii) Transparency brings better governance.