Organizations Management and membership of stock exchanges

The organizational forms of the various recognized stock exchanges India are as follows:

*Bombay, Ahmedabad, Patna, Indore >
Voluntary non-profit making association

*Kolkata, Delhi, Bangalore, Cochin, Kanpur, Guwahati, Ludhiana, Mangalore, Chennai >
Public limited company

*Hyderabad , Pune , Rajkot, Magadh >
Company limited by guarantee

*National Stock Exchange >
A tax paying company incorporated under the companies Act and promoted by leading financial institutions and banks.

*Over the counter Exchange of India >
A company under section 25 of the Companies Act 1956

The regional stock exchanges are managed by a governing body consisting of elected and nominated members. The trading members who provide broking services, own, control and manage the exchange. The governing body is vested with wide ranging powers to elect office bearers, set up committees, admit and expel members, manage properties and finances of the exchange, resolve disputes and conduct day-to-day affairs of the exchange.

The OCTEI and NSE are de-mutualised exchanges where in the ownership and management of the exchange are separated from the right to trade on exchange.

Brokers are members of the stock exchange. They enter trades either on their own Account or on behalf of client. They are given a certificate of registration by SEBI and they have to comply with the prescribed code of Conduct. Over a period of time, many brokers with proprietary and partnership firms have converted themselves into corporate entities. Both NSE and OTCEI have laid down strict standards of the admission of members, which relate to capital adequacy, track record, education, experience and so on to ensure quality broking services.

Stock broker is required to pay an annual registration fee of Rs 5,000 if his turnover per year does not exceed Rs 1 crore. If it does, he has to pay Rs 5,000 plus one –hundredth of one per cent of the turnover in excess of Rs 1 crore. Five years from the year of initial registration he has to pay Rs 5,000 for a block of five financial years. The exchange also levies transaction charges.

The brokerage of transactions vary from broker to broker. The maximum brokerage that can be levied is 2.5 per cent of the contract price exclusive of statutory levies such as SEBI turnover fee, service tax, and stamp duty.

Demutualization of Stock Exchanges:

All the stock exchanges in India except the National Stock Exchange are broker owned and broker controlled. In other words, the brokers who trade collectively own and run these exchanges. The ownership and management of the brokers often led to a conflict of interest wherein the interest of brokers was preserved over those of the investors. Instances of pricing, rigging, recurring payment crisis on stock exchanges and misuse of official position by office bearers have been unearthed in the last few years. As a result, both rolling settlement and demutualization of stock exchanges was announced to preserve their integrity.

Demutualization is the process by which any member-owned organization can become a shareholder owed company. Such a company could either be listed on a stock exchange or be costly held by its shareholders.

Stock exchanges in India are either section 25 companies under the Companies Act or an association of persons. Hence stock exchanges are exempt from all taxes. Through demutualization, a stock exchange becomes a corporate entity, changing from a non-profit company to profit making and tax paying company.

Demutualization separates the ownership and control of stock exchanges from the trading rights of its members. This reduces the conflict of interest between the exchange and the brokers and the chances of brokers using stock exchanges for personal gains. With demutualization stock exchanges have access to more funds for investment in technology mergers with and acquisition of other exchanges and for strategic alliances with other exchanges. Members of the stock exchange also benefit by demutualization as their assets become liquid and they get a share of the profit made by the exchange through dividends. Demutualization makes operations of the stock exchange transparent which facilitates better governance.

There is global trend towards demutualization wherein 17 stock exchanges including NASDAQ and those of Australia, Singapore, Hong Kong, London, and Tokyo have already demutualized and another 15 are in the process of demutualization.