Demutualization
Another most visible and talked about operational changes in the Indian capital markets is the trend towards demutualization. The Government of India had announced its proposal to corporatize the recognized stock exchanges in the country and thereby segregate the ownership, management and trading rights from each other. Demutualization, in a nutshell, is a process of converting a stock exchange from a ‘non-profit’ member-owned organization to a “for-profit”, shareholder owned corporation.
The Union Finance Minister had also emphasized this issue in his budget speech for the financial year 2002-03. SEBI had accordingly; constituted a committee under the Chairmanship of Justice M H Kania, former Chief Justice of India to give recommendations on demutualization and corporatization of mutually owned stock exchanges. In the new environment, mutually owned stock exchanges are no longer monopolies and will be facing fierce competition from other demutualized exchanges, threat of disintermediation from Electronic Communication Networks (ECNs) and Alternative Trading Systems (ATSs). In order to survive in the present competitive markets where profits margins of financial services are diminishing, the exchange must function like efficient business enterprises.
Demutualization improves the flexibility and the response time of the Stock Exchange to improve for the financial needs and various strategic initiatives. Another promise of demutualization is that along with the capital necessary for investment in technology, the shareholders of the newly demutualized stock exchanges provide a new corporate governance structure that is far more effective in managing conflicts among various shareholders, i.e., investors, traders, regulators.
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