Research Team: Francis Rathinam, Parvathi Jayamohan and Loknath Acharya
Commencement: September 2009
Completion: August 2010
Funded by: National Stock Exchange of India, 12 months
Stock exchanges, by providing liquidity, help allocate resources optimally through efficient price discovery. Given the nature of the public good they provide, any mismanagement in exchanges may have systemic implications for the economy. There has been, surprisingly, little attempt to analyse the organisation of exchanges and their implications for corporate governance. An in-depth analysis of the evolution of alternative organisational structures of exchanges that have emerged as the preferred solution to the complex and innovative activities that characterise modern capital markets will help chalk out future regulatory policy. This study provides such an analysis. After carefully analysing the inherent conflicts of interest in the present ownership and management structures of exchanges and the measures to handle such conflict, this report proposes to separate the regulatory arm of Indian bourses where conflicts due to demutualisation are as intense as elsewhere. Separating the regulatory arm and mandated information disclosure would ensure that the traditional benefits of proximity to the business arm and access to the expertise of the business arm are retained. At the same time, it would make exchanges’ regulatory function far more transparent than they are today. International case studies show that separating the regulatory arm and imposing stringent requirements on board structure, voting rights and disclosure help mitigate conflicts and improve the regulatory performance of the exchanges. Though regulatory arbitrage and regulatory gap due to multiple SROs in the market may remain a concern, these case studies show that SROs around the world have come together to co-ordinate to solve inter-market surveillance and enforcement issues. Thus, the report argues for ‘separating the regulatory arm’ model as a system of ‘multiple watching eyes’ on the market place, with effective dataand information sharing for better enforcement.