The Securities and Exchange Board of India's decision to allow stock exchanges to list, contrary to the Bimal Jalan Committee's recommendations, is a welcome step. By providing an exit route to incumbent shareholders, it would enable exchanges to raise funds for investing in technology upgradation and investor education, thereby contributing to the development of the country's equity markets. SEBI has, however, taken note of the potential for a conflict of interest between regulatory and commercial roles of exchanges, as raised by the Jalan Committee's report on the subject. The capital markets regulator has, hence, stipulated that only those exchanges putting in place appropriate mechanisms to tackle this discord would be allowed to list. These require the exchanges constituting committees with a majority of independent directors to oversee their listing regulations and surveillance functions, their boards not having any trading or clearing member representatives, and 50 per cent of the directors being custodians of public interest.

The above measures primarily reflect SEBI's concern that the exchanges' drive to increase profitability could undermine their regulatory role. While justified, the fact is that these concerns hold whether or not the exchanges are listed. Bourses in India are profit-driven organisations and the mentioned conflicts are already present in the incumbent exchanges. Therefore, there is no reason why the suggested safeguards should not be applicable to all exchanges, and not just the ones to be listed. SEBI has given the exchanges a reprieve by not capping their returns as recommended by the Jalan Committee. At the same time, the stipulation regarding transferring 25 per cent of their profits to a Settlement Guarantee Fund would reduce the disposable funds available with exchanges and, to that extent, affect their valuations. The exchanges ought to, however, view this as the cost of running a business fundamentally prone to payment risks that are systemic in nature, for which there has to be more than adequate provisioning.

SEBI has also done well in allowing promoters three years time to bring down their stake in new exchanges to the maximum permissible limit of 5 per cent. This move is expected to spur competition. Having exchanges with overwhelming dominance, whether listed or not,would, after all, hardly serve lay investors' interests. In fact, one could even argue in favour of raising the cap, as it would, perhaps, attract more number of entrepreneurs wanting to set up exchanges. The framework for listing of exchanges also envisages a greater role for SEBI, from appointing Board members to liaising with the exchange committees responsible for surveillance and regulation. Whether the regulator can really discharge these functions effectively remains to be seen. SEBI has also hinted at moving towards a Self Regulatory Organisation or SRO to take care of regulatory functions of all exchanges. For now, it's a job well begun.

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