In 2005, the Government amended the Securities Contract (Regulations) Act, mandating that stock exchanges in India should corporatise and demutualise themselves.

Demutualisation is essentially a process whereby the ownership and trading rights are segregated. Accordingly, the stock exchanges have been mandated that at least 51 per cent of their equity should be held by public.

In 2007, the Bombay Stock Exchange (BSE) said it had completed the demutualisation process by placing 51 per cent equity with 21 “pedigreed marquee domestic and overseas institutions as well as select domestic corporate and high net worth individuals”, including two leading exchanges of the world — Deutsche Börse and Singapore Exchange. The shares of face value of Re 1 each have been sold at a negotiated price of Rs 5,200 a share, placing the market value of BSE at around Rs 5,000 crore.

Out of broker control Through demutualisation, the 1875-born BSE — Asia’s oldest stock exchange — has presumably come out of the control of brokers. The public issue and listing requirements state that if a company needs to list on the BSE, it should have Rs 3 crore in paid-up capital (the amount of a company’s capital that shareholders fund), and Rs 10 crore paid-up capital for listing on NSE.

BSE’s paid up capital (post-divestment) was Rs 85 lakh and this got enhanced to Rs 10.37 crore due to liberal bonus shares issued by the exchange to shareholders. The BSE has massive reserves of Rs 2,279 crore as on 31st March 2013, against its paid capital. For FY 2012-13, BSE earned an income of Rs 269 crore on its surplus cash investments, much higher than the Rs 240 crore of income it earned from operations. It has earned a net profit of Rs 133 crore for the year.

The exchange has a market share of 16 per cent thanks to the nearly Rs 100 crore it spends a year on liquidity enhancement incentive programmes (LEIPS) in futures and options segment. Due to large cash reserves, proceeds from an initial public offering (IPO) are not required for BSE’s business purposes.

Time for an IPO? Hence, a public offer for sale by existing shareholders is feasible. BSE is yet to get market regulator Sebi’s approval for this, though it filed the IPO documents with the regulator a few months ago. The exchange had set for itself the year-end deadline for going public. BSE’s IPO size could range between Rs 400 crore to Rs 1,000 crore, as per the recent statement from its CEO Ashish Chauhan.

Considering that BSE is one of the two national stock exchanges with good net worth and growing business, and there are no listed stock exchanges in India, public could lap up its shares in its offer for sale through an IPO.

However, post IPO, BSE may face serious scrutiny of its operations by public investors. Particularly, it needs to answer questions regarding its huge expenses on LEIPS, its minuscule share in institutional trading, its far distant second position compared with rival NSE, its lack of get- up-and- go spirit, slow pace of introduction of new products and, finally, for the subtle yet effective interference of brokers in its management.

(The author is former managing director of Ahmedabad Stock Exchange.)

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