'We knew they'd be varying views on the report'

Sarbajeet K Sen/Money Today | Print Edition: April 2011

Bimal Jalan, who chaired the committee on market infrastructure institutions (MIIs), talks to Sarbajeet K. Sen on what the panel's report means for investors.

Were you surprised by the reactions to your report, which at times was quite scathing?
Not really. We knew that there would be divergent views on the recommendations of the committee. Thus, a board member of a stock exchange had an opinion, a shareholder in an exchange had another view and stock exchanges that want to get listed also had a view. I personally welcome the discussions that have taken place among the interested parties, experts and other knowledgeable people.

However, this report should not be viewed as a report by an economist or a single person. We had a diverse panel, which included representatives of industry, from Sebi, the National Institute of Securities Market and the Finance Ministry. Secondly, we had set up a consultative committee, which met all stakeholders including individual experts, over a period of three months. We also consulted global stock exchanges. Our view was that stock markets in India are still evolving. If you look at the Indian stock markets few years ago and now, there has been a sea of change in the whole trading platform.

"When we say that stock exchanges should not make super-profits and that they should set aside some profit for investor protection, these are measures that will benefit investors."
We are very conscious of the fact that the there are no universal models of stock exchanges. Different countries, at various stages of development, have various kinds of stock exchanges. So, we have suggested that there be a wide debate on the issue and that the report be put in public domain.

Moreover, since things are evolving, we have also suggested that whatever decision Sebi takes should be reviewed after five years. We don't say that we have a perfect report. If it was a perfect report, then why would we have suggested a re-look after five years?

However, one of the most interesting fallouts of the report is that an independent poll conducted by the Centre for Monitoring Indian Economy (CMIE) found that 75% of retails investors are happy with the report's recommendations. I am glad that an overwhelming majority of the investor community, who don't have a stake in the governance of exchanges or a shareholding in stock exchanges, have sided with our views.

The debate on the report has mostly been restricted to broad issues relating to stock exchanges. But not much has been said about how the suggestions will impact investors. What would be the benefits flowing out of the report for investors at large?
There are a couple of overarching points that everybody, including those who have interests in managing stock exchanges or are shareholders in stock exchanges, should take into consideration. Firstly, we have to understand the importance of stock markets for savings, investment and growth in general and the stability of financial markets in particular. The capital market scenario has changed dramatically over the past 10 years. For example, there has been a dramatic growth of the mutual fund industry, which manages thousands of crores worth of investors' assets. This was a very important from the retail investor's point of view. These funds invest their money in stock markets.

The second important development is the expansion of the financial market itself. We see IPOs raising funds at unprecedented levels. In such a scenario, you need high levels of transparency, accountability and trust in whatever is going on in the stock market to gauge the viability of the entities that have raised those huge amounts. This is because, institutions like banks and mutual funds, are investing in IPOs. Therefore, viability of the share issuers would have a fall-out on the viability of banks or funds who are investing in them. There is a whole lot of interconnection here.

Therefore, when we say that stock exchanges should not make super-profits, that they should set aside some of their profits for investor protection, that you must be accountable, these are all measures that will benefit the investor community.

Our focus is on the interests of the retail investor, the institutional investor and the larger savings community not directly involved in the stock market. We want them to be the primary beneficiaries of whatever is happening in the financial markets.

The equity culture has not penetrated deep into the country and is still limited to small pockets. Do you see MIIs, such as stock exchanges, as vehicles for financial inclusion as well?
Stock exchanges will always be in some major city. However, wealth is all over the country. Mutual funds are the real vehicles for spreading the equity culture. So, if you are in Puducherry (formerly Pondicherry) and are investing in a mutual fund, the money is flowing to the same place in the financial market, the stock market. What you must keep in mind is the degree of integration of the various segments of the equity markets.

"If you look around, aren't there corporate entities and institutions that are unlisted in which one reposes huge trust. So, being listed is not a virtue per se."
Reading your report, one gets the feeling that there is an undercurrent of fear on the stability of MIIs...
No, that is not true. What we have said is that we should try and strengthen transparency, accountability and the supervisory relationship between those who own and manage stock exchanges and the general investor. The rules have to be transparent and the governance should be transparent so that those who are investing and taking the risk should get a complete sense of what the risk is. There is now a debate over whether pension funds should be invested in equities. This would have a bearing on you whether you are in the government or in a private sector entity. Similarly, we are also interested in investors getting safe returns.

What I gather is that you are not unduly concerned over the functioning of the present structure of MIIs but would like some improvements. Is that your view?
We are okay with the current structure. If you go back a little further, in 2007, everybody was criticising the conservatism of the RBI and complaining that they were not allowing things such as derivative trading. Then, after 2008, those same people were thanking the RBI for its conservatism. What I want to emphasise is that there is no perfect model. We are at a stage when the whole direct and indirect growth of financial markets is broadening and stock markets have become a destination for a lot of public savings, be it through mutual funds or otherwise. We are interested in giving greater access to companies, including public sector companies, to raise money through the capital market. In this phase, the most important thing to decide is how we make sure that transparency and profitability in management and in growth of the trading platform is such that everybody has trust in the system. That is, if I am taking a taking a risk I should know that I am not going to be subject to insider-trading or any such illegal and irregular market practices.

You have emphasised the need for transparency. But doesn't general logic suggest that a listed entity is more transparent because of compliance requirement and accountability to shareholders? Your committee categorically says that stock exchanges should not list. Isn't there an inherent contradiction?
This is a very interesting point that you have raised. But if you look around, aren't there corporate entities and institutions that are unlisted in which one reposes huge trust. So, being listed is not a virtue per se.

Let me try and explain why listing of exchanges can be counter-productive through a hypothetical situation. Suppose you have two exchanges that are listed. One of them has a share price of Rs 100 and the other Rs 30. In subsequent days, the one with the Rs 100 share price becomes Rs 200 and the one with Rs 30 slides to Rs 20. This can lead to a migration of companies from the exchange showing weakness in share price to the one that is showing strength. Such a situation can have serious implications for the system.

Let me also clarify a point here. I am not against listing per se. If you want to list, by all means go and get listed. But then, there should be a Chinese wall between the regulatory and trading roles. Stock exchanges also perform regulatory functions. Exchanges that list must not be a trading platform and at the same time have regulatory and supervisory roles. If you list, then you should run your exchange as a pure trading platform.


  • MIIs (stock exchanges, depositories and clearing corporations) are systemically important institutions whose failure could lead to "bigger cataclysmic collapses" bringing down the economy.
  • The institutions should reduce the regulatory burden of the market by supporting the market regulator.
  • MIIs are seen as 'public utilities' but are often 'profit-oriented'.
  • Should generate only "reasonable profits"; cap may be fixed on maximum return, based on net-worth.
  • Anything above the permissible must be transferred to either an investor protection fund (IPF) or a settlement guarantee fund (SGF).
  • Panel not in favour of listing of MIIs since it is in conflict with their regulatory functions.
  • However, disclosure and corporate governance norms of listed companies to be applicable.
Our judgement was that we are not there yet, given the vast difference between two of our major exchanges. As I pointed out, if you list and if you have substantial drop in prices of the shares of one stock exchange, there might be a huge migration from one stock exchange to the other. Would that be in the interest of competition? The idea was use the next 3-5 years to consolidate, reform and improve trading and make them attractive and then, if you like, you can allow listing.

But there have also been suggestions that the process of corporatisation of stock exchanges in the mid-2000s was to enable them to eventually get listed. Isn't this true?
This is not correct. Do we not have corporate entities that are unlisted? I am surprised when people say foreign investors are unhappy because they had invested with the assurance that the entity would be listed.

When I am taking a position in company 'X', which is not listed with a hope that it will become listed, don't I take a risk? Some people said that investors invested in one of the stock exchanges with the hope that it is going to be listed. But if it was the stock exchange that announced that it was going to be listed when Sebi has not yet allowed listing, then it should be the exchange that compensate the investor if there is a loss because of the misleading statement.

Where is the report now? What is the next step?
It is with Sebi, which will decide on the recommendations over a course of time. I will be glad if the contribution of the report is to make people conscious of the importance of the developing financial sector and the stock markets. The importance of stock exchanges in the financial market arises simply because they are trading platforms dealing with huge volumes of public savings. Since these are important instruments for financial growth and financial stability, we have to see how to combine freedom to operate with greater accountability and transparency. But then, I must emphasise that this (the panel's report) is not the last word, this is just the first word.

Are you meeting Sebi chairman U. K. Sinha to discuss the report any time soon? Has there been an invite from their end or has the panel sought time from Mr Sinha to discuss the report?
We had an informal exchange with the former Sebi chairman, C. B. Bhave, before finalising our report and Sebi was also represented in the committee. It is now for the Sebi Board to consider the various aspects of the report and decide. Personally, I have no plans to meet the present chairman on this matter or in any way try to influence the Sebi process.

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