Return
to Story Page
To print: Select File and then Print from your
browser's menu
R Jagannathan
The president of the Bombay Stock Exchange, Anand Rathi, appears to have his priorities right. Having been elected just a few days after his predecessor was ignominiously ejected by SEBI for various sins of commission and omission, Rathi is right to say that his first job is to improve the image of the exchange. He can certainly clean up the exchange, improve the surveillance mechanisms, and make sure that broker-directors and their cronies do not run riot at the exchange.
But what caught my attention was the interesting possibility he raised about the BSE corporatising itself. As currently organised, the BSE is an association of persons--a club. And that is both a strength and a weakness. A club is run primarily for the benefit of its members--which is fine as long as it does not intersect any area of general public interest. Till the early 1990s, when there was no stockmarket regulator and there were few enforceable rules for brokers dealing with the investing public, the BSE's club culture was goodenough. The markets were not any safer then than they are now, but the club culture protected the central pillars of the market--brokers and the trading system. Whenever any broker went into default, the other club members bailed the exchange out of a crisis.
But when a club's activities start drawing in the public in large numbers--as does a modern-day stock exchange--it cannot continue to be run under the old rules. Hence the need for change. Whether the BSE formally tries to transform itself into a corporate entity or not, it certainly will have to corporatise its culture and improve corporate governance. By this one means that the BSE's collective owners--its brokers--will have to take a backseat when it comes to influencing the day-to-day decisions of the exchange. For its own credibility, the BSE needs to put in a layer of independent professional directors between the exchange's ultimate owners (the brokers) and the official exchange administration.
That may be akin to asking brokers to voluntarilycircumscribe their own powers. But there is no other way Rathi can take the BSE forward to a globalised future.
The world over, successful organisations win in the marketplace by focusing on customers rather than their employees (or club members). Even shareholders are rewarded by focusing on the customer, who holds the key to improving profitability. In other words, a corporate structure works by enabling people to focus on customers outside. A club atmosphere, on the other hand, is inwardly focussed--on its members. The BSE's current structure does not help it focus on its customers (the investing community) directly; instead it views the ultimate customer through the intermediary's eyes (i.e. the broker's).
This hazard is difficult to avoid in a club culture because in a real sense brokers are the exchange's main customers: it is brokers who use an exchange's terminals, put through the deals, and generally deal with the exchange. So how can a stock exchange's administration distinguish between realcustomers and the intermediary ones when the latter also happen to be the key owners of stock exchanges?
The problem of a blurring of identities can be more easily addressed by a corporate structure like the NSE's where the exchange management focuses exclusively on making sure that settlements are honoured and deals are guaranteed. Brokers who look like they will be unable to meet their commitments face the ignominy of having their computer links yanked. This happens because the NSE management is not answerable to a board of brokers. It may consult them, it may try and be sensitive to their concerns, but it acts only in defence of the exchange's broader commitment to run an accident-free trading environment.
On the other hand, picture what could happen in the BSE's current setup. If a broker were to overplay his hand on the trading counter, the exchange's surveillance team will be faced with two choices: either pull the plug and risk the possibility that the broker concerned may use his clout with theboard to negate the decision; or keep quiet and hope the problem will not snowball. It won't work.
Rathi, in a newspaper interview given after being elected BSE president, mentioned that he would like to improve the image of the exchange with the regulator and the finance ministry. This may be important, but he should actually put investors ahead of the queue when it comes to improving the image. A corporate structure for the BSE would be the best way of doing so.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
------------------------------------------------------------
This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
------------------------------------------------------------