Recommendations Of The Kania Committee
Justice MH Kania Committee, appointed by the Securities and Exchange Board of India (Sebi), had recommended that at the stock exchanges having a card system, which gives to their members the right to trade as also the right to a share in the net assets and goodwill of the stock exchange, the fair value of the card be worked out by dividing the fair value of the stock exchange by the number of cards by well-established norms like the underlying asset approach, the income approach, etc, and that the value of the card so arrived at be segregated into a deposit giving a right to trade and shares equivalent to the residual amount representing the share in the net assets and goodwill of the stock exchange.
The Committee had by way of an illustration indicated that if the fair value of the card is determined at Rs 125 lakh, the deposit amount representing the right to trade be placed at Rs 75 lakh and shares of the aggregate value of Rs.50 lakh be issued against the net assets and goodwill of the stock exchange.
The Joint Parliamentary Committee (JPC) had recommended that the process of corporatisation and demutualisation of stock exchanges should be expedited. The Central Government, in its Action Taken Report, had assured that necessary legislative amendments to give effect to the recommendations of the JPC would be made. Sebi, in a letter addressed to stock exchanges issued on January 3, 2003, had advised the stock exchanges to submit a scheme for corporatisation and demutualisation for its approval on the lines of the recommendations of the Kania Committee as approved by the Sebi board within six months.
Share Of Stock Brokers In Reserves And Assets Of Stock Exchanges
Contrary to the recommendations made by the JPC and the assurances contained in the Action Taken Report of the Central Government and also the directive given by Sebi to stock exchanges, the Securities Laws (Amendment) Bill, 2003 introduced in the Lok Sabha provides that no scheme for corporatisation and demutualisation of a stock exchange will be approved by Sebi if the issue of shares for a lawful consideration or payment of dividends or provision of trading rights in lieu of membership card of the members of a recognised stock exchange have been proposed out of any reserves or assets of that stock exchange.
Reserves and surpluses of regional stock exchanges aggregate to about Rs 200 crore, while those of Bombay Stock Exchange work out to about Rs 360 crore. This is done presumably on the premise that the reserves and assets of stock exchanges have been built more out of listing fees and exemption from income-tax than out of the contributions made by members of stock exchanges.
This ignores the contributions made by members of stock exchanges by way of entrance fee, admission fee, annual subscription and levy on their turnover. This also ignores the fact that some of the present members had paid enormous amount to the transferees while purchasing the card from the market.
For example, at the Bombay Stock Exchange, the price of the card had exceeded Rs 4 crore. Even with regard to the listing fees, it needs to be kept in mind that it is members of stock exchanges who make the market and thereby help in the discovery of prices and creation of a platform for transfer of shares.
It is, therefore, not fair to deny to the members of stock exchanges any share in the reserves or assets of stock exchanges. What the Government can, however, do is work out the income-tax exemption amount and deduct the same from the reserves and assets of stock exchanges and the residual reserves and assets can go to their members. As recommended by the Kania Committee, these reserves and assets can be segregated into deposits in lieu of trading rights and shares. This is fair to the State as also to the stock broking community.
Representation On Governing Boards
The Bill also provides that the maximum number of representatives of stock brokers to be appointed on the governing board of a stock exchange shall not exceed one-fourth of the total strength of the governing board. The difference between this provision and the recommendation of the Kania Committee may be marginal as the Bill speaks of the total strength of the governing board, while the Kania Committee stipulates that the three stakeholders, viz, shareholders, brokers and investing public through the regulatory body, should be equally represented on the governing board and that there should also be professionally qualified Chief Executive Officer and Whole-time Director.
Both the Kania Committee and the Bill have missed the basic issue of ensuring that the Public Representative Directors need to be in a majority in a public institution like the stock exchange.
The Bill, when translated into practice, may witness the scenario of representatives of stock brokers and shareholders joining together to outvote the Public Representative Directors, particularly so if the shareholders are from the private sector. This is specially so as stock exchanges are being converted into for-profit companies from not-for-profit entities. Profits in a stock exchange emanate mainly from listing fees and turnover levies, both of which are mostly borne by the investing public.
The Bill provides that for various technical and procedural offences like failure to furnish information, etc. to a stock exchange, failure to maintain books of accounts or records as specified, failure to enter into an agreement with a client, failure to redress grievances of investors within the stipulated time, or failure to segregate securities or moneys of clients or use of the same for self, the person concerned is liable for a penalty of Rs 1 lakh for each day of occurrence or Rs 1 crore, whichever is less.
Such vast powers will be vested in an officer of Sebi of the rank of a Division Chief, who can be appointed as an adjudicating officer.
The Bill also provides that for failure to pay the penalty imposed by the adjudicating officer, the guilty can be visited with imprisonment from one month to 10 years or with fine upto Rs 25 crore, or with both.
The penalties proposed in the Bill are too severe compared to similar provisions in the Companies Act, where the fines vary from Rs 500 per day upto an aggregate amount of Rs 50,000 in respect of corporates worth crores of rupees.
Even in respect of vanishing companies, penalties that can be imposed under Section 209A of the Companies Act are a fine of not less than Rs 50,000 and imprisonment not exceeding one year. Most of the stock brokers have a net worth of a few lakhs and penalties contemplated can drive anyone caught into liquidation. As penalties need to be commensurate with the gravity of the offence, there is an imperative need to scale down the schedule of penalties proposed in the Bill.
Delisting The Securities
The provision embodied in the Bill, empowering stock exchanges to delist the securities of a listed company, inter alia, for insider trading or unfair trading practices by the company or its promoters or its directors or for malpractices by the promoters or directors or persons in the management of the company, is not fair to the shareholders of the company who are denied a market in the process.
The proper course of action is to impose deterrent punishment on the guilty for which provisions already exist in the Sebi Act and are also being provided in the Bill. Fines for these offences can be even upto Rs 25 crore and in the case of insider trading, it can go beyond Rs 25 crore, as the quantum of fine can be three times the amount of profits made out of insider trading, or Rs 25 crore, whichever is higher.
Because of the scams that took place on stock exchanges in 1992 and 2001, the general climate in the country is against the stockbrokers. This ignores the tremendous services rendered by the stockbroking community in the creation of a fair and transparent marked for listed securities and the spread of equity cult throughout the country. Not that there are no mischievous elements in this community. There are a few of them, as in any other segment of society, but to treat the community as a whole with suspicion and to deny to the community their legitimate rights and dues is not fair. They are today more sinned than sinning.
The Bill, if enacted in its present form, will do more harm than good to the securities industry, which has become today a vital segment of the economy.
In fact, global eyes are presently focussed on the Indian capital market which is more advanced than many of the developed markets and which is offering returns higher than most of the markets of the world. Let us nourish this market and let us not over-regulate it, as is being proposed in the Bill, and retard thereby its growth. u
(The author is the chairman of Inter-Connected Stock Exchange of India Ltd. These are his personal views)