The report of the Bimal Jalan committee that reviewed the ownership and governance of market infrastructure institutions (MIIs) must be viewed against the larger context of the changing role of the stock market in India’s financial sector. Equally, the committee’s recommendations must be viewed in the context of the lessons learnt from the trans-Atlantic financial crisis and the impact that distortions and mis-governance in the financial sector can have on the real economy. The report’s focus on stability of markets is, therefore, important. The days when a few brokers could sit together and run a stock exchange are long gone. The stock market has become a major financial intermediary through which funds flow into the rest of the economy, including corporate houses, banks and financial institutions. Proper governance and stability of the market is vital to the stability of economic growth. This is the key message of the Jalan committee and its recommendations must be viewed in that context. The committee was entirely right to observe that the governance and ownership norms for MIIs need to be tailored carefully so that, on the one hand, MIIs ensure the safety and reliability of markets and, on the other, “they retain their ability to innovate on the products, processes and the range of services they offer”.
By saying that exchanges should be discouraged from making abnormal profits, the report wants to discourage a lot of existing investors in stock exchanges who have come into the market because of speculative or trading gains. The whole idea now is to look at anchor investors who are going to take a long-term call. Nobody can counter the basic premise that excess of a certain threshold of profit should go to the investors’ cause or to the settlement guarantee fund. The report’s bias against listing of stock exchanges makes sense as listing will lead to quarterly pressures, performance pressures, speculative trades and information. There is much insider information available with the exchanges about listed entities that would create a conflict of interest.
The report correctly worries about the classic principal-agent issues in the management of stock exchanges. There is a conflict of interest issue arising out of private ownership of an entity vested with regulatory responsibilities. A balance is, therefore, needed in managing potential conflicts of interest. The idea that technological progress in trading has made regional stock exchanges redundant is obvious and too many exchanges serve no purpose. It may be argued by the critics of the Jalan committee report that listing would have made the exchanges more transparent, and that by disallowing listing, a transparent exit route for an investor through exchange-traded sale may get closed. While the recommendation of a higher net worth requirement of Rs 100 crore at all times for new exchanges may be a dampener for new entrants, it is a welcome proposal. The National Stock Exchange has set standards for governance, efficiency of operation and transparency that all existing and aspiring entities must follow and, where necessary, improve upon. Competition is not in itself a virtue if it does not improve transparency, governance and investor protection. New aspirants may not like the raising of the bar for entry, but unless they meet higher standards of governance, they should not hope to find entry. That is the essence of the Jalan committee view, and we endorse it.