Bimal Jalan Committee

Bimal Jalan Committee Recommendations & Impact Recommendation : The Committee is not in favour of permitting listing of MIIs Impact : During the last four years, investors have pumped in over Rs 10,000 crore in India's existing exchanges. These investments were made based on the view that exchanges would divest and demutualised based on SEBI's MIMPS regulation. Now that exchanges are disallowed to list, there will be no scientific price discovery and transparent exit option left for these inves
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  Bimal Jalan Committee   Recommendations & Impact Recommendation : The Committee is not in favour of permitting listing of MIIs Impact : During the last four years, investors have pumped in over Rs 10,000 crore in India'sexisting exchanges. These investments were made based on the view that exchanges would divestand demutualised based on SEBI's MIMPS regulation. Now that exchanges are disallowed to list,there will be no scientific price discovery and transparent exit option left for these investors, thusputting their investments into jeopardy. Non-listing coupled with cap on profits will mean thatexisting investors will have to exit at a high discount to attract some investor.Demutualisation was introduced to ensure exchanges' financial autonomy and to make themdependent on their own balance sheet. As this clause will render investment in exchangesunattractive, it will not serve the purpose of demutualization. It would also be difficult to raiseadditional resources for capital investment. New generation technology and infrastructure areresource intensive and non listing will make it unattractive to infuse capital for such marketdevelopment initiatives.It is a proven fact that widely held diversified companies are best made accountable by listing.Since stock exchanges are not subject to RTI or a CAG audit, non-listing would reduceaccountability of MIIs. Recommendation : MIIs should not be permitted to make unreasonable profits Impact : The recommendation states that an MII being a public utility should endeavour to earnonly reasonable profits and at par with average earnings of corporate sector in India. As profitsare being capped, exchanges like NSE which have made more investment will be entitled to makemore money officially.On the other hand, exchanges which begun with low capital will get less entitlement for returndue to fixed RoI model. Lack of exit route and cap on profits will further discourage  entrepreneurship in this industry. Also, if this recommendation is to ensure fair play, then the best way to normalise profit is to bring open, fair and free competition, where one would achievenormal levels of profit rather than a monopoly enjoying super normal profit. Recommendation : The Committee proposes to support the concept of Anchor InstitutionalInvestor, but restricted to banks and public financial institutions. Impact : Banks and PFIs were allowed to hold 5% in stock exchanges, which was revised up to15% by the Kania Committee set up by SEBI in 2002. The Bimal Jalan Committee only raises thislimit to 24%. Stock exchanges are not the first line of business for public financial institutions and banks. Therefore, whenever they have invested in exchanges, they have always remained aspassive investors. So, it can be assumed that in future too, banks and PFIs will also not actively partake in this industry as this is not their core line of business.This recommendation does not support the Committee's reason for choosing banks and PFIs asanchor investors as those 'who will take the lead role of setting up a stock exchange'. Integrity of acompany or a stock exchange is determined by the Policies, sound Risk Management andmonitoring systems, robust technology and not by the Anchor Investors adopted by them. Recommendation : Shareholding limits inclusive of all exposures of the shareholder to the MII Impact : Exchanges are like any other corporates, but playing a larger role as a first-levelregulator. However, along with making them accountable and transparent, the mandate of aRegulator should also be to make them viable to investors. Therefore, treating debt and equity inthe same class to calculate shareholding makes entry into an exchange venture as difficult as exitfor an investor. Thus, this recommendation is against the objective of engendering competition inthe exchange industry. Recommendation : Minimum capital required for an exchange is Rs 100 cr Impact : NSE till now has pumped in Rs 826 crore and BSE has invested Rs 386 crore as CapitalExpenditure. Yet, the committee has suggested that the minimum capital required for an  Exchange is Rs 100 crore. This amount is far smaller than what is actually required to start anational-level, multi-product exchange. The minimum capital outlay required to start a new exchange capable of competing with NSE would be at least Rs 1,000 crore and with a cushion of at least one or two year of losses.Even if any exchange now starts operations with an outgo of Rs 100 crore and depends on capitalinvestment through internal accruals, then the exchange may take more than 10 years to get tothe level of NSE and by then, NSE would have progressed much more. Recommendation : Networth requirement for clearing corporation fixed at Rs 300 cr Impact : This will be a huge burden for new-generation exchanges that have a separate clearingcorporation as promoters will have to maintain a networth of at least Rs 400 crore at all times (Rs100 crore in the exchange plus Rs 300 crore for clearing corporation). This criterion willdiscourage the launch of new-generation clearing corporations and may result in India not havinga new clearing corporation for a long time as it would require a high commitment on the part of investors. An Industry like insurance and banks, which runs a higher chance of risks, has much lowernetworth criterion of Rs 100 crore and Rs 300 crore. Thus, the networth requirement criterion forrunning a stock exchanges and clearing corporations is illogical as Clearing Corporations have well established margining systems and restricting the amount to be traded linked to the depositsavailable with them.Clearing corporations globally work on self-insurance arrangement, which ensures that either thedefaulter pay everything or else the clearing entities share the risk out of a clearing fund created by them collectively but not through equity capital. No investors of existing exchanges will injectadditional capital with norms such as non-listing and cap in profits resulting in closure of existinginstitutions and a monopolistic scenario in clearing corporations too. Recommendation : Holding of exchanges in depositories to be restricted to 24% Impact : Though the Committee finds holding in depositories will be a conflict of interest, yet itsees no conflict when a Bank has trading and brokerages subsidiaries and are allowed to be   Anchor Investors in them. There appears to be no logic that Stock Exchanges, ClearingCorporations and Depositories are identified as MIIs, but have different ownership norms.Moreover, this norm will force BSE to reduce its 54% stake in CDSL to 24%. Recommendation : Clearing corporations and depositories cannot invest in other class of MIIs Impact : SEBI is going back on its earlier decision which is like changing goal post every time.This will be a major blow to some of the existing exchanges that have investments from clearingcorporations and depositories that have such investment. Moreover, this recommendation willfurther prevent market consolidation. Recommendation : Fair competition with optimal number of exchanges Impact : There are examples of two highly successful and world-class regulators in India such asthe RBI, which has a policy to operate over 100 banks, and Forward Markets Commission (FMC), which runs five exchanges and is considering three more. However, the Committee speaks of favouring competition, but is actually complacent with running only two equity exchanges, twodepositories and a standalone clearing corporation.The Committee contradicts itself by stating 'large number of stock exchanges will fragmentliquidity'. The US and Europe have large number of exchanges and very liquid markets. Also, new generation technology such as 'smart order routing system' where the order is routed to the bestprice across any platform defies this logic of more exchanges leading to fragmenting liquidity.
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