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In keeping with the commitment made by the Government in the National Common Minimum Programme towards orderly development and functioning of the capital markets, which reflect true fundamentals of the economy, an Ordinance has been promulgated today to amend the Securities Contracts (Regulation) Act, 1956 (SCRA). The main purpose of the Ordinance is to provide for compulsory corporatisation and demutualisation of the stock exchanges so as to strengthen their governance and avoid conflict of interest in the present mutual stock exchanges. This is expected to, inter-alia, safeguard the interests of investors and bring about greater transparency and efficiency of exchanges.
Those stock exchanges, which are not already demutualised, will have to do so within a given time-frame and under a scheme approved by SEBI so as to restrict participation of brokers on the governing board of stock exchanges, to reduce their shareholding and to make the right to trade in a stock exchange distinct from the ownership and management right.
The Ordinance also provides for amendment of Depositories Act and the SCRA so that the provisions in these two Acts are aligned on the lines of the amended SEBI Act, 2002 in matters like penalty, appeal procedure, compounding of offences etc.
In the Budget 2004-05 Finance Minister had announced the Government’s intention to create an appropriate trading platform for small and mid-cap companies. The Ordinance amends the SCRA also to provide the legal framework for such a trading platform under regulatory permission from SEBI. It is expected that this measure will create liquidity in small and mid-cap companies and provide better opportunities to small investors.
An imminent need for a structural reform of the stock exchanges in the country had arisen from the concerns that the present mutual organisational structure of stock exchanges had failed to address the conflict of interests situation inherent in them and was not conducive to good governance. The Joint Parliamentary Committee on the Stock Market Scam, 2001 (JPC) had commented adversely on this situation and strongly recommended that the process of corporatisation and demutualisation of stock exchanges be expedited to safeguard the interests of investors and to bring about greater transparency and efficiency of exchanges. The Government in its Action Taken Report had assured that the necessary legislative amendments to give effect to this recommendation would be proposed. Thus, amendments to the Securities Contracts (Regulation) Act, 1956 were required to be made on an urgent basis mainly to strengthen governance of stock exchanges through corporatisation and demutualisation of stock exchanges to fulfill the assurance given by the Government to the Parliament in respect of early implementation of the recommendations of the JPC.
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