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WHAT IS DEMUTUALISATION?

• Demutualisation refers to the conversion of a “not for-profit”

organisation into a “for profit” company.

• The concept of Demutualisation can be applied to any “non-

profit “organisation or association.

• It is segregation of management, ownership and trading rights. 

HISTORY

• Historically, stock exchanges were mutual organisations

managed by the members located in a single city.
• The stock markets worldwide are experiencing a churning,
resulting in increasing competition.
• A stock exchange, if it has to stay relevant, needs to innovate
consistently in the contemporary arena.
• “Technology” and “Cost of Transaction” are the two main
facets of Demutualisation.
HOW EXCHANGE IS DEMUTUALISATION?
• The exchange values all its assets including the value of seats
(membership licence) and arrives at a total value.

• If the company is not being listed, the shares may be offered to

its members.  
WHY DO EXCHANGE DEMUTUALISE?
• “Corporate structure” is the goal of Demutualisation

• A company is better equipped to respond to changes when

compared to a closely held mutually owned organisation
For e.g
National Stock Exchange (NSE) for example, has spun off its wholly owned
subsidiaries like National Securities Clearing Corp. and more recently
NSE.IT into a dedicated info-tech company.
BSE, on the other hand, is a mutually owned association with less
transparency, hence seems to be an ideal candidate for
Demutualisation. 
ARGUMENTS IN FAVOR
• Beyond selfish motives

• Cope with competition

• Professionalism
TYPES OF DEMUTUALISATION

• Full Demutualisation
• Sponsored Demutualisation
• A mutual holding company
RECENT REFORMS
• Till the middle of the 1990s, the stock market in India was
fragmented with several regional exchanges.

• The securities scam of the early Nineties and the involvement of

a few members of stock exchanges gave a tainted picture of
members controlling stock exchanges and the Government
made a hasty and costly move in the process of reforming the
stock market.

• It sponsored the establishment of the National Stock Exchange

FATE OF THE EXCHANGES
• The present move of the Government like its earlier moves is
directionless.

• The first two requirements of the ordinance, namely,

corporatisation and separation of ownership and trading rights

• The question is who will buy the shares of the stock exchanges
DRAWBACKS
• Conflict of interests

• Brokers were manipulating the market

• Lack of strict vigilance

ADVANTAGES
• Rationalized Governance
• Investors Participations
• Competition from Alternate Trading System’s (ATS) and
Electronic Communication Networks
• Globalization
• Resources for capital investment
SEBI’S GUIDELINES
• SEBI issued its guideline on 31-11-2006 for investment in stock
exchanges in India

• Shareholdings of trading Members have to be brought down to

49%
LIM ITATIONS B Y SEBI
• Not more than 5% in the paid up capital.
• Separate FDI cap of 26% and FII cap of 23%.
• No FII shall seek and get representation on the Board of
Directors of stock exchanges. No foreign investor including
persons acting in concert will hold more than 5% of the equity
in the exchange
DEMUTUALISATION OF BSE
• Asia’s oldest stock exchange with 131
• 790 Brokers
• It was corporatised on 19 May 2005
• Around 51% stakes of 790 brokers were offloaded to 21
investors.
• 19 investors (like SBI, LIC, Aditya Birla and so on) have picked
up 41% stake.
• 10% by Deutsche Borse and Singapore Exchange. Each group
has picked up 5 % stake for Rs. 189 crore each
DEMUTUALISATION OF NSE
• National Stock Exchange was formed in November 1992 as a tax
paying company
• From day one, NSE has adopted the form of a demutualized
exchange’s
• It is owned by a set of leading financial institutions
• Promoters of the NSE are IDBI, IFCI
COMMITTEE FORMED FOR SUGGESTIONS
• Stock Exchanges are converted into companies limited by
shares
• Amendment is made to the Income Tax Act 1961
• Amendment would also be required in the Indian Stamp Act
1899 and Sales Tax law
• Shareholders, brokers and investing publics are equally
represented on the governing board of the demutualized
exchanges.
• A uniform model for corporatization and demutualization
DEMUTUALIZATION OF REGIONAL STOCK EXCHANGES
• Trading arms of BSE & NSE
• A separate platform.

THE REGIONAL STOCK EXCHANDES THAT HAS BEEN DEMUTUALIZED ARE:-

• Vadodara Stock Exchange • Magadh Stock Exchange

• Jaipur Stock Exchange
• Saurashtra Kutch Stock Exchange
• Bhubaneshwar Stock Exchange
• Inter Connected Stock Exchange
• Bangalore Stock Exchange
• Calcutta Stock Exchange
• Madhya Pradesh Stock Exchange
• Ludhiana Stock Exchange
• Delhi Stock Exchange
• Cochin Stock Exchange
• Pune Stock Exchange
• Ahmedabad Stock Exchange
• Madras Stock Exchange
• Gauhati Stock Exchange
 PROCESS OF DEMUTUALISATION

• Valuation of the assets

• Sale of shares
 CHALLENGES OF DEMUTUALISATION

• There will be no changes in the conflict of interest

• The government can not solve the exchange’s management

problem.

• Demutualization by itself may not achieve improved

governance.
CONCLUSION

• If stock exchanges are of self regulatory nature then they find

ways to profit making objectives.

• This issue has already gained importance at the international

but it needs to be considered more intensely at domestic level.
..thank you !!!