Members may be denied access to bourse reserves

Member brokers may be barred from using reserves and surplus of stock exchanges for personal gain.

The finance ministry has said bourses cannot use their reserves and assets to pay dividends to member brokers, issue shares to them or provide for their trading rights.

It has also proposed that the Securities and Exchange Board of India limit the number of representatives of stock brokers on its governing board to one-fourth its total strength.

Besides, the ministry has said the market regulator can restrict the voting rights of brokers when they become shareholders in the exchanges.

It has asked stock exchanges to ensure that shareholders with trading rights do not hold more than a 49 per cent stake post-demutualisation.

It has asked the exchanges to dilute up to 51 per cent of their stakes in favour of the public and other institutions within 12 months.

Finance ministry sources said several stock exchanges, which had submitted their corporatisation and demutualisation schemes to the market regulator, had planned to convert their free reserves and liquid cash into company deposits, which could be later withdrawn by member-brokers in lieu of trading rights.

The reserves and surplus of the regional bourses and the Bombay Stock Exchange were estimated at around Rs 550 crore (Rs 5.5 billion) on March 31, 2003.

The Delhi Stock Exchange hopes to distribute about Rs 60 crore (Rs 600 million) in cash to members who want to relinquish their trading rights.

Several members are waiting for an exit because the Delhi Stock Exchange and most of the regional bourses witness no trading on most days.

According to sources at the Delhi Stock Exchange, the Kania committee, appointed by Sebi to suggest a framework for corporatisation and demutualisation of bourses, had recommended that reserves and surplus could be used to provide for trading rights and issue of shares representing ownership.

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Most of the regional bourses, like those in Hyderabad, Baroda, Ahmedabad and Jaipur, have planned to convert their reserves into company deposits.

All the bourses submitted their demutualisation and corporatisation plans to the market regulator before the July 31 deadline.

Bourses that were already corporatised had approached the department of company affairs to seek an exemption from converting their free reserves into company deposits, sources at the Delhi Stock Exchange said.

The finance ministry introduced the Securities Law (Amendment) Bill, 2003, in the Lok Sabha in August this year, which was subsequently referred to the standing committee on finance.

The Bill states that Sebi should not approve schemes if issue of shares or dividend payments, or provisions of trading rights in lieu of membership cards, are proposed out of the reserves or assets of stock exchanges.

The Delhi Stock Exchange plans to distribute all its reserves, except the Rs 8 crore (Rs 80 million) Customer Protection Fund, to its members.

It also plans to issue shares to its members in lieu of their ownership rights by treating the Investor Services Fund, which has a corpus of about Rs 6 crore (Rs 60 million), as part of its paid-up capital.