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Corporatisation and Demutualisation under the Securities Contract (Regulation) Act, 1956

Introduction to Corporatisation and Demutualisation

Corporatisation and demutualisation are two significant facets of transformation in the Indian stock exchange mechanism, introduced under the Securities Contract (Regulation) Act 1956, to augment the transparency, efficacy, and governance of the securities market.

Understanding Corporatisation

Corporatisation implies the conversion of a non-corporate entity into a corporate entity. It establishes the exchange as a legal person, separate from its members, conferring perpetual succession, ability to contract, and legal capacity.

Key Reasons for Corporatisation:

  1. Better Management: It enhances the professional management of the exchanges by delinking the ownership rights from the management functions.

  2. Accountability and Transparency: Corporatisation fosters a robust mechanism for accountability and transparency in the functioning of the stock exchange.

  3. Capital Infusion: It paves the way for new capital infusion, enabling exchanges to expand their services, technology, and infrastructure.

Concept of Demutualisation

Demutualisation is the process of segregating the ownership, management, and trading rights of the members of a stock exchange. Before demutualisation, stock exchanges operated as mutual organisations where the members owned, managed and traded on the exchange. Demutualisation transforms this structure into a shareholder-based entity, separating the roles of ownership and trading.

Key Reasons for Demutualisation:

  1. Improved Governance: It curbs conflict of interest and ensures a balanced decision-making process.

  2. Enhanced Competition: It fosters competition by permitting entry of new players.

  3. Global Benchmarking: It aligns Indian stock exchanges with global practices.

Procedure for Corporatisation and Demutualisation under SC(R) Act 1956

The Securities Contracts (Regulation) (Amendment) Act 2004 introduced provisions for corporatisation and demutualisation. The process is outlined in Section 4B of the Act:

  1. Submission of Scheme: Every stock exchange is required to submit a scheme for corporatisation and demutualisation for approval from the Securities and Exchange Board of India (SEBI).

  2. SEBI Approval: SEBI may either grant its approval, suggest modifications or reject the scheme. If modifications are suggested, the stock exchange has to re-submit the scheme within one month.

  3. Implementation of Scheme: Once the scheme is approved, it must be implemented by the stock exchange within twelve months from the date of approval.

  4. Vesting of Assets and Liabilities: Upon the approval of the scheme, all assets and liabilities of the stock exchange will be transferred to and vested in a recognised corporation or company.

  5. Restructuring of Contracts: All contracts and agreements pertaining to the stock exchange will be restructured and enforced as if they had been entered with or by the corporation or company.

  6. Preservation of Rights and Obligations: The rights, obligations and interests of the stock exchange in any legal proceedings will not be affected.

Case Laws on Corporatisation and Demutualisation

Bombay Stock Exchange vs. SEBI (2010): The case revolved around the scheme of demutualisation approved by SEBI. The Bombay High Court upheld the decision of SEBI to approve the scheme, stating that the intention behind demutualisation is to prevent a conflict of interest.

Conclusion: Corporatisation and Demutualisation under the Securities Contract (Regulation) Act

Corporatisation and demutualisation under the Securities Contract (Regulation) Act, 1956 have brought about a paradigm shift in the functioning of the Indian securities market. They have moved Indian exchanges towards a more transparent and accountable framework, aligning them with international best practices and paving the way for an inclusive, efficient, and globally competitive securities market. The procedures laid down in the Act ensure that the transition is smooth, legally sound, and beneficial for the market participants and the economy as a whole.

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