Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis-II - Question Paper

Caselet 2



learn the caselet carefully and ans the subsequent questions:


9.
explain how “for profit” and “not for profit” stock exchanges are various in their ownership structure.

(9 marks)
< ans >

10.
explain the issues associated with Self Listing.

(9 marks)
< ans >

Most of the stock exchanges across the world are “not for profit” organizations and are owned by members organized as mutual associations. Now after the “for profit” organization the ques. of listed stock exchanges is now a new focus in India. MCX requested for an IPO. A latest SEBI report says that regional stock exchanges should do IPOs and list on themselves. BSE could get listed, possibly on BSE. But exchanges are not ordinary firms, where we applaud when the firm graduates from startup to IPO. Listed exchanges pose daunting policy ques.. In the bad old days, an exchange was a club of brokers. It was run by brokers, in the best interests of brokers. This led to malpractice. Today, we know that what works best is a three-way separation ranging from owners, managers and trading members. The pioneers in this new "demutualised" framework were the Stockholm Exchange (1993) and India's NSE (1994). Over the years, most major global exchanges have moved towards this structure to a few extent or the other.

The managers have their reputations to protect; they only earn a salary, and have no financial interest in profits of either exchange or members. This helps them be impartial. The owners are institutions such as UTI, who are also the biggest consumers of the services of the exchange. A higher dividend from the exchange is small change to an owner like ICICI Bank, when compared with the benefits from a better run exchange. Hence, the interests of the owners are aligned with those of users of the exchange and the country at large. The governance issues of a demutualised exchange are qualitatively altered by going public. This brings in a set of owners (the shareholders) who demand dividends. Post-issue, the management team owns shares, has stock options, and gets bonuses linked to profits. The management team then gets a direct financial incentive to increase turnover and thus the profit of the exchange. The quest for turnover is incompatible with the regulatory and supervisory functions of an exchange.

Internationally, IPOs by exchanges have been preceded by much cogitation and public debate about these conflicts of interest. As an example, the US SEC had an what are consultation-and-committee process leading up to a policy position on listed exchanges. Policy responses include placing regulatory functions of a listed exchange in a separate non-profit organisation, with a wholly separate management team and board, and a separate funding stream. A limit of five per cent ownership by a single shareholder has been placed in Singapore, Hong Kong, the Philippines and Tokyo. A variety of strictures have been placed to address the dangers of self-listing.

Earning:   Approval pending.