In recent years, regulators around the world, including the International Organisation of Securities Commissi-ons (Iosco) have been grappling with ‘conflict of interest issues’ arising out of demutualised, listed, for-profit stock exchanges that have performed the function of Self-Regulatory Organisations.
In India, the government has ensured the demutualised structure of our bourses avoid some conflict situations that could arise if market intermediaries acquire significant shareholding by cornering shares. The pre-listing rush to mop up shares of the demutualised Delhi and Bombay stock exchanges was quickly quashed by the Securities and Exchange Board of India (Sebi) to prevent what is known as “customer-control” of bourses through significant holding by intermediaries such as brokers and investment bankers.
The global debate on ‘conflict of interest’ promises to acquire a domestic context with the imminent listing of the Multi Commodity Exchange of India Limited (MCX). MCX has sought listing on the National Stock Exchange (NSE), which holds 2% of its equity. On the face of it, there is limited potential for conflict, since the NSE is professionally managed and unlisted. However, it raises some curious regulatory dilemmas.
First, the NSE as a shareholder will approve the listing of MCX in line with disclosures in the prospectus. Does its shareholding in MCX make it better qualified to vet the application or will it lead to a favourable bias? Similarly, stock ex-change listing guidelines require all price-sensitive information to be disclosed to the stock exchanges to ensure a swift and equitable dissemination of such information to the public. Sebi even requires a Chinese Wall to operate between employees who handle such price-sensitive information and the rest of the exchange staff. But what happens when the exchange itself is a shareholder of the listed company (in this case another bourse)? Is it enough that senior management voluntarily ensure they have no access to the information before it is released? Or does Sebi need to spell out the rules?
A reader has written to me that NSE must be asked to divest its holding in MCX, to meet the highest level of corporate governance. In my view, a 2% shareholding may not compromise NSE’s independence. But, what if a similar stake is held by private intermediaries? Clearly, bigger issues of conflict are bound to crop up in future. What happens when the BSE or the NCDEX (NSE is a promoter of NCDEX) seeks listing on the NSE? Or, both BSE and NSE decide to self-list? Commodities bourses do not compete with stock exchanges, but will there be issues of competition and conflict of interest when the BSE tries to list on the NSE and vice versa?
• The NSE-MCX cross-holdings raise conflict of interest issues
• Most countries opt for stricter oversight of for-profit listed bourses
• The solution is likely to be complex and the issue requires discussion
Another worry about listed, for-profit bourses is whether commercial pressure and their consequent focus on income generation will undermine their regulatory and governance structure and encourage them to cut costs on investor protection and supervision. The NSE has been the only for-profit exchange in India for a decade and its ownership structure made this issue inconsequential. But that may change with the listing of MCX and others where corporate or individual ownership is significant.
International regulators have already dealt with issues of cross-listing and self-listing with clear guidelines. However, while the first Indian bourse is awaiting regulatory clearance, we have yet to debate the issue. One suggestion is that the Central Listing Authority (CLA) must be revived to handling listing and conflict issues. Is this necessary or even viable when there are only two major bourses operating in the equity market and the regional bourses are all but defunct?
Various countries have adopted different ways of dealing with conflict. Some, like New Zealand, have a co-regulatory regime with explicit powers of oversight for the securities regulator. An Iosco-commissioned study reveals that most countries have opted for stricter oversight of pro-profit, listed bourses by the regulator to deal with conflict situations. They have also mandated conflict resolution committees, independent directors, separate regulatory divisions, imposed ownership restrictions and separation of functions within exchanges. When asked, Sebi chairman M Damodaran agreed that issues of self-listing, cross-listing and shareholding of bourses need to be discussed by the Primary Market Advisory Committee (PMAC). But will the rules be in place before MCX is cleared for listing?