DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY,

LUCKNOW

‘Corporate Law’
Final Draft
on
‘Role of Stock Exchange in Corporate Governance’

Under supervision of Submitted by:

Ms. Priya Anuragni Bhavesh Yadav

Assistant Professor Roll No. – 40
Dept. Of Law Semester- VI
RMLNLU, Lucknow. Section- A
SYNOPSIS
RESEARCH QUESTIONS

 What were the traditional roles of stock exchanges in Corporate Governance?

 What was the impact of Demutualization of stock exchange on corporate governance?

 What is the evolving role of the stock exchange in Corporate Governance?

OBJECTIVES
 To trace the traditional role of stock exchanges in Corporate Governance.

 To examine the impact on the role of stock exchanges in Corporate Governance after it is
demutualized.

 To analyze what could be the evolution of the role of stock exchange in corporate
governance.

LITERATURE CONSULTED

The researcher has referred an Article on the ˜Role of Stock exchanges in Corporate Governance
by Hans Christianen and Alissa Koldertsova to get the clear idea of the role of stock exchanges.
Another Article on ˜demutualization of stock exchanges by L.C Gupta is followed to understand
the effect of demutualization of stock exchanges. Tejpal.N History and evolution of stock
exchanges in India, and Role of stock exchange in corporate governance by Sabernee Chatterjee.
Article by Smiriti Sharma, Role of Stock Exchange in Corporate Governance has also been
referred for the evolving role of the stock exchange.
Introduction

Corporate sectors want a wide market for trading of securities. The investors want liquidity for
their investments. The securities which they hold should easily be sold when they need cash.
Thus, there should be a place where the securities may be purchased and sold. Stock exchange
provides such a place where securities of different companies can be purchased and sold. 1 Stock
exchange is a body of persons formed with a view to regulate and control the business of buying
and selling securities. Stock exchanges provide services to the investors, corporate sectors and to
the society. The project is concerned about the role of stock exchange in corporate governance
and also focuses on the impact of demutualization of stock exchanges on Corporate Governance.

Demutualization has raised issues on the role of exchanges. After demutualization the role of
stock exchanges in Corporate Governance has changed. This project focuses on the impact of
demutualization of stock exchanges on Corporate Governance. The project first describes the
concept of stock exchange, then the role of stock exchange in Corporate Governance. This
chapter deals with the traditional role of stock exchanges that was listing, disclosure standards
and monitoring compliances. Then the impact of Demutualization of stock exchanges in
Corporate Governance. This chapter deals with the changing scenario of the stock market and
then the evolving role of exchange.

1
Sabarnjee Chatterjee, Role of Stock Exchange in Corporate Governance, Corporate Law Journal, 2014
< http://corporatelawreporter.com/2014/05/21/role-stock-exchange-corporate-governance/> assessed on 30th Mar
2018
Stock Exchange

Stock exchanges are organized and regulated markets for various securities issued by corporate
sector and other institutions. The stock exchange enables free purchase and sale of securities as
commodity exchanges allow trading in commodities.

Section 2(j) Securities Contract (Regulation) Act,1956, stock exchange means

(a) anybody of individuals, whether incorporated or not, constituted before corporatization and
demutualisation under sections 4A and 4B, or

(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whether under a
scheme of corporatisation and demutualisation or

Otherwise, for the purpose of assisting, regulating or controlling the business of buying, Selling
or dealing in securities.

Stocks first become available on an exchange after a company conducts its initial public offering.

Corporate Governance

Corporate Governance is a term that refers broadly to the rules, process or laws by which
business are operated, regulated and controlled. The term can refer to internal factors defined by
the officers, stockholders or constitution of a corporation as well as to external forces such as
consumer groups, clients and government regulations. India's SEBI Committee on Corporate
Governance defines corporate governance as the "acceptance by management of the inalienable
rights of shareholders as the true owners of the corporation and of their own role as trustees on
behalf of the shareholders. It is about commitment to values, about ethical business conduct and
about making a distinction between personal & corporate funds in the management of a
company."2

2
The Role of Stock Exchange in Corporate Governance, Smiriti Sharma, 2014
http://cssmriti.blogspot.in/2012/07/role-of-stock-exchange-in-corporate.html accessed on 31 March 2018
THE TRADITIONAL ROLE OF EXCHANGES IN CORPORATE GOVERNANCE
Historically, the fundamental direct commitment of exchanges to corporate governance has been
listing and disclosure standards and monitoring compliance. The administrative capacity of stock
exchange was in the past for the most part restricted to issuing rules and clearing up parts of
existing frameworks. The standard-setting part of stock trades was basically practiced through
the issuance of listing, ongoing disclosure, maintenance and de-listing requirements. On the
implementation side, stock trades have imparted their administrative capacity to capital market
supervisory organizations.

Notwithstanding supervising their own particular guidelines, stock trades were doled out the part
of observing the consistence with enactment and auxiliary securities direction. Since the
declaration of the SEBI, stock trades have regularly expanded their administrative part to grasp a
more extensive palette of corporate administration concerns. They have added to the
advancement of corporate administration suggestions and urged their application to recorded
organizations. The goal of the accompanying piece of the article is to condense these key
channels for trades' commitments to great corporate administration in recorded organizations.3

Role of Stock Exchange in Corporate Governance, Smiriti Sharma, 2014

3

http://cssmriti.blogspot.in/2012/07/role-of-stock-exchange-in-corporate.html accessed on 31 March 2018

Impact of Demutualization of stock Exchanges in Corporate Governance
Demutualization means restructuring the stock exchange and changing it from a nonprofit
organization mutually owned organization by its members into a profitable company owned by
various entities including the public. The shares of the exchange can then be distributed among
members, financial institutions and the public. Done properly, a change in the status of the
exchange could provide the needed capital to build the marketplace, lower costs to members and
better serve investors.
Exchanges have demutualized and in most cases become listed. Demutualization has changed the
ownership of stock exchanges, significant ownership stakes were often retained by previous
member firms. The fundamental governance structure of exchanges was not significantly
impacted. But self-listing and the subsequent dispersion of ownership of exchanges have finally
divorced their interests from those of broker dealers. Now investors are not required to give
commission to the brokers or wait for their turn. Moreover, now due to demutualization there is
increase in competition and investors have an opportunity to invest in the foreign exchanges also.
Now the corporate can do more good to the investors and stockholders by providing which is its
primary objective. A rapid improvement in information technology and the creation of innovative
financial instruments have also been among the key factors.4 But with the increase in opportunity
to invests are many risks also which stock exchanges might face due to the increase in the
number of listing, weight of which is increasing day by day.
With regard to the functioning of securities market competition between exchanges can produce
conflicting results. Concerning the ability of stock exchanges to enhance corporate governance
of listed companies, competition between stock exchanges, in the absence of minimum standards
set by the regulators (or weak enforcement of such standards), raises concerns. The incentives
faced by exchanges to establish and maintain high regulatory standards might weaken as they
weigh the risk of deterring listings altogether or losing them to competing market places. This
risk may be exacerbated by the pressures a demutualised exchange is subject to from its
shareholders to give top priority to maximizing profitability.5

4
Hans Christaniansen and Alissa Koldertsova, Role of stock exchange in Corporate Governance, OECD (2008)
http://www.oecd.org/finance/financial-markets/43169104.pdf accessed on 31 March 2018
5
supra 1
THE EVOLVING ROLE OF EXCHANGES IN RESPECT OF CORPORATE
GOVERNANCE

1. Exchanges act as a source of corporate governance related regulation

Generally, the fundamental direct commitment of trades to corporate administration has been
posting and exposure guidelines and observing consistence. The administrative capacity of stock
trades was in the past for the most part restricted to issuing rules and clearing up parts of existing
structures. The standard-setting part of stock trades was basically practiced through the issuance
of posting, continuous revelation, support and de-posting necessities. On the implementation
side, stock trades have imparted their administrative capacity to capital market supervisory
organizations.6 Notwithstanding supervising their own particular guidelines, stock trades were
doled out the part of observing the consistence with enactment and auxiliary securities direction.
Since the declaration of the SEBI, stock trades have regularly expanded their administrative part
to grasp a more extensive palette of corporate administration concerns. They have added to the
advancement of corporate administration suggestions and urged their application to recorded
organizations. The goal of the accompanying piece of the article is to condense these key
channels for trades' commitments to great corporate administration in recorded organizations.7

2. Exchanges played a central role in the effective implementation of national

corporate governance codes
“Corporate Governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The corporate governance framework is there
to encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society.” The Exchange has brought about unparalleled
transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as
a model for the securities industry in terms of systems, practices and procedures.

6
Tejpal.N History and evolution of stock exchanges in India, shodhganga(2011)
http://shodhganga.inflibnet.ac.in/bitstream/10603/2027/7/07_chapter%202.pdf accessed on 31 March 2018
7
Akhtar Shamshad, Demutualization of stock exchanges, Problems, Solutions and case studies,
Director,Governance, Finance and Trade, East and Central Asia Department, Asian Development Bank, At 83,(2002)
(http://www.set.org.com/) accessed on 31 March 2018
3. Compliance requirements
Listed companies have to comply with rules and regulations of concerned stock exchange and
work under the vigilance (i.e. supervision) of stock exchange authorities. Clause 49 of the listing
agreement with stock exchanges provides the code of corporate governance prescribed by SEBI
for listed Indian companies. With the introduction of clause 49, compliance with its requirements
is mandatory for such companies.

4. Awareness raising efforts have also played a role

Some exchanges have been actively involved in increasing the awareness around the value of
good corporate governance. Such programmes not only serve the general public but also require
corporates to maintain good governance in light of investor awareness.8

8
Supra 4
Conclusion

Development of norms and guidelines is an important first step in a serious effort to improve
corporate governance. The existing (Clause 49) and Companies Act, 2013 legislations do cover
the fundamentals of effective corporate governance and India compares favorably with most
other developing and Asian economies as far as the adequacy of corporate governance
regulations are concerned. Corporatization of Stock Exchange has no adverse effect on Corporate
Governance as separation of ownership, management will cause efficiency. But profit motive of
stock exchange after being demutualised may somehow affect the performance of the stock
exchange in corporate governance as now it itself has become a company. There are different
opinions on the performance of stock exchanges after it is demutualized. Some says that intense
competition may increase the skill of the performance of stock exchange. Some other’s view is
that because of profit motive it may however have adverse effect on the stock exchange.
However, some laws are implemented like SCRA, SEBI ACT 1992, which shall protect the
interest of the investors as well as other corporate sectors which are listed in the stock exchanges
for selling of its shares.9

The incentives faced by exchanges to establish and maintain high regulatory standards might
weaken as they weigh the risk of deterring listings altogether or losing them to competing market
places. This risk may be exacerbated by the pressures a demutualised exchange is subject to from
its shareholders to give top priority to maximizing profitability. If the exchanges realize that that
there has been a breach in the rule, then they would take strict disciplinary action against the
concerned individual/firm. 10

Improved corporate governance, however, does not solely rest on control through increased
regulations. The bigger challenge in India, however, lies in the proper implementation of those
rules at the ground level. In India at present there are 23 recognized stock exchanges along with
NSE & BSE playing a prominent role in carrying out objectives of SEBI rules, regulations &
guidelines in true letter and spirit. It provided new market for securities, increased goodwill of
the company, helped in the growth of the Companies. Recently we find stock Exchange have

9
Supra 4
10
What is the role of the Stock Exchange under GRC? by VComply.
https://blog.v-comply.com/role-stock-exchange-grc/ accessed on 31 March 2018
demutualized and in most cases become listed and now stock exchanges have become engaged in
intensified competition and are refashioning them to meet the challenge. Thus, this is how the
role of stock exchange is changing towards corporate governance.

Bibliography
1. OECD Document on Role of Stock Exchanges’ in Corporate Governance by Hans
Christiansen & Alisa Kolderstova. This article is referred because it discussed the impact
of the changing ownership of, and competition among, stock exchanges on the corporate
governance of listed companies. It also discussed the traditional role and the impact of
demutualization of the stock exchange on the corporate governance. As the article has
been referred in many other articles and research papers, increases its authenticity.
2. Sabarnjee Chatterjee, Role of Stock Exchange in Corporate Governance, Corporate Law
Journal, 2014. This article is very important because it talked of the role of the exchanges
in the Indian context. The article goes one step ahead and discusses about the impact of
demutualization on the stock exchanges and how exchanges become listed itself and how
it affected the functioning of the stock exchanges. It also talks of the change in the non-
profit exchanges to profitmaking companies.
3. The Role of Stock Exchange in Corporate Governance, Smiriti Sharma, 2014. The article
is very much concerned about the ground reality of the rules and regulations related to the
corporate governance. It talks of corporate governance area where there are few issues
quite as important as the role of stock exchanges in the governance process, how stock
exchanges can play a substantial or limited role in the process. But in the India, they are
major players, requiring boards with a majority of independent directors and various
committees, likewise staffed with independent directors. It also described the evolving
role of the role of stock exchange.
4. Tejpal.N History and evolution of stock exchanges in India, shodhganga, 2011. This
article describes the historical role of the stock exchanges and signifies on the history of
the history of Indian stock exchange. It also tells that Indian shre market is the oldest in
Asia. The article also talked of the history and functioning of BSE and NSE.
5. Akhtar Shamshad, Demutualization of stock exchanges, Problems, Solutions and case
studies, Director,Governance, Finance and Trade, East and Central Asia Department,
Asian Development Bank, At 83,(2002). This is a case study on the demutualization of
stock exchange. I have referred to this article so as to understand the need of
demutualization and what could be that effects of it on the stock exchange.