Critique on Bimal Jalan Report on Exchanges

Submitted By: Bhagirath K Lader [WMP4022]

Identify any five issues raised by critics on Bimal Jalan report. Also
find out the best practices adopted globally concerning the issues identified.
The critics have identified the following issues concerning the Bimal Jalan
report on Market Infrastructure Institutions (MIIs):

1. Prohibition on the listing of stock-exchanges: The committee views stock-

exchanges as MIIs that need special treatment because of their systemic
importance, being public utilities, natural monopolies and ability to enjoy
economies of scale.

2. Restrictions on the ownership of stock-exchanges: No one entity can have

ownership of more than 5% from day-one with exception of institutional
investors like banks. The critics view that diffused ownership from the
beginning might lead to management hijack or investor disinterest or
both. Lack of a passionate entrepreneur in the initial years might seal a
stock exchange’s fate.

3. The maximum profit that an exchange can earn would be capped at a

certain percentage of the annual return on net worth of the previous year.
An excess over this cap would be transferred to Investor Protection Fund
or a similar fund. This would result in existing equity of exchange becoming
like a non-cumulative preference shares with a fixed rate of dividend and
the government would own the economic equity of the exchange in the
form of IPF.

4. Key executives should be remunerated like bureaucrats- fixed salary with

fixed annual increments, no variable pay and no form of stock options.

5. SEBI should have the discretion to limit the number of MIIs operating in the
market, in the interest of the market and in public interest. The regulated
public utility model ensures that

International Best Practices:

1. Regulators across the globe have adopted various methods to address

the conflicts of interests: (a) Government (statutory) model (b) Limited
exchange SRO model (c) Strong exchange SRO model (d) Independent
SRO model. India has adopted strong exchange SRO model.
 Critique on Bimal Jalan Report on Exchanges
Submitted By: Bhagirath K Lader [WMP4022]

2. The shareholding of some major exchanges worldwide is quite diffused like

that of Tokyo Exchange, Singapore Exchange Ltd, NYSE, LSE, NASDAQ etc.

3. Internationally, as a best practice, stock exchanges have chosen to

segregate the regulatory functions from their commercial functions and
have put in place measures to ensure autonomy to the regulatory
departments. The degree of separation ranges from outsourcing the
regulatory function to an independent SRO, hiving off those departments
to a separate subsidiary and putting in place measures such as ‘Chinese
walls’ between the commercial and regulatory departments.

4. The variable salary of marketing officers and other executives of stock

exchanges worldwide has been a matter of intense debate over past one
decade. According to Notification of the Stock Exchange of Thailand in
2003, some elements of the salaries of these executives have been
recommended to be capped.