Who should be allowed to buy stakes in stock exchanges?

Who should be allowed to buy a stake in stock exchanges? That is the bone of contention between the finance ministry versus others, reports CNBC-TV18.

Ashok Jha, the day-old finance secretary, says the issue of ownership of stock exchanges is still being worked out. But the corridors of the finance ministry are not as silent.

The message coming across is that stock exchange companies cannot be like other profit-making ones. This is because they are self-regulating entities with punitive powers, and a quarter-to-quarter focus on profitability would lead to a conflict of interest.

This would be ironical, because it is the conflict of interest that compelled the broker-owned Bombay Stock Exchange to become a company in August last year, and why it is required to shrink its stake to 49 per cent by May 2007.

The exchange is awaiting SEBI guidelines but has already elicited interest from more than a dozen entities including the New York Stock Exchange and the Nasdaq.

The equity cap on foreign institutional and foreign strategic owners aside, the finance ministry is grappling with a more fundamental issue — who should be allowed to own an equity stake in stock exchanges and what the individual limits should be.

The finance ministry would want only those entities that have an interest in the healthy functioning of the stock exchanges, and not just a financial interest to be members.

To avoid a conflict, the BSE could hive off its regulatory functions like the New York Stock Exchange did, when it went public in May this year.

This would allow it to be listed, become publicly traded as company for profit, and subject to public scrutiny. The BSE says such a mechanism was rejected when it proposed it in 2001.

The finance ministry believes that a NYSE-like regulatory structure cannot prevent conflict because it is answerable to the same board that is ultimately driven by profits.

One view favours the NSE model of ownership by institutions like banks and pension funds, for which the government will have to make guidelines to ensure that only fit and proper entities get ownership rights.

The other view is that profit motives need not be in conflict with good governance. Exchanges need size to thrive. They can attract more business only with finer rates, which in turn will draw more companies and traders, and further drive volumes. The finance ministry will have to reconcile these views.