INTRODUCTION TO STOCK MARKET

Every individual tries to plan & secure his/her future using various avenues of investment. An individual invests money because of multiple reasons. A few of these can be listed as :More and more returns on money invested, thus a new source of income. Planning/ securing ones future

Tax benefits

Saving for childrens education/ social obligation

Safety

Hedging against devaluation

Possessing liquidity

The growth of an economy and hence development of a nation depends on the amount of resources that are readily available to various factors of production in the economy. Implicit in this statement is the fact that savings/investment of the inhabitants and other like Non- residents, foreigners, both individual and
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institutions play a key role. It is financial markets which help in channelising the savings/ investments into the economy and makes it available to factor of production. Financial Markets consist of Money Market and Capital Market. Money Market provides short-term capital to borrowers for meeting their short term working requirement.

Capital Market is a market for long term funds.

ABOUT CAPITAL MARKET

The major borrowers in this market are corporate, agriculture sector and the government. The corporate sector needs funds for capital investments purposes like expansion, diversification, integration (both forward & backward), mergers and acquisitions. The government needs funds for its various programs for infrastructure development like roads, highways, power, sanitation, water supply etc. The supply of funds for the capital market comes for individual households, corporate banks, insurance companies, specialized financial agencies and the government. Capital market is divided into market and equity market. Though in common parlance, when we talk of market, it is to imply equity market or stock market. India has one of the oldest stock market in Asia. India has the second largest share holding population, with about 8 crore share holders next only to U.S.A. Capital market is further sub divided in to: PRIMARY MARKET It is market where security is issued for the first time. Secondary market The secondary market is represented by Stock Exchange which provide an organized market place for investors to trade in securities.

INTRODUCTION TO STOCK EXCHANGE

Stock exchange refers to an organized market where govt. Securities and shares, bonds and debentures of the benefited trading units are regularly transacted. Its business is carried on with in a particular building in which a person can easily convert his shares into cash or new securities. Thus it is a market for the exchange of transfer able securities by providing a continuous market. The term stock exchange is referred by some people to stat Market. Therefore some writer says, "It is a place to get rich quick while others regard as place of gambling. The securities of public companies can be transacted in the exchange only if they have been approved by the committee of the stock exchange. A company desiring its shares to be approved must first satisfy very rigid rules concerning the prospectus. It must also agree to abide by the regulations of the stock exchange about any aspects of its conduct. Stock Exchange Defined:

The supreme court of India has enunciated the roll of stock exchanges in these worlds: A stock exchange fulfills a vital function in the economic development of a nation. Its main function is to liquefy capital by enabling a person who has invested money in, say a factory to convert it in to cash by

disposing off his shares in the enterprise to someone else.

Features of Stock Exchange

1. Specialized market. Stock exchange is a specialized market for the

purchase and sale of industrial and financial securities. 2. Rigid rules. There are large number of buyers and sellers who conduct their activities according to rigid rules. 3. Basis of formation. Its activities are controlled by the company ordinance in our country. It can be formed as company limited by guarantee or company limited by shares. 4. It is an association of persons known as members. 5. Membership is must for transacting business.

ORIGIN OF STOCK EXCHANGE The trading in securities in India was started in the early 1973. In the 19th century there was a major increase in the volume of trade. The reasons underlying were the enactment of Indian Companies Act 1850, which introduced the concept of limited liability and the outbreak of American Civil War which resulted in the increased demand of Indian cotton in Europe. The earning from the export of cotton was channelized into capital market which was given tremendous attention by investors.
The stock market witnesser a disastrous slump with the end of American civil war in 1853. The brokers realized the need to organize themselves into wellregulated body with definite rules and regulations for the continuance of securities dealings. Thus the native shares and stock brokers associationcame into being the 1875 which latter came to be called as the Bombay Stock Exchange- BSE. This being the first stock exchange in India was followed by setting up of Ahmdabad Stock Exchange in 1897 and another at Calcutta in 1908. At present there are 24 Stock Exchanges in India recognized by the Govy. Under the SC act, 1956.

LIST OF VARIOUS STOCK EXCHANGES IN INDIA Name of stock exchange Years of Type of organization Sr_No establishment Bombay stock exchange 1875 Voluntary Nonprofit organization 1 Ahmedabad stock 1897 Voluntary Nonprofit exchange organization 2 Calcutta stock exchange 1908 Public limited company 3 M.P. stock exchange, 1930 Voluntary Nonprofit Indore organization 4 Madras stock exchange 1937 Co. limited by guarantee 5 Hyderabad stock 1943 Co. limited by guarantee 6 exchange Delhi stock exchange 1947 Public limited company 7 Bangalore stock 1957 Pvt. Converted into public ltd. exchange co. 8 Cochin stock exchange 1978 Public limited company 9 U.P. stock exchange, 1982 Public limited company 10 Kanpur Pune stock exchange 1982 Co. limited by guarantee 11 Ludhiana stock 1983 Public limited company 12 exchange Jaipur stock exchange 1983 Public limited company 13
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Guahati stock exchange 14 15 Magadh stock exchange 16 17 18 19 20 21 22 23 24

1984

Public limited company Public limited company Co. limited by guarantee Co. limited by guarantee Co. limited by guarantee N.D. N.D. Pure demutulised Pure demutulised N.D. N.D.

Kannaar stock exchange 1985 1986

Bhuvneshwar stock 1989 exchange Saurashtra stock 1989 exchange,kutch Vadora stock exchange 1990 Meerut stock exchange O.T.C.I. 1991 1993

National stock exchange 1995 Coimbatore stock exchange Sikkim stock exchange 1996 1997

FUNCTIONS OF STOCK EXCHANGE The functions performed by a stock exchange are as follows: 1. Ready Market: Stock exchange ensures increased liquidity and ready market for the securities. This enables it to attract people who have surplus money even for a short period of time. 2. Mobilisation of Savings: Stock exchange helps in mobilization of surplus funds of individuals, business firms and cooperatives for investment in popular securities. 3. Evaluation of Securities: Stock exchange helps in determining the price of various securities. The prices at which transactions take place are recorded and they are made public in the form of market quotations which help the investors to know current market prices of various securities. 4. Capital Formation: Stock exchange not only mobilises the existing savings but also induces the public to save money. This facilitates capital formation in the country. 5. Proper Channalisation of Capital: Stock exchange directs the flow of savings into the most productive channels. When an existing company issues securities to raise more capital, it will be successful only if it is earning sufficient profits. Public response to such issues by weaker companies will be discouraging. 6. Fair Dealings: Stock exchanges ensure fair dealings and safety of funds because

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of strict regulations on the working of stock exchange. The members of the stock exchange have to operate under certain rules which checks over trading, illegitimate speculation and manipulation. Thus, stock exchange safeguards the interest of the investors. 7. Control of Corporate Sector: Every company has to conform to the rules framed by the stock exchange. Through these rules, stock exchange exercises influence on the management and working of companies in public interest

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WHO BENEFITS FROM STOCK EXCHANGE?

Benefits to Companies :1) A company whose shares are dealt in on a stock exchange enjoys great reputation in the capital market. 2) The marketability of shares is ensured and in consequence, the company enjoys a wide market for its shares. 3) Because of their shares listed on the stock exchange, the market value of shares of a company is likely to be higher in relation to earnings, dividends and property values. This helps the company in merger plans. 4) New companies can raise funds easily from the capital market because of indirect support provided by the stock exchange. 5) The activities of speculators save the listed securities from frequent fluctuations in the prices of securities. Benefits to Investors :1) Stock exchange safeguards the interests of the investors. They are assured of a ready and continuous market for the securities held by them. The brokers cant cheat the investors. 2) It provides liquidity of investments by providing a continuous market in shares and debentures. 3) Securities can be used as collateral security for loans.

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4) Price quotations of stock exchange help the investor to know the real value of his investments. 5) Normally the securities of sound companies are traded in the stock exchange. The investors are saved from the risk of investment in unsound companies. Benefits to the Community or Society :1) The stock exchange helps in the economic development by encouraging investors to invest their savings in securities of corporate sector. It encourages capital formation in the country. 2) By encouraging marketability of securities, the stock exchange upholds the position of efficiently managed companies. 3) It facilitates a well managed enterprise to raise further funds easily. 4) It helps the Government to borrow from the public and thus enables it to undertake development projects of national importance. 5) Stock exchange helps in optimum utilisation of scarce financial resources. 6) A stock exchange is a barometer of the economic conditions of a country. It reflects the trends in the economy through fluctuation of prices of various securities.

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INTRODUCTION OF LUDHIANA STOCK EXCHANGE

HISTORICAL BACKGROUND The Ludhiana Stock Exchange Limited was established in 1983, by Sh. S.P. Oswal and Sh. B.M. Munjal, leading industrial luminaries, to fulfill a vital need of having a Stock Exchange in this region. Since its inception, the Stock Exchange has grown phenomenally. The Stock Exchange has played an important role in channelising savings into capital for the various industrial and commercial units of the State of Punjab and other parts of the country. The exchange had a total of 284 brokers, out of which 79 were corporate brokers. Among 284 brokers, it was further classified as 212 proprietor brokers, 2 partnership brokers and 70 corporate brokers. Then, there were only 23sub-brokers registered. Ludhiana Stock Exchange became the second bourse in India to introduce modified carry forward system after BSE on April 6, 1998. On the same date, LSE also introduced a settlement guarantee fund (SGF). The SGF guarantees settlement of transactions and the carry forward facility provides liquidity to the market. LSE became the first in India to start LSE Securities Ltd., a 100% owned subsidiary of the exchange. The LSE Securities got the ticket as sub-broker of the NSE. In 1998, the exchange also got permission to start derivative trading. For the settlement of dematerialized securities, the Ludhiana Stock Exchange has

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also been linked up with National Securities Depository Ltd. (NSDL). OBJECTIVE 1. To channelize the savings into investment in Capital Market there by providing funds for growth and expansion. 2. To provide liquidity to the investors of the region by providing them with a Secondary Market Network. 3. Disseminating information among investors thereby saving their interests. 4. To main high standard of commercial honour and integrity. 5. To promote and inculcate honorable practices and just and equitable principle of trade and business. 6. To discourage and to suppress malpractice detrimental to the interest of investors at large. FEATURES OF LUDHIANA STOCK EXCHANGE 1. First regional stock exchange to give proposal of making subsidiary as broker of NSE and BSE for survival of stock exchange and second to start operations like broker of NSE and BSE. 2. First regional stock exchange to start trading in commodities market. 3. First regional stock exchange to start courses on capital market, only BSE is performing this sort of activities and NSE is also performing courses on capital market only for members but ludhiana stock exchange will start for
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outsiders also. TERRITORIAL JURISDICTION: LSE has played an important role in generating capital for the companies in the states of Punjab, Jammu and Kashmir and Himachal Pradesh with only six companies listed in the beginning, now it has risen to nearly 357 companies (231 regional and 126 non-regional). ADMINISTRATION AT LSE OF IST PROFILE The council of management of the Exchange consists of nine members, out of which two are Government Nominees, four are Public Representatives and one Executive Director who is also Ex- officio member of Board. At every Annual General Meeting, one third of the elected the Exchange is managed by the Executive Director who is also Ex- officio member of the Board. At every Annual General Meeting, one third of the elected Directors retire by rotation. Administration of the Exchange is managed by the Executive Director who is assisted by a Company Secretary and a team of Executives, Assistants, Technicians and Sub- Staff.

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MILESTONES AT LSE October 17 , 1981 : certificate of incorporation.

th

April 29th, 1983 : recognition by Govt. of India under section 4 of securities contract (regulation) act 1956. August 16th , 1983 : certificate of commencement of business.

January 1990 : The ludhiana stock exchange set up investor protection fund.

November 18th , 1998 : Implementation of online screen based trading. LSE become 5th stock exchange in India to introduce online screen based trading. April 6th ,1998 : implementation of MCFC (modified carry forward system). LSE become 2nd stock exchange to get permission from SEBI to introduce MCFC. April 6th , 19978 : Establishment of SGF (settlement guarantee fund) November 16th , 1998 : commencement of trading and settlement on demat scrips. LSE became 4th stock exchange in India to get membership in NSDL.

October 1999 : commencement of trading at remote sites through VSAT counters. January 10, 2000 : introduction of rolling settlement cycle in 10 scrips.

July 2nd , 2000 : introduction of compulsory rolling settlement in 414 scrips.

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July 28th , 2000 : BOLT trading system was installed at LSE. April 1st ,2002 : rolling settlement cycle prevailing at LSE on T+3 basis. April 1st , 2003 : rolling settlement ctcle prevailing at LSE on T+2 basis.

TRADING MECHANISM
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To do trading of LSESL, an investor must identify a Registered Broker who is willing to deal on his behalf. The transaction is made at level where the bidding is at the highest and offering is at the lowest and is acceptable to both buying and selling brokers. The operation of sale and purchase of scrips is as follows. Walk to any Broker/ Sub-Broker. See the prices of the Shares Scan the Counter at LSESL It will display the Five best Bidding Offer for all the scrips Listed/ Traded Decide to buy and sell, ask your broker to deal on your behalf. Make the Payment/ Margin Money/ Shares Certificate be for the pay-in-day Collect the Confirmation Slip Visit the same counter on pay Out day to collect Delivery/ Payment
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CORPORATE GOVERNANCE PROFILE:

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Although the LUDHIANA STOCK EXCHANGE is not a Listed Company, yet it has followed a model of corporate governance, which is evident from the composition of the Statutory Committee. The Investor Services Committee comprises of Four Public Representatives and Broker Member. It is headed by Sh. D.K. Malhotra, a legal expert. The Audit Committee is headed by Sh. R.K.Bansal, Chartered Accountant. Statutory Committees are represented by Broker and Non-Brokers in 20:80 ratio.

TURNOVER
LUDHIANA STOCK EXCHANGE is one of the leading Stock Exchange among the Regional Stock Exchanges of the country, and has been providing trading platform for the investors situated in Punjab, J&K, Himachal Pradesh & Chandigarh. At present, it has 335 Listed Companies and among them, 193 are Listed as Regional Companies. It had been generating significant amount of the business in the Secondary Market. The Structural changes that took place in recent past in the Capital Market of the country had a negative impact on the trading volume of the Regional Stock Exchanges. There has been a significant reduction of turnover during the financial year 2001-02, but the reduction in turnover of the Exchanges has been more than adequately compensated rise in the turnover of LSE Securities Limited, a subsidiary of Ludhiana Stock Exchange.

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LISTING
Listing is one of the major functions of the Stock Exchange wherein the Securities of the Companies are enlisted for trading purpose. Any Company Incorporated under COMPANIES ACT, 1956, coming out with an IPO, has to mandatorily list its Shares on a Stock Exchange. The Listing Department of Ludhiana Stock Exchange deals with listing of Securities, further listing of issues like Bonus and Right Issues, Post- Listing compliance of the companies, which are already listed with Ludhiana Stock Exchange. The companies desirous of listing its Securities on the Exchange have to sign a Listing Agreement with the Stock Exchange. After getting the Listing approval, the company has to ensure and report compliance of the post listing requirements. The listing section of LSE monitors the post- listing compliance of all the listed companies, which are found deficient in compliance.

SETTLEMENT GUARANTEE FUNDS (SGF)

The Stock Exchange established a settlement guarantee fund (SGF) on April 6, 1998. It provides guarantee of all the genuine trades made through the Screen Based Trading System of the Stock Exchange.

END OF AN ERA

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The management of the Stock Exchange apprehended that the smaller regional Stock Exchanges would not be able to meet the challenges imposed by expansion of bigger Stock Exchange like NSE and BSE and might end up loosing their business to VSAT counters of the bigger Stock Exchanges. In order to prepare for such a eventually, Stock Exchange set up a broking arm in the name of LSE Securities Limited (a subsidiary company of the Stock Exchange) in January 2000 and built Infrastructure and IT based sophisticated systems to enable its members and investors to trade on NSE and BSE through the subsidiary route. The Stock Exchange was thus able to convert the threat if faced from expansion of NSE and BSE through the Subsidiary Company. The shift became more prominent when SEBI introduce Compulsory Rolling Settlement and banned the deferral products like Badla, MCFS and ALBM w.e.f. July 2, 2001 causing thereby an end to arbitrage opportunities between the Stock Exchange and NSE/BSE. Ultimately. There was complete shift of trading from the Stock Exchange to the LSE Securities Limited in January 2002.

TRADING ON BIGGER STOCK EXCHANGES THROUGH SUBSIDIARY ROUTE

As stated in the preceding para, the Exchange acquired the membership of NSE & BSE through its subsidiary, the LSE Securities Limited, with the

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objective of the providing an enabling mechanism to its member brokers to trade on NSE and BSE as sub-brokers of LSE Securities Limited. Trading at BSE and NSE was commenced through the subsidiary route from September 2000 and December 2000, respectively, and the trading in F&O segment of NSE commenced in February 2002.

DEPARTMENTS

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The aim of LUDHIANA STOCK EXCHANGE is to ensure the secure channel to the investment of the investor & to provide the proper services under the prescribed guidelines of SEBI. To maintain the proper system of working of Stock Exchange, there are so many Departments in which particular functions are performed. The LSE has categorized its functioning of Department into Two types. These are Services and Operational.

DEPARTMENTS

OPERATIONAL

SERVICE

OPERATIONAL DEPARTMENT: LEGAL DEPARTMENT SECRETARIAL DEPARTMENT LISTING DEPARTMENT MEMBERSHIP DEPARTMENT TECHNICAL & MAINTENANCE DEPARTMENT
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 PERSONAL DEPARTMENT ACCOUNTS DEPARTMENT SERVICES DEPARTMENT: EDP/ Computer Section MARGIN SECTION CLEARING SECTION

SURVEILLANCE SECTION

DEPOSITORY SECTION

OPERATIONAL DEPARTMENTS
LEGAL DEPARTMENT: When a broker or outsider clients do not settle the claims in between then they move to the Legal Court. The Legal Department comes in to a picture to fight for the cause of the Investors & against the Defaulting Member. Legal Department also assists the members & to settle their dispute through the arbitration committee or investor grievance committee so that they may be settled at earliest without incurring heavy dues on amount regarding account fee, advocate fee etc. The main objective of Legal Department is to undertake & make effective, the byelaws, rules & regulations of the Exchange & to see the guidelines, circulars & any

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amendments in bye- laws made by SEBI & to enforce them at right time so that the further complications may be reduced or avoided. SECRETARIAL DEPARTMENT: The duties and the function of this department include maintenance of records of minutes like:

Meeting of Various Committees.

Meeting of Members. Meeting of Board of Directors Minutes of Annual General Meeting (AGM) Minutes of Extra Ordinary General Meeting (EGM) TECHNICAL & MAINTENANCE DEPARTMENT: The Technical and Maintenance Section of LSE is regulated the activities of Electrical, Mechanical and Security of LSE. It looks after the following functions: Electrification of Building. Air Conditioning of Plant. Maintenance of Generators. Fire Fighting System. Other. PERSONNEL DEPARTMENT
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Motive of this Department is to choose a right person for right job. It deals with the Appointment, Interview and Leaves, PF of Employees, Recruitment and Selection. Employees get salary after 5 years of duration. DA is not more than 43% of Basic Salary. Now the LTC is freezed. LUDHIANA STOCK EXCHANGE DOES NOT HAVE PERSONNEL DEPARTMENT IN ITS ORGANIZATION CHART. ACCOUNTS DEPARTMENT Most of the work in Accounts Department of LSE is done manually. Help is taken from the computers for the purpose of making the Trial Balance, Income and Expenditure Statement and Balance Sheet. The Annual Report of the Exchange is generally published in September after Annual General Meeting every year. It performs the following functions: To make and receive payment to the outside agencies. To disburse personal expenses. To keep the record of all incomings and outgoing money and preparation of Financial Statement at the end of the Financial Year. To get their Accounts Audited from the third party.

SERVICES DEPARTMENT

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 EDP SECTION The growing Technicalities and increasing work load has enhanced the importance of computer section of LSE. This department is mainly referred as EDP Section i.e. Electronic Data Processing Section. In the present time this section is the backbone of entire Stock Exchange because it is performing many important activities. The whole function of Stock Exchange would come to halt, if this department becomes inactive. It prepares several reports namely:Scrip Wise Statement of Number of Each Settlement Period. Sub Broker wise delivery bills receives order. Downloading of delivery orders. Sub Broker wise Final Statement. HDFC Bank Entry. MARGIN SECTION Behind the establishment of the Margin Section, there is some rationale, which is To prevent broker from indulging in excessive speculation. To keep a track of Base Minimum Capital (BMC) and Additional Base Minimum Capital (ABMC) and set exposure limit for the each broker member. Before the Trading being started a broker has to deposit BMC to this Department

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CASH PORTION Cash track only RS. 1.25 Lakhs

CASH/ FDR/ BG CRIPS RS. 3 Lakhs

The Margin Section allows two types of limit to broker. They are: NET EXPOSURE LIMIT NSE = 25 times gross 3.5 times net. BSE = 25 times gross 6 times net. SERVELLANCE SECTION In LSE, for the purpose of ensuring a fair market, this section is responsible for monitoring the trading activity. Some Companies rig the price of their scrips. So this section keep track of trading patterns of the broker to prevent the market manipulation. Whenever a member makes excessive exposure, beyond the limit alert (signals) are given by the system. Then large variations in the price as well as the volume of the scrip are scrutinized and appropriate actions are taken. DEPOSITORY PARTICIPANT DEPAERTMENT Another most important section is depository in LSE. This system commenced trading in demat shares from November 6, 1998 by becoming a depository is a system, which holds out shares in the form of electronic accounts in the same way a bank holds our money in a saving account. Depository system provide the following advantages:30

 Shares can not be lost or stolen and there is no need to doubt the genuineness of shares i.e. whether they are forged or fake. There is no risk of bad delivery shares transactions like transfer etc. can no delay in transfer. CLEARING HOUSE There are rolling settlement cycles w.e.f. 1st April 2002 which is prevailing at LSE and commenced on daily basis. At the end of settlement date member have scrips wise delivery notes and have to deposit it with clearing house as per following:T = Trading period (say Monday) T+2 = Pay in of funds on Wednesday by 10.30 a.m. T+2 = Pay in of Securities on Wednesday at 2.00 p.m. T+3 = Auction for undelivered scripts on Thursday. T+4 = Auction pay in securities and funds on Monday by 10.30 a.m. T+5 = Auction pays of securities and funds on Monday at 2.00 p.m.

LIST OF HEAD OF VARIOUS DEPARTMENTS

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Sr.No. Name 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Ms. Pooja Sharma Mr. Pawan Bhardwaj Mr. Sudesh K. Sharma Ms. Sarabjit Mr. Vinay Mahajan Mrs. Jyotika Sharma Mr. Shammi Kohli Mrs. Deepti Mahajan Mr. Rajinder Pal Singh Mr. Dheeraj Arora

Designation TRAINING COORDINATOR MEMBERSHIP DEPARTMENT LISTING DEPARTMENT SECTARIAL DEPARTMENT DP DEPARTMENT KYC DEPARTMENT IT DEPARTMENT COMMODITY DEPARTMENT MARGIN DEPARTMENT ACCOUNTS DEPARTMENT

SOURCES OF FUNDS:

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 Membership fee from brokers at the beginning. Initial Listing fee from companies i.e. RS.1,000 / Annual Listing fee from companies. Fines and Penalties from brokers. Maintenance charges @ RS. 1216 per room per month from those members having room and those not having room are charged at the rate of RS. 3000 p.a. Interest earned on fixed deposits. Broker members served a notice for 60 days. If the member fails to comply with notice, then he can be expelled. APPLICATION OF FUNDS: 5% of Listing Fees to SEBI each year. 20% for Providing Services to Investors. Personal Expenses. Administrative Expenses. Electricity Charges. Security Charges. Telephone Charges. VSAT Charges.

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 Printing and Stationary. PAY-IN All the members are required to honor their pay in obligations up to T+2 day at 10:30 am e.g. a member who has traded on Monday can meet his/ her pay-in obligation up to Wednesday. The LSESL in turn is required to pay in the Securities and funds on T+2 day to the Clearing House of NSE and BSE (as the case may be). PAY-OUT The pay-out of Securities/ funds is done on T+2 basis up to 1:30 pm. THE DEPOSITORY SYSTEM Depository system is concerned with Conversion of Securities from Physical to Electronic form, Settlement of Trades in Electronic Segment, Electronic Transfer of Ownership of Shares and Custody of Securities. The system results in instant as compare to six weeks time under Physical Mode. In depository system, there is no physical script and as such most sat eh problem of fraudulent transfer, take certificate, hare lose etc. virtually disappear. Electronic transfer is faster in comparison to paper work. Stamp duty exempted and turns over & liquidity enhances manifold. After going through we are in position to state that the principal function of a depository is to dematerialize securities and enable their transactions in book entry
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from. Debiting the transfers depository account and crediting the transfers depository account transfer the securities. Re- Materialization. Rematerialization refers to the process of conversion of conversion of shares from electronic from into physical form. This process is prevalent in certain case only and used selectively. Pledge Creation and Closure. DP provides the services of pledge creation, in case the account holder gets a loan granted against the pledge of securities. The balance lying in the account of person or part thereof is pledged with the institution granting loan to the holder or the account. Pledge closure refers to the process whereby the securities already pledged are credited to the account of the person after the person has repaid the loan. This is done as per instructions of account holder. Settlement of Trades. All the trades are settled through either market or off market transfers. In case of settlement of trades by market transfers the buyers account in the DP is credited on the account of seller of securities is debited in the concerned DP. This way the DP trades the market or off market transfers.

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LSE SECURITIES LIMITED PROFILE

OBJECTIVES OF THE COMPANY LSE Securities Limited is a subsidiary of the Ludhiana Stock Exchange, which was formed with an objective to enhance business and investment opportunities for the investors and members of Ludhiana Stock Exchange at large, through innovative products by encompassing a variety of activities related to the capital market. The company has a paid-up capital of Rs 5.55 crores. INTRODUCTION OF THE LSE SECURITIES LTD. LSE Securities Ltd., was incorporated in January, 2000 with a view to revive the capital market in the region and for taking full advantage of the emerging opportunities being provided by expansion of bigger stock exchanges like NSE and BSE. The company since its inception has marched forward rapidly and achieved many milestone in a short span of existence. GOVERNING COUNCIL The Council of the management of the Company comprises of 10 directors of which 3are broker members and 7non-brokers. Five non broker members are Independent Directors of eminent status from the field of finance, law and management and remaining two are Chief Executive Officer of LSE Securities

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Limited and Executive Director of the holding company (Ludhiana Stock Exchange), who are on the Board of the company as ex-officio Directors. Thus the council of management has representation of sub-brokers as well as professionals and subject specialists representing various fields of business activities. Operations of the company are run in a professional, transparent and fair manner keeping in view of the interest of investors as well as other stakeholders. CORPORATE MEMBERSHIP OF NSE & BSE SEBI, at the initiative of LSE, permitted smaller Stock Exchanges, to trade on bigger Stock Exchanges through their subsidiary companies. The Ludhiana Stock Exchange floated its subsidiary company, the LSE Securities Limited, with the objective of obtaining trading rights on bigger Stock Exchanges. It has obtained corporate membership of both NSE and BSE in the first half of year 2000. TRADING AT NSE AND BSE The LSE Securities Ltd. commenced trading operations in Capital Market Segments of BSE and NSE in September, 2000 and December 2000 respectively. The turnover of the Company at NSE and BSE is growing by leaps and bounds ever since in incorporation. There was encouraging response from the sub-brokers specially at NSE counters.During the financial year 200537

06, the Company recorded a turnover of Rs. 7975 crores and Rs.3834 crores in "Capital Market" segments of NSE and BSE respectively. For the year ended 2005-2006, there were 128 sub-brokers registered for NSE and 68 for BSE. F&O SEGMENT OF NSE The LSE Securities Ltd. commenced trading operations in Future and Options Segment of NSE in February 2002. The Company became the first subsidiary of any Regional Stock Exchange which commenced trading in F&O Segment of NSE. Response to trading facilities in the F&O segment of NSE has been very encouraging and volumes generated in this segment soon exceeded those in Capital Market segment. TRADING THROUGH V-SATS The LSE Securities Limited has provided facility to its sub-brokers for trading on NSE and BSE through VSAT counters which are located outside Stock Exchange Building. During 2005-2006, 27 sub-brokers of the company have been trading through VSAT on NSE and 13 on BSE. CERTIFICATION IN FINANCIAL MARKET In order to provide professional services to the investors of LSE Securities Limited through its sub-brokers, the company motivated its sub-brokers and its staff to qualify the certification in financial markets conducted by NSE. All trading terminals for Capital Market Segment and F&O segment are being
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operated by the persons after having qualified the said certification DEPOSITORY PARTICIPANT SERVICES NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL) The LSE Securities Ltd. commenced its operations as Depository Participant of NSDL in August 2000. The DP services provided by the Company have technology edge over other DPs, as DP of the company is the only On-line Real-Time DP in the region. As a result of efficient services and competitive rates, the Company has been able to increase its market share in the DP business at the cost of other DPs in the region. As on date DP of NSDL and CDSL of the Company at Ludhiana is servicing over 35000 beneficiary accounts. DEPOSITORY PARTICIPANT SERVICES CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED (CDSL) In order to further strengthen its services to sub-brokers and investors, the Company applied for the DP of CDSL. It started DP operations of CDSL in December 2001. With the operationalisation of DP Services of CDSL, the Company has been able to provide delivery of shares to sub-brokers and investors on the day of pay-out which in turn helps the sub-brokers to give timely deliveries to their clients. Introduction of CDSL operations has also enabled the sub-brokers and investors of the Company to timely meet the pay-in
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obligations of securities purchased by the investors on BSE and sold next day on NSE through the Company and vice-versa. EXPANSION PROJECTS To increase its presence in the region further, the company plans to open its branches of Depository Services in the major cities of the region. To start with, it has already opened its branches at Jalandhar Amritsar and Chandigarh.

INTRODUCTION
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Globalization and technological advancement are twin forces in the 20th century has resulted in closed integration of capital markets and will high level of cross border investment participation. Today business world increasingly reliance on private capital flows, economics are striving to cut through capital attracting competitive advantages. The stock market world wide are experiencing a churn resulting in increasing competition, unification in happening right before our eyes and the day is not far when there will be single unified stock exchanges. Stock exchanges are under going a change as investor seek cheeper, quicker and better services. So there is increasing trend among international stock market to demutualize for mobilizing capital and cross the border access. Traditionally stock exchanges have been mutual associations set up by men be for member and use by the member. Generally they have been operated on not for profit basis so that any profit are returned to members in the form of lower trading cost or access fees. Stock exchanges are operated and regulated differently in terms of the role of the board and the staff of the exchange, powers of the chief executive commitiees. Exchanges have a variety of voting structure and the balance of power between different users.

The key issues were :

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 Increasing pressure for low cost trades Access to cross border trading Electronic mode of trade Professional management of exchanges

MUTUALISED STOCK EXCHANGES

Traditionally most of the stock exchanges have been non- profit and mutual cooperative organization all over the world. Their precise legal form varied from country to country, depending on the domestic legal and corporate finance system, but their ownership and governance structure has some common features. In India most of the exchanges are organized as Association of person under section 25 of Companies Act, 1956. These exchanges are Mutual exchanges and these are non- profit organizations and exempted from tax. The stock exchanges generally to be owned, controlled and governed by exchange members who are usually stock brokers. Brokers elect their representatives to regulate the activities of exchange including their own activities. On one side the trading members are the owners of the stock exchanges and on the other
42

side they are consumers or they are real beneficiaries. In mutual exchange ownership, management and trading is in same hands. Now the traditional ownership and governance structure is being questioned. In mutualised organization there is always conflict between regulatory and public interest role of exchange with private interest of elected directors. The main reason for scams by the exchange management. Largely due to the broker interference with day to day administration and ultimate decision making power is in the hands of brokers due to absence of SEBI nominees and public representatives in board meetings. The limitations of mutualised structure gave birth to the demutualised structure.

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LIMITATIONS OF MUTUALISED STOCK EXCHANGES

Mutualised stock exchanges have following limitations:CONFLICT BETWEEN INTEREST OF INVESTORS AND BROKERS:Conflict between the interest of investors and brokers is main drawback of mutual exchange. The elected directors misuse their official positions for personal interest. In case of dispute between brokers and investor, investors interests do not always receive the same utmost objective treatment. The regulatory and public interest role of the exchange conflict with private interest of the elected directors as the same sometimes gets precedence over regulation broker on exchange does not offer an effective model for self regulatory organization. ABSENCE OF SEBI NOMINEES AND PUBLIC REPRESENTATIVES IN BOARD MEETINGS:Many non-broker directors are busy in their professional life they do not often understand the intricacies of functioning of stock exchanges and are not assertive enough and not regular in attending meetings. So in board meetings broker director have dominance over taking important decisions. Mutualised exchanges lack quality of administration or we can say broker managed

44

exchanges is far satisfactory stage where ultimate owners and real beneficiaries are same. LACK OF ADEQUATE FINDS:Today where stock market needs change for technological advancement mutual exchanges have no funds for which most of the part they got from members. For further expansion, these exchanges need funds, which these can collect from commercialization of stock exchange. So mutualised exchanges are facing so many problems. These exchanges want there own place among the crowd. The only solution to the problem of mutual structure is demutual structure. CONFLICT BETWEEN ELECTED BROKER AND OTHERS:Another major drawback of mutualised stock exchange is that there is a conflict between elected broker and others. The elected broker misuse there official position for personal interest. LACK OF PROFESSIONAL MANAGEMENT:The mutualised stock exchanges lack professional management because of the conflict between broker and investor. LOW PUBLIC CONFIDENCE:Due to lack of professional management and lack of transparency public lack

45

confidence in stock exchanges and resist to invest. LACK OF TRANSPARENCY:Mutualised stock exchange lacks transparency as they do not reveal full information as required by brokers and investors.

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DEMUTUALISATION OF STOCK EXCHANGES

Demutualization consists of two words. de and mutualisation

NO

ASSOCIATION

So demutualization means no association. Demutualization refers to the transition process of an exchanges from mutually owned association to a company owned by shareholders. The above in effect means that after demutualization the ownership, the management and the trading rights at the exchanges are segregated from one another. In recent years there has been trend for exchanges to convert from non- profit member owned organization into profit shareholder owned organization without strict regard to whether prior to conversion of the exchange was truly mutual or cooperative in nature or a company limited by share. Demutualization represents wholesale corporate cultural transformation ie. Changing every dimension of exchange.

But also involves change in the corporate thinking at each level.

47

 The organization should act as a commercial organization. According to Securities Act, 1956. demutualization means the segregation of ownership and management from trading right of members of a recognized stock exchange in accordance with a scheme approved by the Securities Exchange Board of India. Here Scheme means schemes for cooperation or demutualization of recognized stock exchange which may provide for 1. The issue of shares for a lawful consideration and provision of trading rights in lieu of membership cards of members of a recognized stock exchange. 2. The restriction on voting rights. 3. The transfer of property, business, assets, rights, liabilities, recognition, contracts of recognized stock exchange, whether in the name of the recognized stock exchange or any trustee or otherwise and any permission given to or by the recognized stock exchange. 4. The transfer of employees of a recognized stock exchange to another recognized stock exchange. 5. any other matter required for purpose of, or in connection with, the
48

corporatisation or demutualization, as the case may be, of the recognized stock exchange. In stock exchange term demutualization refers to the segregation of three groups i.e. ownership, management and trading. It also aims at maximizing stakeholders value of unlocking hidden values.

49

MUTUAL VS. DEMUTUAL

SR. NO.

MUTUAL EXCHANGE

DE- MUTUAL EXCHANGE

1. 2. 3.

Owned by traders Not for profit Restriction on trading rights

Separate ownership For profit No such restriction on trading rights No such card exists Electronic mode of Trading

4. 5.

Card carries premium Usually open cry system

6. 7.

For mutual interest Slow to adapt system

For public interest Quick to adopt new System

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MUTUALIZATION OF STOCK EXCHANGE

OWNERSHIP

MANAGEMENT

TRADING RIGHTS

DEMUTUALISATION OF STOCK EXCHANGE

OWNERSHIP

MANAGEMENT

TRADING RIGHTS

WORLD SCENARIO
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In capitalism, the ultimate driving force and the regulator is competition. Exchanges are no exception to this rule and single most important cause behind demutualization is competition driven by technological advances. In the 80s,a potent competitive threat from electronic communication networks (ECN). These provided low cost order matching services with in a brokerage house so that lesser orders are routed to the exchanges for execution. ECN also provided anonymity to block trades, extended trading and greater disclosure of the orders in queue, which were usually not offered by exchanges. These technological advancements were happening more in developed parts of the world that is Europe and America. So fearing there existence, stock exchanges in these countries planned to find out some way, to cope up with the immense competition that these stock exchanges were facing from ECNs and the competition they were giving to each other i.e. mutualised stock exchanges themselves. The first ever international stock exchange that adopted demutualization model was Stockholm stock exchange in 1993. SSE converted itself from mutual organization to a demutualised co. ltd bt shares. After that, Helsinki stock exchange was demutualised in year 1995.

52

53

DEMUTUALISED STOCK EXCHANGE (INTERNATIONAL)

SR.NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Name of the stock exchange Stockholm stock exchange Helsinki stock exchange Copenhagen stock exchange Amesterdam stock exchange Borsa Italian stock exchange Australian stock exchange Keland stock exchange Athens stock exchange Singapore stock exchange SIMPEX LIFFE Toronto stock exchange Sydney future exchange Chicago mercantile exchange New York mercantile exchange London stock exchange
54

year 1993 1995 1996 1997 1997 1998 1999 1999 1999 1999 1999 2000 2000 2000 2000 2000

17. 18. 19. 20. 21. 22.

Pacific stock exchange Osio exchange NASDAQ Euronex Deutsche orsi New York stock exchange

2000 2001 2001 2001 2001 2001

INDIAN SCENARIO
Demutualization has been experimented in India even before the concept to be propounded internationally. The over the counter stock exchange of India, promoted and incorporated in 1990 by financial institutions as non- profit company under Section 25 of the companies act, was a pioneering attempt in separating ownership and membership of the exchange. The subsequent setting of the national stock exchange of India limited in November 1992 as a taxpaying company unlike other stock exchange in the country was another significant effort. With a distinctly different organizational structure, its coexistence with other mutualised exchanges was an interesting phase in the capital market history of the country. Events of conflicts of interests and their

55

impact on the market have led to union budget for 2002-03 laying emphasis on demutualization of stock exchanges. A group set by SEBI is expected to deliberate on this issue, and could be precursor for sweeping change in the structure, market position and management of stock exchanges in the country, in curbing of market is the prime driver for demutualization. In addition, other impacting factor technology, competition and institutionalization and globalization of the investors have changed the Indian capital market. This restructuring opportunity may have to be utilized to assess the competitiveness, efficiency and global aspirations and opportunities of the Indian market it is an important destination in the global financial scene. In terms of legal structure, the stock exchanges, which are recognized under securities contracts (regulations) act 1996, in India, could be segregated into two board groups: 20 stock exchanges that were set up as companies, limited either by shares or by guarantee, and three stock exchanges that are set up as association of person (AOP). In India two exchanges are demutualised national stock exchanges NSE is pure form of demutualization and another exchange OTCEI over the winter exchange of India. NSE is the first stock exchange that adopted demutual model in April 1993, and NSE is financed by most of the leading financial institutions

56

( IDBI, LIC, GIC, ICICI, UBI, IFCI, ETC.). NSE has two fully owned subsidiaries one is National Securities Clearing Corporation LTD. And other one is VSE IT LTD. commenced on April 1996, and October 1999, respectively. Recently on 20th may 2005 SEBI has approved the scheme of demutualization of Bombay Stock Exchange (BSE) with certain modifications.

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CLASSIFICATION OF STOCK EXCHANGES IN INDIA

STOCK EXCHANGES IN INDIA

20 stock exchanges either as companies limited by shares or by guarantee e.g. NSE. OTCEL, LSE, BGSE, etc.

3 stock exchange as association of person (AOP) i.e. BSE, ASE, and Indore stock exchange

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WHO CAN DEMUTUALISE?

Is the term restricted only to corporation of stock exchanges? Any organization that is non- profit body (which is not as same as loss making), and is not distributing its profit to owner members but retains the same to develop infrastructure of the organization, can demutualise.

WHY DEMUTUALED?
The arguments in favour of demutualization could be summarized as follows: TO REMOVE ILLS OF MUTUALISATION: Removal of conflicts between the interest of investors and brokers is main drawback of mutual exchange. The elected directors misuse their official positions for personal interest. In case of dispute between brokers and investors interest do not always receive the same outmost objective treatment. The regularity and public interest, role of exchange conflict with private interest of the elected directors. As a same some times get precedence over regulation, broker on the exchange does not offer an effective model for self regulatory organization.
1. Appointment of SEBI nominees and public representatives in

board meetings: Many non-m brokers are busy in their professional life. They do not

59

often understand the intricacies of functioning of stock exchange, and are not assertive enough and are not regular in attending meetings. So in board meetings broker director have dominance over taking important decisions. Mutualised exchanges lack quality of administration or we can say broker managed exchanges is far from satisfactory stage, where ultimate owners and real beneficiaries are the same. 2. Removal of conflict betwwn elected brokers and others: Another major drawback of mutualised stock exchange is that there is conflict between elected broker and others. The elected brokers misuse their official positions for interest. FOR FINANCIAL BENEFITS: 1. Acess to variety of capital sources: Demutualization will benefit by variety of capital sources. The financial institute and general public will be interested to invest their funds in stock exchanges shares. 2. wider customer base: demutualization will help in widening the customer base as the products and services will be easily accessible from any where.
60

Different products and services will be introduced. 3. Improve shareholder value: This lead to payment of dividends resulting in better relationship. Demutualization will improve shareholder value because it will be more regulated market and payment of dividend will also be regular. It will maintain better telations. 4. More profits driven: As the cost will decline profit will rise. 5. Better cost control: Regulators of exchange will control the cost. The cost will decline because of better quality products and services. 6. Share price improvement: Share price of the exchange will improve because of high competition and profitability. 7. Increased market capitalization: Market capitalization of shares will increase because of better management and control. FOR NON FINANCIAL BENEFITS: 1. More focused management:

61

Because of ownership, trading right and management will be in three different hands so the management will be more focused.
2.

Freedom to purse:

Business opportunities unconstrained by vested interest issue: more business opportunity will be accepted because the interest of different parties will be separated and there will be no concern with them. 3. Quicker decision making: As the professional staff will turn the exchanges there will be quicker decision making. Brokers decision will not influence organization interest. 4. Flexibility, efficiency and competitiveness: Stock exchanges will be more flexible with new technology, more efficient and it will be competitor for other stock exchanges.
5. Ensuring own destiny and reliant on member:

Earlier the member of stock exchange determines the stock exchange destiny. They were the regulator but after demutualization members will not interfere in stock exchanges decisions. 6. Better public relations:
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Positive press coverage public interest will be priority and this will Increase its value in medias eye. In addition there should be more transparency of exchange as a public company.

63

IMPORTANT CRITICAL FACTORS FOR SUCCESS

Balanced ownership Aggressive Service Level Agreements (ASLA) Customer Relationship Management (CRM) Stakeholder Relationship Management (SRM) Modern Corporate Governance

64

REASON FOR DEMUTUALISATION

Demutualization is the need of the day. There are many reasons, which lead to demutualization of stock exchanges, which are as follows: For new organizational form: In mutualised form of exchanges brokers were the owners and they regulate the stock exchanges. They preferred their interest for the sake of organizational interest. This leads to scams of stock market. In demutualized form administration will be separated grom brokers. For technological improvement: Today where advance technology is the key to success. Traditional exchanges members have purchased seats that entitle them to use the exchange as their business place, vote on policy matters and share in exchanges profit importantly members are also the source of capital for exchange expansion and up keep. To keep up with heavy investment in technology and to streamline the exchanges decision process, exchanges are planning to demutualise in order to improve accountability and operate primary for own profit interest. Condition for regional stock exchange:

65

Today nearly all RSE have nil turnovers. These stock exchanges are working as an asset management companies looking after their assets. These stock exchanges have threats from NSE and BSE also the ban on bald has killed the RSE. SEBI and government enforcement: SEBI has enforced the stock exchange to go for demutualization because demutualised exchanges have self regulatory system. For merger of stock demutualised exchanges have self regulatory system. If the stock exchanges needs to be merged than these should be mutualised because if the stock exchanges themselves are listed companies, perhaps because of their wide shareholding, laws relating to disclosure & substantial acquisition may arise because of their application just as in the case of any other public listed company. Globalization: For globalization exchanges want more funds & for cross border self listing of stock exchanges is needed which can be possible in demutualised cases. Development of capital market: Capital market is suffering from its growth and recognition. The demutualization is needed for its development. To face the competition:

66

Capital markets are growing and these are offering new products. For leading them exchanges need differentiation which can give them growth in the trading. Lack of transparency: Mutual exchanges are less transparent these exchanges have rough management and the facts are behind the veil. Demutualization of stock exchanges will low the costs of service provided. High cost: Investors are facing high cost both in terms of financial & non- financial. They need a protective environment & low cost. Demutualization of stock exchanges will low the cost of services provided. Non- Profit organization: Exchanges are working as non- profit organization. It retains profit for the expansion and does not pay to shareholder. To be a for profit organization demutualization is needed. Separation of risk management and surveillance function: In stock exchanges the function of risk and prefer their interest. So demutualization is needed for separation of these two functions. Brokers are consumers:

67

In stock exchange brokers are self consumers and buyers. They are taking services from stock exchange. To separate these two demutualization is needed. Rationalization governance: If the greater competition exists and the interest of the member diverges from the exchange, the mutual governance model ceases to function well. The corporate model will enable management to take actions that are in the best interest of the customers and the exchange will achieve greater independence from its members with respect to regulatory functions. Investor participation: The new corporations will be more profit oriented due to shareholder accountability. However in todays competitive environment, a stock exchange must be responsive to the needs of the companies and institutional and retail investors in particular, institutional investors have a strong preference for any anonymity when they are in the best affecting the large block trade. Competition from ATS an upstairs trading: The threat of competition from alternative trading system (ATS) has forced traditional exchanges to examine their role as trading arenas and to take measure that facilitates more competitive future strategies. An ATS is a

68

privately operated computerized system that performs many of the functions of an exchange by centralized and matching buy and sell orders and providing post trading information.

69

HURDLES FACED BY STOCK EXCHANGES

WHILE IMPLEMENTING DEMUTUALISATION
Demutualization does not only mean legal changes, but it means cultural transformation in corporate entity and every dimension of exchange will change. There are many problem faced by exchanges while implementing demutualization model. Before commencing demutualization following issues must be properly analyzed and need to be considered for successful demutualization program. The exchanges must be clear with their objectives. 1. What does the exchange hope to achieve from demutualization and how far is the management prepared to achieve complete demutualization? 2. What infrastructural changes need to be in place to achieve the desired results?
3. What is the appropriate corporate governance structure for an

exchange?

70

4. How does demutualization entity provide the organization before an IPO (Initial Public Offering) take place? 5. How do you protect your brand in a post- demutualised environment? 6. Can you achieve your business goal, as per your target earning rates when regulators are setting moving targets? These are just some of the so many questions that need to be answered, for successful implementation of demutualization program. A failure to recognize these issues there is risk to exchanges reputation and in future exchanges may be unhappy even after demutualization. The term demutualization hides a number of complex issues that need to be understood and addressed.

71

Provision regarding election, tenure, and retirement of directors POST DEMUTUALISATION Category of Directors Broker members Having trading rights Trading member Representation. Non- brokers Shareholders culture Election By shareholder from amongst the persons having trading rights on LSE limited. By shareholders from among the person not having trading rights but are shareholders of LSE Independent directors ltd. SEBI will appoint these directors. Chief executive officer CEO of exchange Will appointed by BOD with prior approval of SEBI Will hold office at pleasure of SEBI. Are permanent members of body and are not subject to retire by rotation. Tenure and Retirement Term of 3 years with Maximum two terms for Each director 1/3 will retire by rotation at AGM.

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PROCEDURE FOR DEMUTUALISATION

1. Transfer of ownership 2. Valuation of assets and liabilities 3. Division of net assets into the shares 4. Offering of assets to public 5. Distribution of funds to brokers 6. Listing of shares of exchange

STEPS OF DEMUTUALISATION
Step 0 Mutualised exchange Step 1 Corporate structure Step 2 Trading of shares among members Step 3 Trading of OTC Step 4 Corporate governance Step 5 Stakeholders relationship management Step 6 SLA driven operational management Step 7 Customer relationship management Step 8 Private placement of exchange shares Step 9 Free trading of exchange shares
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PROCEDURE FOR DEMUTUALIZATION WITH BUTTERFLY STAGES

Comparison of demutualization with butterfly stages Metamorphosis Stages Egg stage Description Starting point (mutualised) Comments If starting now start as a commercial entity like eons (Electronic Communication Network) Caterpillar stage Getting fatter, earth bound Demutualised upto step 3 and vulnerable victim of circumstances Pupa stage Massive internal change in process still vulnerable Butterfly stage Highly mobile, very attractive, able to make master of own destiny Demutualization implemented step 4 to 7 Highly commercialized step 8 & 9 a legal maneuver.

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KANIA COMMITTEE REPORT

INTRODUCTION According to governments proposal to corporatism and demutualization the stock exchange by which ownership, management and trading right would be segregated from each other and legislative changes, if required, would be proposed accordingly to give effect to corporatisation and demutualization of stock exchanges. Corporatisation and demutualization of stock exchanges are complex subjects. These issues would need careful examination and then SEBI felt it necessary to appoint a group of eminent personalities in the field of law, finance etc. to advice SEBI on this matter. TERM OF REFERENCE To review and examine the present structure of exchanges includes those set up as companies and as unincorporated bodies and in this light examine the legal, financial and fiscal issues involved in corporatising and demutualisating the stock exchanges. To recommend the specific steps that need to be taken for implementing the schemes.

75

 To advice on the consolidation and merger of stock exchange. The group would submit its report within two months from the date of its first meeting. The date of submission of report has further extended till 31st Aug, 2003. METHODOLOGY The group in all held to meetings to obtain a better assessment and appreciation of these issues, the group felt that it would be useful to first heat the different points of view of major stakeholders. The group also studied the proposal of BSE on demutualization submitted to SEBI. The group also submitted the existing article of association, charters trust deed, rules regulations and by laws of the exchanges. RECOMMENDATION OF THE GROUP Desirability of demutualization and sequencing of the process:Group noted that stock exchange representatives of brokers association and investors association were unanimous and the corporative and demutualization by which the ownership and management would be separated from each other. EFFECTIVE AND TRANSITION FROM A NON- PROFIT MAKING ENTITY The group recommended that: As demutualization of exchange is essential a conversion from non-profit to
76

profit making company, and would result in distribution of assets under the income tax act be so amended if necessary. Necessary provisions should also be made in the Indian stamp act and the sales act laws, the transfer of assets from mutual exchange to demutualised exchange. As only the scheme approved by SEBI will qualify for exemption under the income tax act. Indian stamp act and sales act. Each stock exchange would be required to submit a scheme drawn on the line recommendation to SEBI approval. SEGREGATION OF TRADING RIGHTS FROM OWNERSHIP Trading card system to be replaced by the deposit system where by in the money deposit by the member to obtain trading rights only, be considered as the deposit with the exchange for trading purposes, while the group favour the deposit system it would like to leave the choice of adopting the either system to stock exchange. The following procedure is adopted if the deposit system is adopted by the exchange for segregated of trading rights and ownership. LISTING OF THE DEMUTUALISED EXCHANGE:-

77

The group felt that while listing of the stock exchange it should be the desired objective, it may not be mandatory. The group therefore recommends that it would be desirable for demutualised stock exchange to list its shares on itself or any other stock exchange. CEILING ON THE VOTING RIGHTS OF THE SHAREHOLDERS Having regards to the public interest in the efficient functioning of the exchange, it is important that no single entity of the group of related entities should be allowed to control a stock exchange through concerning its shares. LEGAL CHANGES REQUIRED The group felt that it would be difficult to implement these recommendations without amendments in some of the provisions in the various relevant statues. The group recommended that the relevant provisions of the securities contract act 1956, the income tax act 1961, and the Indian stamp act 1899 be suitably amended.

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MERITS OF DEMUTUALISATION
Success of demutualization depends upon its implementation. Following are the merits of demutualization: 1. ABILITY TO RISE NEW CAPITAL Demutualised entities have wider access to capital and can have wider horizons as compared to mutual exchanges. This gives the demutualised exchanges a competitive edge in winning business and a better position to embrace the technology evolution. 2. BALANCED OWNERSHIP STRUCTURE In demutualised structure there is a balanced ownership structure. Because ownership, management and trading are separate. The separation of shareholding, management and users in a demutualised exchange makers for better strategic decision making. 3. FLEXIBILITY AND TRANSPERANCY Demutualised stock exchange have more transparency and flexibility as compared to the mutual exchanges. These exchanges are free from personal interest of brokers as day to day affairs are settled by related committees i.e. NSE there is executive committee(EC) or trade related issues committee(COTI)

79

on settlement issues(COSI) for managing the affairs of the exchange. 4. BETTER RELATIONSHIP WITH STAKEHOLDERS Demutualised stock exchanges have improved the relationship with external parties through stakeholder relationship management(SRM) and customer relationship management(CRM).

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THREATS TO DEMUTUALISED STOCK EXCHANGES AND ITS SOLUTION

The debate had centered on safeguards against control changes and the wider issues of regulations. Those who oppose the proposal have argued about the risk of loss of sovereignty in terms of ownership Successful demutualization is required to be aware about the following threats: 1. BALANCE BETWEEN COMMERCIAL AND REGULATORY ROLE: A demutual exchange suffers from a different type of conflict of interest, since it is for-profit organization, its commercial role may get precedence over the regulatory role. Every decision is likely to be tested against its impact on profitability. It may be either very lenient in enforcing the rules to encourage the volume of business or very strict in enforcing of rules to increase penal revenue. NSE has been able to strike a fine balance between its commercial and regulatory roles, which supplements each other. 2. SELF LISTING TO REJECT OF INTEREST:

81

A demutualised exchange to be listed on an exchange, this would open up another arena of conflict of interest if it listed on itself as has the AXS done, it is unlikely that the exchange would like to subject itself to some strict discipline as applicable to other listed companies. One solution could be to list securities on the other stock exchange. But permit trading on it. A better solution would be vest the listing power in a body, like UK listing authority separate from stock exchange. 3. ELECTION OF NOMINEES: In a mutual environment, the governing council including nominees of regulators and public representatives. This is necessary in the public interest to refrain the elected directors from pursuing their self interest only, in the demutualised environment such a check is necessary to ensure that the board of directors do not act only in the best commercial interest of the organization, this may be achieved by including a few public representatives, who should have specific responsibilities and to held accountable. The practice of having nominees of regulator must, however, be discounted. This makes regulator vicariously liable for the entire crisis occurring in the exchange. Further the regulator cannot be expected to make, at least in theory, a fair investigation into the affairs of the exchange. 4. THREAT OF TAKEOVER:
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In demutual environment, the shares can be concerned by a few undesirable person. The exchange should be prone to hostile takeovers; such probability can be reduced by prescribing ceiling on shareholding requiring regulators approval for change in ownership beyond a theshhold limit. Public representatives will be useful to prevent mismanagement in such cases. 5. LACK OF KNOWLEDGE: It is an underlying fact that a mutual exchange has a better access to expertise and knowledge of the market participants, which are critical inputs for framing rules. As the brokers are involved in framing the rules a mutual generally ensures compliance with such rules by them the access to market expertise and knowledge and compliance with the rules have been successfully achieved by NSE through EC, COSI, COTI etc. 6. FINANCING: Government and SEBI seem to be suggesting NSE model of demutualization. They are implicitly hinting at capital contribution by financial institutions. A large number of financial institutions, banks an insurance company have already contributed capital in OTCEI and NSE. Would they like to make similar contribution for 21 exchanges, more so when majority of they are only clinically alive? It is doubtful if there would be adequate response from the public if all 21
83

exchanges are corporatized and there securities are evaluated professionally and offered for sale. But why should policy maker regulator suggest a particular model if they have to, they should first look at consolidation of exchanges before they mutualised them. 7. NON-COMPLIANCE: It is more desirable if the initiative for demutualization comes from exchanges themselves. The authorities have to just approve the memorandum and article of association of demutualised structure as they did for NSE and OTCEI. It is hearting that some exchanges have already started working towards demutualization. What if they do not demutualize voluntarily? The lanes provide enough stick for the authority to enforce demutualization. They have power to recognize a stock exchange, renew the recognition or withdraw the recognition/ renewal of recognition, a stock exchange is required to comply with such conditions as are or may be prescribed or imposed under the provision of SCRA and the SCRR from time to time. The authorities also have the power to direct stock exchanges to make rules or amend rules. In exercise of these powers. The authorities have been tinkering with the composition of governing body. In the extreme case of non compliance by any stock exchange, the authorities can withdraw recognition.

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8. SHAREHOLDING: The process of demutualization would involve offering of a corporatized exchanges to public, including trading members subscribed for the shares and in terms of their right under the companys act, get themselves elected to the board of directors. This defeats the purpose of demutualization. It is necessary to specify under SCRA that a shareholder which is also a trading member can not join the board. There is thus an apparent conflict between the companies act and SCRA in the sense that the former confers a right on the right too shareholder to join the management. While the later deprives a broker shareholder from joining the management this conflict is easily well accepted principle of special law (SCRA) prevails over the general law (co. Act) a deep understanding of the laws, however, overshadows this conflict and makes it clear that the both the act are seeking to fulfill the same objective. The co. Act requires an interests directors to refrain from participating in the deliberation in the board of directors of an exchange would be perpetually interested director, he has to refrain from attending the board meeting and hence can not really contribute use to management it is therefore desirable that such a shareholder refrains voluntarily from joining the board or in prevented from joining the board by SCRA. Thus SCRA would reinforce the objective of co. Act at more explicitly.

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9. EXEMPTION FROM CAPITAL GAINS: It is reported that a few exchanges are seeking exemptions from stamp duty on transfer of asset and tax assumptions on capital gains arising from transfer of any asset of an exchange or membership in the pursuance to corporation. These exemptions in respect of transfer of assets from the erstwhile non corporate to the emerging corporate exchange is understood. This should be granted to encourage corporatisation in public interest. But the need for reserves and surplus of the exchanges or his right to trade? The membership card is a fictitious asset. According to recent Supreme Court ruling, the membership card of a stock broker is not a property. The reserves and surplus, which have grown because of so many concession and tax benefits, of not for profit organizations cannot be shared by the contributing member. What need to be transferred is the right of a trading member to take from erstwhile non corporate exchange to the emerging corporate exchange, which should be automatic. 10.MEMBERS AND SHAREHOLDERS MEMBERS: The corparatisation cum demutualization would result into two classes of members namely, trading members and shareholders members. Since member under the SCRA means a member of recognized stock exchange, it is apprehend in some circles that the SCRA may accommodate different classes of members, provide the
86

solution. It has been affirmed recently by the Supreme Court that there can be more than one class of members and they will fall in the definition of members under the SCRA

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SCHEME OF DEMUTUALISATION
Ludhiana Stock Exchange Association Limited
1. The name of The Ludhiana Stock Exchange Association Ltd. has now

been change to Ludhiana Stock Exchange Limited. The report of Kania committee along with the public comments was considered by board of SEBI and was approved subject to the certain conditions, such conditions are:

The existing members of stock exchange will get shares in

demutualised entity but whether they will hand voting rights or not is yet to be determined by SEBI. The board will have equal representation of the broker shareholder and investing public. 2. Amendment of Memorandum and Articles of Association for compliance SEBI guidelines for demutualization. Post demutualization the name of company will be Ludhiana Stock Exchange Ltd. In order to comply with SEBI guidelines on demutualization the Board of Directors has purposed suitable amendments in the Memorandum and Articles of
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Association in accordance with the provisions of companies act, 1956 and SEBI guidelines and securities laws (amendment) ordinance 2004 on corporation and demutualization of stock exchanges. 3. Implementation The scheme shall upon publication be binding on all persons and authorities including all members, creditors and employees of Ludhiana Stock Exchange and on all persons having any contractual right, power, obligations or liability with, against, over, to, or, in connection with Ludhiana Stock Exchange or its members. 4. Split of shares It is purposed to split the shares in 10, 00,000 of re. 1 each member would be given 2000 shares of re. 1 each after split. 5. Purpose composition of Board of Directors/ purposed structure on appointed date As on appointed date of Demutualisation, since there would be no shareholders in the company who are from trading members as separate category the composition of governing board shall be as under: Trading member representatives Shareholders representative 3 Nil

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Independent directors Executive directors/ MD/ CEO Whole time director (if appointed)

9 1 1

PROPOSED STRUCTURE AFTER 1 YEAR With in one year from the date of demutualization upon disinvestment of shares by trading members to the shareholders, the composition of the governing members would be as under: Trading member representatives Shareholders representative Independent directors Executive directors/ MD/ CEO Whole time director (if appointed) 3 3 6 1 1

6. Restriction of Voting Rights Regarding the voting rights of the shareholders of the LSE will have the voting rights in the general meeting of the company. However no single shareholder can exercise by voting rights in excess of 5% of total voting rights of exchange however there will be no restrictions of voting rights of the shares held for public financial institutions as defined in the
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companies act 1956. 7. Process of elections

The election of appointment of directors under the entire public

representative category will require prior approval of SEBI. Broker represent representatives would be elected by the shareholder from the amongst the brokers of the stock exchange in terms of the provisions of the companies act, 1956. One third of such directors shall be retired by rotation at each annual general meeting. There is appointment of a committee of charted accountant for the valuation of assets or liabilities of stock exchange. 8. Tenure of Directors The tenure of various categories of directors will be in accordance with the guidelines to framed by SEBI in following manner: The managing director to whole time director:They will be the paid employees as well as the permanent members of the board, so they will not subject to retirement on rational basis, they will hold them positions as long as they continue to be in employment of the exchange.

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 Public representation:Public representation will have their tenure expiring in the next annual general meeting at one year from the date of their appointments which ever is later. Shareholder Directors and Brokers Directors:They will be appointed on rational basis and out of them 1/3 will retire every year. 9. Corporate governance LSE shall observe all norms relating to corporate governance, disclosure and reporting as may be stipulated by SEBI from time to time. 10.Impact on Registration of Stock Brokers and SEBI Turnover Fee Applicability Any change in the name, status, organizational and management set up of Ludhiana Stock Exchange pursuant to this scheme of demutualization, there will be no impact on the status of member of Ludhiana Stock Exchange in respect of their liability relating to SEBI turnover fee. All existing broker getting trading right will continue to trade under the same SEBI registration certificate, as existing on the date of demutualization. 11.Disinvestment/ Forfeiture LSE shall ensure that at least 51 % of its equity share capital is held within 12
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months from the date of publication of the order under sub section (7) of section (4) of the securities laws (amendment) ordinance,2004 by the public other than shareholders having trading rights and the exchanges shall ensure that the shares held by trading members thereafter do not exceed 49% of the share capital The exchange shall have fixed and permanent lien an right of forfeiture on all equity shares of the members who have not settled their dues to exchanges and/ or SEBI. 12.Clearing Corporation The exchange has provided in its Bye-Laws/Article of Association for transferring the duties of the clearing house to a clearing corporation. The exchange shall appoint Clearing Corporation for the clearing of the trades depending upon the economic feasibility to be decided by the Board of Directors of the exchange from time to time. 13.Participation of LSE Members in BSE indonext Members of LSE can participate in the BSE indonext or any other scheme for providing trading platform approved by SEBI. Members of other stock exchanges can also trade on LSE and vice-versa. If allowed by SEBI. 14.Settlement Guarantee Fund(SGF) Customer Protection Fund(CPF)

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Post demutualization, the SGF and CPF maintained by the exchange shall continue in the same form and utilized for the same purpose for which they have been set up. 15.Power of SEBI SEBI shall have powers to amend, modify or delete any of the provisions of this scheme.

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PUBLIC NOTICE
LUDHIANA STOCK EXCHANGE ASSOCIATION LIMITED DEMUTUALIZATION SCHEME, 2005 [Approved and notified by SEBI on September 15, 2005 vide S.O.NO.1317 (E)]
1. 1.1 Title and Commencement This Scheme shall be called The Ludhiana Stock Exchange

Association Limited (Demutualisation) Scheme, 2005 (hereinafter referred to as this Scheme") and shall have effect on its publication under sub-section (4) of Section 4B of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the SCRA). 1.2 The Ludhiana Stock Exchange Association Limited (hereinafter

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referred to as LSE) shall be demutualised in accordance with this Scheme on and from the Appointed Date as may be notified by the Securities and Exchange Board of India (hereinafter referred to as SEBI) in respect of LSE under Section 4A of the SCRA: Provided that the activities specified in the respective clauses of this Scheme shall be implemented as per the time schedule specified in those clauses. 2. Definitions In this Scheme, unless the context otherwise requires, 2.1 "Due Date" means the date, as may be determined by the

Governing Board, which shall not be later than 3 months from the date of publication of the Order under sub-section (7) of Section 4B of the SCRA. 2.2 2.3 "Governing Board" means the Board of Directors of LSE. "Member" means a person who is a member of LSE on the day
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preceding the Due Date as per the Register of Members maintained by it. 2.4 "Shareholder" means a person who holds any equity share(s) of

LSE on or after the Due Date. 2.5 "The Ludhiana Stock Exchange Association Limited" (LSE)

means the Company limited by shares, registered under the Companies Act, 1956 vide registration no 16-4696, having its Registered Office at Feroze Gandhi Market, Ludhiana, which has been recognised as a stock exchange under the SCRA. 2.6 "Trading Member" means a stock broker of LSE and registered

with SEBI as such under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. 2.7 Words and expressions used and not defined in this Scheme but

defined in the Securities and Exchange Board of India Act, 1992, the

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Depositories Act, 1996, the SCRA, the Companies Act, 1956, the rules and regulations made under these Acts, the Memorandum and Articles of Association, Rules, Bye-Laws and Regulations of LSE, shall have the same meaning respectively assigned to them in the above mentioned Acts, memorandum and articles, rules, bye-laws and regulations. 3. Memorandum and Articles of Association, etc.

3.1 LSE shall incorporate the provisions of this Scheme appropriately in its memorandum and articles of association and the rules, bye-laws and regulations on or before the Due Date. 3.2 The memorandum and articles of association and the rules, bye-laws and regulations of LSE may be amended after the Due Date in accordance with the applicable laws, provided that no such amendment is inconsistent with any provision of this Scheme. 4. Governing Board

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4.1 On and from the Due Date, the Governing Board shall be constituted in accordance with the provisions of the Articles of Association of LSE in force from time to time: Provided that (i) the representation of Trading Members does not exceed one-

fourth of the total strength of the Governing Board, and the remaining directors are appointed in the manner as may be specified by SEBI from time to time, and (ii) the Chief Executive, by whatever name called, is an ex-officio

director. 4.2 Notwithstanding anything contained in clause 4.1, SEBI may nominate directors on the Governing Board as and when deemed fit. 5. Listing of Shares The LSE may at any time, list its securities on any recognised Stock
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Exchange. 6. Demutualisation 6.1 A Trading Member may or may not be a Shareholder. 6.2 A Shareholder may or may not be a Trading Member. 7. Trading Rights 7.1 A Member, who is registered as a stock broker on the day preceding the Due Date, shall become a Trading Member on the Due Date. 7.2 A Member, who is not registered as a stock broker on the day preceding the Due Date, shall become a Trading Member on being registered as a stock broker under SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 within 3 months from the Due Date. 7.3 After the Due Date, a person desirous of becoming a Trading Member shall be admitted if he complies with the requirements and brings

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in fees and deposits as specified in the rules, bye-laws and regulations of LSE. 7.4 LSE shall, for the purpose of admitting any person as a Trading Member, follow uniform standards in terms of capital adequacy, deposits, fees, etc. irrespective of mode of acquisition of trading right by that person: Provided that different standards may be followed for admission of a person as a Trading Member who has acquired trading right by way of transmission. 7.5 A Trading Member may surrender his membership to LSE in the

manner specified in the rules, bye-laws and regulation of LSE. 7.6 Irrespective of the date or mode of acquisition of trading right, the

Trading Members shall have uniform rights and privileges. 7.7 Trading Members on the Due Date shall continue to have the same
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rights and privileges in respect of their clients and constituents and other members arising out of or under any act, omission or contract or law, notification, order, direction, etc. as had accrued to them while being Members on or before the Due Date. 7.8 Trading Members shall be bound by all obligations and liabilities

towards their clients and constituents, SEBI, LSE and other authorities or other persons arising out of or under any act, omission or contract or law, notification, order, direction, etc. while being Members on or before the Due Date. 8. Shareholding Rights 8.1 A Member shall become a shareholder on the Due Date: Provided that the shares in respect of a defaulter member, vested with the defaults committee of LSE, shall be dealt with as forfeited shares under the Companies Act, 1956.
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8.2 LSE shall ensure that at least 51% of its equity shares are held by public other than shareholders having trading rights in the manner and within the period prescribed in sub-section (8) of Section 4B of the SCRA. 8.3 On and from the Appointed Date, LSE shall ensure that public other than shareholders having trading rights continuously holds at least 51% of equity shares. 8.4 On and from the Due Date, no Shareholder, who is a Trading Member, shall have voting rights (taken together with voting rights held by him and by persons acting in concert with him) exceeding 5% of the voting rights in LSE. 9. Transfer of Clearing and Settlement Functions 9.1 LSE shall, within two years of the Due Date, subject to the prior

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approval of SEBI, transfer the duties and functions of its clearing house to a Clearing Corporation, recognised under the SCRA. 9.2 Until the duties and functions of the clearing house are transferred as provided in clause 9.1, the clearing and settlement functions in relation to trading on LSE, shall be carried out by the clearing and settlement mechanism as used by LSE at present or in such other manner as the Governing Board may determine. 10. Utilisation of Assets and Reserves

10.1 LSE shall not do anything contrary to the provisions of Section 4B (3) of the SCRA. 10.2 Without prejudice to the generality of the provisions of clause 10.1, LSE shall not use its assets and reserves as on the date of publication of this Scheme or the proceeds from disposal of such assets or the proceeds from disposal of successive species of assets acquired from the proceeds
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of disposal of such assets for any purpose other than discharging the current liabilities outstanding as on the date of publication of this Scheme or the business operations of stock exchange. 11. Compliance with this Scheme

11.1 LSE shall ensure compliance with the provisions of this Scheme at all times and shall not do anything contrary to the provisions of this Scheme. 11.2 Without prejudice to the generality of the provisions in

clause 11.1, LSE shall continuously comply with the provisions in clauses 3.2, 4.1, 6, 7.3, 7.4, 7.5, 7.6, 8.3, 8.4 and 10. 11.3 LSE shall report compliance with the provisions of this Scheme in such manner as may be required by SEBI from time to time. 12. Removal of Difficulties

If any difficulty arises in giving effect to the provisions of this Scheme, SEBI may,

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at the written request of LSE, relax any of the provisions of this Scheme.

OVERVIEW OF DEMUTUALISATION PROCESS

In order to demutualized, the proposed regime would require a company to follow the steps outlined below, the entire conversion process would be overseen by the office of the superintendent of financial institution (OSFI). 1. Board Authorization First, the companys board of directors must authorize management to develop a conversation proposal ( Canadas four large mutual life companies have already taken this step.) 2. Preparation of the Documentation The second step is to develop the conversion proposal. This is a comprehensive package that must first be approved by the companys board of directors, and then sent to OSFI. Among other things, the proposal. This is a comprehensive package that must first be approved by the companys board of directors, and then sent to OSFI. Among other things, the proposal contains the estimated market value of the company and a description of how the value would be allocated to eligible policyholders {for e.g. in the
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form of shares, cash or policy enhancements}. Under the proposed regime, the entire value of the co. must be allocated to eligible policyholders- i.e. policyholders entitled to vote at annual meetings of the co. these policyholders would receive benefits upon demutualization in exchange for their current ownership rights and interests in the co. A number of experts opinion are required in the conversion proposal, such as opinions on whether the methods used to estimate the co. value are appropriate whether the distributions among the policyholders is fair and equitable, and on the security of the policyholders policy benefits. 3. Review of Documentation and authorization by OSFI In addition to the conversion proposal, the co. must submit to OSFI for review all information destined for eligible policyholders. This package must, among other things, include the conversion proposal and a summary of the expert opinions; a description of the advantages of the demutualization to the co. and its policyholders; a description of the alternatives to demutualization considered and the reasons why the directors of the co. believe demutualization are the best interest of the co. and its policyholders and a discussion of the tax treatment of the demutualization benefits. OSFI would also review and approve the notice of meeting and proxy from that would be sent to eligible policyholders with the
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information package. The notice of the meeting must be sent between 45 and 75 days before the special meeting to consider demutualization, to allow policyholders sufficient time to review the information package. If the superintendent is of the view that policyholders require additional information prior to the vote on demutualization, he may direct the co. to undertake such measures as the sending additional information to policyholders or holding information sessions. 4. Special Meeting to consider Demutualization A special meeting must be held at which eligible policyholders vote on the conversion proposal. The proposal must receive the support of at least two third of eligible policyholders who cast votes, either in person or by proxy. 5. Application for Ministerial Approval If the conversion proposal is approved by the eligible policyholders, an application for demutualization must be forwarded within three months to the minister of finance for his approval. 6. Allocation of Benefits Upon demutualization, contractual obligations between the co. and its customers would not be changed. What would change are the policyholder ownership rights

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in the co. in the exchange for these rights, the co. would distribute benefits to policyholders, as described in the conversion proposal. Nevertheless, policyholders would still have the right to elect at least one- third of the board of directors of the converted co. Demutualization benefits would generally take the form of shares which kept or sold for cash. Each share would entitle the shareholder to one vote (shareholders elect upto two- third of the board of directors). Benefits could also in the form of cash, policy enhancements or premium reductions. When benefits other than shares are distributed, an independent actuary or a valuation expert must provide an opinion that these benefits are appropriate substitutes for shares. 7. Post Demutualization Converted co. will face a public market environment, and should be allowed time to adjust to their new corporate structure before being approached by possible acquisitors or mergers partners. Therefore, after demutualising, co. must remain widely held {i.e. no one person can own more than 10% of any class of the shares of the co.}. the restriction will be reviewed in two years after the demutualization regulations come in to the force. In addition the govt. will not approve merger proposals between large demutualized companies during the adjustment period. A shareholder will allow converted companies more flexibility to raise capital to
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offer innovative new products to meet their customers evolving needs and invest in new technologies. Increased access to capital will also enhance co.s ability to make acquisitions, which will enable converted companies to take advantages of growth opportunities and complete for a market share in a rapidly changing market place.

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TO STUDY THE CHANGING SCENARIO OF LUDHIANA STOCK EXCHANGE

(From mutualisation to demutualization) Dear respondents, You are kindly requested to fill this questionnaire any information that you will provide would be kept confidential. NAME OCCUPATION ADDRESS PHONE NO. E-MAIL --------------------------------------------------------------------------------------------------------------------------------------------------

1. How are you related with LSE? Broker Investor Employee Any other

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2. Are you satisfied with present working of LSE? Satisfied Not satisfied Cant say 3. What are the reasons for the downfall of regional stock exchange (RSE)? Lack of knowledge Growing competition Lack of transparency Any other 4. Regional Stock Exchange should be? Close down Merged Demutualization None 5. Do you know the concept of demutualization? Yes No

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 Not exactly 6. Do you think demutualization will improve the functioning of LSE? Yes No Cant say 7. Will demutualization of stock exchange help in reducing scams? Yes No Cant say 8. Will the concept of demutualization will minimize the say of brokers in stock exchange? Yes No Cant say 9. Do you favour listing of shares for stock exchange to others or self stock exchanges?

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 Yes No Cant say THANKS FOR YOUR SUPPORT AND CO-OPERATION DATE SIGNATURE

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ANALYSIS OF QUESTIONNAIRE
Analysis and interpretation of facts makes clear the idea about the studied effects. Following are some results from the survey of questionnaire. Q-1 How are you related with LSE?

Brokers-40% Investors-30% Employees-10& Any other-30%

Q-2 Are you satisfied with present working of LSE?

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Satisfied-80% Not satisfied20%

Q-3 What are the reasons for the downfall of regional stock exchange (RSE)?

Lack of transperancy-35% Lack of technology-% Growing competition-50% Any other -15&

Q-4 Regional Stock Exchange should be?

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Closed down-10% merged-35% none-55 demutualised-%

Q-5 Do you know the concept of demutualization?

Yes-80% No-15% Not exactly-5%

Q-6 Do you think demutualization will improve the functioning of LSE?

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Yes-60% No-25% Cant say-15%

Q-7 Will demutualization of stock exchange help in reducing scams?

Yes-35% No-40% Cant say-25%

Q-8 Will the concept of demutualization will minimize the say of brokers in stock exchange?

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Yes-40% No-35% Cant say-25%

Q-9 Do you favour listing of shares for stock exchange to others or self stock exchanges?

Yes-80% No-15% Cant say-5%

Q-10 Do you think that appointment of CEO and Chairman as different persons improve the working of Stock Exchange?

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Yes-90% No-7% Cant say-3%

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AGGERGATE RESPONSE OF BROKERS, INVESTORS, EMPLOYEES AND OTHERS.

SR. NO. 1. QUESTIONS How are you related with LSE? REPLY Broker Investors Employee Any other 2. Are you satisfied with present working of LSE? Satisfied Not satisfied Cant say 3. What are the reasons for the downfall of regional stock exchange(RES)? Lack of technology Growing competition Lack of transparency Any other 4. The regional stock exchange should be Close down Merged Demutualised None 5. Do you knoe Yes about the concept RESPONSE 40% 30% 20% 10% 80% 20% % % 50% 15% 35% 10% 35% 55% % 80%

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of demutualization? 6. Do you think demutualization will improve the functioning of LSE? Will demutualization of stock exchange help in reducing SCAMS? Will the concept of demutualization minimize the say of brokers in stock?

No Not exactly Yes No Cant say Yes No Cant say Yes No Cant say

15% 5% 60% 25% 15% 50% 20% 30% 40% 35% 25% 90% 7% 3% 90% 7% 3%

7.

8.

9.

Do you favour Yes listing of shares for stock No exchange to other or self stock Cant say exchanges? Do you think that Yes appointment of CEO and No chairman as different persons Cant say improve the working of stock exchange?

10.

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CONCLUSIONS
Based upon the findings from the data collected from brokers and other secondary data that has been used to carry out the research project here is the conclusion. There is a mixed reaction of the brokers on the demutualization

of the regional stock exchanges. However, overall they are not happy with the demutualization because they think that are the people who have prompted this exchange, they have some intimate relationship with exchange, and now SEBI is separating them by misusing the powers. Frequent reforms made by SEBI (which were the need of the hour) in the capital market leads to zero turnover at regional bourses, some of these reforms in chronological order are as follows: Regional stock exchanges had their embarked region where no other stock exchanges were allowed to enter but then NSE was allowed to expand throughout the country. Then all regional stock exchanges were asked to computerized

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and have online trading system ( regional stock exchanges spend more than Rs. 150cr. On it ). Then SEBI allowed BSE to expand outside Mumbai to regions of RSEs ceiling of 5% on the voting rights of shareholders so that the basic purpose of demutualization of stock exchanges would not be deteriorated. Further , some broker wanted the chairpersons of the board should be a broker member so that they should have a strong position in the exchange even after demutualization. However, many believe that since the exchange being demutualization. It does not matter to them as to who should be the chairperson. One of the most criticized provisions of the scheme is the exist routine provided by the company. The reason is that those brokers have access to the national bourses like NSE and BSE having a wide range of products. So it is expected that exchange will have to pay to the brokers their due amount three years post demutualization because there will be hardly any buyer of the trading rights of the members, however, those who do not have trading rights at these bourses would perhaps like
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to trade at the exchange. Further the revival if regional stock exchanges by allowing the financial companies and other institutions to hold more than 5% of the shares will hardly serve the purpose. The reason is, would they like to make similar contributions and there securities are evaluated professionally and offered for sale.

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SUGGESTIONS
There are some suggestions for mutualised to turn its structure from a mutualized to demutualized one. This demutualized structure will benefit the exchanges up to a large extent. The brokers task should be confined to the purchase and sale of securities. If the broker is allowed to participate in management he will not justify to his work. So it is better for him to do single work as the principal of division of work will efficiency of his work and hence exchange. The ownership should be in the hands of financial institutions means the third party will finance the exchanges day to day functions. This will raise the source of funds of stock exchanges. Stock exchange should have a different technology, different products from other exchange. The broker should follow the code of ethics given by SEBI. The post of presidents and vice presidents should not be in the hands of the brokers. So to reform the capital market, various amendments should be done. Out of which demutualization is the first reform part from this SEBI should change its rule and regulations and should take care of each
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and every exchange separately.

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BIBLIOGRAPHY
BOOKS Indian Securities Market Issued by NSE LSE Bulletin issues of April 2007, May 2007, June 2007 Beuro Report Kothari C.R. Second Edition Research Methodology Vishwa Prakash Publications 2004

NEWSPAPERS FINANCIAL EXPRESS BUSINESS WORLD THE TRIBUNE HINDUSTAN TIMES BUSINMESS LINES BUSINESS STANDARDS THE HINDU BUSINESS LINE ECONOMIC TIMES

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WEBSITES WWW.SEBI.GOV.IN WWW.BSEINDIA.COM WWW.NSEINDIA.COM WWW.GOOGLE.COM WWW.SHAREKHAN.COM WWW.YAHOO.COM

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