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Stock Market Reforms: A Return to Dirigisme?

The restructuring of India’s securities exchange environment recommended by the Jalan Committee does not address the real issues facing the capital markets.


Thomas S. Caldwell


The Jalan Committee’s recent report, Review of Ownership and Governance of Market Infrastructure Institutions, must be commended for recognising the importance of capital market structures in the development of India’s economy and their efforts to avoid the overly fragmented market environments of other countries, particularly America. That being said, what specific measures are necessary to achieve India’s economic goals while avoiding the destructive impact of unintended consequences?


In this comment, I will only deal with a few of the Committee’s recommendations which I feel will crepate significant problems for India’s exchanges and capital markets and, as a consequence, its economy. These relate to ownership, profitability and compensation.




Before it’s public share offering, the New York Stock Exchange was typical of virtually all privately-or closely-held exchanges of the time. They functioned as utilities, the role now envisioned for exchanges by the Jalan report. The NYSE was then grossly inefficient and succeeded only as a result of little or no competition. It was a high cost trading environment which did not develop new products, capitalise on new trends or modernise its trading systems, and failed to adopt the most basic of good management practices. This was the NYSE of less than a decade ago. The changes since becoming publicly-owned and being faced with competition have been amazing. The NYSE has revamped its systems, caught up with the competitions speed of execution, reduced costs, developed new products, expanded accross the globe and has again become a world leader in the securities exchange space.


Publicly-owned companies, as a result of their accountability to a wide number of shareholders, must continually strive for efficiency and innovation. Corporate governance has also seen a quantum leap forward as a result of securities exchanges ceasing to be tightly controlled “old boys” clubs.


All over the world, the thrust of the auditing profession has been to make public-company reporting transparent, accountable and comprehensible to investors. These three factors are part of the reason that public companies are worth more than private ones. To allow securities exchanges to remain private would be to deny investors the benefit of the high standards which are being set for India’s public companies while standing as an implicit criticism of the listing process and public companies general. Possibly the NSE and BSE could cross-list on each other’s exchange if extra accountability is desired, but to not list at all makes everything that happens at exchanges more opaque to the outside world.


Publicly-traded companies have a currency both to expand and to attract better talent. Further, it can be shown that mutually-owned or closely-held companies have continually failed to successfully compete with publicly-held corporations. The Committee’s proposed constraints on public ownership will relegate India’s securities exchanges to provincial trading environments. There is an opportunity here for India to properly build the infrastructure in order to become a leading global financial centre, while enhancing the core economic functioning of its financial services sector.


Further, publicly-listed securities exchanges have traditionally raised a country’s profile on the world economic scene. They point to the rule of law, corporate governance and an investing culture. Brazil’s Bovespa Exchange is a clear example of a publicly-traded securities exchange raising the international awareness of its listed companies as well as its country’s vast potential.


The skills and economic weight exist in India. However, the proposed restrictions on securities exchanges’ financing possibilities will make real progress quite elusive. To avoid significantly negative unintended consequences, the focus should be on trading regulation and governance, not ownership. The former brings order, the latter, stagnation. When securities exchanges simply function as utilities, as in the past, capital market development always suffers.




Constraints on the profitability of any industry are, in effect, contraints on growth and innovation. What is being proposed by the Jalan Committee is a series of constraints which are addressing problems unrelated to the securities exchange sector. Excess profits have not been a feature of any exchange that I am aware of, or can envision.


Profits result from numerous factors such as innovation, efficiency, management skills, technology breakthroughs or simply providing a better product or service. Regulating profits according to some formula based upon capital totally negates all of the above. There is no reason to do things better or differently.


Further, a profit constraint based on capital only rewards the largest entity in the field and constrains all of its competitors. Governments have never been the best judges of what a company requires in terms of the profitability required for growth, diversification, new opportunities or contingent risks. Also, profits may come in one fiscal period but growth or innovation possibilities can arise several periods later. Stripping profits now can and will reduce options later.


Diversification of securities exchanges both vertically (order entry to settlement and custodial) and horizonatally (new products), with resulting efficiencies, will be significantly reduced by the profitability and regulatory proposals of the Jalan Committee.




Securities exchanges are in competition for good people as much as trading volumes. India, with its supply of bright technocrats and savvy business leaders, will become the net supplier of skilled people to securities exchanges around the world if the compensation constraints of the Jalan Committee are introduced. India should not become an exporter of its best and brightest in this key economic sector.


There is one basic fact which emerges from the Jalan Committee report and that is: If the report is adopted in its current form, the future of India’s economic growth will be traded elsewhere in the world. For example, Singapore and other exchanges already trade Indian securities anf that volume will increase proportionately, without benefit to India.


The report does not address the real issues facing India’s capital markets and is quite arresting from an international perspective. The contemplated constraints will have a significantly negative impact on the worlds view of India as an investment destination, while achieving no positive end at home.


Serious second thoughts must prevail regarding the overall consequences of this reversion to an older style of government policy which failed India in the past.


The author has been active in the securities industry for over 45 years, and is a past governor of the Toronto Stock Exchange. The organisation he heads is or has been one of the largest shareholders of the New York Stock Exchange and the Chicago Board Options Exchange, and has invested in a securities exchange in India.

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