We keep hearing about demutualization from time to time in papers. What exactly is demutualization? And is it good or is it bad?
Before we undertand what it means, let us first of all understand that stock exchanges in
But this is not the way stock exchanges operate in developed coutries. Hence the need for demutualization was felt as a reform measure in government circles. This is supposed to end the monopoly of the stock brokers. This was sought to be achieved through the transformation of the constitution of the exchanges into for-profit public limited companies. The demutualization in
The demutualization of the stock exchanges in
- The representation of the brokers on the governing boards of each of the stock exchanges is restricted to a maximum of a fourth of the board’s strength, the rest being appointed in the manner specified by SEBI (Securities & Exchange Board of India).
- The aggregate shareholding of broker-shareholders is limited to a maximum of 49% of the stock exchange’s equity capital.
- A minimum of 51% of the equity capital is to be held at all times by public other than broker-shareholders.
- No broker-shareholder is allowed to have more than 5% voting rights.
Demutualization is supposed to bring in more efficiency to the management of the markets. With the public holding a major share in the equity capital of the stock exchanges, the brokers are expected to be in a less powerful position to manipulate the stock exchanges.
There is an excellent piece on demutualization covered by ET in the classroom at: http://www.economictimes.com/guide/etclass/etmark5.htm