Clifford Chance
Modernisation of Indian stock exchanges: a regulatory perspective
24 November 2011
Reforming the rules for ownership, governance and listing of Indian stock exchanges will enhance their ability to support India's fast-growing economy.
These reforms will also enable Indian stock exchanges to participate in the current spate of mergers among exchanges around the world that are leading to the formation of regional and global stock markets.
One of the main areas for reform should be to loosen the tightly-controlled share ownership limits that are imposed on an individual shareholder.
Although the current five per cent cap on an individual's shareholding is designed to prevent a dominant shareholder or interest group from controlling an Indian exchange, other countries, such as the UK, USA and Singapore, have removed ownership restrictions to encourage more competition and greater efficiency.
The rules covering the listing of stock exchanges would also benefit from modernisation. Concern that allowing Indian stock exchanges to list would lead to a conflict of interest between the exchanges' commercial and regulatory responsibilities has been one of the main barriers to reform of these rules.
However, other countries that have allowed their exchanges to list have avoided such potential conflicts by transferring regulatory responsibilities from the exchange to other financial regulators.
Allowing Indian stock exchanges to list would also help to improve their governance by requiring them to comply with all of the corporate governance requirements that apply to companies that are admitted to trade on exchanges.
