Q3 IS Listing a statutory requirement?
Which type of companies are required to seek
enlistment?
1. Every company issuing shares or debentures to the public by issue of prospectus shall
make an application to one or more Stock Exchange for permission for enlistment of
shares. (Sec. 73(1) of Companies Act, 1956)
2. Where a prospectus states that an application has been made for the share or debentures
to be dealt in on one or more recognized Stock Exchange, such allotment will be void, if
the permission has not been granted by the Stock Exchange or each such Stock
Exchange, as the case may be, before the expiry of ten weeks from the date of the closing
of the subscription list. (Sec. 73(1A) of Companies Act, 1956)
3. Sec. 73(1A) implies that if an application has been made to two or more Stock Exchange
then the permission should be granted by all these Stock Exchange, for the allotment to
be valid. Otherwise, the allotment will be void.
( In the class he emphasised about independent directors, woman directors while talking about
Regulation 17, it is one of the listing obligation to have independent directors but I am not sure
whether we have to write this under this question but to be on safer side I will just add the
obligation below)
Board of Directors.
17. (1) The composition of board of directors of the listed entity shall be as follows:
(a) board of directors shall have an optimum combination of executive and nonexecutive
directors with at least one woman director and not less than fifty per cent of the board of
directors shall comprise of non-executive directors;
21[Provided that the Board of directors of the top 500 listed entities shall have at least one
independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed
entities shall have at least one independent woman director by April 1, 2020;
[Explanation: The top 500 and 1000 entities shall be determined on the basis of market
capitalisation, as at the end of the immediate previous financial year.]
(b) where the chairperson of the board of directors is a non-executive director, at least one-third
of the board of directors shall comprise of independent directors and where the listed entity does
not have a regular non-executive chairperson, at least half of the board of directors shall
comprise of independent directors:
Provided that where the regular non-executive chairperson is a promoter of the listed entity or is
related to any promoter or person occupying management positions at the level of board of
director or at one level below the board of directors, at least half of the board of directors of the
listed entity shall consist of independent directors.
Public Companies which want to raise capital through the sale of equity seek enlistment.
Q4 Outline the drawbacks and defects in the working of Stock Exchange in India, How far and in
how much ways SCRA, 1956 has removed them?
Earlier (i.e. prior to 1991), all stock exchanges in India are broker owned and broker controlled.
In
other words, it is the brokers who collectively owned, controlled and managed these exchanges.
However, the ownership and managership of these stock exchanges led to a conflict of interest
where the interest of these brokers was given prominence than the investors. These led to price
rigging, frequent payment crises on stock exchanges and misuse of official position by office
bearers.
(LAWS BEFORE 1990 ALSO LED TO MANY SCAMS PARTICULARLY HARSHAD
MEHTA) Therefore, demutualization of stock exchange was resorted to instill confidence in the
minds of the investors.
So, through the demutualization process, a stock exchange becomes a profit making company
and
a tax paying entity. Demutualization separates the ownership and control of stock exchange from
the trading rights of members. This reduces the conflict of interest and also the chances of
brokers using the trading mechanism for personal gains.
In November 2002, SEBI approved the uniform model of corporatization and demutualization of
stock exchanges, recommended by the Kania Committee. Further, Securities Contract Regulation
Act was amended on October 12, 2004, through an ordinance, making it compulsory for the
exchanges to convert into corporate entities and delink their broker members from the
management. The ordinance restricts brokers’ representation in the governing body of stock
exchanges to 25%. It also reduces their shareholding from 100% to 49%. Moreover, 51% of the
stake of the stock exchange should be held by the public. This segregation was initiated to
safeguard the interest of shareholders, bring greater transparency and efficiency of stock
exchanges.
Demutualization is the process by which any member owned organization can become a
shareholder owned company. Such a company can either be listed on a stock exchange or be
established as a closely held company. In simple words, a demutualized stock exchange is
basically a company form of organization in which the company goes public and owners will be
given equity shares.
Advantages of Demutualization
(i) Enable stock exchanges to have more access to funds for investment in technology.
(ii) Facilitate merger and acquisition of other exchanges.
(iii) Facilitate alliances with other stock exchanges.
(iv) Benefit to members of the stock exchange as their asset becomes liquid.
(v) Members get share of the profits made by exchanges through dividends.
(vi) Makes operations of the stock exchanges transparent.
(vii) Transparency brings better governance.
CORPORATISATION OF STOCK EXCHANGE
Corporatisation of Stock Exchange is the process of converting the organizational structure of
the Stock Exchange from a non-corporate structure to a corporate structure. Traditionally, some
of the stock exchanges in India were established as association of persons such as Bombay Stock
Exchange. Corporatisation of such exchanges is a process of converting them into incorporated
companies.
DEMUTUALISATION OF STOCK EXCHANGE
Demutualisation refers to transition process of an Exchange from mutually owned association to
a company owned by shareholders. In other words, transforming the legal structure of an
exchange from a mutual form to a business corporation form is referred to as demutualization.
The above, in effect, means that after demutualization, the ownership, the management and the
trading rights at the Exchange are segregated from one another.
DEMUTUALISATION OF STOCK EXCHANGES
The process of demutualization is to convert the traditional “not for-profit” stock exchanges into
a “for profit”company and this process is to transform the legal structure from a mutual form to a
business corporation form. The important features of the demutualisation exercise are as
follows :
1)The board of a stock exchange should consist of 75% public interest/ shareholder directors and
only 25% broker directors, and
2) 51% shareholding of the stock exchange should be divested to public/ investors and only 49%
of shareholding can remain with the trading member brokers.
The options prescribed for divestment/dilution of brokers’ shareholding in a stock exchange are
as follows: 1) Offer for sale, by issue of prospectus, of shares held by trading member brokers.
2) Private placement of shares
3) Fresh issue of shares to the public through an IPO.
