Corporatisation and Demutualisation of stock exchanges

It has also been suggested that the stock exchanges, which have set up broking subsidiaries, should be allowed to merge with the subsidiary and continue to act as a broking entity. The Group was of the view that the proposals for corporatisation and demutualisation should not be made applicable on a selective basis. These should be applicable uniformly to all stock exchanges and it would be up to the stock exchange whether to accept the proposal or not. The choice of non-acceptance would carry with it the consequence of derecognition and as mentioned earlier, derecognition would lead to winding up of the stock exchange in accordance with its articles and rules. While the existing members will be entitled to shares in the corporatised / demutualised stock exchanges in lieu of the existing rights, the voting rights of the shares held by the broker shareholder would be determined by SEBI in consultation with the Government of India. A body corporate incorporated under the Companies Act, whether under a scheme of corporatisation and demutualisation or otherwise, for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

De-mutualisation refers to the process where a mutually owned company or co-operative by customers gets itself converted into a Joint Stock Company. It gave an advertisement in the newspaper to invite the application for the required posts. To finalize the best candidate it followed a series of steps To begin with they rejected the forms of those candidates who did not fall in their basic criteria. The manages of the company also updated themselves about the changes in the Labour laws of the country. Which source of recruitment have they followed?

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Indeed this is one of the objectives to be achieved through this entire exercise of demutualisation of the stock exchanges. A mutual insurance coverage company is an insurance coverage firm owned totally by its policyholders. Any profits earned by a mutual insurance coverage firm are either retained throughout the company or rebated to policyholders in the type of dividend distributions or lowered future premiums. In distinction, a inventory insurance coverage company is owned by buyers who’ve purchased company stock; any profits generated by a inventory insurance coverage company are distributed to the investors with out necessarily benefiting the policyholders. Court of Federal Claims ruled that a taxpayer recognizes no gain from the demutualization of a mutual insurance firm. A major disadvantage of the mutual company organization is the agency’s reliance on policy premiums as a supply of income.

Section 21 of the SCRA states that where securities are listed on the application of any person in any recognized stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange. A recognized stock exchange may delist the securities as provided by the Section 21A of the act on any of the grounds prescribed under the act after giving a reasonable opportunity of being heard to the person affected by such action. For instance, Australia’s life insurer and funds manager AMP recently demutualised, as did Sun Life Assurance, the Canadian insurance firm.

However, after demutualisation and listing of ASX on the same stock exchange, the number of shareholders expanded to over 6000 with more than 5000 having fewer than 5000 shares each. I) Prior to demutualisation, the assets of ASX and LSE, were owned by the stock exchanges which in turn were owned by the brokers and the stock exchanges were set up as trusts. However in the case of SGX, the Fidelity Fund and the SIMEX compensation fund were held in Trust, with the investors as the main beneficiaries.

Definition of Short Term Capital Gain: Section 2(42B) Income Tax

Secondary market– The secondary market is also known as the stock market; it acts as a trading platform for investors. Here, investors trade in securities without involving the companies who issued them in the first place with the help of brokers. This market is further broken down into – auction market and dealer market. One of the most effective ways of availing cheap capital for a company is by issuing company shares in thestock exchange marketfor shareholders to acquire. Listed companies can generate comparatively more capital through share issuance owing to their repute in astock exchange marketand use it to keep their company afloat and its operations running. Demutualization refers to the conversion of an existing non-profit organization into a profits-oriented company.

Once listed as a public company, the exchange will be governed by the normal corporate governance standards and ethics to ensure more transparency. It will dispel the perception among investors that since the exchange was being run by a trust, it was open to manipulation. Qualified policyholders obtained shares of stock in the new public company. Note that some mutual firms, corresponding to Nationwide Mutual Insurance Company and the MassMutual, have owned inventory companies listed on a stock trade.

Need for multiple category of stock exchanges that is stock exchanges segregated according to the size of the issue listed and whether in each category there should be more than one stock exchange. Restrictions on voting rights in the corporatised stock exchanges. The manner in which trading rights are to be given to members – through refundable deposits or through transferable cards. The profits of the stock exchange would also vary with the number of companies listed on the stock exchange.

Why are companies demutualized?

This determination has widespread ramifications for individuals, professional associations and business entities that owned insurance coverage policies. Some of the biggest insurance corporations in America demutualized within the final decade, including MetLife Inc. and Prudential Financial Inc. Between MetLife and Prudential alone, there were approximately 22 million policyholders on the time of their demutualizations that occurred in 2000 and 2001, respectively. Indeed, when I raised this tax therapy problem with a South Carolina accountant, he suggested that the one of the largest malpractice protection suppliers in South Carolina for accountants was Prudential.

Incorporation in the memorandum and articles of association of existing stock exchanges set up of relevant provisions to give effect to the Group’s recommendations. The process of demutualisation of the stock exchanges would involve three broad steps viz. Structure of the governing boards of stock exchanges and representation of brokers. Each member of the ASX received 166,000 shares in the new entity against the only consideration provided by the brokers of relinquishment of mutual ownership rights.

On July 31, 2002 Anthem Insurance Companies, Inc. completed its conversion from a mutual insurance company to a inventory firm, and have become a wholly owned subsidiary of Anthem, Inc. As a part of the restructuring, individuals who owned insurance policies had been distributed new inventory in the insurance coverage corporations when it remodeled to a publically owned firm. A mutual insurer that’s unable to lift funds may be pressured out of enterprise or declared insolvent.

In order to be a shareholder prior to demutualisation, one had to be a member firm. In 2000 it became a for-profit company and got listed on itself. Demutualization is the process of which a customer-owned mutual organization or co-operative changes legal structure to form a joint stock company.

Spotlight on Stock Markets

This basic objective can be achieved in the Indian context without getting into all the legal complications of first converting the exchanges into limited liability tax-paying entities and then separating their ownership from the trading rights of brokers. The necessary changes can be effected quickly and without any hassles by exercise of the powers that SEBI already enjoys to reconstitute the governing boards of the stock exchanges. In effect, three amendments have been made by the Finance Act, 2001, in clause of Section 47, which has taken effect from April 01, 2002. Their effect is to indicate that the corporatisation of a recognized stock exchange in accordance with a scheme approved by the SEBI will not be a “transfer”.

The idea is to change the structure of exchanges that were originally formed as trusts. Demutualisation allows such associations to conduct commercial business to make a profit just like a normal corporate entity. Demutualisation would also allow the exchange to put in place a board of directors, to look after day-to-day operations. Demutualisation is a process that changes a mutual or co-operative association into a public company by converting the interests of the members into shareholdings. These holdings can then be traded like the shares of a company.

Some jurisdictions nonetheless present the possibility of registering joint-stock corporations without limited liability. MetLife, which completed the deal on November 1, 2010, paid roughly $7.2 billion in cash and $9.0 billion in MetLife fairness and other securities. The securities portion of the deal consisted of seventy eight.2 million shares of MetLife frequent stock, 6.9 million shares of contingent convertible preferred stock and 40 million equity units.

• The stock exchanges, which had demutualised have followed different models.
• As only the schemes for demutualisation approved by SEBI will qualify for the exemptions under the Income Tax Act, the Indian Stamp Act and the Sales tax Act, each stock exchange would be required to submit a scheme drawn on the lines of these recommendations to SEBI for approval.
• Each member of the ASX received 166,000 shares in the new entity against the only consideration provided by the brokers of relinquishment of mutual ownership rights.
• However, SEBI may, by notification in the official Gazette, specify the names of the stock exchanges, which had already been corporatized and demutualised, and such stock exchanges shall not be required to submit the scheme under this section.

The Group also noted that in several countries such as Australia and Singapore, a separate Act was passed to give effect to demutualisation. Among the statutes which require changes here are the Securities Contract Act, 1956, the Income Tax Act, 1961 and the Indian Stamps Act, 1899. 9.43 The Group therefore was of the view that some of the stock exchanges could explore the possibility of merger on the lines of Euronext. The Group does not recommend any specific route demutualisation meaning as being mandatory as the choice should be dictated on commercial considerations. The Group however feels that it would be in national interest that the infrastructure available with the stock exchanges be put to best economic use. In case the stock exchanges adopt the Euronext model, SEBI will have to work out the eligibility criteria for the brokers, model rules and bye-laws for such an stock exchange, the risk containment measures, and the listing guidelines.

Section 6 of the SCRA requires the recognized stock exchanges to furnish periodical returns to the SEBI relating to the affairs of the stock exchange. The SCRA empowers the SEBI to direct inquiry and call for inquiry report in relation to the affairs of any member of the stock exchange. The SCRA, in Section 3 of the Act, has provided for a specific procedure which enabled the stock exchange desirous of being recognized by the Government to apply in the manner prescribed by the act. The Procedures relating to granting of recognition by the Government to the stock exchange are explained in Section 4 of the SCRA. Simultaneously, the SEBI is also empowered to give recognition to the Stock Exchange. It is found that there are many “for profit” organizations even stock exchanges, which are not demutualized.

Selection of a broker The first step is to select a broker, who will buy/sell securities on behalf of the investor/speculator. Brokers may be individuals, partnership firms or corporate bodies. Selection of broker is compulsory as trading can only be done by SEBI registered brokers, who are members of a stock exchange. On the other hand Corporatisation of Stock Exchanges is the process of converting the organizational structure of the stock exchange from a non-corporate structure to a corporate structure.

Besides, pursuant to this directive the brokers have stepped down from these posts in almost all the stock exchanges. The Group felt that there is a need to further strengthen the present governance structure to compliment the demutualisation exercise so that the purpose of demutualisation could be fruitfully served. 8.1 The discussions in the foregoing paragraphs on the experiences of demutualisation in other countries, the present constitution and governance structure of the stock exchanges in India and the views expressed by various segments of stake holders, distil into the following issues. The Group felt that these issues would need to be addressed, as these are germane to any model of demutualisation. C) The maximum number of representative of the stock brokers of the recognized stock exchanges to be appointed on the governing board of the stock exchanges which shall not exceed one fourth of the total strength of the governing board. Under section 4B, SEBI can reject the proposed scheme if SEBI satisfied that it would not be in the interest of the trade and public to approve the scheme.

The office bearers will have access to inside information which can be misused by them. There is transparency and no professional approach. Moreover, they cannot raise large funds for modernization or up gradation by offering equity shares to others.