Stock exchanges should neither list nor make supernormal profits, according to a report prepared by a committee under the chairmanship of former Reserve Bank of India governor Bimal Jalan.

The report was made public on the website of the Securities and Exchange Board of India on Tuesday.

The National Stock Exchange (NSE) made a net profit of Rs613.77 crore last fiscal, while the Bombay Stock Exchange (BSE) reeled in Rs231.58 crore, according to information on their websites.

The recommendations take into account the feedback of three national and two regional exchanges in addition to 24 other entities including investor associations, brokers and depositories.
It has also set norms for the compensation of exchange heads while limiting the role that trading members could play in the involvement of the boards of exchanges.

The compensation of Ravi Narain, MD of the NSE, was Rs6.6 crore last fiscal, while that of Chitra Ramakrishna, the joint MD of the exchange, was Rs4.4 crore.

Madhu Kannan, managing director and chief executive officer of the BSE, has a package of Rs.1.6 crore, as did Joseph Massey, MD and CEO of MCX Stock Exchange.

The Jalan Committee report said all market infrastructure institutions (MIIs) including stock exchanges should be made to follow the disclosures and corporate governance requirements of the listing agreement applicable to listed companies.

However, “the committee is not in favor of permitting listing of MIIs”, the report said, citing conflict of interest.

Additionally, an exchange should not become a vehicle for attracting speculative investments, it said.

Both the BSE and the NSE have suggested that they are exploring the possibility of listing themselves.

Stock exchange subsidiaries, too, may not get a chance to hit the bourses without seeking prior Sebi approval.

If an entity ‘is substantially owned (i.e. 24% or more of equity capital) by that stock exchange or by an MII in which that stock exchange holds shares, then such entity shall seek prior approval from Sebi before listing. ‘

The report also brings in the concept of anchor investors for MIIs consisting of domestic institutions with a net worth of at least Rs1,000 crore and which fall under the definition of public financial institutions or banking companies as defined by the Companies Act and the Banking Regulations Act, respectively.
Anchor investors can hold up to 24% of the total equity of the exchange, along with persons acting in concert.

Every anchor institutional investor will have to bring down its holding to 15% or less in ten years from the time it is recognised as an anchor.

All anchor investors together can hold no more than 49% of an exchange.

The report recommends that a cap be placed on the maximum profits that the shareholders of the MII can enjoy.

Any profits above such limits should be transferred to funds towards ensuring settlement guarantees and investor protection.
The compensation of key management personnel, including such as executive directors or chief executive officers, should be determined after giving due regard to the industry standards for the same, the report said.

At various points in time, there has been dissent expressed in the media over the pay packages of exchange officials which run into eight figures.

These had been justified by some quarters on the basis of the performance of the bourse as a business entity.

According to the report, increments for such executives should be fixed and not include any variable component linked to the performance of the entity. It should also not include any stock options in the MII.

The report also took another step towards removing the influence of trading members, who earlier exerted much influence over exchange operations in the days before demutualisation.

The board of these institutions should not include any trading or clearing members. The number of public interest directors should have an equal number of shareholder directors.

The report recommends the formation of an advisory committee consisting of trading members to make use of their practical experience while maintaining governance standards.