Investment Management

Double Taxation Avoidance Agreement (DTAA)

A major portion of international capital flows entering the Indian economy is aided by taxation laws and systems among countries like the Double Taxation Avoidance Agreement.

The phenomenal growth in international trade and commerce and increasing interaction among nations, citizens, residents and businesses of one country has extended their sphere of activity and business operations to other countries. A person earning any income has to pay tax in the country in which the income is earned (as Source Country) as well as in the country in which the person is resident. As such, the income is liable to be taxed in both the countries.… Read the rest

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Demutualization of Bombay Stock Exchange (BSE)

The change in the name of Asia’s oldest stock exchange, from the Stock Exchange, Mumbai to the Bombay Stock Exchange Ltd., (BSE Ltd.) is of more than cosmetic significance. Along with the change in name comes a new perspective, one brought about by a comprehensive change in its ownership and management. Until now, the BSE like most other exchanges in India was owned and managed by brokers, who also had the sole right to trade in the exchanges. Conflicts of interest were bound to arise in such situations. Until the advent of the National Stock Exchange in 1994, the BSE was India’s pre-eminent exchange, accounting for an overwhelmingly large proportion of the share market transactions of the country.… Read the rest

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Tax liability attached to a demutualized stock exchange

When a trading right is acquired, and a share is allotted to a member of an stock exchange by virtue of which he acquires a membership privilege against the extinguishment of the previous right of membership, no transfer of assets effectively takes place and neither of the acquisitions should therefore be deemed to be a transfer within the meaning of the word in the Income Tax Act. However, at the point of sale of any of these two rights, capital gains tax would be attracted.

Since the above processes are necessary to implement a policy announced by the Government, and in the larger interests of the securities market in India as well as in the interests of investors, it would be necessary to ensure that both the processes described above are tax neutral and no additional tax liability is attached either to the stock exchange or to a member of a stock exchange which is implementing an approved scheme of demutualization.… Read the rest

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Governance of the demutualized stock exchanges

In the past, in almost all the stock exchanges, the broker members of the governing boards have been critical in the governance of the stock exchanges. The reconstitution of the governing boards of the stock exchanges by SEBI, which reduced the broker representation on these boards to 50%, had helped in making the boards more independent and minimized the influence of brokers. However, in most stock exchanges on account of the brokers retaining posts of the officer bearers of the stock exchanges till recently viz. president, vice-president and treasurer, they continued to play a dominant role in the management of the stock exchange.… Read the rest

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The need for demutualization of stock exchanges

Demutualization of stock exchanges implies that a mutually owned stock exchange is converted into a company owned by shareholders. In other words transforming the legal structure, of an exchange form to a business corporation form is referred to a demutualization. The ownership, management and trading is separated and are in different hands. They are clearly separated like a commercial entity. The management of the exchange is separated from the shareholders and the brokers.

Need for demutualization:

  • Stock exchanges owned by members tend to work towards the interest of members alone, which could on occasion be detrimental to rights of other stakeholders.
… Read the rest
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Demutualization of stock exchanges

Demutualization refers to the conversion of an existing non-profit organization into a profits-oriented company. In other words, an association that is mutually owned by members converts itself into an organization that is owned by shareholders. The company can take different shapes and forms, that is, it could be either a listed or unlisted company which may be closely held or publicly held.

Demutualization of stock exchanges involves the segregation of members’ right into distinct segments, viz. ownership rights and trading rights. It changes the relationship between members and the stock exchange. Members while retaining their trading rights acquire ownership rights in the stock exchange, which have a market value, and they also acquire the benefits of limited liability.… Read the rest

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