NSE Demutualization Project Summary of Report CMA Workshop November 24, 2009 John Carson Compliax Consulting

Agenda 2 1.Key Issues – summary 2.NSE’s Mandate and Status 3.CMA approvals 4.Ownership 5.Corporate Governance 6.Listing 7.SRO Responsibilities 8.NSE Business Administration 9.Regional Integration

Key Issues in our Report 3 1.Mandate of the Exchange 2.Financial Viability of the Exchange 3.Business Strategy and Plan 4.Ownership of the Exchange 5.Allocation of Shares in NSE Share allocation post-IPO shareholder structure Mandatory divestment level in IPO Target majority of “investor” shareholders 6.Ownership restrictions in NSE

Key Issues Listing of NSE 8.Corporate Governance of the Exchange 9.NSE Self-Regulation Responsibilities 10. Conflicts of Interest 11. CMA Oversight of NSE Operations 12. Regional integration of Exchanges

5 Demutualization Changes Member organizationCorporation - shareholders Cooperative governancePublic company governance Public utilityBusiness Non-profitFor-profit PrivateListed SROSRO?? Unchanged: Licensed and regulated organization with statutory obligations. Demutualization is a platform, not a solution.

Mandate and Status of the NSE 6  For-profit, commercial company under the Companies Act  Licensed Exchange under the Capital Markets Act  Subject to the requirements under the NSE Demutualization Act  Must comply with terms of Articles as approved by CMA  As a licensed Exchange, the NSE must meet certain public interest responsibilities  Material changes must be approved by CMA  Subject to ongoing oversight by CMA

CMA Approval of Demutualization  CMA must ensure that “new NSE” will continue to meet requirements of its license  Plus demutualization requires CMA to impose new terms and conditions on NSE  Legal framework report – recommended conditions of license: Overall fit and proper test Ownership restrictions Corporate governance Financial resources IT Systems 7 Exchange Rules Self-regulation functions Risk management Participation or access Clearing and settlement

CMA Approval  NSE application must cover many of these areas, especially:  Ownership  Corporate governance  SRO operations  CMA review of application must ensure that NSE’s plans, and the terms and conditions covering each area of the licensing criteria are satisfactory  CMA approval must attach terms and conditions  CMA must approve any changes in future

Ownership after Demutualization 9 Option 1 Private Company (transitional stage) Option 2 Listed Company Stakeholders and strategic shareholders:  Members (banks & brokers)  Listed companies  Institutional investors  Foreign exchange?  Public shareholders  May include strategic shareholders Offer shares to all members of these groups, or to a subset of them. Stakeholders may continue to hold shares after listing but members must significantly reduce holdings

Ownership Issues and Responses NSE as Listed Company IssueResponse  Ensure that ownership is not concentrated in 1 person (e.g. a bank) or any group acting in concert  Limit ownership by any person to 5% or 10% initially  Members must cut shareholdings to X% in total  Prohibit groups from acting in concert  CMA should have power to waive the cap on application of NSE.  Control private sales to foreign entities (e.g. strategic investor like a foreign exchange)  Consider a global limit on foreign ownership  CMA should have power to waive the cap on application of NSE  Ensure that Exchange remains in sound financial position  NSE may declare dividends provided that it remains in sound financial position  Short term interests of investors may conflict with long term objectives of NSE or its public interest responsibilities  Limit ownership by any person to 5% or 10%  CMA oversight program – review of decisions to prevent conflicts 10 Conflicts of interest Control of NSE Foreign ownership Dividends & Distributions

IPO and Listing of NSE 11  Timing: Listing to occur within 12 months of demutualization, unless the CMA grants an extension  CMA must approve the self-listing application and prospectus  IPO process should be approved by the CMA, including the transaction advisors  NSE should carry out a primary financing as part of the IPO to raise capital to finance its business plans IPO = primary financing by NSE + secondary offering by members (and ICF)

Timing of Listing 12 Immediate ListingWithin 1 YearTransition Period  Australia  Hong Kong  Deutsche Borse  Euronext  Singapore  Malaysia  Athens  LSE  NASDAQ  CME  Toronto International Precedents Transition period to put business structures and processes in place

Immediate Listing 13 Listed Company ProsCons  NSE is subject to market disciplines on corporate performance and disclosure  Ensures reform of ownership and governance  Successful IPO will raise large funds for business and market development  Serve as a model of high standards of corporate governance and disclosure  NSE may need more time to mature as an organization and be on sound business footing  The private company ownership model might better foster development of NSE and market  IPO is subject to market timing considerations

Requirements for Listing  Need successful business and “growth story”  Use of proceeds of IPO should be identified  Conditions for self-listing must be agreed with Regulator: Approval of listing application by CMA NSE compliance with Listing Rules Address conflicts of interest Decide on ownership restrictions  Financial statements must be restructured on public company model  Listed company corporate governance and disclosure procedures must be established 14

Corporate Governance - Board 15  CMA must approve the Directors on the first Board  NSE to propose candidates in its application for demutualization  Board of Directors of 11 persons  The majority of directors must be independent of NSE and its members Maximum of 3 member directors  All directors must be elected by shareholders (except CEO)  Not a “stakeholder board” – all directors have a duty to act in the best interests of the corporation

Corporate Governance – Oversight 16 CMAIssueNSE Review and approve charter Responsibilities of the Board of Directors Board develops and adopts a charter Approve candidates based on fit & proper test Nomination of Directors Nomination Committee nominates candidates Review policies & procedures Corporate Governance Policies & Procedures Board develops and adopts CG policies & procedures Review effectiveness of policies & procedures Implementation of CG Policies & Procedures Assess effectiveness of policies & procedures annually Appointment of NSE Managing Director Board appoints the MD Review appointment based on fit & proper test

Governance – Advisory Committees 17  The Board may authorize customer advisory committees to provide input to management and the Board  Committees should be advisory only – no decision-making authority  Advisory committee members do not need to be independent  Committees could include: Trading Committee Business Conduct Committee Listing Committee IT Committee

Governance – SRO Department 18  The SRO unit must be functionally and physically separate from business operations of NSE (Condition of license)  The SRO unit should report jointly to a Regulation Committee of the Board and to the CEO  Regulation Committee should be comprised entirely of independent directors  Committee should consider all proposed rule changes concerning business conduct and compliance issues  CMA oversight of NSE SRO operations includes approval of rules, regular reporting to CMA, and regular inspections  MOU on self-regulation between the CMA and NSE  Disciplinary tribunal to hear disciplinary cases

Governance – Conflicts of interest 19  Board of Directors has a majority of independent directors  Member advisory committees have no decision-making authority or mandate to supervise operations  The Board of Directors’ code of ethics should include a conflict of interest policy  Conflicts between the business and SRO functions must be managed based on conditions set by CMA  CMA oversight will include monitoring of how NSE manages conflicts

SRO responsibilities 20  The NSE’s high-level responsibilities shuld be set out in the CMA Act and / or the Licensing Regulations, including: Market regulation – trading rules & surveillance Member regulation – business conduct rules & inspections Listings – listing standards & ongoing obligations of listed issuers.  CMA and NSE arrangements on regulatory cooperation should be set out in an MOU  NSE’s primary responsibility is to ensure compliance with its rules, and CMA regulations that pertain to trading on NSE and the business conduct of its members  The NSE will enforce its own rules through its disciplinary process.

Terms of Approval – SRO Functions  Adopt an independent corporate governance structure for SRO functions  Ensure conflicts of interest are managed appropriately  Develop a new Rule Book  Commit the financial and human resources needed  Develop a disciplinary process based on an independent tribunal  Ensure compliance by its members with its rules and policies, and enforce its rules through the disciplinary process as appropriate 21

NSE Business Administration 22  NSE’s business should be managed by its Board and management.  NSE business plans should not be subject to CMA approval, subject to the points listed above.  The NSE should set its own fees and prices for services, subject to CMA review to ensure “fair access” principle is respected.  CMA should refrain from intervening in the business BUT: CMA is responsible for ensuring that the NSE remains financially viable. The NSE should be required to report any proposed material changes in its organization, business operations or finances to CMA. All products must be in compliance with the CM Act and regulations. CMA must approve any NSE rule changes required to introduce or change a trading product class. CMA must approve any prospectus required to introduce and sell a specific product.

Regional Integration 23  Demutualization of NSE and other regional exchanges can facilitate the integration of the exchanges in East Africa.  But regional integration should be a separate project.  Integration will proceed much faster and be more effective if regional exchanges are also demutualized.  Integration of a commercial exchange with mutual or government-owned markets will be limited.

The End 24 Thanks for your interest.