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Capital Market and Securities Laws · Securities Contracts (Regulation) Act, 1956

Corporatisation and Demutualisation of Stock Exchanges under SCRA

Updated 11 October 2026 · Fact-checked

Under sections 4A and 4B of the SCRA, 1956, a recognised stock exchange must be corporatised (made a company) and demutualised (ownership separated from trading rights). It submits a scheme to SEBI, which approves or rejects it. After approval, at least 51% of equity must be held by the public within twelve months.

Understand Corporatisation and Demutualisation of Stock Exchanges

Old Indian stock exchanges were run as mutual bodies. The brokers were the members. They owned the exchange, managed it and traded on it. This mixes three roles: ownership, management and trading. It can cause conflicts of interest. For example, brokers on the governing body may favour their own trading interests over those of investors.

Corporatisation means converting the exchange into a company with share capital. Demutualisation means separating the three roles. Shareholders own it, a professional board manages it, and brokers keep only trading rights. The two usually go together, but they are not the same thing.

Section 4A says that, from the appointed date, every recognised stock exchange not already corporatised and demutualised must be so, in line with section 4B. The appointed date is notified by SEBI in the Official Gazette, and can differ for different exchanges. SEBI may fix another appointed date for an exchange that was prevented by sufficient cause.

Section 4B sets out the procedure. The exchange submits a scheme to SEBI within the time SEBI specifies. SEBI may approve it with or without modification if it is satisfied that this is in the interest of the trade and also in the public interest. It may also reject it, after giving a reasonable opportunity of being heard.

Two safeguards matter most. First, the scheme cannot be paid for out of the exchange's own reserves or assets. Second, SEBI can restrict the voting power and board representation of broker-shareholders, so that brokers do not control the exchange.

Key rules to remember

Section 4A: duty to corporatise and demutualise
All recognised stock exchanges (not already done) → corporatised and demutualised as per section 4B, from the appointed date
Appointed date is notified by SEBI in the Official Gazette. It can differ for different exchanges.
Scheme submission and approval (s. 4B(1), (2))
Exchange submits scheme to SEBI → SEBI approves (with or without modification) if in the interest of the trade and also in the public interest
SEBI may notify exchanges already corporatised and demutualised. They need not submit a scheme.
Bar on use of reserves (s. 4B(3))
No approval if shares, trading rights in lieu of membership card, or dividends to members are proposed out of reserves or assets of the exchange
The shares must be issued for a lawful consideration.
Publication (s. 4B(4))
Approved scheme published by SEBI in the Official Gazette and by the exchange in two daily newspapers → scheme binding on all
It binds members, creditors, depositors, employees and others, despite any contrary law or agreement.
Rejection (s. 4B(5))
Reject by order, published in the Official Gazette, after reasonable opportunity of being heard
The hearing must be given to all persons concerned and to the exchange.
Restrictions on brokers (s. 4B(6))
Broker representatives on governing board ≤ 1/4 of total board strength
SEBI may also restrict voting rights of broker-shareholders and their right to appoint representatives. This is done by a written order.
Public shareholding (s. 4B(8))
Public (other than shareholders having trading rights) holds ≥ 51% of equity share capital within 12 months of publication of the s. 4B(7) order
SEBI may extend by another 12 months on sufficient cause and in the public interest.

How to solve Corporatisation and Demutualisation of Stock Exchanges questions

Most questions ask you to explain the concept, state the procedure, or apply a limit to given facts. Use the same frame each time.

  1. 1Identify what is asked: meaning, procedure, limits, or a fact-based problem.
  2. 2Define corporatisation and demutualisation separately, in one line each.
  3. 3State the provision: section 4A for the duty, section 4B for the procedure.
  4. 4Walk through the sequence: scheme to SEBI, approval or rejection, publication, binding effect.
  5. 5For fact problems, pick the relevant rule: bar on reserves, one-fourth board limit, or the 51% public holding within 12 months.
  6. 6Apply the rule to the numbers or facts given. Do the arithmetic clearly.
  7. 7End with a clear conclusion that names the section.

Quickest way: Remember it as: Duty, Scheme, Publish, Restrict, 51%

When to use it: Use it for short notes and for case-based questions in the exam hall.

  1. Duty: section 4A, all exchanges, from the appointed date.
  2. Scheme: submit to SEBI, which approves or rejects (hearing before rejection).
  3. Publish: Gazette plus two daily newspapers. The scheme then binds everyone.
  4. Restrict: broker board seats at most one-fourth. Voting rights can also be limited.
  5. 51%: public holding within 12 months, extendable by 12 months.
  6. Then write the conclusion in one line.

Common mistakes in Corporatisation and Demutualisation of Stock Exchanges

  • Treating corporatisation and demutualisation as the same thing.

    They are almost always done together, so notes blur them.

    Fix: Corporatisation is a change of legal form into a company. Demutualisation separates ownership, management and trading rights. Write both definitions.

  • Saying the 51% must be held by the public including broker-shareholders.

    Students remember the figure and forget the exclusion.

    Fix: Section 4B(8) says the public other than shareholders having trading rights. Include that phrase.

  • Stating the 12-month period from the wrong date.

    Students assume it runs from approval of the scheme.

    Fix: It runs from the date of publication of the order under section 4B(7), the order restricting broker rights. The extension is a further 12 months.

  • Writing that broker representatives can be up to one-third of the board.

    Confusion with other fractions in company law.

    Fix: The limit is that the number shall not exceed one-fourth of the total strength of the governing board.

  • Thinking SEBI can reject a scheme without hearing the exchange.

    Students focus on SEBI's power and skip the proviso.

    Fix: Rejection needs a reasonable opportunity of being heard to all persons concerned and the exchange. The rejection order is published in the Official Gazette.

  • Forgetting that an already corporatised exchange need not submit a scheme.

    The proviso to section 4B(1) is short and easy to skip.

    Fix: SEBI may notify such exchanges by name in the Official Gazette, and they are then exempt from submitting a scheme.

Worked examples

Example 1

Explain the procedure for corporatisation and demutualisation of a recognised stock exchange under the SCRA, 1956.

Show the solution
  1. Provision: section 4A requires recognised stock exchanges not already corporatised and demutualised to be so from the appointed date notified by SEBI, in accordance with section 4B.
  2. The exchange must submit a scheme to SEBI within the time SEBI specifies. An exchange already corporatised and demutualised and notified by SEBI need not submit one.
  3. SEBI may make such enquiry as necessary. If satisfied that it is in the interest of the trade and also in the public interest, it may approve the scheme with or without modification. It cannot approve if shares, trading rights or dividends are proposed out of the exchange's reserves or assets.
  4. If SEBI is not satisfied, it may reject the scheme by an order published in the Official Gazette, after giving a reasonable opportunity of being heard.
  5. An approved scheme is published by SEBI in the Official Gazette and by the exchange in two daily newspapers. It then binds members, creditors, depositors, employees and all others connected.
  6. SEBI may also restrict the voting rights and board representation of broker-shareholders. Within 12 months of publication of that order, the public must hold at least 51% of the equity share capital.

Answer: Corporatisation and demutualisation under sections 4A and 4B follows this sequence: scheme to SEBI, approval or rejection, publication, binding effect, broker restrictions and a public shareholding of at least 51%.

Example 2

The governing board of a recognised stock exchange has 16 members. SEBI's order restricts broker representation to the maximum permitted. Find the maximum number of broker representatives. Also, the order under section 4B(7) was published on 1 March 2026 and the exchange has not reached the required public shareholding. State the date by which it must comply, and the latest date if SEBI grants the extension.

Show the solution
  1. Section 4B(6)(c): broker representatives shall not exceed one-fourth of the total strength of the board.
  2. One-fourth of 16 = 16 ÷ 4 = 4.
  3. Section 4B(8): public holding of at least 51% must be achieved within 12 months from publication of the order. 12 months from 1 March 2026 ends on 1 March 2027.
  4. The proviso lets SEBI extend by another 12 months on sufficient cause and in the public interest. The latest date is then 1 March 2028.

Answer: At most 4 broker representatives. The exchange must comply by 1 March 2027, or by 1 March 2028 if SEBI grants the full extension.

Exam tips

  • Quote section 4A for the duty and section 4B for the procedure. Examiners reward correct section numbers.
  • Write the two terms separately. A common short-note question asks for the difference between them.
  • For numerical or fact problems, name the limit first (one-fourth or 51%), then compute.
  • Mention both public-interest and interest-of-the-trade tests when discussing SEBI's approval.
  • Close every answer with a one-line conclusion tied to the facts.

Practice questions from Securities Contracts (Regulation) Act, 1956

Corporatisation and Demutualisation of Stock Exchanges: frequently asked questions

What is the difference between corporatisation and demutualisation?

Corporatisation converts the exchange into a company with share capital. Demutualisation separates ownership, management and trading rights, so brokers no longer control the exchange by virtue of membership. Sections 4A and 4B require both.

What is the minimum public shareholding in a demutualised exchange under the SCRA?

Section 4B(8) requires at least 51% of equity share capital to be held by the public, other than shareholders having trading rights. This must be reached within twelve months of publication of the order under section 4B(7). SEBI may extend by another twelve months.

How many broker representatives can sit on the governing board?

Under section 4B(6)(c), SEBI can cap the number of broker representatives, and the cap must not exceed one-fourth of the total strength of the governing board. SEBI can also restrict broker-shareholders' voting rights.

Can SEBI reject a demutualisation scheme?

Yes. If it is not in the interest of the trade and the public interest, SEBI may reject the scheme by an order published in the Official Gazette. Before that, it must give a reasonable opportunity of being heard to the persons concerned and the exchange.