The government will introduce a Bill to corporatise stock exchanges in the Budget session of Parliament.

This is in line with the Securities and Exchange Board of India decision to ask for a legislative change in the Securities Contract Regulation Act to facilitate the changeover of exchanges from an association or trust to a corporate body.

The Bill will be a significant step towards reforming exchanges after the stock market scam of 2001. The changeover will follow the Justice Kania committee recommendations.

However, the ministry is firm that the broker members should not have any representation on the new board of directors, to ensure that investors have confidence that the management of the bourses have been distanced from brokers, unlike the other recommendation of the Kania committee.

The Sebi board had recommended that while members would be entitled to shares in exchange for their rights, their voting rights would have to decided by the Centre.

Also exchanges would have to submit corporatisation schemes within six months. But unlike the global practice, shares of an exchange would not be listed on itself but on other exchanges.

The changeover would affect all exchanges, except the National Stock Exchange.

For corporatisation and demutualisation, the Income-Tax Act and the Stamp Act will also have to be amended. All profits of stock exchanges will now be taxed.

But the amendments to the Income-Tax Act will ensure that the past profits of an exchange, which were not taxed when it was a non-profit entity, is not be taxed, even though it is an entity geared to profits.

Reserves can, however, be taxed in the hands of shareholders at applicable rates when they are distributed as dividend.

But the transfer of assets, shares and trading rights from the current to the new entity will not be classified as transfer under the Income-Tax Act.

Sebi has also said exchanges can either opt for the card system or the deposit system, but the appropriate method of valuation has to be followed.

For the deposit system, there will be equal board representation of brokers, shareholders and investor representatives.

Sebi will, of course, approve names of directors on the board and their tenures.

Run-Up to the Budget 2003