Earlier the stock exchanges in India are formed asassociation of stock brokers. Stock exchanges were mutualorganizations that were managed by members in a single city witha huge dealer population. They were registered as what is known assection 25 companies or as not-for-profit organization.Organizational profit making was never the motive; the exchangesrequired funds only the extent of meeting its expenses. Any surplusmade by the exchange resulted in reduced access fees for members.Though outside professionals have been appointed to researchwings and to positions such as executive directors, in practice, theexchanges have been run by broker-members electedrepresentatives.The members, who provide brokerage services also own, controland manage the exchange. DRAWBACKS:-
The conflict of interests between the owners, the membersand the management - since all the brokers are managing theexchange together then such conflict is advent to happen.2) Brokers were manipulating the market for their advantage-That is investor’s interest was ignored.
Scams took place in pre-demutualization phase-1992-Harshad Mehta scam & 2001-Ketan Parekh Scam
Lack of strict vigilance on the market-No one person or management was there to look after the affair of theexchange.
So Indian market and financial sector felt the need of demutualization.