The broad smile on the faces of the Multi Commodity Exchange (MCX) brass on Wednesday morning was understandable. They would indeed be relieved, as the Securities and Exchange Board of India’s (Sebi’s) decision to grant permission to MCX Stock Exchange (MCX-SX) to launch stock trading ends an agonising wait of over two years that saw numerous court battles, a slugfest with the market regulator and hectic backroom manoeuvring. But will the smile last long enough? Sebi tacked on an onerous condition: that MCX’s promoters have to reduce their direct equity from 10 per cent to five per cent within 18 months of the date of approval and that MCX and Financial Technologies will also have to extinguish their entitlement to equity, or rights over equity arising from instruments such as warrants (currently estimated at around 60 per cent of the total shareholding in MCX-SX), within three years. The MCX-SX brass says this can be done easily, though it is not clear how it can achieve these stiff targets. But it is also true that these weren’t a nasty surprise in the fine print.
The question is whether just a five per cent stake after three years would serve as sufficient motivation. Will promoters build a business for the long term once they know they have a very limited stake in its future? Moreover, what defies logical analysis is the implication that a stock exchange is somehow a more sensitive institution than a bank. The draft norms issued by the banking regulator for new banks allow promoters to have a stake of up to 15 per cent. For existing banks, the Reserve Bank of India (RBI) insists on a cap of 10 per cent, but there are indications that it is to be increased to 15 per cent to provide a level playing field between new and old players. So what has Sebi seen that the RBI hasn’t?
There isn’t any doubt that a third stock exchange was necessary — the sector desperately needs some competition, given that the National Stock Exchange has had a nearly 90 per cent share in the country’s equity trading segment for a long time now. But, the show of exuberance by MCX-SX notwithstanding, it is unclear how it intends to navigate the market regulator’s recent policy on market infrastructure institutions, which is, at best, a confusing document. In its bid to make the Bimal Jalan Committee report “acceptable”, Sebi has actually come up with a policy that is neither here nor there. For example, the Jalan committee went to one extreme by banning the listing of stock exchanges for five years and virtually making exchanges not-for-profit associations. Sebi found that unacceptable, but instead came up with a solution that would make life difficult for everybody: it forced exchanges to transfer a quarter of their profits to the settlement guarantee fund of the clearing corporation to meet contingencies. While the regulator takes credit for killing two birds with one stone, the reality is no stock exchange will discover an attractive valuation since it will be based on 75 per cent of the earning potential. Though MCX-SX doesn’t have to worry about that immediately, as the Sebi rules say exchanges have to be operational for at least three years to list, the fact is there could be a hangover the day after the celebrations.