Indian exchanges miss global M&A action

While stock exchanges worldwide are consolidating, not much action is happening in India due to the cap on equity holding in stock exchanges.

On Tuesday, the Deutsche Borse and the New York Stock Exchange (NYSE) announced their decision to merge. Also, SGX, Singapore’s leading stock exchange, made a final offer to take over the Australian Stock Exchange. India, however, isn’t directly impacted, as there is a cap on foreign ownership of exchanges here. A single investor can hold only up to five per cent in an exchange. However, five types of entities, including stock exchanges and financial institutions, can hold up to 15 per cent in a stock exchange.

Despite that, a debate has started on whether any consolidation is possible among Indian stock exchanges. In the country, the National Stock Exchange (NSE) is the largest in the equity cash and derivatives segment. The Bombay Stock Exchange (BSE) has almost nil share in derivatives but follows NSE in the cash segment. In currency futures, MCX-SX is the market leader (49 per cent share), followed by NSE (30 per cent). In the past couple of months, United Stock Exchange’s (USE’s) share has started improving (it is 12 per cent now).
 

GROWTH CURBS

• Global mergers of exchanges don't affect India directly
• BSE supports concept of anchor investor
• Revival of OTC exchange stuck 
• Cap on equity holding in the way for consolidation; need felt to increase that
• MCX-SX had earlier made an offer to play anchor role on BSE

NYSE had invested in NSE but sold the stake last year. The Deutsche Borse holds five per cent in BSE. According to a senior exchange functionary, “BSE is the best placed to benefit from the merger of the two global giants, as it is getting the expertise of only Deutsche. NYSE’s expertise may also become available now.”

Indian revamp
BSE needs to revamp its business, as it has not been able to mark its presence in the derivatives segment even after several initiatives. The last attempt was start of physical settlement in derivatives. The first such settlement is due in April. The industry is also discussing the need for an anchor investor in BSE to provide a fresh push. BSE is understood to be supporting this, but the cap on holding is keeping outside investors away, says an observer.

A couple of years ago, MCX-SX had made an anchor investor offer to BSE, with a proposal for cross-holding. Under the proposal, the latter was to take care of the cash market business and the former of the derivatives segment. This proposal was, however, not approved by the BSE board, said a person familiar with the development. A BSE spokesperson declined to comment on this. A stock exchange can hold up to 15 per cent in another exchange.

Ashima Goyal, professor, Indira Gandhi Institute of Development Research, said, “Stock exchanges in India need more competition. BSE has made several attempts to revamp its working but has not been able to transmit them effectively. A new entity should be allowed to compete.” NSE is focusing on leveraging its benchmark index, the Nifty, taking it to a global stage, while bringing global indices on its platform. Its next big move is expected to be the launch of a segment for small and medium enterprises.

BSE has picked up a 15 per cent stake in USE for non-equity derivatives trading. USE’s share has started rising since the middle of December. Its share was now in double digits and increasing, said Gaurav Arora (of Jaypee Capital), who initiated the process of setting up USE few years ago. USE is using BSE’s platform to trade in currency derivatives. Another exchange, MCX-SX, a market leader in currency futures, also wants to enter the equity segment, but its case is in the court.

Needed moves
On the global merger’s impact, Joseph Massey, managing director & CEO, MCX-SX, said, “The merger of Deutsche Borse and NYSE is in line with the global consolidation that has been happening among various exchanges for geographical penetration, asset class consolidation, cost rationalisation and strategic advantages.

This is certainly a good move and the requirement of the market.”

However, for this to be meaningful in India, he suggests two things. “The first is broad-basing of the market in terms of size, investor base, geographical presence, availability of product segments, greater financial inclusion and a more competitive market structure, with more exchanges and intermediaries. Currently, one exchange, which is 65 per cent held by foreign and private investors (NSE), accounts for over 95 per cent of the Indian market, which is not healthy. And, we have only one per cent of the population using the exchanges. Monopoly itself is bad. Private sector monopoly is the worst.”

Reliance Capital last year made a Rs 90-crore bid to revive the Over the Counter Exchange of India However, as the new ownership structure for stock exchanges is being discussed, the move has faced hurdles, says a source.