Two shareholders miffed at NSE for sidestepping restructuring issue

They fear the plan could put exchange's IPO on backburner, lower valuations and lead to adverse tax implications

Two foreign shareholders in the National Stock Exchange of India (NSE) -- Norwest Venture Partners and SAIF -- wrote to the chairman and CEO of the exchange recently, pointing out that the minutes of the September and December meetings of the shareholders failed to mention the discussion on restructuring, and demanding that the minutes be amended.

Norwest owns 2.1 per cent while SAIF has a five per cent stake in NSE.

The letter has once again brought to the fore opposition from few foreign shareholders’ to the restructuring plan, which they feel could put the exchange’s initial public offering on the backburner, potentially lower valuations and lead to adverse tax implications. This follows a letter dated January 13, sent by a group of nine investors to the exchange's chairman, opposing the restructuring plan.

“Please note that the exchange receives several letters from stakeholders. Most of these letters are bilateral and it will be unfair to discuss the content unless asked by a regulator. And as you know many such issues were not under consideration when the market related acts were framed,” said an NSE spokesperson. According to him, NSE‘s intent to self-list and to restructure the organisation before listing are two separate considerations, and both can progress simultaneously. “NSE is open to discuss such concerns in appropriate forums including the Board,” he said.

Some of NSE’s shareholders believe that the proposed restructuring will require significant changes to Sebi’s existing SECC regulations, especially with regard to the shareholding norms. They also fear that the proposal to move cash from the regulated business to the holding company may not be acceptable to the regulator.

“There’s no visibility on approval timelines for the restructuring. Given the significant changes that are required to existing regulations the process could take years,” said a foreign shareholder, on condition of anonymity. “If there are concerns with the NSE management's ability to grow unregulated businesses and make acquisitions, these could be separately addressed with the market regulator without going through a massive restructuring,” he added.  

The restructuring seeks to transfer ownership of the exchange’s unregulated businesses like CAMS, Dotex and IISL to a new group company.

One investor is asking how the NSE management plans to invest in unregulated businesses. “If the plan is to make acquisitions with excess cash on the NSE balance sheet, the management should demonstrate how that will generate superior returns vis a vis returning the cash to shareholders,” said Sohil Chand, managing director, India, Norwest Venture Partners, a minority shareholder.

Chand added that currently investors are attributing a regulated business multiple to all the earnings of the NSE and post-restructuring, investors will likely value NSE on a sum-of-parts basis, applying different multiples for regulated and unregulated businesses. “We feel that the unregulated businesses would attract much lower multiples than the regulated business,” said Chand.

Experts are divided over the benefits of restructuring. “It will help the exchange focus on its securities business and insulate it from the risks flowing in from the non-core business,” said RS Loona, managing partner, Alliance Corporate Lawyers. Sandeep Parekh, founder at Finsec Law Advisors feels that it would be prudent for the exchange to follow the mandate of the shareholders and defer the restructuring. “The exchange can go ahead with restructuring once it lists itself rather than pushing for it now,” he said.

The exchange, for its part, has reiterated that the restructuring plan has been envisaged for ring-fencing the core regulatory function of the exchange post listing. A restructuring plan needs Sebi's in-principle consent and it is only logical that the exchange has explored regulatory feasibility for the said process, said the exchange spokesperson.

The exchange, however, declined to specifically comment on the adverse impacts of restructuring.