Round two

At long last, India gave the green light to the creation of a third national stock exchange. MCX-Stock Exchange’s two-year long legal tussle with the capital markets regulator has ended in victory. But the young contender now faces three big challenges.

First it needs investors. The Securities and Exchange Board of India’s approval is based on MCX’s submissions that backers MCX and Financial Technologies will cut their combined current stake to five per cent from 70 per cent today, including warrants.

Second it must create ample liquidity for customers. To do that, MCX needs to carve out a slice of business from both the National Stock Exchange and the Bombay Stock Exchange. That’s a tall order when the NSE claims market share of more than 75 per cent in derivatives and about 68 per cent in equities.

The task is made especially difficult by question marks remaining over its trading platform. The Dubai Gold & Commodities Exchange, in which in which FT and MCX hold a combined 45 per cent stake, recently ditched MCX’s ODIN platform in favour of Sweden’s Cinnober technology. That may require MCX to compete on price, leading to a race to the bottom that damages margins across the industry.

Third MCX needs to repair its image, which has been badly bruised by a protracted battle with regulators for its existence. Espirito Santo has given the FT group a red flag on corporate governance, due to poor disclosure and communications. The market regulator claimed that the exchange’s promoters were “persons acting in concert” and had entered into buyback arrangements with some financial investors while selling their shares to them. The country’s top regulator publicly accused the exchange of being “dishonest in its disclosures.”

True, the Bombay High Court eventually ruled in favour of MCX, and the Supreme Court directed regulators to consider afresh its application. But the reputational damage has been done. As part of its approval of MCX’s ambitions, the exchange must bring in the new investors. The sooner it brings in new high-quality equity partners, the better its chances of success.