The Fear Of Climbing Aboard

There’s more than meets the eye in the debate over the listing of India’s two premier stock exchanges. That’s the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), which have a daily turnover of about Rs 18,000 crore and Rs 3,600 crore respectively. The battle lines are hardening. Union minister of state for finance Jayant Sinha has ope­nly made a case for the listing of the stock exchanges. But some former and present bureaucrats and members of the NSE are resisting any move by the government to get them listed.

On January 1, 2016, markets regulator SEBI came out with regulations paving the way for the listing of the exchanges. SEBI’s new regulations have effectively cleared the path for the cross-listing of the exch­an­ges—in other words, listing on each other—to improve transparency. Yet, little has moved. While BSE has moved ahead and finally got SEBI clearance for its IPO—the first step in a listing—the go-ahead has come after two years of its application.

According to some investors of NSE, the UPA government went slow on the listing of the stock exchanges and bureaucrats in the Union finance ministry put the proposal in the backburner for several years. Because of this, SEBI was silent on the issue. Speaking at an industry chamber recently, Sinha spoke his mind clearly. He said, “We want to ensure that we follow global standards on listing. For many of our public sector financial institutions, including LIC, which has a stake in NSE, it is an opportunity to monetise an asset which is valuable. As far as public sector banks are concerned, they need to strengthen their balance sheets as well as monetise their assets. So listing the exchanges is an opportunity to enable our national institutions to monetise holdings.”

The main resistance to the listing is coming from NSE, the bigger of the two bourses, which is putting conditions before the government and SEBI before it moves towards a listing. It is arguing that, being a competitor, it cannot list on BSE and make disclosures to it. It says it is ready to list, provided it can make disclosures to a third party or SEBI—but not BSE; it’s also pushing for self-listing, something SEBI has not allowed currently. Says Ravi Narain, vice-chairman, NSE, “The key issue is that of securing approval for self-listing. Not to do so will be highly inappropriate and unfair to the investor community.” To be sure, NYSE, Tokyo, Deutsche Borse, Hong Kong SE, Singapore SE, London SE, Euronext and Nasdaq are all self-listed. BSE, however, is open to listing on NSE.

But NSE’s stand has not gone down well with investors and brokers. Some investors say that the real reason for its resistance is that it functions like a closed club without transparency and is driven by bureaucrats. A listing of the bourse will make it transparent and accountable and corporatise it, which may not be to the liking of the people running it.

A top broker who is a member of both BSE and NSE, told Outlook, “NSE is one of the most opaque and undemocratic institutions ever. It actually never promised a listing to its shareholders. We see no good reason why NSE has been against a listing. I suspect the real reason is their quite usurious executive pay...among the highest in India, for no good reason.” He adds that NSE’s negative attitude towards listing has been attracting the ire of its institutional shareholders.

Experts find fault in NSE’s contention that being a competitor, it cannot make disclosures to BSE and cannot list on it. Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, says, “There is a bit of silent rivalry between BSE and NSE and some admission of non-confidence on part of NSE. If you are a stock exchange and into various services, how long will it take another exchange to find out about you?” Quite obvious.

To be fair, NSE has gone on record to say that it supports listing, has even set up a committee late last month to look into it and has approached SEBI for restructuring of the exchange to separate the profit-seeking and the regulatory arms. Says Chitra Ramkrishna, MD & CEO, NSE, “We are committed to take the listing of the country’s most trusted bourse to the exchange platform. Understanding of critical issues and a constructive dialogue is important to reach this milestone in stipulated timelines. I am sure the listing committee will play a pivotal role in this process. Restructuring is needed to ring fence the core exchange operations, including its regulatory role.”

But investors are worried. Says Sohil Chand, MD, Norwest Venture Partners India, a shareholders of NSE: “Investors are concerned with the developments at NSE and believe that the NSE management should take steps for initiating the listing process in a time-bound manner without delay. In the past, shareholders have made several representations to both the management as well as the NSE board regarding the proposed restructuring and constitution of a listing committee to set the wheel in motion.”

There’s unanimity that the move will make the exchanges more professional, accountable and transparent. Says Chand, “Listing will be the first step tow­ards Indian exchanges becoming global. Listing would improve the level of corporate governance by mandatorily subjecting the exchanges to the disclosure requirements mandated by them for listed companies in India in the interest of transparency and accountability.”

Investors feel that the existing governance framework of Indian exchanges rest­ricts innovation and their urge to become globally competitive, which is against the interest of the exchanges. Listing would greatly assist the government’s initiative for deepening of India’s financial market by allowing participation of retail investors and mutual funds.

Most stock exchanges globally got listed within a year of their demutualisation. Indian stock exchanges demutualised in 2004, but are yet to be listed. Demutu­alisation is a process by which an organisation changes from being mem­­ber-­­owned to being shareholder-owned. BSE shareholder Tom Cal­dwell, chairman & CEO, Caldwell Securities, Canada, says, “Listing will have greater efficiencies, not necessary in a closed ‘old boys’ shop. There will be better service for listed companies and greater communication with the investing public; better accountability as a public company and will cut internal ‘sweetheart’ deals and bring in better governance.”

Non-listing has led not only to locking of value of the stakes of Indian PSUs and financial institutions in the exchanges, but, as stressed, also raises key concerns regarding management transparency. So in effect, investors are being denied the benefits of such valuation. Also, non-listing has discouraged retail investors from coming fully into the market.

Sinha is sticking to his stand to get the exchanges listed. But given the entrenched lobbies, will he be able to achieve what the UPA stonewalled? 

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The Road To Accountability?

NSE argues that being a competitor, it can’t list on BSE

“We’re committed to take the listing of NSE to the exchange platform.” Chitra Ramakrishna, MD & CEO, NSE

• BSE and NSE are not listed

• NSE ready to list but not on BSE. Has also made a strong case for self-listing

• BSE just got clearance for its IPO, will take nine months to complete formalities

• NYSE, LSE, Singapore SE, Tokyo SE, Hong Kong SE Euronext and Nasdaq are all self-listed

• NSE has proposed to SEBI for restructuring to separate profit-making, regulatory arms before listing

“Listing of the exchanges can enable national institutions to monetise holdings.” Jayant Sinha, Union MoS, Finance

• Jayant Sinha pushing for listing of stock exchanges, says PSUs, banks will benefit from it

• SEBI issued regulations for cross-listing of stock exchanges in January

• Listing of exchanges will make them more professional, accountable, transparent and will bring investors, especially retail investors, into the market. PSUs, banks will benefit from it.