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The BSE & NSE IPO Saga!

Published on Fri, Nov 20,2015 | 23:44, Updated at Mon, Nov 23 at 23:43Source : CNBC-TV18 |   Watch Video :

Foreign investors in India's two premier stock exchanges are an unhappy lot. They've been looking for an exit via an IPO. But, neither exchange has managed to progress towards a listing. The NSE has not even applied to SEBI yet. The BSE wrote to SEBI in 2013, but investors say the regulator has not yet responded. So last month they wrote a polite letter to the Finance Minister, which among other things extols the virtues of listing stock exchanges. But, what's stopping that listing process? Is it an unresponsive regulator, onerous regulations or in the case of one exchange, hesitant management? Sajeet Manghat and Menaka Doshi bring you the story!

In 2010 Rahul Mehta of Argonaut India bought a 4.6% stake in the BSE. Argonaut has been holding this stake for over 5 years now and time is ripe for an exit ...but an exit is nowhere in sight!

Rahul Mehta, Director, Argonaut Private Equity

“There was an implicit understanding and an explicit understanding that there would be an IPO of these exchanges; that has not been carried through. The regulation is in place for this to happen; we don’t understand exactly why that has not been followed through. Where does the blame lie, we don’t understand is it at the bureaucracy level, is it at SEBI or is it with management of one of the exchanges? We believe it is certainly not the management of BSE because the BSE has already filed an application.”

In 2012 BSE’s shareholders approved a resolution to list the exchange. On Jan 1, 2013, BSE applied to SEBI seeking an in-principle nod to go ahead with the listing process. But investors say SEBI has not yet responded. It’s been almost 3 years.

Rahul Mehta, Director, Argonaut Private Equity

“There has been no movement from SEBI’s side. What we have done is, we passed another resolution, we meaning the shareholders - both domestic institutions, foreign institutions and retail shareholders, passed a shareholder resolution at the recently concluded BSE annual general meeting (AGM) asking management to apply for the IPO again. However, we have heard nothing from SEBI.”

Patience is also wearing thin at Norwest Venture Partners India. Managing Director Sohil Chand invested in the NSE in 2009. 6 years on and NSE has yet to approach the regulator to list. In September this year at the NSE AGM, NVP failed in mustering shareholders to back a resolution to list the exchange. But he says the NSE management seems to be coming around.  

Sohil Chand, MD, NVP India

“Historically our view has been that management has not put their weight behind the listing. They have had many concerns around the regulatory framework, separation of regulations, and they wanted more direction from the regulator on things. I don’t think they have internally been convinced that listing is the best way forward. As I said, I think that attitude has changed a little bit in the recent past so we are hopeful that we are heading in the right direction here.”

NSE’s CEO, Chitra Ramkrishna admits to initial reluctance but says the exchange is now working with investors to achieve a listing.

Chitra Ramkrishna, MD & CEO, NSE

“The fact is that we are very closely engaged with our stakeholders. We have been meeting them practically every quarter now. In fact as we speak, we will be meeting them again. So, in fact the process is evolving with discussions with them.”


Foreign Direct Investors

BSE: 21%
NSE: 26%


Argonaut India

Invested in BSE in 2010
Bought 4.6% stake for Rs 172 cr
Today it’s worth* Rs 200 cr

*As per last investment transaction


NVP India
Invested in NSE in 2009
Bought  2.11% stake at Rs 2650/share
Today it’s worth* Rs 3950/ share

*As per last investment transaction

21% of the BSE and 26% of the NSE shares are owned by foreign direct investors. They claim the delay in listing is hurting their investments. 5 years ago Argonaut bought the 4.6% BSE stake for Rs 172 Cr. Today it’s worth Rs 200 cr. A year later NVP invested 250 crores to buy a 2.11% stake in the NSE at Rs 2650 a share. That’s now worth Rs 3950 a share as per the last valuation. That’s a 50% gain for NVP.

Sohil Chand, MD, NVP India

“I think what is important is to see what has happened to the multiple and the Rs 3,950 represents a multiple of only 14 times trailing earnings. When we look at comparable stock exchanges, the listed stock exchanges whether it is Hong Kong or Singapore or other comparable markets, they traded 30 times forward earnings. So, in our estimate the NSE right now, the private markets are undervaluing it by 50 percent.”

Which is why a group of foreign investors have written 6 letters to the finance ministry in the past 3 years, the most recent one in October this year, subtly pushing the cause of listed exchanges. They’d like clarity in the Stock Exchange & Clearing Corporation or SECC Regulations and some help from SEBI.

Sohil Chand, MD, NVP India

“When we invested, we didn’t know about these regulations because these regulations were not in place. The only thing that was in place was the Kania committee report which had been published way back in 2002 and that in fact had suggested that all exchanges be required to list. It was our expectation when we entered that the exchange would be listed fairly soon. I know that BSE shareholders had a similar expectation. So, moving forward, post the Jalan committee, it created a period of great uncertainty and big overhang on the stock price. If you see transactions completely dried up during that period. Once SEBI clarified through SECC Regulations that they would allow the exchanges to list and basically sort of disagreed with many of the recommendations of the Jalan committee then trade started happening again.”

Currently neither the BSE, nor the NSE are fully compliant with the SECC – it’s work in progress for both. For instance the BSE has yet to reduce its stake in its depository to 24%.  While the NSE, which holds around 25% in its depository, is seeking an extension to meet this guideline.

Chitra Ramkrishna, MD & CEO, NSE

“Are we broadly in compliance with the SECC Regulations? Yes from the regulatory segregations all of that. However, there will be some pieces where we will need to talk to the regulators and see what will be looked at as compliance and we will do that when we cross the bridge.”


SECC Regulations, 2012
No person shall, directly or indirectly, acquire or hold equity shares of a recognised stock exchange unless he is a fit and proper person

But even if both were to meet all SECC & SEBI requirements and push ahead with listing plans, they’d run into a couple of unfriendly provisions. For instance the SECC requires every shareholder of an exchange to meet the fit and proper test – that means SEBI approval for every shareholder.  

Sohil Chand, MD, NVP India

“That is clearly not practical in a listed company context. However, we have seen a work around in the case of MCX which is the commodity exchange which is also now regulated by SEBI. There what the regulator has done is stipulated a 2 percent ownership below which fit and proper doesn’t apply. We believe they could do something similar in the case of the equity stock exchanges whether they are BSE or NSE.”


SECC Regulations, 2012
A recognised stock exchange may apply for listing of its securities on any recognised stock exchange, other than itself and its associated stock exchange

The SECC regulations also prohibit self-listing. That means the NSE would have to list on the BSE and vice versa! Word has it neither exchange is comfortable with that. Though NSE suggests it’s their shareholders that prefer a self-listing.

Chitra Ramkrishna, MD & CEO, NSE

“For any company that lists on NSE, I offer a value proposition of liquidity, index, derivatives, etc. I genuinely believe that this is tremendous benefit that I can offer the securities that are listed on NSE. It is only natural that my shareholders want to see the same benefit for the NSE shares.”

Pratibha Jain, Lawyer says exchange listing conditions in India are based on some of the best global listing practices, though India may have been more conservative in its approach.

Pratibha Jain, Partner, Nishith Desai Associates

“We are closer to the Hong Kong Stock Exchange model except we don’t allow self listing and rightly so I think being conservative in India makes sense. We are still a developing economy and our financial markets, the stock exchanges together constitute a significant portion of it and they have been very well managed up till now. So being conservative in the Indian context is probably a good thing.”


SECC Regulations, 2012

-    Directors On Exchange Board cannot hold Directorship of any listed company
-    Every Director appointment needs SEBI approval
-    Foreign Exchange investment limit = 5%
     (Domestic Exchange investment limit = 15%)

But investors may not agree. Even though some of these conservative regulations have nothing to do with a listing. For instance the current SECC regulations don't allow directors on an exchange board to also sit on the board of any listed company. Also, every board appointment needs prior SEBI approval and sometimes that approval can take 6 months or more. There’s also the 5% investment limit for foreign stock exchanges - making it unattractive for any foreign exchange to invest. But if SEBI were to heed the suggestions of investors, the changes would be time consuming to make! And investors are running out of time!

Rahul Mehta, Director, Argonaut Private Equity

“We are long-term investors, at the same time we are not necessarily running a charity. So, we invest under very strict procedures, under procedures where we know when our money is going to coming back to us and what kind of expected returns we have. We can certainly live with regular business risk and that is something we live with everyday but what we cannot understand is risk that comes out of regulations changing.”   

Sohil Chand, MD, NVP India

“The listed stock exchange model is one that is well established throughout the world. Every major developed country in the world whether it is the US, UK or Japan, China, Hong Kong, Singapore, Germany they all have listed stock exchanges. The country’s which don’t have listed stock exchanges are countries like Saudi Arabia, Argentina. I think we need to decide which category we want India to be viewed in.”

Sajeet Manghat, CNBC-TV18

“The debate on the pros and cons of listing a stock exchange has played out in India. SEBI decided to allow listing, but investors say its SEBI’s lack of response and some regulations make listing impossible. SEBI refused to comment on the story. Foreign Direct Investment between Rs 5000-10000 crores made in the NSE and BSE is ripe for exit. And right now that money is stuck, with no exit in sight. In Mumbai, with Menaka Doshi, Sajeet Manghat.”


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