But government rules relating to foreign direct investments (FDI) and even foreign institutional investments (FII) in exchanges were ambiguous - almost silent - on the topic. Last month, the Reserve Bank of India (RBI), the country’s central bank, announced rules relating to foreign investments in Indian bourses.
And last week, barely a fortnight after the RBI came out with the new rules, both the leading stock exchanges – the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) – were in negotiations with international exchanges and other investors over part sale of their holdings.
The New York Stock Exchange (NYSE), together with Goldman Sachs and two other institutional investors, were first off the mark, launching the process of acquiring a 20 per cent stake in the NSE, paying some of the existing owners – including banks and an insurance firm – a whopping $460 million.
The BSE, the 132-year-old exchange, is also in talks with exchanges including the NYSE (but this was before the NYSE’s announcement about plans to acquire a stake in the NSE), its rival, the Nasdaq, the Singapore Stock Exchange (SGX) and Deutsche Boerse.
Hsieh Fu Hua, the chief executive of the Singapore bourse, last week said the SGX had been short-listed by the BSE for a five per cent acquisition in the exchange.
There has been growing foreign interest in the Indian stock markets, following the frenzied growth in stock valuations over the past two years. Market capitalisation of all the listed companies in India jumped by 50 per cent since 2004, and amounts to $820 billion. Market capitalisation has for the first time even overtaken the country’s gross domestic product (GDP) of $800 billion.
Considering the keen interest of international players to acquire a stake in Indian exchanges, the government also decided to announce its policy on foreign investment in commodity exchanges. International investors are keen on buying stakes in two major commodity exchanges – the National Commodity & Derivatives Exchange (NCDEX) and the Multi Commodity Exchange of India (MCX).
Similarly, there are moves for the acquisition of a partial stake in the two depositories – National Securities Depository (NSDL) and the Central Depository Services (CDSL).
NYSE’s bid for the 20 per cent stake in the NSE will, however, take some time to be cleared, as it has to be approved by the Foreign Investment Promotion Board (FIPB). While India allowed foreign investors to buy up to 49 per cent stake in the stock exchanges, it stipulated that only 26 per cent could be through the FDI route, which involves approval by the FIPB.
The Securities and Exchange Board of India (SEBI), the capital markets regulator, has also ruled that while FIIs could acquire up to 23 per cent investment in stock exchanges, no single institution can own above five per cent in an exchange.
THE NYSE roped in three other partners for the 20 per cent bid in NSE, each contributing five per cent ($115 million) for the acquisition. Besides Goldman Sachs, the other two investors include General Atlantic, a private equity firm, and Softbank Asian Infrastructure Fund, the private equity division of Japan’s Softbank Corporation.
The bid for its 20 per cent stake indicates NSE’s enterprise value of nearly $2.5 billion The BSE’s enterprise value could be slightly lower, but above the $2 billion-mark. The NSE was started in the 1990s by government-owned financial institutions to bring about transparency in the country’s capital markets, which had been snared in a major scam.
Unlike the BSE, which was owned by brokers, the NSE was owned by professional companies, and started on a clean slate. It introduced screen-based trading in India – the BSE had to follow a few years later – and started giving licenses to brokers across the country.
The 21 promoters of NSE include the Life Insurance Corporation (LIC), General Insurance Corporation (GIC), Industrial Finance Corporation of India (IFCI), ICICI Bank (which was a government-owned institution in the 1990s), and Infrastructure Leasing and Financial Services (IL&FS). The exchange, which overtook the BSE as the largest stock exchange in the country, accounting for 70 per cent of stock transactions, reported a net profit of over Rs2 billion, on a turnover of Rs4.75 billion.
The NYSE has been eagerly looking at Asia in general, and India in particular. The exchange, together with its rival Nasdaq, has been attempting to woo successful Indian companies to list at the bourse. Many Indian companies are listed on the NYSE and the Nasdaq.
Internationally, there’s a lot of churning happening in stock and commodities exchanges. The NYSE Group Inc, which is acquiring Euronext SA for almost $15 billion, is eager to expand its presence globally. It is also seeking cooperation with the Tokyo Stock Exchange.
Nasdaq recently made a hostile bid for the London Stock Exchange, following the failure of Deutsche Boerse – which is now being eyed by other exchanges – to acquire the LSE for $2.5 billion. Euronext also made a failed bid for the LSE. But most of the acquisitions involved American and Euoropean exchanges.
NYSE’s bid for the NSE has brought Indian bourses into the M&A game. The Singapore Exchange, together with the Deutsche Boerse, is now keen on acquiring a stake in the BSE. Nasdaq has also shown some interest in Asia’s oldest exchange.
The BSE wants a strategic sale of 26 per cent of its equity – which could go to a consortium of international exchanges and financial institutions – and has to sell another 25 per cent equity through an initial public offering (IPO), to bring down the holdings of its broker-owners to below 50 per cent.
INDIA’S commodity exchanges are also on the radars of international majors. According to Yashwant Bhave, secretary, department of consumer affairs, the government will shortly announce a decision on whether FDI will be allowed in commodity futures exchanges.
Though there are about two-dozen commodity bourses in India – with a turnover exceeding $600 billion – the NCDEX and the MCX account for 95 per cent of the trades. International investors are keen to acquire shares in these exchanges, and also participate in the trades.
MCX has been getting many proposals from foreign investors, wanting to have a stake in India’s largest commodity exchange. Jignesh Shah, managing director, MCX, feels there is need for an international broker or an exchange to partner the MCX.
PH Ravikumar, managing director, NCDEX, believes that FDI will help commodity exchanges to induct the latest technology, introduce new products, improve their risk management systems and enhance capital.
The Forward Markets Commission (FMC), the commodity markets regulator, has urged the government to allow foreign funds to trade in metals, bullion and oil. Two international investors have a stake in India’s two largest commodity bourses: Fidelity International owns nine per cent in MCX, while Goldman Sachs has a seven per cent stake in NCDEX, which was promoted by the NSE.
Goldman Sachs, which plans to invest significantly in the Indian real estate sector as well, is also eager to acquire a stake in the NSE-promote National Securities Depository Ltd (NSDL). Foreign banks including Citibank, Deutsche Bank, Standard Chartered and HSBC, have a 12.7 per cent stake in NSDL.
There are moves to enhance foreign ownership in depositories up to 51 per cent, with 26 per cent through the FDI route, and the remaining investments by FIIs. The CDSL, which is owned by the BSE, may also go in for an international partner.