Listing alone will bring about transparency and throw some light on their costs, operations, appointments and other dealings which remain hidden from the public eye today
After nearly 10 years of prevarication, misdirection, smoke-screens and false promises to institutional investors who were lured to invest in demutualised stock exchanges on the promise of listing, there seems to be serious pressure from the finance ministry to, finally, make it happen. The ministry, in turn, is under pressure from large institutional investors who are fuming at being trapped without an exit route. There are three reasons why things have come to a boil now.
First, in order to persuade brokers of the Bombay Stock Exchange (BSE) to accept demutualisation, the government and the regulator clearly indicated that exchanges would be listed as part of the processes Justice MH Kania had recommended in 2005. But the past 10 years have only seen a series of deliberate obfuscations by exchanges and the market regulator, engineered through the recommendations of carefully chosen committees. BSE’s investors, finally, ran out of patience and angrily moved a resolution at its annual general meeting held in September 2015 seeking approval for listing of equity shares of the BSE.
Investors in the National Stock Exchange (NSE) are just as incensed. Some 17 of them wrote to the prime minister and the finance minister requesting that the stock exchanges be listed. According to sources, these investors were far more emphatic at their personal meeting than in their letter outlining the benefits of listing. Some are so exasperated that they have gone public with their anger.
The Mint newspaper quotes Sohil Chand, managing director at Norwest Venture Partners, saying this about the NSE: “Every time, they come up with a new excuse to delay the listing further.” He was furious about NSE’s plans to restructure operations, to create a holding company (which could negatively impact valuation) and its demand to self-list, rather than list on a rival exchange as prescribed by SEBI’s (Securities and Exchange Board of India’s) rules in April 2012. In another article in Mint, Mobious Philipose quotes Ravi Adusumalli, managing partner at SAIF Partners, as saying: “NSE says one thing officially on listing and takes a completely different stance privately with shareholders. This has been its strategy for the past many years.” He goes on to tell the columnist, “The NSE management has a fundamental lack of respect for shareholders. While NSE should be the standard for shareholders’ rights and corporate governance, it is anything but (that). They consistently work against shareholders to retain control and I firmly believe that they are against an IPO (initial public offering) because they do not want NSE’s actions and performance to be transparent.” This is a damning indictment of NSE’s management and we will come to it later.
A second important reason for discontent is that the value of stock holding in the bourses is no longer soaring as it did over the past decade. At least two investors have exited the NSE at five-year old valuation through private deals. Investors are also beginning to be concerned at the tactics adopted by bourses to increase turnover and profits or hold on to dominant market positions.
Thirdly, after the merger of the Forward Markets Commission (FMC) with SEBI, we already have one listed exchange in MCX which is no longer privately owned. It cannot suddenly be de-listed due to a merger of regulators nor can unfairly onerous rules be imposed after listing. So, a level playing field requires that exchanges like the BSE, which had applied for permission to list in 2013, should quickly get the go-ahead, with full clarity on rules.
The combined pressure of these factors, probably, led to some quick decisions by the SEBI board at its meeting on 30th November on the listing of exchanges. It also addressed issues related to depositories and clearing corporations and the conflict of interest that may arise in disclosure and good governance rules under the listing agreement of stock exchanges. The SEBI board has classified stock exchanges as infrastructure companies at their request; it has also decided that 51% of the shareholding will be with the public and that the shareholding of trading members/ associates/ agents should not exceed 49%. Each and every ‘applicant’ (exchange) must make a declaration that all shareholders meet the ‘fit and proper’ norm, at the time of listing, and follow compliance procedures notified by the regulator afterwards. It is not clear how this can happen, since SEBI itself has passed strictures against innumerable brokers who are already shareholders of the BSE, if not the NSE.
Despite the need for better clarity on a few issues, it seems almost certain that Indian stock exchanges will, finally, be listed. Only time will tell whether this will be good or bad for the Indian market because it is entirely dependent on the quality of regulation and supervision by SEBI. Market history shows that after touting professionally run bourses as the best thing to have happened in the Indian capital market space, we have allowed these to become ivory towers, where even their own shareholders complain about their functioning.
In 1999, when the NSE marked five years of its existence, I wrote in a newspaper column: “A careful study of stock market reforms indicates that in India, it was not the capital market regulator or the government, which drove the change towards automated trading systems and modernisation of stock exchanges. The National Stock Exchange (NSE), a mere market intermediary, through example, demonstration and sheer success forced a swift and relentless pace of change in the markets.”
I had further written that neither the government nor the regulator had expected “NSE to emerge as a clean and efficient nation-wide trading system providing investors in 280 cities direct access to a single, safe and transparent system.” What an irony that, 20 years later, NSE’s own institutional investors are accusing it of lack of transparency and poor governance!
The argument for transparency, through listing, becomes even stronger when you recall an interesting article in Business Standard in 2006 titled “Listed Exchanges Pose Unique Problems”. It made a strong case against listing of bourses, based on the situation that existed then. The article argued that professional managers, who earn only a salary and have no financial interest in the profits of the exchange, worked better. Today, salaries at the bourses are among the highest in the private sector and even the regulator seems unclear about whether they are accompanied by fat stock options. This is important, because the Bimal Jalan committee had frowned on ESOPs (employee stock ownership plans) linked to profitability for stock exchanges. Conversations with SEBI insiders indicate that the regulator knows little about remuneration at the major bourses. Responses to RTI (Right to Information) queries also reveal that bourses have not felt the need to seek explicit prior approval of the regulator while creating new posts at senior levels with full clarity on compensation, role and responsibility. This suggests poor supersvision or regulatory capture—both are bad for the capital market.
Another argument of the article in favour of not listing the bourses was that professionally managed exchanges would stand firm against the issue of market integrity or broker malpractices. This, too, seems doubtful, since the race between the exchanges for the past few years has been about market dominance, at any cost. The intensity of the inter-exchange warfare has somewhat reduced after the challenge from the MCX group vanished in the aftermath of the National Spot Exchange debacle.
However, court battles and cases before the Competition Commission of India raised serious questions, not only about tactics adopted by the bourses to ensure market dominance but also the role and ability of the regulator in controlling them.
And, yet, despite all possible pitfalls of listing the exchanges and concerns about excessive focus on increasing profits every quarter, listing alone will bring about transparency and throw some light on their costs, operations, appointments and other dealings which remain hidden from the public eye today.
(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at firstname.lastname@example.org)
Correction: MCX was erroneously referred to as Metropolitan Stock Exchange. This has been corrected