The Hindu Business Line : NSE gets a global flavour

Four pedigreed foreign institutions, including New York Stock Exchange, acquiring five per cent equity stake each in the National Stock Exchange within weeks of the government relaxing the FDI guidelines for investment in stock exchanges is a welcome trend for the Indian securities market. As the country's largest stock exchange in terms of average daily turnover, offering investors advanced screen-based trading and a well-established clearing and settlement mechanism, the NSE reflects the robustness of the Indian equity market. Overseas investment in the NSE is thus an added endorsement of this phenomenon. The NSE's financials too rest on a solid footing, with revenues and post-tax earnings growing by 44 per cent and 23 per cent respectively in 2005-06, and there is all the likelihood of the current momentum being sustained in the coming years.

These investments, especially by the NYSE, can help the NSE tone up risk management systems, improve governance structures and help introduce greater trading innovations and new product launches. As the government further relaxes the rules for overseas trading by resident Indians, the tie-up with NYSE will also help reduce cross-border trading costs. However, the Government fixing a 5 per cent cap on FDI by foreign institutions appears arbitrary and not fully justified. This decision appears to be a hangover of the regulatory mindset that has curbed investments by foreign banks in the banking sector. As the trend of stock exchange consolidation gathers momentum among global bourses, the economies of scale could lead to a drop in trading costs across the board. Unless these investment caps are removed in a phased manner to help Indian exchanges participate meaningfully in the consolidation, they will lag behind their international peers.

In any case, only greater investment participation will incentivise foreign institutions such as the NYSE to share technology and trading expertise with the Indian exchanges. For instance, Indian exchanges will have to explore the scope for creating alternative electronic trading platforms, such as the one offered by Archipelago (acquired by NYSE), to ensure that institutional interest for 24X7 trading is serviced in the long run. Finally, it is only a matter of time before the NSE may also consider an initial public offering of equity on the lines of that planned by the BSE. In the quest for profits, the pressure to perform may work in favour of the exchanges, but a conflict of interest may come into play. With the commercial functions attracting far greater attention than its regulatory role, there is a growing apprehension that shortages of stock market professionals may crop up in the near term and investors' interests may take the back-seat in the long run.

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