SEBI has done well to see the pointlessness of bickering over technicalities, thereby paving the way for a new equity-trading exchange.

The dynamics in Indian equity markets is set to change with MCX Stock Exchange (MCX-SX) getting regulatory approval for launching a platform for trading in stocks (including derivatives), interest rate futures, and wholesale debt products. Permission for the new bourse was stuck over the last two years, with the Securities and Exchange Board of India (SEBI) insisting that the promoters first bring down their aggregate stake in MCX-SX to 5 per cent and the latter complaining about the inability to find buyers for an exchange currently trading only currency futures. That stalemate has been resolved now, as the promoters – MCX and Financial Technologies (FT) – have been granted 18 months’ time to dilute their holding to the stipulated 5 per cent. This is more in tune with the existing regulations for private banks or commodity exchanges – where promoters are allowed to hold much higher stakes initially and have also been given more time to reduce their holding.

From an investor’s standpoint, SEBI has done well to see the pointlessness of bickering over technicalities and, thereby, paving the way for a new equity-trading exchange. The country’s existing two bourses, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), have virtually run out of ideas to revive sagging trading volumes. This is reflected in average daily cash turnover, which has fallen by nearly a third on the NSE since 2010, while halving on the BSE. Retail investors, in particular, have been net sellers over the last three years. Clearly, a catalyst — similar to what NSE’s advent in 1994 did by creating a nationwide electronic trading platform and forcing BSE to follow suit — is required to shake the market out of its current somnolent state.

That said, one should be realistic, though, about expectations of MCX-SX’s entry in the equity segment providing such an impetus. Merely having another stock exchange is no guarantee that investors will come back in droves. Opponents of MCX-SX have, in fact, been maintaining that yet another exchange would only result in splitting of existing volumes and generating shallow pools of liquidity. The promoters of MCX-SX, however, have three points in their favour. Firstly, FT is the country’s dominant exchange trading software and technology provider and that can potentially contribute to product innovations to draw in more investors. Secondly, MCX itself is already operating India’s largest commodity bourse. Its experience in reaching out to and educating investors in remote corners of the country can probably be extended to equity and debt as well. Lastly, the promoters have interests in overseas exchanges in Dubai, Botswana and Mauritius, which could be helpful in attracting inflows from qualified foreign investors and non-resident Indians in West Asia and Africa. This is a class of investors that the Government is also looking to tap in the current context of a weakening rupee.

(This article was published on July 11, 2012)
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