The great exchange bazaar

The Securities and Exchange Board of India’s order asking Financial Technologies (India) Ltd to divest its stakes in MCX-SX, MCX-SX Clearing Corporation, and regional stock exchanges raises serious doubts about the efficacy of regulations governing the ownership of stock and commodity exchanges. SEBI has based this order on the ruling of the Forward Markets Commission, the commodity market regulator, that FTIL was not “fit and proper” to hold a controlling stake in commodity exchanges. This order needs to be viewed in conjunction with the preliminary enquiry initiated by the CBI against former SEBI Chairman CB Bhave and former whole-time director KM Abraham for granting MCX-SX the licence to start a currency futures platform. While questioning the integrity of the two is ludicrous, it highlights the absence of strategic thinking in developing equity and commodity markets. There are criteria on minimum capital, infrastructure and number of members that promoters setting up new exchanges must meet. But the check done on the track record of the promoters is perfunctory. Also, while doling out these licences, no one seems to be asking the relevant questions: do we really need another exchange and what can the new exchange do to improve the market?

There is no dearth of exchanges in India. SEBI's own website lists 22 under its purview, of which three are national exchanges offering trading in the entire gamut of products — equity, fixed income and currency. Of the other 19 exchanges, there is no trading taking place in 16. The scene in the commodity space is similar with six national multi-commodity exchanges. Of the 13 commodity-specific regional exchanges, many are non-functional. But this glut has not stopped the securities and commodity regulators from issuing fresh licences. Despite this melee, the number of investors has not expanded and volume is concentrated with the largest player. The National Stock Exchange accounts for more than 80 cent share in equity and MCX dominates the commodity market in a similar manner. While new exchanges for trading in different products or assets may be justified, permission for me-too exchanges is uncalled for. Recent experience suggests that some promoters resort to unlawful methods to increase turnover in the exchanges, with a view to garnering a higher valuation and exiting with a neat profit.

Exchanges are as systemically important as banks. Therefore, the government and the regulators need to review regulations and tighten them up. Else we could be made to undergo another NSEL-type fiasco, which has not only resulted in losses to investors but has eroded the credibility of Indian capital markets.

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