It’s not just the Indian companies that are warming up to the primary market, the BSE and the NSE have also now joined the queue to list their shares. But the country’s premier stock exchanges might not find this endeavour smooth sailing.

For, the Indian stock market regulator, the Securities and Exchange Board of India, has not been too enthusiastic about allowing stock exchanges to list. While the Bimal Jalan Committee had recommended that exchanges should not be allowed to list, SEBI had subsequently allowed this, but with many caveats.

If the recent guidelines approved at the December SEBI Board meeting are any indication, the market regulator still appears to be veering towards the more conservative approach — that stock exchanges, being systemically important institutions, should not be motivated by the desire to make profits.

Since listing and the drive towards getting better valuation for its shares can make the management focus more on earning hefty income, there are some who believe that public listing is harmful to the interests of the small investor who trades on the exchange platform.

Global experience

This does not seem to be the case if we consider the exchanges currently listed. Of the 60 stock exchanges that operate across the globe, around 10 are listed. But some of the largest exchanges, going by the traded turnover, such as the NYSE, Nasdaq, Euronext, Hong Kong Exchanges and the Japan Exchange group are listed and owned by public shareholders. This is not surprising as the larger and more profitable exchanges are likely to find more takers.

These listed exchanges have continued to maintain a leadership position in terms of the securities traded, and investor experience in these bourses has not been materially different from those that are not listed. Investors are willing to pay a decent multiple to these listed exchanges; PE multiple ranges from 17 to over 40 for various exchanges.

Most of these stocks have delivered more than 10 per cent return over the last one year. The healthy operating profits — of over 40 per cent — recorded by these players is probably also in their favour.

The primary investors in NSE cannot be faulted for wanting to make the most of the favourable environment to exit their stakes now. The exchange is currently in a sweet spot, having more than 80 per cent share of the cash and derivative market in India. It also stands to benefit as the equity penetration improves. But it could be some time before the country’s exchanges are able to list. Here’s why,

The ‘Fit and Proper’ criterion

At its recent Board meeting, SEBI stated that every shareholder in the exchange ought to be ‘Fit & Proper’ and each applicant has to make declaration to this effect at the time of the IPO. And investors in secondary market too have to meet this criterion.

While it is clear that SEBI wants to prevent a repeat of the NSEL fiasco through this dictum, the implementation of this rule will be next to impossible. There will be a mountain of work at the time of the initial offer; scrutinising the declarations of lakhs of applications to verify if the applicants are ‘fit and proper’.

The job will get trickier when the exchanges are traded on the stock exchange platform. If the exchange software can execute a trade in these counters only after verifying if each person who has placed an order meets the criteria, it will take at least two to three days for the transaction to be executed.

The investor will be unable to execute at the best price and many may even be unwilling to go through the rigmarole of giving a declaration, just to trade in a stock. The regulator needs to seriously re-think this policy. After all, what influence can an investor who holds 100 or even 1,000 shares have on the running of the exchange?

Where will they list?

The NSE has been asking the market regulator to allow it to list on its own exchange platform. The request is being made because, if the NSE cannot list on itself, the only other viable alternative is the BSE. Given the bitter enmity between the NSE and the BSE, the NSE would prefer not to deal with its competitor on this issue.

But SEBI is right in not acceding to this demand. Self-listing is not considered a good practice globally as there will always be doubts about the price that is discovered in this model.

With the mounting pressure from its shareholders, NSE now appears to be moving towards listing on the BSE. It will be interesting to see if the two exchanges finally bury the hatchet as they make public issues.

The exchanges have also been told to segregate their regulatory and commercial functions before they list. The NSE will have to restructure its operations so that it does not have direct control on some of its commercial ventures. This will also probably delay the exchange’s listing.

It will be good if SEBI makes up its mind on whether exchanges should list or not and stop sending confusing signals.