Sucheta Dalal :A signal for change abroad and here
Sucheta Dalal

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A signal for change, abroad and here  

May 2, 2005


Ten years ago, the National Stock Exchange (NSE) of India benchmarked itself to the best global standards and forced our capital market on to the path of modernisation. The NSE started as an electronic exchange, sought no concessions and was structured as a for-profit organisation. In contrast, the 200-year-old New York Stock Exchange (NYSE) is just converting to a for-profit electronic bourse. But NYSE’s $3 billion merger with Archipelago Holding Inc. (a Chicago-based electronic trading platform) and Nasdaq’s $1.9 billion plan to buy Instinet (a similar platform) seem set to trigger global changes that India must watch carefully and adopt, if necessary.


The timing of the NYSE and Nasdaq mergers coincide perfectly with India’s own effort to push the demutualisation process at 22 stock exchanges, a majority of which are all but defunct. NYSE’s plans to merge, get listed and turn into a for-profit entity has caused the value of its membership (seat) to vault by over a million dollars. The price reflects the value per seat that will be released by the bourse’s structural transformation and its capacity to raise capital through an Initial Public Offering (IPO). NYSE members are to swap their seats for cash and stock in the merged entity.


More important, the NYSE deal is set to trigger a wave of IPOs and mergers among bourses and permanently change the marketplace. A wave of consolidation and mergers may be in the offing, as bourses focus on profits and compete to improve their offerings to attract more investors. Reuters quotes a leading market analyst’s prediction that if Nasdaq expands its product offering to include options, they could acquire a number of exchanges at a discount to their recent valuations.


These far-reaching changes are accompanied by a revamp of the regulatory structure of bourses. The NYSE will move towards a Nasdaq-like model, where the core regulatory function will be with an independent, not-for-profit entity. The board of this entity will include independent directors from the publicly listed NYSE and others. It will fund itself through fees from member-firms and fines. Meanwhile, the listed company will be free to push for newer trading products, to attract more investors and increase profitability. Analysts predict small investors, who were largely pushed out of the US markets, will see an increased presence.


• We need a market for small and mid-cap stocks and to help smaller firms grow

• Encourage NSE and BSE to take over other exchanges or close these


What do these changes mean for India’s slow and reluctant demutualisation programme? Will our approach lead to consolidation and growth? Not till the government and the market regulator get pragmatic. India has too many bourses, competing for the same securities, through convoluted structures and subsidiaries that go against the concept of transparency and efficiency. Clearly, many of these need closing or merging. Nor does India have a specialised market for small and mid-cap stocks, although the country desperately needs to help smaller companies to access capital and to grow. This will be accelerated if private equity investors and venture capitalists have an exit route, through a transparent trading platform.


Indonext, launched by the Union finance minister, was expected to fulfil such a need. But it has remained just another BSE platform, instead of evolving into a bourse with a different structure and regulations to encourage smaller companies. As the FM said recently, Indonext needs to be reviewed. Ideally, the government should stop worrying about existing members of stock exchanges making a bit of money in the demutualisation process by converting fixed assets into equity or cash. Instead, the government must encourage NSE and BSE to takeover at least the white elephants created by institutional investors (the OTC Exchange of India and the Integrated Stock Exchanges of India), scrap their existing objects and articles of association and convert these into markets for small and mid-cap companies.


If it is argued there is no value in these bourses, the government must close these. It could then turn its attention to reviving or closing the 18 other bourses, which have no clear future or plan. This will happen only if the ministry is focussed on the big picture of market consolidation, by encouraging a different regulatory structure and competition between bourses.

-- Sucheta Dalal