Mumbai: At a time when the trading volume on stock exchanges are plunging and foreign institutional investors are pulling money out of Indian equities, MCX Stock Exchange (MCX-SX), a bourse for currency futures, remains ambitious: It wants to start trading in equities.
The promoters of MCX-SX, Multi Commodity Exchange of India Ltd, or MCX, and Financial Technologies (India) Ltd, run 10 exchanges across the world for various asset classes including bullion, crude, currency and power. They come with impressive credentials: MCX has at least 80% share of the commodity trading market in India and MCX-SX controls about half currency futures trading here.
Exchange scheme: Jignesh Shah. Abhijit Bhatlekar / Mint
In an interview with Mint, Jignesh Shah, vice-chairman of MCX-SX, explains why he wants to start equity trading for which the firm is awaiting approval from markets regualtor Securities and Exchange Board of India (Sebi), and how the market can be developed. According to him, recession is the best time to set up market infrastructure. Edited excerpts:
You want to start equities trading on your stock exchange. What can you bring to the table?
We are a full-fledged stock exchange like the Bombay Stock Exchange and National Stock Exchange.
There are multiple geographies (to be serviced) and multiple instruments needed in the Indian markets today. We want to do that. For instance, no one is servicing the SMEs (small and medium enterprises). There are many other missing markets such as interest rate derivatives, corporate bond market, securities borrowing and lending...
The total number of demat accounts – which is the minimum qualification to participate in the capital market – is one crore, less than 1% of India’s population. If you look at active unique client ID (identification) on the system on any given day, it’s not more than 10 lakh or 0.1% (of the population). So the first target is to reach at least 10% penetration.
How do you do that?
For that, product innovation is a must. Our commitment is to take different equity and bond products to the tehsil level. No one has covered this India model so far. We target 40-50% (of population) penetration. This is the benchmark of developed markets. We want to develop those segments which are missing today.
How long will it take to get the Sebi approval?
We have to follow a process. We don’t see any roadblocks.
One of the concerns among policy makers is the area of governance — particularly the regulatory role of stock exchanges. Your thoughts?
It’s a little surprising. We had mutual exchanges and exchanges had to depend on member ticket (physical) sales. From there, the demutualised model has evolved. Stock exchanges are now a corporate entity and there is no financial dependency on its members.
Look beyond exchanges. Look at banking, telecommunications or even electricity — they are all regulated businesses. And they have been performing very well. Product innovation has happened because of them.
There are very clear roadmaps and proven models. Are we worried about our own regulating abilities? There is an act (of Parliament) and there is a regulator which has regulated 25 exchanges before. I think competition is trying to over-sensitise the issue. Those who want to protect their turfs are saying this. I think the regulator is extremely capable… In the eastern part of the world, Sebi would be the most sophisticated regulator.
In your case, there is no separation between the ownership and management. Isn’t that an issue?
There is no issue. We are a duly recognised stock exchange by Sebi, conforming to all compliance norms. Sebi has given us the recognition after proper scrutiny. We have a strong professional team with domain knowledge to run the business. In fact, that’s our USP.
Is equity the most lucrative in the exchange business? Why are you entering this segment?
It’s not the most profitable... it’s like any other business like banking– a specialized business. We are out and out specialists in technology and financial markets. It is what we know the best…
Sebi rules say that eventually you can hold only 5% stake in a stock exchange. Why are you getting into this? Every car company is not making the Nano just because they can make cars.
Yes, everyone is not making a Nano. In commodities, there was no compulsion for us to bring down our stake down to 32% or 26% which we are planning to do when we have an IPO (initial public offer). It may go down even further.
It’s the way the corporate world works. It’s about about professionalism, corporate governance and transparency. Listing (of a company) and dilution (of stake) is natural.. We are not against it..
The equity markets are down. So, is applying for this segment to push the valuation up as you would need to dilute stake by October?
As a stock exchange if you have been given the licence, after all the due diligence and process has been followed, you would not end up doing only one (segment). So I personally feel that you’re jumping to that conclusion (of pushing up valuation) and this is not fair.
I have put in Rs150 crore as capital. That’s not just for currency (derivatives). The point is if you are a stock exchange you should do everything. Existing exchanges are not innovating enough to seize the India opportunity.
What is this India model you talk about?
India has household savings of about $330 billion. Can’t 10% of this, $33 billion, be channelised by a credible, transparent, world-class infrastructure for industrial development? Can’t we target that much? We all as exchange chiefs should be ashamed if we can’t do that—if not in the first year, at least over a period of time. It’s doable.
Why should we depend on FIIs (foreign institutional investors)? They will come after we develop India model. Where (else) will they go?
Credit markets haven’t developed beyond our cities. Enterprise and entrepreneurship in India is limitless. There are some 14 million SMEs in India. At least 1% of these will have a class balance sheet – triple-A rated. They require growth capital. Can’t we arrange a fantastic market infrastructure for them? .
In both commodities and currency, where you have businesses, it was a greenfield entry. Here you have well-entrenched competition in NSE. How will you compete?
The opportunity is infinite. Look at banking. There are 100 banks. Still 600 million people in India are unbanked and the government is talking of financial inclusion.
Even this (exchange space) is hugely underdeveloped. There can be 10 more exchanges. Let the best get what they deserve to get. Let there be product innovation; everybody should develop a niche and specialization. Even in America, there are 10 stock exchanges, even though we hear of only NYSE and Nasdaq.
NSE is a great player and a very strong competition. But I think opportunity is much bigger and there is space for everyone.