Mumbai: Silicon Valley-based venture capital fund Norwest Venture Partners (NVP) has acquired a 2.11% stake in India’s largest stock exchange by number of trades, the National Stock Exchange of India Ltd (NSE), for approximately Rs250 crore, a Norwest statement said on Wednesday.
The stake has been purchased from IL&FS Securities Services Ltd (ISSL), one of the stakeholders of NSE, at Rs2,650 a share.
At this price, NSE is valued at Rs11,925 crore.
NVP becomes the first entity to take a stake in an Indian exchange through the foreign institutional investor, or FII, route.
In November, the finance ministry had clarified that FIIs could invest in an exchange even if they are not listed. According to Indian law, FIIs can hold up to 23% in an exchange while investments through the foreign direct investment (FDI) route can be a maximum 26%, limiting the overall foreign investments in exchanges at 49%. Within the overall cap, no single investor can hold more than 5%.
Virtual monopoly: The NSE building in Mumbai. Norwest Venture Partners’ investment underlines the willingness of venture capital firms to consider growth equity deals that offer compelling valuations. Abhijit Bhatlekar / Mint
NSE’s FDI limit had been exhausted more than than two years ago when a clutch of seven investors bought 26% of the exchange at Rs2,500 a share.
In January 2007, the NYSE Group, General Atlantic Llc, SAIF Partners and Goldman Sachs acquired a 5% stake each in NSE. This was followed up in March of the same year by Morgan Stanley, Citigroup Inc. and Actis Llp, which acquired 3%, 2% and 1%, respectively.
Since early 2007, there have been other transactions, too, where existing investors have exited in favour of new domestic investors. In at least one such transaction, the value rose to as as much as Rs3,500 per share, said a person familiar with the matter, but who did not want to be named.
That would have meant an enterprise value of as much as Rs15,750 crore for the exchange at the peak of valuation.
NSE’s price-earnings (P-E) multiple, a measure of how much investors are willing to pay for a share, stands at 22.87, calculated on the basis of the price NVP paid and earnings for the year ended 31 March 2008, the latest available.
Meanwhile, Asia’s oldest stock exchange and NSE’s main rival, the Bombay Stock Exchange, or BSE, had a P-E of 26.32, calculated on the basis of the price paid for the last two reported stake sales and earnings for the year ended March 2008.
BSE had sold 5% each to Deutsche Boerse AG and Singapore Exchange Ltd, in February and March 2007, respectively, at a price of Rs5,200 per share.
NSE has a virtual monopoly of the market, with average daily futures and options trading turnover many times more than what BSE records.
The 133-year-old BSE launched currency futures In October last year in a renewed effort to catch up with 16-year-old rival NSE.
In currency futures, NSE had a headstart over BSE. In the cash segment, where shares change hands, BSE had the first-mover advantage. And in the futures segment, both exchanges started simultaneous trading in June 2000.
Norwest’s investment in NSE underlines the willingness of venture capital firms to consider growth equity deals that offer compelling valuations. Traditionally, venture capital funds invest in early-stage private businesses.
Norwest made its first growth-stage investment in India in mid-March, when it spent $15 million for a stake under 5% in OnMobile Global Ltd, a publicly listed provider of value-added services for cellphones. The stake was picked up from the market.
“A large part of our efforts is on growth equity deals in the $15-50 million range, with $50 million being the exception than the norm,” said Sohil Chand, managing director of NVP India.