The sale of a 5% stake in the Bombay Stock Exchange (BSE) to Deutsche Borse marks another step in India’s financial integration with the rest of the world.
The deal at Dalal Street is the fourth of its type in recent months. The National Stock Exchange (NSE), the Multi Commodity Exchange and the National Commodity Exchange have already attracted foreign investment. These transactions come in the wake of the December 2006 Reserve Bank of India guideline that allows foreigners to own up to 49% of local exchanges.
Some may baulk at the thought of our national stock markets being bought over by foreigners, but we welcome these transactions.
There has been a string of similar deals the world over, heralding the long-overdue consolidation of global stock exchanges. The world’s biggest equity markets have been through three major transitions since the mid-1990s. First, the old open outcry system was replaced by digital trading. Second, most exchanges demutualised and became companies that could merge and acquire. Third, the actual action: exchanges across national borders have bought into one another with an enthusiasm once reserved for the companies and banks that were listed with them.
The Indian capital markets have already been through stage one and stage two, as pioneers rather than laggards. NSE, for example, had a corporate structure and computerized trading years before the likes of the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). There has been domestic consolidation as well, with NSE and BSE reducing most other exchanges to irrelevance. It is now time for the two major equity markets and the two young commodity markets to get into stage three, and form trading links with global peers.
Over the past five years, merger mania has spread across the developed markets. Many of the major stock exchanges in Europe have merged to form Euronext.
This new exchange is now reportedly in merger talks with NYSE. Deutsche Borse launched an unsolicited bid for LSE and has also been in talks with NYSE for a friendly merger. Nasdaq already has a 29% stake in the London exchange, though its attempt to take control has been rejected by LSE shareholders. Earlier, they had also snubbed Macquarie Bank and Deutsche Borse.
But why is all this frenetic activity worthy of praise? The strategic investments in Indian exchanges could be the first step towards their eventual participation in the new global trading platforms that are likely to emerge because of the wave of mergers and acquisitions. This should help Indian investors.
Indian equity and commodity investors are forced to largely trade on local exchanges, thanks to the strict rules on capital outflows. However, India could move to a more open capital account by 2009. Retail investors and mutual funds will then have greater freedom to buy and sell foreign securities.
The costs of trading in globally integrated markets will be substantially lower, given the fact that investors could then have access to common brokerage accounts and a common depository. Similarly, foreigners will find it easier and cheaper to trade in Indian securities. The resulting liquidity could push down the cost of capital in India.
Regulators will face several new challenges. Consolidation brings with it the danger that cartels will form. The big issue ahead will be whether fewer exchanges will mean higher trading and listing fees. Trading scams will be more difficult to monitor. It’ll be a new world for regulators.
The problem will be how to marry national securities regulations with transnational markets and trading activities. The Securities & Exchange Board will have to prepare for a day when it perhaps loses its monopoly control over the stock exchanges in this country, and learns to adopt a more collaborative approach to securities regulation.
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