National Stock Exchange will soon be listed; or perhaps not

After a lull of over two years, there is a buzz among shareholders of National Stock Exchange of India Ltd (NSE). One of them, IFCI Ltd, finally managed to find a buyer for part of its stake in the exchange. Then, late last week, two shareholders who attended the exchange’s annual general meeting told Mint that the process of listing the exchange has been initiated.

One of the reasons finding buyers for NSE’s shares had proven difficult was the lack of visibility about the exchange’s listing. With a US-based hedge fund now investing 263 crore for a 1.5% stake in the exchange, it looks like there is a belief, at least in some quarters, that the long-awaited listing may soon become a reality.

But, on the other hand, IFCI’s sale at a rather unimpressive valuation should temper some of the excitement. After all, if the chances of listing were all that bright, IFCI would have waited. Instead, it is in talks to sell some more of its NSE shares.

According to data collated by VCCircle Network, IFCI’s latest deal was at a 2.5% discount to the previous large deal in June 2013. If anything, the exchange’s valuations should have risen since then. To start with, the exchange’s consolidated profit has risen by 20% in the past two years. And while Multi Commodity Exchange of India Ltd (MCX), which is listed, enjoys a valuation of 38 times trailing earnings, NSE has been valued at 17 times earnings—leave alone the value of its stake in other ventures.

Besides, the perceived threat from Jignesh Shah’s entry into the equity and equity derivatives trading space got nullified about two years ago, due to the National Spot Exchange Ltd scam. More recently, a Securities and Exchange Board of India (Sebi)-appointed committee recommended the draconian measure of forcing exchanges to transfer 25% of profit towards a settlement guarantee fund can be stopped. In other news, the exchange increased its stake in National Commodity and Derivatives Exchange Ltd last year, besides taking clear leadership in the relatively new interest rate futures segment.

In this backdrop, it does seem surprising that IFCI settled for a valuation similar to the one in mid-2013. Either it was in great need of the liquidity, or it doesn’t rate the chances of a listing anytime soon very high.

According to a private equity shareholder, however, the exchange indicated in a private meeting that a listing can happen as soon as the next financial year. The exchange also spoke about initiating a restructuring of its businesses, although it’s not clear what this entails. Sebi’s rules for listing require exchanges to separate their business and regulatory functions with Chinese walls between the two; but this was put in place soon after the regulator issued the regulations in 2012.

If anything, Sebi needs to provide some clarifications to pave the way for listing.

As pointed out in this column earlier, even though Sebi has allowed exchanges to list on paper, for all practical purposes, they can’t. For instance, Sebi’s rules include a lopsided requirement that an exchange must ensure that every investor that buys its shares must be ‘fit and proper’. It’s one thing to ensure this for an unlisted entity, where share transfers are few and far between. For a listed entity, where shares change hands every few seconds, compliance will be impossible.

But with Sebi now in the process of being merged with the Forward Markets Commission (FMC), these issues are expected to be put to rest soon. FMC, after all, allowed MCX to list years ago, and had waived the ‘fit and proper’ requirement for shareholders who own less than 2% in a commodity derivatives exchange. After the merger, Sebi will have one listed exchange under its ambit, and it’ll be odd to not allow others to do the same. Of course, one can’t fully rule out some bureaucratic ingenuity to ensure that listing remains a reality only on paper.

Besides, since NSE has been known to be reticent about listing in the past, it remains to be seen how fast it moves after the regulator permits listing. BSE Ltd, on the other hand, had already appointed merchant bankers, and it was only because of its prodding that the above hurdles to listing came to light in the first place.

It’s quite likely that the older of the two exchanges may end up being the first equity exchange to list in the country. Coming back to IFCI, it may not have got the maximum bang for its buck. But given NSE’s dithering on the issue in the past, it may well end up looking wise for taking what’s available on the table now.

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