India’s market regulator proposes relaxed norms for setting up new stock exchanges

Photo by Livemint

The markets regulator on Wednesday proposed to ease ownership norms for entities that plan to start new stock exchanges in India, a move that may end the 16-year-long dominance of the National Stock Exchange (NSE), allow entry of foreign exchanges, and lower the trading costs for investors.

Currently, NSE, BSE and Metropolitan Stock Exchange are the three nationwide bourses in India, with NSE being the largest in terms of trade volumes both in cash and derivatives segments. Though BSE is Asia’s oldest bourse, almost all equity derivatives business in the country happens on NSE’s trading platform.

The reason behind the migration of trading to NSE was the exchange’s better technology and the absence of legacy issues that had plagued BSE. “The Indian securities market has witnessed dominance in trading and depository space, raising concerns on the possibility of excessive concentration and institutional tardiness in quickly responding to the changing market dynamics which may have an adverse bearing on efficiency in trading, record-keeping, supervision and risk management practices,” the Securities and Exchange Board of India (Sebi) said in a discussion paper.

Even though NSE has been dominating the exchange business, it has faced several technical glitches, causing unexpected market crashes and losses to investors. Sebi is also probing a case of certain algorithmic traders unfairly benefiting from priority access to the NSE platform.

A review is crucial to facilitate new entrants to set up stock exchanges or depositories, Sebi said.

The proposals, if implemented, will allow foreign exchanges to enter India either through joint ventures with a new domestic entity or through mergers with existing stock exchanges. The proposed norms will also allow new companies to acquire existing exchanges or facilitate mergers of existing exchanges and depositories.

This will increase competition, which in turn will lower the costs of trading for investors, attract more investors into the equity market, and lower the membership and clearing fees for brokers and other trading members.

For setting up a new exchange, the promoter may hold up to 100% stake initially and then lower it to either 51% or 26% within the next 10 years.

If the promoter of such a new exchange or a depository launching or entering in India is a foreign entity, it may hold up to 49%, to begin with. This can be brought down to either 26% or 15% within 10 years, Sebi proposed.

At present, Sebi norms mandate exchanges to maintain a 51% shareholding by the public and a total of 49% holding by trading members, associates and agents. Foreign entities are allowed to hold up to 15% in domestic stock exchanges.

Sebi said any person (domestic or foreign), other than the promoter, may acquire up to 25% shareholding in an exchange or depository.

Also, at least 50% of the ownership of the exchange or the depository has to be held by entities who have an experience of at least five years in areas of capital markets or technology related to financial services, Sebi proposed.

In the case of an existing exchange or a depository, any entity may acquire up to 100% shareholding and lower its holding 51% or 26% in 10 years, Sebi said.

However, for an acquisition of more than 25% stake, prior Sebi approval will be required.

In such cases of acquisition, if the new promoter is a foreign entity, it may hold up to 49%, which can be brought down to 26% or 15% in 10 years, Sebi said.

The regulator said that another dominant trend shaping the exchange and depository landscape is the emergence of new technologies such as distributed ledger technology, artificial intelligence and machine learning.

“Several new fintech or techfin players have emerged in trading space in various jurisdictions, who are increasingly deploying these disruptive technologies and challenging the traditional functioning of stock exchanges and depositories (collectively termed as market infrastructure institutions, or MIIs),” said Sebi.

“A need is, therefore, being felt to forge a competitive landscape in MIIs’ space by facilitating new players, who may like to challenge other MIIs in their already established domain, to set up MIIs or merge and acquire the existing entities,” Sebi said. The existing norms not only inhibit entry of new players but also restrict the acquisition of existing exchanges and depositories, especially due to a default pre-condition of dispersed shareholding at the initial stage itself, which limits the upside gains for a potential entrant arising out of entrepreneurial capital.

Sebi has sought feedback on its proposals by 5 February.

The article was first published on livemint.com.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.