NSE, MCX in merger talks

The two exchanges may soon submit proposal to market regulator

The National Stock Exchange (NSE) and the Multi Commodity Exchange (MCX) have entered into merger talks ahead of the implementation of the universal exchange framework in October. The two entities plan to approach the market regulator, the Securities and Exchange Board of India (Sebi), as early as this month, a top official said. The merger will help the NSE and the MCX cement their leadership positions both in the equities and commodity derivatives space. The two exchanges have readied a blueprint for the merger proposal, which will be discussed with Sebi. Sources say the NSE entered into talks with the commodity bourse soon after the market regulator allowed exchanges to dabble both in the equities and commodities space. The decision was taken by the Sebi board at its December 2017 meeting. A spokesperson for the NSE said, “We will not comment on market speculations.” A query sent to the MCX did not elicit immediate response. Sources say the NSE, which already has a stronghold in equity and index derivatives, wants to be leader in the commodity segment as well. “The commodity space is still evolving and has great opportunity to develop in the current scenario. So, having a dominant player will help bring in a lot of economies of scale,” explained a person in the know. In the equity derivatives space, the NSE has a near monopoly, while in commodity derivatives, the MCX enjoys a lion’s share of 90 per cent. “It is premature to share any further details of the proposal, since talks are still in the preliminary stage,” said the official cited above. Currently, the MCX has market capitalisation of ~37 billion. In comparison, the NSE is much bigger. In December 2016, when the NSE filed its offer document with Sebi, it was looking for a valuation of ~400 billion. Since then, the valuation has increased further, thanks to a good uptick in trading volumes.

Market experts say the merger could be a win-win situation for both the exchanges as competition is set to intensify after October as all existing bourses will look to foray into new segments. The BSE has already announced its aggressive plan to enter into commodity derivatives and offered incentives to its members to start commodity derivative trading under same membership. The NSE is ready with its commodities plan but is yet to come out with details. Being a commodity bourse, the MCX will face tough competition from the equity exchanges, which arguably have much superior technology and client base. On the other hand, the MCX will need huge capital if it wants to aggressively foray into the equities space. The proposal could also address the NSE’s pet peeve – going public. Despite mounting shareholder pressure, the NSE has not been able to list due to legacy issues. As the MCX is already listed, the merger could lead to back-door listing for the NSE, say experts. “If the plan materialises, the merger will require approvals of the shareholders and creditors of both the exchanges. Also, this requires a principal nod from Sebi and later the National Company Law Tribunal (NCLT). Since it is the merger of two exchanges, both entities need to be in compliance with the Sebi’s Securities Contracts (regulation) (Stock Exchanges and Clearing Corporations) Regulations,” said Sandeep Parekh, founder, Finsec Law Advisors. The proposal will also have to be cleared by the Competition Commission of India. The NSE currently holds a 15 per cent stake in the NCDEX, a commodity bourse. Experts say the exchange may have to divest this stake if the MCX proposal goes through.