FDI push via bourses fails to yield results

In 2016, govt increased ceiling of foreign shareholding to 15% from 10%; none has availed of the benefit

The central government’s move to allow higher foreign direct investment (FDI) in Indian stock exchanges has failed to take off. In 2016, it notified rules allowing a foreign entity to hold up to 15 per cent in an exchange. Earlier, this was capped at 10 per cent. However, none has come to avail the extra legroom.

Industry players say this is because it still allows only portfolio investment and does not provide any extra privilege such as control. Also, foreign exchanges have preferred to play the India stock exchange growth story through the nonequity route, including product tie-ups.

The Centre has allowed foreign portfolio investors (FPIs) to acquire shares in an exchange through initial allotment, besides the secondary market route. Depositories, banks, insurance companies and commodity derivative exchanges are among those allowed to avail of the 15 per cent investment ceiling.

“The changes brought in the FDI policy for foreign exchanges are not effective for strategic investors. The current provisions do not provide any incentives or rights even after raising stake. Further, ongoing legacy issues such as the co-location controversy with the National Stock Exchange (NSE) has raised a certain degree of uncertainty among these investors,” said Siddharth Shah, partner, Khaitan & Co.

Goldman Sachs, Saif Partners, Gagil FDI and Aranda Investments are among the top shareholders of the NSE, each holding five per cent. The BSE exchange’s top foreign shareholders are Singapore Exchange and Deutsche Börse at 4.7 per cent each. The composite cap for foreign investment in stock exchanges is 49 per cent.

Some say the recent decision by exchanges to snap ties with foreign counterparts could have hit sentiment.

“The cap on shareholding, both for domestic and international investors, has acted as a deterrent for serious investors to invest in the market. After all, allowing five per cent or 15 per cent is telling an investor that we want your money but not your opinion on how to run the exchange. Policymakers understand this disincentive structure, which is why they have allowed 100 per cent investment at the GIFT City (in Gujarat),” said Sandeep Parekh, founder, Finsec Law Advisors.

The move to allow 15 per cent shareholding was part of the centre’s push to enhance global competitiveness of Indian stock exchanges, to accelerate and facilitate the adoption of latest technology and global practices.

Sources say soon after this announcement, the Chicago Mercantile Exchange (CME) did show interest in taking stake in the Multi-Commodity Exchange (MCX). CME had earlier also placed a non-binding bid in 2014, when 63 Moon Technologies (erstwhile FTIL) had to sell 26 per cent in MCX. However, the deal did not materialise.

The rise in FDI was first proposed by the Securities and Exchange Board of India in 2012. It was turned down by the Bimal Jalan committee. The regulator had again sent its proposal in June 2014 to the finance ministry.