Proposal to allow more exchanges may find takers

In Jan, Sebi floated a discussion paper proposing to ease ownership norms for new exchanges

The technical glitch at the National Stock Exchange on Wednesday may give more credence to the markets regulator’s proposal of allowing new exchanges to increase competition in the space. In January, it floated a discussion paper in which it proposed relaxing ownership rules to allow more entrants in the exchange space.

The technical glitch at the National Stock Exchange (NSE) on Wednesday is likely to give more credence to market regulator Securities and Exchange Board of India’s (Sebi’s) recent proposal of allowing entry for more exchanges to increase competition in the space.

In January, Sebi floated a discussion paper in which it proposed relaxing ownership rules to allow more entrants in the exchange space, which is seeing a disruption globally with the emergence of new technologies such as block chain.

The jury is still out on the subject. A section of the market believes the liquidity pool should be at a single venue to facilitate better price discovery and reduce impact costs. Others feel competition would force existing players to get stronger. Also, recent developments in financial technology will only be realised if more players are allowed to enter the fray.

The last day to submit feedback on the discussion paper titled ‘Review of Ownership and Governance norms for facilitating new entrants to set up Stock Exchange / Depository’ was February 5. Sebi is currently collating the feedback. However, Wednesday’s outage at the NSE, which halted trading for nearly four hours, is likely to be a big talking point when Sebi takes up the issue, said market players.

At present, NSE faces competition from BSE (formerly Bombay Stock Exchange) and MSEI. However, the exchange has managed to garner more

than 90 per cent share both in the cash market and derivatives segments.

“The scrutiny over NSE’S dominant position is perhaps an outcome of a series of missteps by NSE in recent years. Sebi’s proposal to reduce barriers to entry is a sensible move. It is conceivable that new players are waiting in the wings, or a large foreign entity could bring capital and expertise into one of the smaller exchanges. But it is more likely that the threat alone will spur NSE to invest in operational improvements, and experiment with newer technologies,” says Sivananth

Ramachandran, director of capital markets policy (India), CFA Institute.

“Wednesday’s episode will give more prominence to the proposal inviting more competition in the exchange space. New players could help boost penetration. Currently, less than 4 per cent of India’s population invests directly in the stock markets. Global exchanges like Nasdaq are known to enter newer geographies with the help of local partners. We can see the same playing out here,” said Kaushlendra Singh Sengar, CEO at Invest19.

Some say glitches shouldn’t be the sole factor while deciding on competition in the exchange space, and regulatory officials should give more prominence to other factors like liquidity, governance, and ownership structures.

In the discussion paper, Sebi proposed to allow promoters setting up exchanges to have 100 per cent shareholding that can be brought down to 51 per cent or 26 per cent after 10 years. Current rules forbid a single entity – especially a public financial institution — from holding more than 15 per cent stake in an exchange.