NSE stakeholders, management at odds over recommendations

The recommendations of the Bimal Jalan committee on the future of the Indian capital market have pitted minority shareholders in the country's largest bourse, the National Stock Exchange (NSE), against its management. The committee set up by the Securities and Exchange Board of India (SEBI) has sought a cap on profits made by the bourses and also wants to prohibit them from getting listed on the grounds that this would lead to a conflict of interest. The NSE rift reflects the wider debate on the report and the attendant lobbying that has broken out following its release on 24 November. The investors say their shares will lose value and accuse the bourse's management of disregarding their interests while supporting the recommendations. The investors say they will lobby the government to reject the recommendations. Based on a stock price of Rs 4,050, at which NSE shares were last traded privately, and with 45 million of them outstanding, the market value is pegged at around Rs 18,225 crore, according to some of the private equity investors in the bourse.

If profits are made "normal" as per the panel recommendations, say 15-16%, the valuation will slump, the investors said. This erosion could be as much as 70%, according to calculations by a private equity (PE) investor with a minority stake in the bourse. The investors also said the Jalan panel unfairly protects the interests of the NSE's senior management, which draws a fixed salary. Ravi Narain, managing director (MD) of NSE, defended the committee's recommendation on listing at a Confederation of Indian Industry (CII) summit on Tuesday. "Listing of exchanges throws up significant conflicts of interest because of the intertwining of commercial and regulatory roles," he said. "People have argued that conflict of interest is not serious... But why is it then every developed market has taken the regulatory role out of the exchanges?"

The comment came after a newspaper advertisement by Financial Technologies India Ltd (FTIL), itself seeking to set up a stock exchange, that addressed Narain and Chitra Ramakrishna, the joint MD of NSE, by name, and asking NSE management to protect the "lawful interests" of investors. "Listing of exchanges will ensure transparency in operation, good corporate governance, regular filing and publication of data, seamless exit for investors," it said. "Hence anyone arguing against listing...is arguing against the transparency and corporate governance." FTIL-promoted MCX Stock Exchange Ltd's proposal to set up a stock exchange has been rejected by Sebi over several violations, including that of shareholding norms, following which it has taken on the regulator and the NSE at various forums including the media. A member of the Jalan committee said on condition of anonymity: "If an investor can buy shares in an unlisted company, he should be able to sell it too. Nobody had assured them at the time of investment that they will be allowed to exit through listing." The committee did not want short-term speculative investors in the exchange, the person said. "NSE had never assured investors listing," an NSE official said last week.

"Despite that there have been a number of transactions. These will continue." As much as 40% of the bourse is held by PE funds and some high networth individuals (HNIs). These include General Atlantic Llc, Goldman Sachs Group Inc., Temasek Holdings Pvt. Ltd and Saif Partners, which each hold 5% (the maximum allowed) in the exchange. Tiger Global (4%), Morgan Stanley (3%) Premji Invest (3%), Norwest Venture Partners (2%), Citibank (2%) and Actis Advisers Pvt. Ltd (1%) are the other major investors. Hero Honda Motorcycles Ltd, SREI Infrastructure Finance Ltd, FTIL and a few HNIs also hold NSE shares. These investors have purchased shares in NSE since 2007. In December 2006, the Reserve Bank of India issued guidelines allowing foreign direct investment of up to 26% and foreign institutional investor investment of up to 23%, subject to a 5% cap on each entity. Last month, an unidentified investor bought a stake of less than 1% (4.4 lakh shares) in FTIL for Rs 167 crore, or Rs 3,800 a share, valuing the NSE at $4.4 billion (nearly Rs 20,000 crore).