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A significant FDI with long-term benefits

NSE stake sale shows recognition of its strengths by topnotch investors

— PHOTO: AFP

MAKING HISTORY: A view of the New York Stock Exchange (NYSE). India's National Stock Exchange made history last week by attracting investment by NYSE and three equity funds.

IN WHAT could be a kind of record in the annals of overseas investment in India, the National Stock Exchange (NSE) has attracted foreign direct investment (FDI) in a very short time after the policy framework was amended making it possible. The enabling rules now allow FDI up to 26 per cent of the paid-up capital in an Indian stock exchange. However, there is a cap of 5 per cent beyond which no investor, either directly or indirectly, can hold shares.

Foreign institutional investors can invest up to another 23 per cent. Hence the total foreign investment can go up to 49 per cent. Evidently, there has been plenty of overseas interest even before the formal notification of the new rules. That explains the speed at which the NSE could become the first stock exchange in India to admit overseas shareholders. No additional capital has been issued to accommodate the new shareholders. What took place on January 10 is a transfer of shares by five domestic institutional shareholders — IFCI (7 per cent), IL&FS (5 per cent) ICICI (5 per cent), PNB (1 per cent) and GIC (2 per cent) adding to 20 per cent — to four select foreign investors — the New York Stock Exchange Group, Goldman Sachs, General Atlantic and Japan's Softbank Asia Infrastructure Fund.

According to reports, the sale consideration is between Rs. 2,250 and Rs. 2,500 a share. NSE's paid up capital is Rs. 45 crore and the exchange is valued at $2.5 billion. Since no stock exchange in India is listed, it is only through transactions such as these that the valuation of the whole exchange can be arrived at with some degree of accuracy.

Arriving at a valuation is just one aspect of the transactions. That some of the world's biggest names in the financial field are now part- owners of the NSE has its own story to tell. Of particular interest is the acquisition by the parent of the NYSE, the world's biggest stock exchange. Goldman Sachs is a well-known investment bank already having a significant presence in India.

NYSE's global forays

Given that each of them cannot acquire stake beyond the cap (of five per cent), their investment is seen as having a `strategic' value, with a long-term significance. The NYSE's future actions vis-a-vis its investment in the NSE will be keenly watched. It is now on a global acquisition spree, having undergone recently a major corporate transformation, somewhat akin to what the BSE has had to undertake. Very recently it secured shareholder approval for its $14.6 billion merger with Euronext.

While announcing the deal, a senior official of the NYSE has said, "at five per cent we are neither in a control position nor in a position to control cost synergies.''

In other words, NYSE's investment in NSE does not come under the category of takeovers of one exchange by another, a trend that has recently been accelerating at the global level.

However, it points to the way of long-term consolidation of global exchanges and most certainly the strengthening of the brand value associated with the world's leading exchanges. It is also well recognised that India along with China presents the next big opportunity when returns from similar investments may not yield quick results. The NYSE will also get increased visibility in India and that is by no means an inconsequential factor at a time when there is keen competition among the world's leading exchanges for listings by Indian companies.

The gain for NSE

What are the benefits accruing to the NSE and the Indian financial sector? Obviously the association with one of the world's largest exchanges will be of considerable help although the presumed benefits in terms of technology and managerial upgradation tend to be exaggerated in all such deals. The possibility of foreign firms listing in Indian bourses — to gain access to Indian savings — seems remote now but as globalisation proceeds further this may become a possibility in which case the NSE is sure to exploit its association with the NYSE. For now, of course, the most tangible gain for the NSE is the recognition of its strengths by top-notch global investors. Since global consolidation of exchanges is very much on the cards, a tie up with the NYSE can have a number of potential advantages.

BSE's moves awaited

It has been reported that the Bombay Stock Exchange is in talks with the London Stock Exchange, the NASDAQ, the Deutsche Bourse and the Singapore Stock exchange to sell a 26 per cent stake. When the sale materialises both the principal stock exchanges of the country will figure in one or the other of the world's leading alliances of stock exchanges.

All these indicate the level of global interest in the Indian financial sector and the two principal bourses, the BSE and the NSE. However, it is highly unlikely that the regional stock exchanges will receive similar attention in their present moribund state.

C. R. L. NARASIMHAN

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