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Integrating with global markets

The investment by the New York Stock Exchange (NYSE) and three other well-known global financial entities in the National Stock Exchange (NSE) is significant for the investors as well as the recipient. The speed at which the foreign investors moved in to exploit the new regulations is probably unparalleled in the history of foreign direct investment so far. At one level, it indicates the positive view global investors have on India and its financial sector. Rules permitting foreign direct investment in the Indian stock exchanges up to a maximum of 26 per cent (and foreign institutional investment up to another 23 per cent ) were put in place very recently. It is not surprising that the NSE should be the first stock exchange to have foreign shareholders. The exchange, started only in 1994, has grown into one of India's two premier stock exchanges, taking its place alongside the much older Bombay Stock Exchange. There are reports that the BSE too is exploring equity tie-ups with, among others, the NASDAQ, London, and Singapore stock exchanges. Should that happen, the two exchanges would enjoy the benefits of the valuable franchises that the world's biggest exchanges represent. The development will also herald another phase of the growing integration of Indian capital market with its counterparts in the developed world.

However, one should resist the temptation of exaggerating the likely benefits from such alliances. Indian regulatory norms restrict any individual investment in the stock exchanges to 5 per cent of the equity. That along with the 49 per cent cap on overseas investment rules out any takeover of an Indian stock exchange by a foreign entity. In the foreseeable future at least there will not be synergies or cost savings that a conventional merger would confer. An immediate benefit to the NYSE is enhanced visibility in India and with it a chance to score over their rivals in wooing quality listings from domestic companies. At a global level, consolidation of stock exchanges is gathering pace. NYSE itself recently took over a major European exchange, Euronext, in a $14.6 billion deal. American stock exchanges especially have been hit hard with many publicly quoted companies withdrawing their listings. Tough legislation enacted in the wake of the Enron debacle has also caused a migration to exchanges, usually European ones, functioning under less stringent regulation. For the foreign bourses seeking to expand aggressively into India and China, the relatively small investments are of strategic value, with their results likely to be seen only over the long term.

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