All decks have been cleared for a new, full-fledged equities stock exchange in India. Nearly four years after granting permission to start trading in currency derivatives, markets regulator Securities and Exchange Board of India (SEBI) has finally allowed
MCX-SX to start operations in equity and equity derivatives, interest rate futures and wholesale debt segments, making it the third stock exchange in the fray. The entry of MCX-SX in new asset classes means greater competition for the incumbents - market leader NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Tuesday's night's development has the potential of threatening NSE's virtual monopoly. As on July 10, NSE has market share of more than 75 per cent in derivatives segment and about 68 per cent in equities segment.
The permission, however, has come with riders. Besides finding MCX-SX non-compliant with the ownership norms, SEBI claimed that the exchange's promoters - MCX and Financial Technologies India Ltd (FTIL) - were "persons acting in concert" and had entered into buyback arrangements with a few financial investors while selling their shares to them, which was against the regulations. The matter went to Bombay High Court which ruled in favour of MCX-SX. The market regulator then moved apex court. In April this year, the Supreme Court directed Sebi to consider afresh the MCX-SX application within three months ending July 10.
Under the new agreement, the shareholding of MCX and FTIL in the equity share capital of MCX-SX will be brought within the five per cent limit within 18 months. In addition, the combined voting rights of FTIL and MCX in MCX-SX shall not exceed five per cent of the paid up capital of MCX-SX at any point of time.
FTIL's ability to successfully run exchanges is proven. Since its inception, MCX is by far the market leader in commodity trading despite the presence of four other players (NCDEX, NMCE, ICEX and ACE). MCX currently allows trading in 49 commodities including bullion, metals, energy and agriculture. Likewise, MCX-SX is already giving tough competition to NSE in the currency segment.
It is expected that the new exchange will offer investors a choice of products and services suited to their risk profile. But to what extent this new exchange will allowed to experiment with products is yet to be seen. Being an IT firm that specializes in capital market solutions, FTIL understands the technology part really well and will try and bring in some best technologies from around the world. On the services part, there's scope of reducing transaction charges and membership fees to capture market share. MCX-SX officials have already talked about their intention to develop an ecosystem for small and medium enterprises. Although MCX-SX's current members network - stands at 750 in around 707 towns --- is large enough, the exchange needs to do plenty of work to generate initial interest in its new offerings.
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