26 August 2008

Indian stock exchange socialism

Today's Financial Express has a strident piece on Indian stock exchange ownership which caps one person's ownership at 5%. It calls the current policy 'strange' and 'ridiculous'. While the adjectives are not wholly misplaced given the governance vacuum at Bombay Stock Exchange (BSE) because of this policy, the piece doesn't go far enough in content. The piece is written on the assumption that some foreign players are just waiting on the sides for a 15% stake. To assume that a strategic investor will play a 'more active' role if it were to hold 15% instead of 5% is also not certain - does 15% in fact give a louder voice than a 5% stake? A foreign bourse is unlikely to be interested in a 15% stake - the number gives it no strategic importance on the Board of Directors and a say in the management, while it gives it a very large downside. Imagine giving US $130 million dollars with no accountability on governance or say in management (based on sale of stake over a year back at that valuation). This has already happened, both Deutsche Boerse and Singapore Exchange have lost heavily despite investing some $43 million dollars each in the BSE.

At the same time, I don't think the concern of the Ministry of Finance is wholly misplaced - they do not want corporate entities to run exchanges as these are critical institutions and can be used by companies to manipulate exchange functionality where their stock is listed. But the medicine is wrong. What can easily be done is that the amendment to the regulations can prescribe that only institutions with international reputation and competence in the financial sector without any non financial sector exposure (whether directly, indirectly or through affiliates) would be allowed to go up to 49% or 76% - of course that would not exclude reputed Indian financial institutions - thus ICICI may be in while Birlas would be out. There will also be a need to ensure that such entities have a say in the governance and management, and it should not again be killed on the grounds that such company is listed on the exchange - relevant safeguards may be implemented though without overdoing it.

See my previous posts here and here.

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